Sunday, December 12, 2004

The Bubble Booms on

I have been quite bearish on the economy and equity markets for the last 2 years, but I am always looking for convincing reasons to be less so. The best argument I've run across yet to believe that the bull market in equities is not over is by Harry S Dent, Jr. Harry is interviewed by Jim Puplava on the Financial Sense newshour. It is worth listening to.

Mr Dent draws the parallel between the 00 decade and the 1920's. We all know that the period from 1925 to 1929 gave us a raging bull market bubble, but what most people are unaware of is that this was preceeded by a bubble market and then a crash in the early 1920s. Dent points our that this period was both a demographic and a technological boom. The new technologies that spawned that bubble market, automobiles, electricity, radio, etc, followed an "S" shaped adoption curve, which caused an initial boom as these technologies grew to near 50% adoption, then a bust which was caused by a shakeout and consolidation of the best companies in those markets, and then a larger bubble market as these technologies were driven into the economy towards a 90% adoption. He sees the same thing in store for the computer & communications technology revolution that started to boom in 1995. The second part of that boom, the drive to 90% adoption, will take place between 2005 and 2009.

The second force that Dent sees driving a bubble boom for the next four years will be the peaking of the baby boom demographic bubble. His approach relies on deterministic demographic factors which point to 2009 being the peak spending year for boomers.

Before you get too excited, Dent foresees a very sizeable bear market following on the completion of this bubble boom, comparable in extent to the 1930s Great Depression, at least as far as the equity markets are concerned. He sees the Dow peaking at 40,000 in 2009, but losing up to 80% of that value over the next 10 years, back down to 8,000 or so. A sobering thought, but also a chance to profit from one more bubble, possibly the greatest bubble, before this technological/demographics cycle is through. If you missed out on the Internet bubble, you might want to give an ear to Harry Dent.

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