Harry Dent Says S&P 500 To Crash By 86% - Fearmongering Or Fair Warning? (SP500) (2024)

Dent on Fox

Harry Dent was on Fox News on June 9, and said that the S&P 500 could crash by 86%.

Dent is primarily an author, but he also managed Dent AIM Funds, not sure if this is still active. As a bestselling author, obviously, he benefits from extreme predictions, and potential fearmongering.

However, I have received many emails after his Fox interview, asking me whether Dent could be right.

The question is whether this is just fearmongering in order to sell more books, or is Dent's prediction a fair warning.

The government-induced "everything bubble"

Harry Dent is basically saying that we are in the government-induced everything bubble, which has been inflating for "14 years". He notes that bubbles usually last 5-6 years before deflating, but this bubble is still inflating. Thus, once it eventually bursts, it will be the "bust of a lifetime".

He compares the current bubble to the bubble in the 1920s, and states that the bubble in the 1920s was a "natural bubble", not created by the government. Thus, given that the current bubble is created by the government, the bust will be even bigger once the bubble bursts.

The government created this bubble 100%... totally artificial, injecting a drug to artificially perform stronger. And again, everything from human life to history shows, you don't get something for nothing, and bubbles always burst… it's a much, much higher possibility than anybody gives it.

Dent is basically looking back at fiscal and monetary stimulus after the Great Financial Crisis of 2008, as the root of the current everything bubble, which got further inflated with the Trump tax cuts, and even further by the extraordinary fiscal/monetary stimulus after the 2020 pandemic.

In fact, Dent is correct. The Federal debt as a percentage of GDP was only 60% in 2008, now it's at 122% of GDP, as the chart below shows. Further, the government deficit is currently at 6% of GDP, which is with the economy at full employment, and growing solidly at 2-3%. Thus, the government spending continues to stimulate the economy - and keeps the bubble inflated for now.

Similarly, the Fed's balance sheet was below $1T in 2008, and grew to $9T by 2022, before falling to just above $7T - that's still a $6T increase in the Fed's balance sheet since 2008. At the same time, the Fed lowered interest rates to near 0% in 2008 and kept them near these levels until 2022.

Thus, Dent believes that this excess stimulus created the everything bubble, which has been inflating for 14 years, and that this bubble has to eventually burst- and the bust will be spectacular, causing the S&P 500 to drop by 86%.

Dent specifically believes that the housing bubble is at the core of the crisis.

No time in history has housing been so widely owned and so many people having second and sometimes third homes just for speculation.

To be fair, even the Fed admitted in the May meeting minutes that asset valuations are "elevated" and housing prices are "elevated" relative to fundamentals, such as rents.

The staff provided an update on its assessment of the stability of the U.S. financial system. On balance, the staff continued to characterize the system's financial vulnerabilities as notable but raised the assessment of vulnerabilities in asset valuations to elevated, as valuations across a range of markets appeared high relative to risk-adjusted cash flows. House prices remained elevated relative to fundamentals such as rents and Treasury yields...

In fact, Dent is right, current housing valuations are near the highest level since the 1970s, by far, when looking at the price-to-rent ratio, as the chart below shows.

The S&P 500 is also trading at an extreme valuation, when looking at the Shiller PE ratio, which is currently at 35, as the chart below shows.

What would cause an 86% price crash in the S&P500?

So, by looking at the Shiller PE ratio at 35, an 86% drop in the S&P 500 could happen if:

• Earnings drop by 15-25%, which could happen in a deeper recession, and,
• The PE ratio drops back to sub 15 level, which could happen if the earnings growth expectations collapse.

So, these are the key questions?

1. How likely is it that the economy could slip into a deep and long recession? If the yield curve predicts a recession, and the deeper and longer inversion predicts a deeper and longer recession, then we could have a deep recession - because we currently have the deepest and the longest yield curve inversion in history.
2. What could cause the collapse in growth expectations and a sharp multiple contraction? We currently have an unfolding AI bubble in the megacap tech stocks, which are heavily weighted in the S&P 500. If it turns out that the AI is just a fad, the AI bubble could burst, and cause a significant multiple contraction.

Implications

The data supports Dent's thesis, the combined monetary and fiscal stimulus since 2008 has been inflating the bubbles. However the bubble keeps inflating, and it could keep inflating for another 14 years.

Dent does not really explain how exactly the bubble will burst.

My opinion is that the bubble could burst to the extent that Dent predicts only if the US Treasury becomes unable to borrow from global institutions. Specifically, should foreign institutions turn away from the US dollar and US Treasuries, the game ends. The Fed would be the lender of last resort, but that would crush the US dollar and cause massive inflation in the US.

We are not at that level yet, and the question is whether we will ever be at that level.

For now, I just see a regular cyclical recessionary bear market in the S&P 500 (SP500), which might be necessary to restore the price stability - and really endorsed by the Fed. The total drawdown could be 20-50%, and thus it could be significant like in 2008 and 2002, or something minor like in 2022. But I don't see an 86% drawdown. That's what I replied to the emails.

Damir Tokic