Dent: No Ordinary Downturn

NEW YORK CITY-The current downturn is no ordinary economic crisis and nothing like it has been seen since the 1930s, economist Harry S. Dent told a CoreNet Global audience here on Friday. Author of The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History, Dent warned attendees at the CoreNet luncheon not to expect miracles from President Barack Obama’s stimulus package.

He predicted that the current administration will put up around $3 trillion to $4 trillion in stimulus to try breaking the current downturn. But Dent said he sees the country as rounding the bottom of the crisis and over the next year and a half, the economy will have what he called a “choppy, wimpy bounce.”

“We have a downturn that will not be inflationary,” and instead “will be deflationary,” he said. Tossing humor into the pain-filled punch, Dent said, “this much stimulus is like taking a whole bottle of Viagra and not having anything happen.”

After the chuckles ended, Dent again assumed the tone of a Sunday morning preacher, saying that by late next year, the economy would crash yet again. “This is a classic scenario. We’re telling people, particularly in commercial real estate, to be looking at late 2012 or maybe 2013 to come out of this deep mess.” He added that this is a good time to refinance.

Dent said demographics ranging from age to location play a tremendous role in how this economy is playing out as well as its impact on commercial real estate. He said baby boomers are retiring, work force entry is shrinking and people are moving away from congestion. Places like Atlanta were once desirable but now are too congested and that instead, families are choosing places like Tucson, AZ and Birmingham, AL.

“In real estate, this is a shakeup,” Dent said. “People left standing with cash flow and credit inherit the world, and the banks will give them all the devalued real estate for very low prices.”

He also advised that making money should not be the number one priority. “Your goals should be, how do I refinance the property I have, how do I re-structure, sell the ones I can’t and maintain cash flow and credit.” Offering the corporate example of General Motors, he said that despite their woes, the company didn’t go down as fast and as far as their competitors.

Calling on history, Dent said there was a major crash in Japan in the 1990s and a major crash in the United States in the 1930s and that was it. The intervening years, he said, had been mostly up. “The Depression was a pretty good pattern for what happens, because we are going through a boom, bubble and bust. Stock markets and asset prices overreact and the banking system just gets killed.”

Dent said this is a 12 to 14-year process, with the 1929-1942 cycle as the closet analogy. He added that the real estate bottom should occur in 2013.

If we only see a modest rebound from the current stimulus efforts, the stock markets are going to react negatively, Dent said. World markets are going to look at the US dollar and say it’s deflated and that the country has “debased itself and has nothing to show for it.” Dent said that ultimately, either the stimulus will not be enough or the government will be forced to stop because its own dollars and financing become too questionable, too quick. He says for the economy to triumph, it will have to wash out the debt.

More specifically, he said there would be some temporary rebounds: stocks for three to six months; maybe commodities for 12 months; perhaps oil, silver and gold. But he warned that the US faces huge trade deficits and that half the debt is owned by foreign governments or entities who would not be as tolerant of the nation’s stimulus programs.

To address this, Dent recommended that the greater part of the stimulus package should be directed towards infrastructure projects. At present, it’s about one third of the package.

Dent told the New York audience they should be lobbying for infrastructure project money, that it pays off in the long term and that investments in it help make the most of the most attractive mega-city in America. More broadly, “if you can borrow money when things are down, at least have an investment that pays off in the long term. In 2012 or so, China, Dubai or Japan will say to the United States, ‘you guys are bankrupt, you threw away three or four bottles of Viagra.’”

But he added that these countries would be willing to make deals and help us if they get a piece of an investment like infrastructure, which is broadly defined. “If we’re going to add debt to stimulate the economy, you need to be lobbying for infrastructure.”