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Harry Dent Jr. interview

KAREN GIBBS: Most market watchers see a trendless market going into 2005 and beyond, but one prognosticator is bucking the trading range trend. Harry S. Dent, Jr., money manager and author of The Next Great Bubble Boom, says get in now, as we're in for another ride like the Roaring Twenties. Harry, nice to see you.

HARRY DENT: Nice to be here, Karen.

GIBBS: Well, you've got some very provocative ideas in the book, but I didn't really have to dig deep into it. Just looking at the jacket cover gave me a little pause here. You're predicting that the Dow could be at 14,000 by the end of 2005, and at the end of the decade we could see the Nasdaq at 20,000. Excuse my skepticism, but these numbers really sound off the chart.

DENT: No, they do. Actually our targets for the Dow by the end of the decade are 35 to 40,000 and for the Nasdaq our most likely target is 13,000. It could go as high as 20, but if we had to bet today, I'd bet 13,000. Now that sounds outrageous. You've got to remember, it got up to 5,500 faster than anybody thought in the late '90s. That is the same gain the automotive index, the tech indexes made in the Roaring Twenties after the crash, and that's a similar gain that the Dow made from 1922 to '29 from the bottom to the top. So we've also got another chart in the book that's interesting.

We show something called the Dow channel. Since the early '80s when the baby boomers started driving this boom with their rising spending and productivity, the Dow's been going up about 15 percent. We just hit the high end of that channel in '99, early 2000.We hit the low end in the correction. And if the Dow just keeps going at the same average rate since the early '80s, we're not asking for anymore than that, we do hit 40,000 by the end of the decade. So that's our best target. If it hit 30,000, I think most of the listeners would be happy.

GIBBS: You also say that you think the S&P is about 40 percent undervalued right now. And let's say we're at 1130. That's saying that the S&P 500 should be somewhere between 1500 and 1600.

DENT: Yeah, and we expect to see that next year, frankly. We expect to see the Dow at 14,000 plus by the end of next year and the S&P 500 over 1500 and the Nasdaq close to 3,000. Now one of the best long term indicators for valuations, you simply compare bond yields with the yields on the S&P 500, the earnings of the S&P 500. And it shows, yes, the S&P about 40 percent undervalued, and nobody wants to buy. But you've got stocks this undervalued with the demographic trends, baby boomers pointing up, and they never stop spending in this downturn. And you've got these technology cycles going straight from 10 percent in 1994 to 90 percent still zooming up. This is the investment opportunity of a lifetime from our point of view.

GIBBS: Well, your book title is kind of confusing to me, The Next Great Bubble Boom, and bubble brings feelings of 2000 when we crashed and burned. How can you have a bubble and a boom?

DENT: Well, we had one in the late '90s. Our book The Great Boom Ahead saw that coming way back in the early '90s when people thought like today, oh, you know, America's seen its best days, we're too much in debt, the deficit, the Iraqi war, the S&L crisis. But we had two important indicators. Baby boom spending, the simple, predictable demographics of when people spend the most money, and we've tracked technology cycles throughout history and know where we are on them. And we said, you know, technologies are going to accelerate into the mainstream of our economy. It's going to drive up productivity, create new growth industries and an incredible stock market. Now those two things happened.

GIBBS: But you know, we see these boom cycles, these bust cycles, and then they're followed by periods of trading ranges, kind of painful. I'm thinking of like '74 to '82 where the market just, maybe a 1,000-point trading range for the Dow, and then '87 to '91, another just dead in the water period. And we're coming off the bust of 2000 where baby boomers got burned and are very, very shy of the stock market. How are they going to play into helping this scenario play out?

» Another boom: Dent outtakes

DENT: Well, the thing is they're going to continue to spend and continue to invest. I mean that's what our indicators show. Demographics are very projectable, very predictable. The problem is people are getting whipsawed by this bubble boom. I mean what we tell people is not that a bubble has burst. We are in a bubble boom, and that's difficult for investors. '87 was the first bubble. People forget that, 40 percent crash like that on the Dow. That burned people. And you know what? Everybody said it's over after that. Then we get a bigger bubble.

Now we've got one more coming. People, baby boomers in particular, need to take advantage of this boom because after that baby boom spending will decline, put us in a declining economy for 12 to 14 years, just like the Japanese in the '90s and early 2000s. The U.S., you said that extended bear market, '68 to '82 stocks were down, 14 years. In 1930 to 1942, 13-year bear markets.

Generations earn and spend more money. We show this in a chart called "The Spending Wave," as they're moving in greater numbers to their peak spending years, which we can quantify. It's age 46 to 50. And then there's a decline with the baby bust to follow until the next generation comes along.

Every 40 years we get extended bear markets and people are surprised. They shouldn't be any more surprised at that than getting cold in winter in November. We chart these cycles, and it's important to take advantage of this next boom and bubble, because from 2010 to 2022 our spending wave is pointing down, just like it did for Japan in 1990 to 2003.

GIBBS: I can understand how we're going to see a fading back say after 2010, 2012, but I don't see how we're going to get there, particularly when we're facing situations that we've never faced before. We have never had so much geopolitical risk in the marketplace. And we've got foreign investors that are concerned about the falling dollar and what that does to asset values.

DENT: You know, things follow these trends. When you get a down market, value stocks do better than growth. The dollar's going to fall. Government deficits go up when the economy slows. We predicted in 1992, again way ahead of the boom and bubble, that not only would we have a boom and bubble, but the government deficit would disappear by 1998 to 2000 because the economy which strengthened the government's finances, rising taxes, falling inflation, which our indicators predicted would lower the cost of financing.

We see that again. This deficit will reverse. The U.S. will lead in growth again. The dollar will rise, so the dollar also follows these cycles. We get a bigger downturn, we lower interest rates to stimulate our economy more than Europe and other countries, our dollar falls. We have a high deficit, our dollar falls. All of those things will reverse. So we keep our eye -- economists always get kind of confused by all these things, interest rates, dollar, currencies -- we keep our eye on the ball. It's the demographics of generation spending and productivity cycles, and it's these new technologies that increase productivity and create growth industries that actually drive our economy. It's important to know where we are on those cycles.

GIBBS: Boomers aren't one to embrace new technology, though. How do you see boomers pushing this next boom, especially in the technology arena?

DENT: Well, you know, they have. We all say we resisted, but in 1994 cell phones hit 10 percent of households. This is a principle in our book we call the S curve. It takes a long time to get to 10 percent, but all of a sudden, you hit critical mass and things accelerate to 90 percent. Cell phones hit 50 percent in 2001 right in the middle of this crash and they're going to hit 90 percent by the end of this decade.

GIBBS: You're certainly moving against the grain here, because what I hear you saying is that we should be investing in technology now where everyone is saying stay away, don't touch it.

DENT: Nobody wants to touch it, yeah. It was the same in the early '20s. You see this big crash in tech stocks. Again, General Motors is doing the same thing Intel did 80 years earlier. We've got a chart in the book that shows General Motors 80 years ago in the last revolution -- that's about how long we have these revolutions, about every other generation -- crash, bigger boom. General Motors went up 22 times from '22 to '29, and people were saying the same thing, the tech revolution's over, I don't want to touch tech stocks. So tech was going to lead this next boom like it did in '95 to '99.

GIBBS: Baby boomers aren't the only ones driving this economy now. In fact the new term is the echo boomers, the sons and daughters of baby boomers. The outlook doesn't look so good for them though does it?

DENT: Well, you know, it's tough. They're going to have a very good job, they're just coming out of school, a lot of them, and they will be for many years, and they're going to have very good job prospects. They're going to be scarce, so they're going to be in demand during this boom, but a lot of them are going to be coming into their peak career cycles when this economy is slowing from 2010 to 2022. So they have a challenge in careers and jobs.

The baby boomers have the challenge of, "Oh my gosh, what's going to happen to our retirement funds if the stock market doesn't go up at 10, 12 percent a year like most people expect?" So again, people need to get these good jobs, get with good companies now. I'm telling a lot of younger people don't stay in school forever. Go and get a good job and advance your career while the economy is strong. If you want to go back and get a masters degree, do it in the downturn when it will be easier to get in a good college.

GIBBS: Okay. So you're saying for baby boomers get in on this train now. Don't wait for the market to start rallying, jump in and ride a pretty good rally up to 2010. At that point, what should investors do?

DENT: 2010 to 2012 is the danger period. We think that's when the next bubble will peak and the next crash will come. There is nowhere to hide in a time like that. Even real estate will be down by then. So you need to be in high quality fixed income. Now a lot of baby boomers investors may want to just ride out in corporate bonds and fixed annuities. Stocks aren't going anywhere, real estate's not going anywhere. But people who want to turn around and invest again, say once you get a major crash, let's say by mid-to-late 2012, you could start investing in health care and drug stocks because baby boomers are going to keep spending money on that. And incredibly Asia is going to be the part of the world, Europe is going to decline forever after this boom, we're going to start to plateau in the U.S., Asia will have incredible growth opportunities and continued consumer spending trends.

GIBBS: But along with those incredible growth opportunities comes lots of volatility. How much would you suggest Asia can take up of the portfolio?

DENT: We find that Asia should be 10 to 20 percent of your portfolio, because Asia helps to diversify against U.S. stocks. But if you put too much of Asia in your portfolio, the volatility starts to get you and it hurts more than helps.

GIBBS: You also back tested to the fifth year of the cycle, and is this why you're saying 2005 is just going to be a monster?

DENT: Yeah, there's two things about this decennial cycle. You do tend to get a downturn in the first few years. You tend to recover those losses in year three and four in most decades. All the gains in the stock market over time are made in the fifth through ninth year, the second half of the decade. Even in bear markets like the '70s and the '30s, you would have made money from the fifth through nine years.

When you look back, what's the best year in the cycle zero to nine? It's the fifth year. The fifth year has never been down in the last century. The fifth year has averaged 34.6 percent gains. Nobody's expecting the stock market to do that, anymore than they expected such a strong recovery in 2003. Every cycle we have says next year is going to be a strong year. If you don't get in here around 10,000 on the Dow, you're not going to see 10,000 for a long time and you're not going to get another opportunity like this.

GIBBS: Is there anything that could throw this scenario out of kilter?

DENT: You know, our biggest concern is the geopolitical scene.

Terrorism is not new. We actually had the first terrorist attack on America, a bomb on Wall Street in the early '20s, and that caused huge anti-immigration ethic in this country and had a lot of affects, and we had the Roaring Twenties anyway.

But, you know, this is a big thing, and you seeing something like 9/11 that, I mean four months, I was in New York four months after that, and condo prices were skyrocketing again. So it didn't stop people from buying houses, didn't stop people from doing business. But if we had something really major happen, that would be our biggest worry.

We're actually more worried (that) the terrorist type of threats come more and geopolitical conflicts come more in bad times than good times when people are dissatisfied. I mean, we don't consider it an accident that Hitler came out of the Great Depression and World War II came out of that. So we're more worried about that from 2010 to 2022, but that is the wild card.

We've also back tested and shown that when there is political crisis, the markets tend to be down for a few weeks, but tend to be at new highs within six months. They usually are buying opportunities. The Cuban Missile Crisis, the beginning of World War I, Pearl Harbor, the assassination of Kennedy, you know, all these things. The markets react, but demographics and technology cycles still drive the economy, and so those are still pointing up. Those are buying opportunities.

GIBBS: Harry S. Dent, Jr., thanks very much for joining us.

Greenberg on beds

GEOFF COLVIN: Well, that's certainly enough to keep people up at night, but across America there's new excitement in bed. I'm talking of course about the mattress industry, not traditionally the liveliest business, but suddenly you cannot avoid the ads -- for foam beds, air beds, Swedish beds costing $5,000. Mattresses are so hot that Warren Buffett has endorsed one, the Warren model from Omaha Bedding.

But just because the world's greatest investor has put his name on a mattress, should you buy into the industry? Here's a product category filled with innovation, excitement, aggressive marketing and a couple of publicly traded companies to look at very carefully. Our mattress correspondent Herb Greenberg joins us from San Diego, where he also writes for CBS Marketwatch. Herb, the company you have been looking at somewhat skeptically lately is Tempur-Pedic. They make that foam mattress. Now why the caution?

HERB GREENBERG: Well, the caution has nothing to do with whether the mattress is comfortable or is not comfortable. It's all about a stock price, and in this case Tempur-Pedic's stock has run up with the company's profits and sales, which have been very, very impressive. And this is a company investors are valuing, saying this company's going to grow 20 percent a year. But there's a problem here, and that problem, Geoff, is they've got competition, and what they really have in terms of competition is Serta, one of the biggest mattress makers, is quietly right now rolling out its own foam mattress, which is going to be priced less than Tempur-Pedic's, and which is going to have some features Tempur-Pedic's doesn't currently have, which according to Serta is also perhaps a little more comfortable, but that's all subjective because we're talking about beds.

COLVIN: Right. Well, of course what people who haven't bought a mattress in a while might be shocked by is what some of these things cost.

GREENBERG: Oh, my.

COLVIN: The Tempur-Pedic mattresses I checked start at $1,000, and that's the low-end twin size mattress, and they can go up to well over $2,000. So that would seem to leave a lot of room for somebody to come in at a lower price.

GREENBERG: Which is what Serta says it's doing. It says it's coming in and it's going to price its product at say a third below Tempur-Pedic. And when you have that happening and you're buying a company that's been a growth company, you just have to realize that there's somebody out there that may be taking share away from you at some point in the future, and that's the risk and that's what you have to worry about if you're right now taken by the strong momentum in a company like Tempur-Pedic.

COLVIN: There's so much going on in this product category right now. Serta primarily makes conventional mattresses, but even they have sort of stepped up the marketing. Here's a look at some clever marketing for some of their conventional products.

(video clip begins)

COMMERCIAL: The way we see it, Serta's the new way to fall asleep. Counting sheep, the old way. Look, the Serta Perfect Sleeper, supreme comfort, gets me to sleep fast. Counting sheep, slow, boring. Solution, you've got to be new, now, happening! Any suggestions? (Rap music) Gonna put you to sleep, gonna put you to sleep, with the sheep…

(video clip ends)

COLVIN: Okay, Herb, what is Serta trying to tell us? How are they trying to position themselves?

GREENBERG: It's interesting, because they're trying to position their regular traditional spring mattresses as being, you know, the best of class and something that will help you get to sleep a lot easier. Interestingly enough, this is before they roll out their commercials for the foam mattress, which is coming during the first quarter of next year.

COLVIN: Now one of the other things going on in this industry is the air mattress. Select Comfort, that is sort of the one other publicly traded company in this whole space, and you've taken a close look at them. What's their story?

GREENBERG: Well, I've taken a close look at them over the years through two different management teams that have been in there, and this is a company that sells pretty, the stock sells on the hype of the growth, but for some reason it's had several incarnations of the stock going up and being inflated with a bunch of hot air and then getting, you know, pierced because the company hasn't performed the way people of expect. But that said, the company's done an admirable job.

But again, is it a good investment? I don't know, because one of the interesting things here, Geoff, it's very interesting, talking to Serta, they even will tell you -- and they're going to roll theirs out formally in January and February -- but Serta says if you look at the history of beds back at the water beds when those were the alternative mattresses, the real question is what happens when people get rid of those alternative beds? In the case of foam, are they going to go from foam or air back to springs? Or are they going to buy foam again? And right now air and foam beds haven't been around long enough to go through a full cycle, and that's something that we're going to see starting in about two years, or so some of the industry experts say.

COLVIN: There's a larger trend here that I wonder if this is part of. You know, people will now pay $4.00 for a cup of coffee, which no one would have imagined. People will pay X-thousand dollars for a Viking restaurant range to put in their own kitchen. They now seem to be willing to pay thousands of dollars for a mattress, or if it's a DUX mattress from Sweden, $5,000 or $6,000. Is this part of this general upscaling thing?

GREENBERG: Well, you know, I was thinking about that -- and I tried the DUX, by the way, and I didn't like it because it was too soft -- but I will tell you that I don't think so, Geoff. I think as baby boomers age, we're all trying to blame something on our inability to sleep, and so we're coming around to it and we're saying we've got to find a better bed. And we spend so much time in bed, we're all realizing we're not sleeping well. And I'm one of those guys sitting there every night saying, is it the mattress? Is it the pillow? You know, will you stop moving, honey? It wakes me up in the middle of the night because I'm a light sleeper. Gee, foam won't wake me up. So maybe that's one of the things that really might be going on here.

COLVIN: That's a very good point. Almost everything can be attributed to the aging of the population I sometimes think. The foam mattress they advertise with somebody jumping on the bed next to a glass of water on the bed, right?

GREENBERG: Yeah, but here's the other thing. Simmons has a mattress that is a regular spring mattress with, you know, insulated, and I think they show a bowling ball falling down on it with a glass of wine not moving. So what's the difference between a Simmons mattress with springs and a foam mattress? I don't know the answer to that question.

COLVIN: It's a good point. I remember that ad now that you mention it. You know, while we've got you, let me ask you about one other thing, which relates to one of the most popular things that people do in bed, and obviously I mean watching television. You have been following Netflix, the company that rents DVDs through the mail. It's a hot company, right? Everybody talks about it. You have some concerns.

GREENBERG: Well, just because a company is a hot company and has great service doesn't necessarily mean it's a great investment, and that's what we're seeing with Netflix whose stock has just been obliterated with the company's own inability to determine whether it wants to raise prices, lower prices, it's all over the board. Netflix is another case of a company with competition, in this case coming from Blockbuster. And the reality with Netflix is the more the people use their business, the more people use their service, the more they rent, the less money Netflix makes. That doesn't seem like a great business model.

COLVIN: Is that because people pay a monthly subscription?

GREENBERG: They pay a monthly subscription.

COLVIN: And you can rent as much as you want.

GREENBERG: As much as you want. I've heard from some readers who are heavy users who say they're getting lousy service and they think -- and I don't know if this is true because Netflix doesn't take my phone calls -- they think the company is targeting heavy users, trying to get them out the door because they're too costly. Whether that's true or not, I don't know, but I'll tell you, it's a very interesting theory.

COLVIN: Herb Greenberg, it's always great to get a reality check from you. Thanks so much.

GREENBERG: It's always great to be here.

If I were Treasury Secretary...

GEOFF COLVIN: You aren't resting easy if you track the U.S. economy. Although it's growing smartly, the trade and budget deficits are a hot topic -- and so is the tax system that everyone agrees is an abomination but no one agrees on how to fix. Those topics came up when once again this week we asked two prominent Americans what they'd do if they were Treasury Secretary. Stephen Roach of Morgan Stanley may be Wall Street's most prominent and respected economist. Arianna Huffington ran for governor against Arnold in California and wrote a book about corporate executives called Pigs at the Trough.

ARIANNA HUFFINGTON: My most important priority would be to restore trust and confidence in corporate America. This is incredibly important both for people who sleep with a copy of Ayn Rand's Atlas Shrugged under their pillow, and for people who complain about all that's wrong with corporate America. Because right now for example we have this situation, just before the election congress passed a bill that is basically $145 billion dollar boondoggle for corporate America, absolutely loaded with pork and corporate welfare, a bill that John McCain called a disgrace and that Tom Daschle voted for before he got rejected by the voters. So this is not a right left issue, it's a question of leveling the playing field.

COLVIN: Stephen Roach also believes we're spending way beyond our means and don't realize just how dangerous that is.

STEPHEN ROACH: The first thing I would focus on would be the need to raise a very very low national savings rate in the US economy. Our savings rate for individuals consumers, businesses, and the government sector combined adjusted for depreciation is now at a record low, less than 2 percent. We can't keep growing without savings. It puts consumers in debt, it's America more in debt to foreign creditors than ever before. It raises serious risk about long term prosperity and the likelihood of a crash in the dollar, and a very disruptive outcome for other financial assets. We need to get savings higher. The single most important thing I could do as Treasury Secretary to raise national savings would be to eliminate this open ended budget deficit and to do it as quickly as possible.

COLVIN: Savings, deficits -- Arianna Huffington believes you can't talk money without talking morality.

HUFFINGTON: What the Treasury Secretary does, can be positioned in terms of moral values. I think what is happening right now is immoral, I think the Treasury Secretary needs to take morality back from those who have reduced it to sexual morality. It is immoral to have corporations defrauding the taxpayer, by having tax shelters, which often means having P.O. boxes in Bermuda, or other tax shelter islands. It is immoral to have corporate welfare increase while we are reducing welfare to the poor.

COLVIN: Stephen Roach says we'd better do a lot reducing -- lower our sights and face a tough reality.

ROACH: Given our low national savings rate in both the private economy and in these big budget deficits, that this is not a time for us to embark on lofty programs of expanding our government either thru a medical care, an ambitious medical care plan or thru the noble objective of tax reform. These are all things that we should do as a nation, but we can't afford them.

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