08/05/2010 11:04 am ET Updated May 25, 2011

The Grim Reaper's Tale of Horror

It's not every day I chat with the grim reaper. Inappropriately, I rang him up at his home. It would have been more fitting if I had reached him on the set of one of Hollywood's Frankenstein or Dracula horror films.

Given the non-stop flow of dismal economic tidings, one of which was the recent disclosure of disappointing second-quarter GDP growth of 2.4% -- I decided to buzz someone from the dark side. I figured it was an appropriate choice for the current environment even though the overwhelming number of economists see sunnier times ahead later this year and in 2011.

Since we're all being peppered by a bevy of conflicting economic messages, who are we supposed to believe? Should it be Tim Geithner, who says the economy is healing? Or Ben Bernanke, who sees a strengthening economy? Or maybe another grim soul, Paul Krugman, who insists we face a lengthy depression> And let's not forget President Obama, who claims the economy is getting stronger with each passing day.

Our grim reaper is Harry S. Dent Jr., economist, author, newsletter writer and head of HS Dent Investment Management of Tampa, Fla.

Yuck! I should have never called Dent. His outlook was frightening. It was like getting run over by a bulldozer. No, make that two or three bulldozers.

In January of 2009, Dent, an economic bull from 1988 to 2007, spoke to a London investment group during which he commented on the Obama Administration's $787 billion stimulus package. He ridiculed it, saying "Imagine taking a whole bottle of Viagra and not having anything happen."

Now, some 19 months later, judging from his latest thoughts, he clearly thinks a whole case of Viagra would undoubtedly be fruitless, as well, in revitalizing what he predicts will be an increasingly sagging economy.

Dent, who hastened tell me "I've been the most bullish economist around over the past 20 years," has dramatically shifted economic gears -- to such a degree, in fact, that he would likely be most comfortable in the Krugman camp (an outlook that most economists view as sheer folly).

Dent's current outlook is downright ominous. In a nutshell, he looks for the economy to tip into a double-dip recession in January, which he says won't be mild, and that it will get worse from there as we move into a period of zero economic growth.

In fact, for all of 2011, he believes we could see an astounding 10% retreat in the GDP, which sharply contrasts with consensus expectations of GDP growth for the year of a shade over 3%. Further, he sees the economic weakness spilling over into 2012.

Why so gloomy? Dent cites the following:

  • A collapse in consumer spending by the aging baby boomers and their parents as they save more and spend less.
  • Another stock market crash, which he expects to begin the next two to three weeks.
  • Off-the-chart debt, 42 trillion alone at the private level, to hold back spending.
  • Little or no relief in real estate despite what the press and real estate agents have to say,
  • Rising unemployment.
  • Growing signs of deflation

Before dashing for the hills, it should be duly noted that Dent, like many of his investment brethren, has had his fair share of forecasting blunders. One of his more memorable goofs was his 2006 forecast that the Dow would hit 40,000 in 2009.

By the same token, in the late 1980s he accurately forecast a slowdown in the Japanese economy that would last for more than a decade. Likewise, in the early 1990s, he predicted the Dow would reach 10,000, a target which it subsequently topped.

Addressing the nation's two most critical economic issues -- employment and housing -- Dent sees more chaos on both fronts.

Regarding the creation of new jobs, pointing to serious questions as to when we'll begin to see signs of a sustainable economic recovery, a lot of unused capacity and the reluctance of companies to spend on capital expenditures to expand, Dent figures the rehiring process will be very slow. As such, he expects the unemployment rate to climb to 15% by mid-2011.

As for housing, he sees rising mortgage defaults and an avalanche of foreclosures helping to push housing prices considerably lower. Dent estimates prices have fallen 28% to 30% since the early 2006 top and he expects that decline to expand to about 55% over the next two to three years. That's roughly another 25% drop in home prices, an event that would lead to a new housing crisis.

Dent figures if this were to happen, "it would kill the banks, a lot of them would go under and the government would have to restructure the banking system and all the bad loans."

As Dent sees it, an economic collapse similar to what took place in the 1930s can't be avoided, but only be deflated in severity.

Given such a grim outlook, it's obvious our grim reaper sees stock prices heading much lower. So how low is low? Initially, Dent looks for the Dow (now at around 10,680) to skid to 6,440 or lower in the months ahead and then follow with a further decline to 3,200 to 3,800 within the next few years.

Since he thinks this month is the most likely one for a stock crash, his advice is to be out of the market or be short (a bet equity prices will fall).

For conservative investors, he recommends the purchase of Treasury bills and then later invest the money in stocks and real estate when they're much lower in price.

For aggressive investors, his best bet -- a wager that the S&P 500 will fall in price -- is an exchange-traded inverse fund that trades under the symbol SH.

Asked how he reacts when people challenge his doomsday scenario, Dent simply suggests "If someone wants to be a Pollyanna, be my guest."

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