Economic forecasting 101: always do the reverse of what Harry Dent predicts

Posted on 11 September 2012 with 5 comments from readers

Some forecasters like Dr Marc Faber or Jim Rogers have been so obviously right in most of their big calls for more than a decade that they justifiably have iconic status. Others like Harry Dent made their reputation 20 years ago on one good call and have been struggling pretty much ever since.

We last wrote about his predictions in February 2010 when the Dow Jones was at 10,000 and he thought it was about to crash to 2,200-3,000. Today we sit comfortably above 14,000. Get out of gold, he said then, what sort of advice was that?

Wrong yet again

Previously Mr. Dent’s real howler was forecasting a massive stock market bubble in the late 2000s with the Dow at 35,000 that never came close. Indeed, in his last book has was almost humble about noting the complexity of intermingled cycles that make forecasting tough. Why carry on? But he does.

Today Mr. Dent is back on his old hobby horse of deflation being the problem ahead of us, not inflation in his latest tome.

He argues: ‘Think of it another way: what is the biggest single cost of living today? Is it gold? Oil? Food? It’s none of these. It is housing. And what is housing doing? Dropping like a rock. It can’t muster a bounce, despite the lowest mortgage rates in history and the strongest stimulus programs anywhere… ever. The Fed is fighting deflation purposely. It will fail.’

OK but that would be US house prices that have already deflated for the past five years, this is history not the future. US house prices are very low, so low they have nowhere to go, except up perhaps. And what about the price of gold, oil and food? They are rapidly inflating in price. Gold is up $200. Brent crude close to $115. Food prices are up 10 per cent due to crop failures.

Mr. Dent makes his stock market and economic predictions based pretty much solely on the analysis of demographics. This is at a time when automatic trading software and mining robots work on their terms, but successfully in the same field by encrypting many technical parameters and financial indicators. Still, none of them, not even the Bitcoin Loophole software can guarantee 100 percent accuracy. It is astonishing as how Mr. Dent tries to bring accuracy with population alone. His view is that if you get population trends right you can forecast economic growth and therefore where stock markets will do well. It sounds so plausible but can you accurately forecast demographics?

The UK has just seen its largest population increase over the past decade in 200 years due to massive immigration flows. Really the economy ought to be booming instead of being locked in stagflation and debt, and the stock market should be at a record high.

In this example we can see that both the demographic prediction and its predicted effect were wrong. It’s a flawed science with a flawed analysis of its consequences.

Inflation not deflation

So it would be a reasonable conclusion that Mr. Dent has it all wrong again. We have already seen the deflation of the 2008-9 crash in the US housing market and what lies ahead is the inflation as an unintended or perhaps intended consequence of the money printing by central banks that followed, and that is far from over by the way.

What’s wrong with the theory of demographics? Might it not have something to do with the differing spending power of different populations and the capricious nature of their central banks who fight rather than roll with the trend?

Even today 300 million Americans can outspend more than 1.3 billion Chinese and so can their central bank. Brute population numbers are only a part of the equation and highly misleading if you try to use them to try to judge future economic output or stock markets.