“I think we’re going to see the worst crash in our lifetime.”
“The last major global bubble we had was 1925 to ’29,” he said. “They come once every other generation, once in a lifetime, like a 90 year cycle, particularly. And we’re right on that.”
Dent’s forecast is informed by a handful of negative forces, including: exorbitant corporate debt loads, years of accommodative monetary policy (similar to the early 1920s), diminishing central bank efficacy, aging demographics, and lofty stock and real-estate valuations.
For context, here’s a look at the corporate debt load, which has risen to a record $10 trillion amid historically low borrowing costs.
“Credit, the corporate credit market in the US and globally — because of the sheer amount of issuance — is getting somewhat problematic,” Pal said said on “We Study Billionaires,” an investing podcast. “Corporate debt has doubled since 2008.”
And here’s a view of the market’s current valuations juxtaposed against historical norms, courtesy of Bank of America. Clearly, stocks are pricey.
Some worrisome elements have been building slowly for years, while others have only become more troublesome recently. In his view, the combination is reminiscent of a lethal elixir — one that could send markets spiraling. The coronavirus — which Dent refers to as a “perfect trigger” —was simply the straw that broke the camel’s back.
“So here we are with this perfect trigger and I’m saying, ‘Hey, this is going to cause a deeper crisis in 2008 to nine because we didn’t deal with it,'” he said. “I’m just saying, there’s a point where you have a big bubble, and a boom, and you have to de-leverage debt. And that’s what we did in the early thirties.”
In Dent’s mind, the fallout from the Financial Crisis wasn’t dealt with appropriately. The Federal Reserve simply “printed money and blew us out of that recession before we could restructure debt and do all the things that make you healthy again.”
That’s giving Dent cause for concern. During the early 1920’s, similarly responsive accommodative monetary policy set the stage for the Great Depression.
Dent sees common threads.
Now that the Fed has cut interest rates to zero, announced unlimited quantitative easing, started purchasing corporate bonds , and announced an initiative to buy state and local bonds, Dent thinks the central bank’s future effectiveness will be reduced to nil at a time when markets need it most.
“We had this first crash and of course they stimulated their way out of that,” he said. “They’d done everything, but each stimulus has to be stronger. And I think they lose control.”
Dent’s assessment of the current landscape is similar to that of John Hussman — the outspoken investor and former professor who’s been predicting a stock-market collapse.
In a recent client note, Hussman exclaimed: “The Fed has encouraged a maladaptive confidence that risk does not exist. This overconfidence of investors is itself a threat to their survival,” adding, “It should not be a surprise that I expect the S&P 500 to lose about two-thirds of its value over the completion of the current market cycle,” in a separate note.
Dent takes his prognostication a step further.
He says that the market will soon come to the realization that “no amount” of stimulus can “put Humpty Dumpty back together again.” And against that backdrop, he’s projecting a deeper downturn to occur early next year.
Dent, like Hussman, has a long track record of making extremely bearish predictions — and with mixed outcomes. He accurately called the decade-long slowdown that plagued Japan’s economy through 2001. However, his years-long call for a US stock-market bust has yet to materialize at the scale he expects.
“You know what happens? And I’ve got a 90 year cycle, which is right on 1929 with this one. When this happens, you don’t get a 30 or a 50% stock correction. You get 80 to 90,” he said. “I don’t care what age you are, but particularly if you’re over 30 or 40, you will never see a high this high again in real estate or stocks, you will lose almost all your financial assets and they’ll come back much more slowly.”