Monday, November 26, 2012

Revising H.Dent's Cycle...L&C

Are you familiar with Harry S. Dent? He has written a few bestsellers with accurate predictions about our economy, the stock market, inflation and deflation. His breakthrough studies revolve around demographics. Economic pundits disregard his work and their track record of never being correct is the best recommendation for Dent.

In his most recent work, The Great Depression Ahead, Dent says our economy has peaked because the earning and spending habits of the present generation, the baby boomers is over. He divides life into four seasons: innovation, growth/boom, shakeout and mature. These four seasons span 80 years and this is a reflection of our economic cycle. As I continue, I will add an important feature of his work to which I differ on one aspect, the commodity cycle.

Kondratief Wave
was the beginning study in this demographic cycle thinking, but Stalin killed this great economist because he said it did not matter what any leader or government attempts to do, the cycle will prevail and in 1929, proved its validity. You see, contrary to beliefs, inflation is caused by children. This is the innovation period. Ideas are developed. New products follow, but generally only the wealthy can utilize them. This aspect is an important concept in the four seasons. Dent applied the S-curve principal to demographics. For example, the cell phone. This new product needed refining, the costs and service was poor and penetration limited. With improvements the masses adopted the technology.
If you look at a chart along the S-curve for the cell phone, back in 1990, it reached only 1% of the population. By 2000 cell usage reached 50% and by 2008, usage entered into the mature level with 90% penetration. It is the same with everything. Now, when a product reaches the mature stage, it can suffer from shakeout. Only the strong will survive. Keep in mind other ideas about capitalism like Joseph Schumpeter who injected the point that capitalism has within itself the fact that new ideas destroy old products,"creative destruction.": Vinyl records to the eight track to the compact disc to the CD. If you apply this shakeout concept to reality, Gateway is gone. Dell and HP are in decline. The PC is in the mature stage and even Intel is having some problems.

According to Dent, our economy is in the shakeout season and deflation will surface as the biggest threat to our economy. He says, real estate will suffer and he is on the money with that call. He also says commodities like gold and oil will suffer in price. He bases this in a correlation to the shakeout season as Dent says there are two 30 year commodity cycles within the 80 year lifespan cycle and the first 30 years cycle just peaked. I disagree. I believe that we only have reached the 50% penetration level within the commodity cycle and the time difference between Dent and I is because the economic life cycle has been altered by modern governments with their central banks running deficits with disregard to strength of currency which have affected the markets along with regulations. If you look at any trend in any product, there is a pattern in the up thrust or down slide. Nothing goes straight up or down. There is a zig-zag trend. At the moment, housing is bouncing, but I feel that this is just the zig movement and the next level will be down or zag stage to complete the cycle. Now, I think that gold will have to reach the 90% level before capitulation takes affect. I'm sorry, Harry, but I see a big, big, upside in gold before it feels any deflationary effects. 
Liars and Crooks: Will be exposed when Congress talks with the President about the debt ceiling, the fiscal cliff and the subsequent effects on taxes and spending. You will see only personal image and lack of character as opposed to what John F. Kennedy wrote about in his, Profiles in Courage.