The Great Depression Ahead?

February 18, 2009

In uncertain times, knowing what you don't know is sometimes your best advantage in investing long term.

 

I had the chance to interview Harry S. Dent, whose latest book, “The Great Depression Ahead,” is on the top 50 list of Amazon.com best sellers.

When I was asked to do this, my immediate reaction was, “Isn’t he the guy who wrote about the Dow 40,000?”

But, since he’s coming to Colorado Springs, and his talk is free and open to the public, I thought I’d give it a go and try to keep an open mind.

I spent the weekend reading the book. It’s well written and Dent is a smart guy, with a Harvard MBA and management consulting experience with Bain & Co.

He makes some compelling points based on global demographics. Baby boomers across all developed countries are aging and will start to spend less and less. There are fewer younger people in the workforce to support us, which is what he claims will cause the next Great Depression.

Dent notes in the book the many times he’s been right and even addresses some times when he hasn’t.

Now I happen to be basically with him up to this point, but it’s not exactly a secret that we baby boomers are aging—even though we might not always act like it. (I personally have learned the folly of playing city-league flag football at age 50.)

What It Means For Investors

Dent makes some very bold forecasts.

For example, he states the most likely scenario is that the Dow will bounce up to between 12,000 and 13,200 somewhere between April and September of this year. This represents as much as a 60 percent increase from where we are today.

It’s after this bounce that the next Great Depression begins, with the Dow falling to around 3,800 by late 2010. He clearly notes in the book that he is making “very bold forecasts,” and I’ve got to give him credit for doing so.

In my experience, most financial gurus give dates or give numbers, but never give both.

I asked Dent what he would recommend for an investor today, and he responded that for the conservative
investor, “cash is king.” For the aggressive investor, however, he recommends a portfolio of roughly 50 percent stocks and 50 percent commodities.

The stocks, he said, should be heavily weighted toward financial services and natural resources, while the commodities should be in gold, silver and energy. Then, when both hit their highs later this year, it’s time to unload and get back into cash.

While we didn’t directly discuss it, I guess this implies that moderate investors should put part of their portfolio in cash and then invest the other part in stocks and commodities until they peak, later this year.

 

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