A Crash Scenario for Late 2010

05/12/2010 03:19 pm 15:19:50 | Updated May 25, 2011

"The most dangerous thing is illusion," Ralph Waldo Emerson wrote.

But last Thursday's nearly 1,000-point decline in the Dow Industrial during the trading session was no illusion, nor was the accompanying 600-point tumble that day in a mere 20 minutes. It was the real thing as that day's devastation wiped out nearly $1 trillion in equity values as the Dow wrapped up the session with a 347-point loss.

More frightening, as Florida investment adviser Harry Dent, Jr., sees it, that day's bloodbath is "a sign of things to come."

First, though, his reaction to the announcement the other day of a $1 trillion or $955 billion European rescue package that sent the Dow soaring 404 points. "Are the markets nuts or what?" asks Dent. He thinks the buyers who eagerly snapped up stocks that day are unmistakable illusionists, which my dictionary defines as persons subject to false impressions. Where the investing public is concerned, he thinks these illusionists are all over the place.

The last time I caught up with Dent was in February when he predicted the Greek and European debt crises would get progressively worse and that the stock market would run into hurricane weather in May. He was right on.

His update on the European crisis: the markets are still in total denial about the total amount of debt in the developed countries and the ability of governments to bail out and guaranty everything. They simply can't, he says. Now we have the European version of TARP (Troubled Asset Relief Program) -- another $1 trillion in stimulus and rescue. Where does it end?

Dent, the editor of HS Dent Forecast, a monthly newsletter out of Tampa, Fla., looks for economic and geopolitical, and possibly even geological, challenges to continue to occur, and eventually our bail-out programs will not be able to respond. This is very likely to start to happen, he says, between July and August, and that will finally kill the "debt denial."

Addressing himself to what he regards as the most worrisome U.S. issue, burgeoning debt -- $14 trillion in government debt and $42 trillion in national debt, of which $17 trillion is in the financial sector alone, in turn creating unprecedented leverage in investments, Dent figures once the markets wake up to the total amount outstanding and recognize the fact that it cannot be sustained, there will be rapid deleveraging.

A contrarian and bearish as the dickens, he also takes a dim view of our economic scene. In contrast to many economists, who are looking for 3% to 3.5% GDP growth this year, Dent expects the economic roof to cave in around year end, with GDP turning negative between the fourth quarter of 2010 and the first quarter of 2011, and then worsening after that.

His chief reasoning: Serious mortgage delinquencies will continue to go straight up, meaning home prices will not come back and banks will be struck with massive loan defaults; baby boomer spending, which peaked between late 2007 and early 2010, will falter badly, and unemployment, now 9.9%, will shoot up to 15%.

Obviously, such expectations herald bum tidings for the stock market. Dent agrees, but not immediately, he says. He thinks investors should stay with the markets for now, as he feels new highs -- in the 11,600-11,800 Dow range -- are still the most likely scenario into late June or beyond. But then, he would sell into the rally and run because he sees another market crash that should knock down the Dow (currently around 10,830) to about 3,800 by year end. At the same time, he says he would unload real estate, commodities a bit later on and then move aggressively into cash.

Speaking of commodities, Dent thinks that gold, which recently scooted to an all-time high of about $1,245 an ounce, may have hit a top for now after achieving 96% bullish readings in trader sentiment. He has similar thoughts about the U.S. dollar, which has attained 98% bullish readings.

It's worth noting that Dent has made some flamboyant forecasts in past years that have turned out to be dead wrong. Most noteworthy, I recall, was his 2005 prediction that the Dow would hit 40,000 in 2009. Still up in the air is another wild forecast -- which he doesn't consider wild -- that was the subject of a book he had published last year, a New York Times best seller, by the way: The Great Depression Ahead.

We won't have to wait too long to judge his accuracy on this score since he expects the second Great Depression to kick off later this year or in early 2011.

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