This Contrarian Indicator is Ringing Like a Fire Alarm
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, October 10, 2011: Issue #1617
In his new book, The Great Crash Ahead, self-styled “economic futurist” Harry Dent warns equity investors to cup their groins.
Stocks, he declares, will “crash to between 3,300 and 5,600 on the Dow by the end of 2013, or 2014 at the latest… Hold onto your life jacket and climb into the lifeboat. The next few years and the next decade will be the most challenging you have ever seen or will see in your lifetime.”
This is great news for stock investors. Terrific, really. Let me explain why.
History shows that Dent has a gift for getting the big macro picture completely backwards. I’ve written about Dent’s failed market predictions before. But let me bring you up to date.
In 1999, near the tail end of the longest and most powerful bull market in U.S. history, Dent brought out his book The Roaring 2000s Investor, confidently predicting that the Dow would hit 44,000 by 2008. He was off by 35,000 points or so.
Dent also argued forcefully at the time for Nasdaq stocks – the worst investment you could make in the New Era bubble – and predicted “the technology revolution will favor internet-oriented companies.”
Within three years, the Nasdaq lost three quarters of its value and the leading index of internet stocks plummeted 89 percent.
Ouch.
In retrospect, it’s obvious just how wrong Dent was. But during the internet mania, plenty of brokers and investors agreed with him. He sold thousands of books and raked in big bucks as an adviser to top Wall Street firms, including Morgan Stanley.
Bloodied but unbroken, five years later, using his same “demographic trends theory,” Dent published The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2006-2010.
Well, no. That period encapsulated a full-blown financial crisis and the biggest stock market bust since the Great Depression. In the book, he argued again that the Dow would hit 40,000, this time by 2009. The benchmark plummeted to less than 6,500 in the spring of that year instead.
With a track record like this, you might imagine Mr. Dent would get out of the economic prognostication game and think about, say, flipping pancakes or running a daycare center. But no, near the market bottom two years ago, he unleashed The Great Depression Ahead.
Within weeks of the book’s publication, the financial crisis began to ebb, the economy moved out of recession and the Dow began one of its most powerful rallies of the last 100 years. Corporate profits hit an all-time record. And within two years, the S&P 500, with dividends reinvested, doubled.
The Greater Depression? It’s still M.I.A.
You have to admire Dent’s pluck, if not his luck. This is a man with a penchant for getting the big picture spectacularly wrong. And – giving hope and comfort to equity investors everywhere – he now predicts a stock market crash is dead ahead.
Is this truly good news or am I just having fun? Well, both.
In 1995, two finance academics, Campbell Harvey and John Graham, looked at the performance of 236 strategies from 132 investment newsletters. Their discovery? Fewer than 35 percent of the investment letters achieved long-term returns that matched the return of simply buying and holding the S&P 500.
There was one extraordinary finding, however. The performance of some gurus was absolutely horrid, lagging the market by 10 percent to 40 percent per year.
Harvey and Graham concluded that the worst market forecasters are so miserable that their performance could not be attributed to chance! (In other words, it didn’t seem possible to get it that wrong.) They pointed out that you could prosper mightily by doing the opposite of what these gurus recommend.
So a sophisticated investor might note Harry Dent’s new take-no-prisoners forecast… and immediately go long stocks.
There are plenty of contrary indicators…
- The put/call ratio.
- Short interest.
- Mutual fund flows.
- Investor sentiment.
- Consumer confidence.
- The odd-lot indicator.
- And so on…
But Mr. Dent appears to occupy a special place on Mt. Olympus… or at least Mt. Rushmore.
Yes, yes. I know. Even a blind squirrel can pick up an acorn sometimes.
Still… I thought you deserved to know.
Good investing,
Alexander Green
Any investment contains risk. Please see our disclaimer.
23 Responses to “This Contrarian Indicator is Ringing Like a Fire Alarm”
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Great feedback and timely. Thank You
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I’m curious to know – future article perhaps – how much weight presidental candidate Mitt Romney places in the ecomonic policies and future economic indicators of his former school (Harvard) and work mate (Bain). The obvious, goes without saying.
[Mr. Dent received his MBA from Harvard Business School & worked at Bain & Company.]
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I remember Harry Dent and still to this day wonder how he is still around making any kind of investment prognosis of anything. I agree he should be banned from writing about something he has absolutely no knowledge in.
So if you read Dent, just do what he say’s not to do! You will do much better.
Just saying!
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I suppose that if you keep predicting the same thing for a lifetime eventually you will be correct.
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Alexander:
I just received a mailer from Harry warning about the Dow crashing to 3300 and it was very convincing. According to the mailer Harry had a perfect track record and had never been wrong. I was about to sign up. Thank you for telling us the truth.
Allen
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It seems there really are some market forecasters who are consistently wrong about something, and Dent looks like one of them.
There is a TV personality who forecasts the price of oil wrong almost all the time. I invest opposite to his advice and have done OK with that strategy.
It’s ironic that such people often make a lot of money by selling their advice, not by following their advice.
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Mirroring the book by Harry Dent, in early 2009 Martin Weiss offered his views in a book titled The Ultimate Depression Survival Guide. Chapter 1, “Why a Depression is Inevitable” doesn’t forecast when the depression will hit, but subsequent chapters offer investment advice that could be helpful if there actually were a depression. Have readers profited from his advice since the book’s publication? I would be interested to know.
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Truly daft article. It’s easy to carp, but most people are well off the mark, including Alexander Green himself. Remember his recommendation of Market Vectors Gold Miners on 30th June 2008? They were worth 47 then and fell to less than 20 by the beginning of October, just three months later. 60% off. BRAVO?
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I did learn one thing from the Roaring 2000s, the term “half-back”. His predictions about the demographics of North & South Carolina seem to have been a good call.
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I bought and read Dent’s forecasting book.
I’m just so glad I’m subscribed to newsletters like this one. This post was amazing. Keep up the good work.
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There was also a dreadful AIM (now Inesco) Dent mutual fund…a real go-nowhere then a long slide down investment. Glad I bailed on that one before the fund was quietly dropped.
That said, Dent knows a few things about demographics but can’t seem to turn it into an investable idea.
I look at the Boomers and see increased prospects for health care, health technologies, residential options for seniors (besides dreadful 55+ communities), leisure and travel for seniors, etc.
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And precisely what, pray tell, qualifies a man with an absolutely dismal financial record to run a day-care center? Given that most mothers no longer have the luxury of staying home, this is one of society’s most important undertakings. Do you want your children under this man’s supervision?
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Shame on you for picking on the people who rode the short bus to school. He does not deserve to be ridiculed about a few mistakes, even if it is every one he has ever made. The good news is there are plenty of suckers to buy his predicto rags so at least he is off welfare and not collecting my tax dollars. Keep up the good work.
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In 1980 after 10 years with a broker, I realized that the market usually went the opposite of his recommendations. I made money on several stocks he was not recommending. I completely agree with you on Mr. Dent.
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Dent makes one observation that is correct:
The Baby Boomers are the largest cadre passing through the population, and they are now on the road to retirement. That should have a major effect on the economy (not necessarily awful, but certainly significant)
I trust that Mr. Green will have some investment projections to share with us, regarding the shifts that will play out in the economy.
We look forward to that ongoing commentary!
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Alex:
Regarding your article on Harry Dent, I read and understand what he says but do not necessarily act on his recommendations except for buying AEC common stock based on his long term trends analysis. AEC makes sense to me given the current condition of the economy and housing market and has held its value during the recent market volatility. Also, his reasoning is quite in-line with the Oxford Club and other publications coming out of Baltimore. Perhaps he is more doom & gloom but his scenario(s) are possible maybe just not as highly probable as you would like. His underlying rationale is that the U.S. government, especially during the 8 years of Bush administration, has overspent and paid for those expenditures by printing money which has and will continue to devalue the dollar. We are far from over this quagmire and many bad things are still going to unfold.
We have to live within our means in the future but have to first work our way out of the current mess.
I factor Harry’s analysis into all the other information I receive.
Michael Upper
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Thanks for the heads up on Dent. The world seems to be aligned into two prediction camps-the coming great inflation or great depression. Both are horrible but in dramatically different ways. Assuming one will prevail, Dent has a 50% chance of being right.
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I have always wondered how such a confident predictor’s predictions fared. Yet, in a recent speech, he seemed to make sense on his theory that since the baby boomers drive consumer spending (70 % of US economy). and that since house buying is usually a function of young family formation (need and conditioned aspiration) that the housing market may remain moribund into the foreseeable future in North America. Any thoughts on this?
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I agree that Dent can get the big macro picture wrong, but I give him credit for his superb exposition of the details of the financial world. In short order he explains things like the securitization of home loans, the details of how the Fed actually “prints” money, etc. (just look at the index of his latest book).
Armed with some knowledge, I can work out my own macro picture tracking targeted ETFs. Whither China, FXI; our financial system, XLF; the dollar, UUP; commodities, DBC? You don’t have to buy them, just follow them with a charting service.
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Thanks for the humorous update about the now infamous Harry Dent. More to the point, Mr. Green, please tell us about a few of the prognosticators who got it right over the last 10 years?
Would you give us those names whether they come from Oxford Club or not.
Would you care to share that information with the readers??
Many claim a good track record, few can be verified!
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truth is, from a marketing standpoint, the best time to sell a superbearish forecast or newsletter, coincides with a peak in amateur pessimism. The recent AAII poll showed the ratio of bears to bulls has not been this negative since MAR 2009. Mr. Dent will probably sell a lot of books. Having a senior moment, so can’t remember author of saying “you’ll never go broke underestimating the intelligence of the average investor.” Sheep to the slaughter.
jjd
Newtown CT
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I find the comment by the gentleman about spending by the bush administration for 8 years interesting,
does he not know that the Obama administration has already outspent the TOTAL of every other administration combined!? I do agree the Bush administration and most others have way overspent,but the obama administration makes the others look like minor leaguers.
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Pair Dent with Suze Orman and you have the perfect contrarian indicator system, with a timing signal.
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