Depression? What Depression?

My latest bedtime reading is a book called The Coming Great Depression by Harry S. Dent. I keep it on my nightstand, and read a few pages every evening before I go to sleep.

The Coming Great Depression? Sweet dreams, buddy!

Dent is primarily a demographer, and he uses demographic trends as a tool for forecasting the economy. His major point is that there is a strong correlation between birthrates and asset prices (stocks and housing), with a forty year time lag. Put another way, if the birthrate goes up this year, in forty years the stock market will go up as well.

The logic behind this observed correlation is simple. People in their late thirties and early forties are at their peak productive years in the workforce. Also, those are the years of peak consumption, as people raise families, move up to bigger houses, spend on their children’s education, etc.

The primary prediction of the book is that the current downturn is only the start of a longer down cycle. The down cycle will play out over the next 10 to 15 years. The bottom of the trough will occur in 2012 or 2013, with the next boom cycle starting in 2022.

After the post WWII baby boom generation, birth rates fell and we had what is called the baby bust generation that followed. What Dent calls the Echo Boom generation was born in the eighties, a time of increasing birth rates. The dearth of baby busters will cause the drop off in the economy, and the Echo Boomers will ignite the next growth cycle as they hit their peak productive and consuming years.

The author throws in a lot of other cycle analysis to support his arguments. He mentions commodity cycles, technology cycles, political cycles and others. The periodicity of these cycles range from 18 to 250 years in length. I’m not sure I buy the additional arguments. I mean, please. A 250 year cycle that he can predict will bottom out in the next ten years? It just sounds like looking for arguments to support a predetermined prediction.

The central demographic argument is compelling, however.

If we are headed into an economic trough that will last 10 to 15 years, than equity investing is a losing game until the next up cycle starts. Better to focus on building up your cash position and acquire high rated bonds.

The good news for me is that if Dent is right, the next upswing in asset prices will occur just as I am getting ready for retirement. A rising market will fund my golden years.

Of course, Dent also wrote a book called Dow 32,000 a few years back, at the height of the tech boom, and we know how that turned out.

I’ll take it all with a grain of salt.