How to Profit From the Upcoming Downturn

Yesterday, the New York Stock Exchange recorded a 1010.14 intraday trading loss that they are blaming on computer errors. By the end of the day the stock market had recovered some of the lost ground only being down 347.80. But for the consumer that is somewhat skittish about the shape of the economy and is concerned about huge run up in stocks over the last several months, this event may be one more challenge for ongoing consumer confidence.

Even though business in the first quarter has been good for a number of retailers, the rest of the year still looks to be a challenge requiring aggressive promotional activities coupled with sharp merchandising to encourage the customers to part with their dollars. The government stimulus of tax refunds and new homeowner tax credit are gone for the year. The good news is that a number of people have bought homes recently and will need furniture. The bad news is that without the tax credit, the housing activity is expected to be stagnant for several months which does not bode well for later year activity.

But of far greater concern is the overall health of the economy beyond housing

My son Jay and I attended the Glazer Kennedy Super Conference recently where high level entrepreneurs and sharp marketing people gather to network and share ideas that are working in businesses across the country. In one session of over 800 people, the speaker asked for a show of hands of how many people had an increase in business from 2008 to 2009 and over two thirds of the room raised their hands.

Into this environment, we had the good fortune to hear from Harry S. Dent, Jr. The program introduced him as “among the most reliable, successful and celebrated economic and business trend forecasters of our time!” Dent uses the science of demographics to predict the direction of the economic activities in all countries. His recent book and an audio CD series that followed deal with “The Great Depression Ahead” and “How to Prosper in The Downturn” in my opinion are must reading and listening to gain a different perspective on the true state of the economy.

Jay and I actually had lunch with Harry before his talk (it’s a long story so if interested in how I did that you’ll have to ask me later). But I can tell you from the lunch and later the speech that Harry is unwavering in his predictions. There is absolutely no uncertainty in his mind that what is about to occur is inevitable. It is not if, but when.

And folks, it’s quite scary….

• What Harry predicts is that we will experience a huge market crash sometime late summer to early fall of this year.
• He believes the market could lose 50% or more of its value by year end.
• He believes it will take approximately 2 years thereafter before the economy gets back on its feet.
• To prosper he recommends going very liquid in your investments so that when the market does tank, you will be there to buy up stocks at 50 cents on the dollar.
• Get rid of any non-performing real estate at whatever the price because it will be worth less in 6 months.

Based on life cycle spending, demographers can predict with much certainty when household spending patterns will peak and fall. Harry’s predictions are that the baby boom generation spending habits are entering a period of saving for retirement and not spending on kids or things. There will be a lack of demand for many consumer products because the next generation coming along is much smaller and will not have the same buying power as the baby boom generation.

His specific timing for the crash later this summer is based on several elements.

1. Mortgages are due to reset in July, August, September, October. More foreclosures will follow.
2. Consumers will not be participating in the 2^nd and 3^rd quarters when the government stimulus wears off. Unemployment is still quite high around 10% so there is not purchasing power.
3. Investment banks are highly leveraged
4. There is an incredible amount of government debt along with unfunded federal liabilities that must be accounted for.
5. Interest rates are being artificially held down. Once they go up it will stifle investment even more.
6. China has a huge real estate bubble that could pop by year end.
7. This problem in Greece is just one of many European country challenges that will hurt the US indirectly.

In his opinion, the real concern is not inflation but deflation. The private sector is massively deleveraging that leads to deflation. The last time we saw deflation on this scale in the country was 1929 through the 1930’s. Businesses that keep standing will be the winners. Businesses with cash, cash flow, and credit will survive and thrive after the next couple year’s shakeout.

I present this to you as an insight for contrarianism that if proved accurate could help you position your business and your financial future. I am by no means a financial authority, and my financial advisor did not get as worked up about Harry’s teachings as I did. So do not take this column as an endorsement and blame me if it doesn’t work.