Harry Dent’s Demographic Cliff- Pete Wargent

Another year, another book, another crash forecast! But instead of dismissing Harry Dent’s latest predictions, let’s take an objective look at some of his suggestions, and see what we can learn from them.

1 – China credit bubble

First up, China!

Most level-headed commentators have at least acknowledged the risks of China’s credit bubble bursting or a lack of liquidity causing a major corporate/banking collapse.

Dent cites the phenomenal boom in dwelling prices in cities like Shenzhen where price-to-income ratios have reportedly roared off the scale, and apartment vacancy rates in China of around 24% (aka “build it and they will come”).

China’s is a government-led economy – some prefer to call it a kleptocracy – and many believe that the planned urbanisation and economic growth will ultimately fail, being no substitute for a free-market or capitalist economy.

There’s certainly a bit of confusion and scepticism about the growth figures from China.

The GDP data causes regular amusement in the online community since is always seems to either hit the target bang on or turn out to be a ‘slight beat’ (e.g. 7.6% GDP growth versus 7.5% market expectations).

Clearly the data is at best opaque and at worst made up, the numbers being fiddled with fake invoicing and other underhand practices.

Sceptics sometimes look at the growth in electricity usage as a proxy or an unofficial China GDP, and these numbers tend to suggest the actual growth rates are some way lower in China.

For all the talk of a ‘slowdown’, however, China’s reported retail sales are growing at well above 13%, fixed asset investment at just under 20% and industrial production continues to hum along apace (the blue bars in the chart below).

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Dent’s opinion is clear enough: China will inevitably blow up in the next month or two. If China’s failure is your position, then the big question is: how long do you need to short the market for?

We all saw the pictures of China’s ghost cities and people worried aplenty. But such photos were surfacing as long ago as 2008-2010, and that’s a long time ago now.

If Dent’s doomsday outcome does occur then Australia’s interest rates would quickly hit the zero bound and other stimulatory measures would presumably be considered.
2 – Commodity prices

Dent predicts that commodity prices will soon collapse as demand drops off. These risks have been well documented in Australia, particularly with our heavy reliance on iron ore and coal exports to China.

The Reserve Bank continues to monitor the commodity price index closely, particularly since the index is indeed well below its most recent peak.

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It’s worth noting that over the past year commodity prices declined by around 10 per cent in SDR terms with the prices of gold, coal and iron ore all having fallen over this period.

However, Australia’s terms of trade have not been falling of late – the index has actually risen by 6 per cent in Australian dollar terms over the past year thanks to our weakening currency.

That said, there’s no question that commodity prices are well above their long-term average and downside risks do indeed abound.
3 – Demographic cliff

The title of Dent’s latest book is The Demographic Cliff. The way he usually works it is to write a global book that can be sold as such, and then include 3-4 pages on Australia’s inevitable forthcoming demise at the front to lure local readers in.

Just one problem here: unlike other developed countries, Australia does not have a major demographic cliff.

Below is what our population pyramid is forecast to look like by 2061 – a population of around 41.5 million, around three-quarters of whom are expected to live the in our few capital cities. And growth is apparently projected to continue well past that date too.

Note the shape of Australia’s projected demographic pyramid.

While acknowledging that an economic downturn could result in lower immigration, Australia’s population policy is skewed towards young, skilled migrants and we are not planning for a demographic cliff.

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Source: Australian Bureau of Statistics
4 – Sydney housing market

Dent produces a chart of historical prices and predicts that the Sydney housing market will crash in value by 27%, starting imminently.

Sounds extreme, but then again in 2011 he was here forecasting 55% falls, so if anything, that’s more than a 50% improvement.

The ABS  noted that house prices in Sydney increased by 4.7% over the last quarter of 2013 and 13.8% over the year, so the target is moving steadily away from him.

If there’s one thing we should have learned over recent times, it’s that you can’t call housing markets only by looking at price charts (Sydney’s stock on market is at the lowest level on record today) but still, corrections are always possible. Sydney’s dwelling price to income ratio is rising, but remains below where it was a decade ago.

I’m always open-minded to viewpoints, but the the one question I always have for perma-bears on Sydney’s housing markets – which I haven’t yet received a satisfactory answer to – is on the supply response.

Sure, I have no idea what will happen over the short term (and given the humongous error in his 2011 predictions, neither does Harry Dent, clearly), but if Sydney’s population sky-rockets to 8.5 million from 4.5 million, given the geographical constraints of the city – including it being surrounded by mountains, national parks and an ocean – how are land prices going to fall over the longer term?

I note here that Sydney is developing into a multi-speed market.

We have fringe suburbs that few people want to live in and some horribly over-priced high rise developments where the land value per individual dwelling is chronically low (c.3% in certain cases).

I’d steer well clear of the those, certainly. And in fact, most Aussies do, since they are often sold off-shore.

But as for the supply-constrained suburbs with houses and smaller boutique apartment blocks (where the land value percentage tends to be high), there is a lot of continuing upward pressure on prices.

If I sound relaxed about Sydney house prices, that’s because I am. Property should only, in my opinion, be a long-term investment, and the long-term trend for well located stock is clear to me.

Further to that, I’m a Pom who has left my UK portfolio of properties fully invested straight through the greatest credit boom and then the financial crisis in living memory over the past 6 years with no particular worry or stress.

If you stick to buying the right property in the right locations (in and around London in Britain’s case, where prices will easily break to new highs in 2014) you have little to fear over the long term.

London has been called out as a housing bubble for as long as I can remember, and probably longer that that still. But our experience and research has consistently shown that returns from property are as much (if not more) what and where you buy as the state of the national economy.

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Source: AllenWargent
5 – Australian stock markets and economy

Dent forecasts Australian stock prices to fall by 50-55% in the coming couple of years. Is he right? Well, maybe.

We’ve been in a market where returns have been strong for half a decade now so a correction may or may not be due.

I’ve given up trying to forecast stock price movements, particularly in these perverse times of quantitative easing (QE) when bad news can be good news, and the desperate search for yield distorts markets.

I note that Australia’s Reserve Bank holds a very different view to Dent, forecasting 4% economic growth to return in due course through 2016/17, while central banks in the US and Britain seem increasingly confident of stronger growth returning.

Forward PE valuations in Australia aren’t particularly high, and regular buyers of well-diversified and dividend-rich LICs will likely continue to do well over the long term. If you are inclined to be a stock picker, you might look at healthcare as a sector with an excellent long term growth potential.

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6 – Gold

And finally, Dent predicts that the gold price will retrace to US$750/oz, with a possible collapse to US$250/oz!

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Source: kitco

There may well be downside risks to gold as the Fed’s taper takes hold, and of course, markets can certainly overshoot on the upside and on the downside, but given that the production costs of even the large-scale miners are so much higher than this, I really can’t envisage $250/oz (?!).

Still, thank goodness, I don’t invest in gold (-27.3% in 2013) or silver (-34.9% in 2013) so will observe with interest from afar!

 

A positive note!

Well, after all that potential gloom, a more positive note to finish. Dent has often said that if he would pick any developed country to be in this coming era, it would be Australia, thanks to our favourable demographics.

Further, says Dent, Australia has a very low level of gross government debt “at only 29% of GDP”, so Australia should be able to cushion any downturn to some extent.

He even said in 2011 that although he forecast a crash from 2012 to 2014, Australia would be in a strong position to lead the boom to follow.

We never got the crash, but the latest Reserve Bank forecasts and business confidence surveys suggest that the economy is picking up.

Let’s hope they are right!

[post_ender]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'Harry Dent’s Demographic Cliff- Pete Wargent' have 1 comment

  1. February 22, 2014 @ 7:59 am Michael Correll

    Hi Michael and Pete,

    Enjoyed reading this analysis of Dent.
    I think Phillip J Anderson is predicting another bull-market?
    http://phillipjanderson.com/real-estate-cycle/

    Yours sincerely,
    Michael Correll

    Reply


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