Harry Dent Jr. is principal of the H.S. Dent Foundation and H.S. Dent Advisors, which serves as the sub-advisor to the $354 million AIM Dent Demographic Trends Fund and the Roaring 2000s Unit Investment Trust managed by Van Kampen Investments.

Dent is a prognosticator of economic, technological and demographic trends, and author of three books including The Great Boom Ahead and The Roaring 2000s. Dent's fourth book will debut this fall and will provide more comprehensive forecasts for the next 20 years. Dent discussed his predictions and their anticipated fallout on the fund industry with Mutual Fund Market News' Lori Pizzani.

MFMN: On what do you base your predictions and projections?

Dent: We have studied history for 3,000 years and have seen the same technology cycles, inflation, deflation, population and people trends, 40-year generation cycles, and 80-year economic revolutions. History very much repeats itself but you have to understand the new drivers of each cycle.

MFMN: What relevant trends are you seeing now?

Dent: Right now, 50% of people invest in mutual funds, up from less than 15% in the early '70s. That is likely to grow to well over 70% of the population owning mutual funds.

We are moving into a millionaire economy. We're in the most unusual boom in history and we are seeing more and more individuals with substantial net worth. Incomes are getting higher so people can save in mutual funds more easily. For the first time in history, people are starting to experience equity investing through their 401(k) plans.

MFMN: Given the stock market's difficulty over the past two years and the current economic recession, have you backed off from your prediction that the Dow will climb to 35,000 within this decade?

Dent: My viewpoint hasn't changed. The Dow has been growing at about 15% per year since the '80s. Even with the corrections of 2000 and 2001, which saw the Dow hit the bottom of our prediction channel [range] we are still predicting the Dow at 35,000 in late 2008 or 2009.

MFMN: What will drive the Dow to that peak?

Dent: The upward trend is driven by the predictable spending patterns of the Baby Boomer generation. Right now, Baby Boomers are in an investment cycle, an accelerated investment mode. They are in their late 30s and into their 50s and spending is at its height. We're still in the heat of strong Baby Boomer spending.

Before the 80s, we didn't have government surveys on what consumers spent. But there's an information revolution and with new technology we can readily predict spending patterns. Only demographics will tell you where you are on a cycle and when the boom will end.

We are seeing the same new technology cycle today that we saw in the 1920s, even though the technology is far different today. Wireless phones, the Internet and home PCs are working their way into the population with a 50% penetration. That could climb to 90%. We're likely to see more tech mania, like the kind we saw in 1998 and 1999, from late 2002 through 2008 or 2009. By 2007 we will see a return of irrational exuberance. Nasdaq may get as high as 16,000 to 20,000 then.

MFMN: That's good news. So what's the bad news?

Dent: The Baby Boomer spending will have peaked in 2008 or 2009 and we will then see a more difficult economy not unlike Japan's economy in the 80s when they had no Baby Boomer generation feeding their economy. We saw the same kind of generation peak in the U.S. in the 1930s and the 1970s.

MFMN: So what happens after 2008 or 2009?

Dent: Baby Boomers will start leaving the workforce. We're projecting that from 2009 until 2023 there won't be as much spending by Generation Xers. It's not that there won't be as many of them as there were Baby Boomers. But Gen Xers don't want to spend as much on cars and houses, etc.

MFMN: What will be the fallout of that decreased spending by Gen Xers?

Dent: After 2009, the U.S. stock market will fizzle out. We're telling mutual fund companies not to worry about going to value or sticking with growth styles. We are telling them to start building up their bond offerings and focus on non-U.S. investment capabilities in areas like Asia so that they will be prepared for the worst, eight to 10 years from now.

We haven't seen real deflation since the 1930s, but every 80 years we see it reemerge. From 2010 to 2023 we will see a depressionary, deflationary downturn that will look and feel like the 30s.

MFMN: What happens post-2023?

Dent: Things will cycle again. Every other generation you get a new cycle. After the Gen Xers, beginning in 2023, will come the Echo Baby Boomers, the generation which emerged about 1999. They will then progress into their own predictable cycle of higher spending.

MFMN: What are your short-term predictions?

Dent: We see the economy reviving in 2002, but we also see inflation creeping back. Inflationary pressures could be severe enough to cause a stock market correction. The market will advance, but could pull back in the third or fourth quarter. By late 2002, we'll see a new bull market.

MFMN: What advice can you offer mutual fund executives to handle short-term changes?

Dent: Start promoting your growth funds again now and encourage people not to abandon those funds or they will miss the best part of the coming boom. Right now people are fixated on bonds. It's not easy to get people to go against the grain.

Mutual fund companies need to know there are going to be new players in the middle market, like Fidelity Investments and Charles Schwab were in the '70s.

Also, fund executives must consider how to get to that 90% penetration level of investors owning mutual funds. That can be achieved through automatic contributions into 401(k) plans for most of the current workforce. Right now the 401(k) plan market has $2 trillion. But this could be doubled. Fund companies should use technology to allow employers to much more easily set up 401(k) plans. The process has got to be simple and automatic.

Harry Dent Jr: Fund Industry Clairvoyant or Crackpot?

Prediction: "After those enormous deficits into1992, the government will start to wind down federal deficits and will likely be in a balanced budget or surplus by 1998 to 2000."

Year Predicted: 1993

Outcome: TRUE

Prediction: The coming era of prosperity could see the Dow reach 8,500 by 2007.

Year Predicted: 1993

Outcome:TRUE -- First hit 8,500 February 1998

Prediction: "There will most emphatically not be a Great Depression of the 1990s."

Year Predicted: 1993

Outcome: TRUE

Prediction: "The economy will start to grow at moderately strong rates from late 1997 into 2002."

Year Predicted: 1998

Outcome: FALSE -- Economic growth stalled, current recession began March 2001.

Prediction: "...it will be smooth sailing for stocks, especially after 1998."

Year Predicted: 1993

Outcome: FALSE -- Stocks broke new highs, but hit the skids in April 2000.

Prediction: "The Dow could peak at 21,500 or, on a faster growth trajectory, could reach as high as 35,000 by 2008."

Year Predicted: 1998


Prediction: "The next Great Depression will be from 2008 to 2023."

Years Predicted: 1993, 1998, 2002


Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.