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www.hsdent.com
Copyright 2010, HS Dent Publishing
The Debt Crisis Ahead: Late2010 Late 2012 . . .
How You Can Prepare Now to
Survive and Prosper
Clear Demographic Trends MakeOur Debt Issues Even More
Pressing
The Process: Reduced Spending
and Debt
The Deleveraging of Debt in the
1930s
The Ticking Time Bomb Despite the Recovery, RisingMortgages Underwater
Deflation, not Inflation Despite
the Massive Stimulus
2
2
3
5
6
Table of Contents
Special Report
March 26, 2010
Harry S. Dent, Jr.Author of
The Great Depression AheadThe Next Great Bubble Boom
The Roaring 2000s
The Great Boom Ahead
Compiled and Edited By:
Rodney JohnsonPresidentHS Dent Publishing
www.hsdent.com
HS Dent Publishing
The government is racking up debt at a record pace. The goal is to
stave off an economic crisis brought on by the greatest spending, real
estate and debt bubble in modern history. Unfortunately, the
government is doing exactly the wrong thing! Instead of trying to prop
up inflated real estate values and company and consumer debt, the
government should be embracing a painful but necessary period of
debt restructuring. It is the ONLY SOLUTION to our currenteconomic problems.
The Federal debt mushroomed from $5 to $12 trillion in the pas
decade, and is forecasted, even under the best scenario, to reach $20
trillion in this decade. But are you aware that private debt has swelled
to $42 trillion? If you include government debt our total is $56 trillion
and growing (Chart 1). Add in unfunded liabilities for social security
and health care of $46 trillion (Chart 2), our total debt balloons to
$102 trillion, or seven times the value of everything we make in the
US in a year (715% of GDP)!
This is truly unprecedented. Before the Great Depression, total U.S.
debt was 170% of GDP, the 40% fall in GDP caused that ratio to rise
to 270% in 1932. If you had debts totaling $500,000 while you earned
$70,000 a year, would you feel good about your future?
0
10,000,000,000,000
20,000,000,000,000
30,000,000,000,000
40,000,000,000,000
50,000,000,000,000
60,000,000,000,000
1977 1982 1987 1992 1997 2002 2007
Federal Govt Trust FundsFederal GovtState and Local GovtFinancial SectorForeign
CorporateHousehold OtherConsumer CreditHome Mortgage
Government$14Trn
Financial
$17Trn
Corporate$11Trn
Consumer$14Trn
Total:$56 Trn !
Total U.S. Debt, 2008
Chart 1Source: Federal Reserve Flow of Funds Report
10
20
30
40
50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Addition of MedicarePart D
Includes Social Securityand Medicare
$46 trillion
Unfunded Entitlement ObligationsIn $Trillions
Chart 2Source:The White House, US Treasury
$46Trillion!
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Does adding debt to an economy that is plagued by excessive debt really sound like a solution? A 10-
year-old could figure that out! We must recognize the full magnitude of DEBT in the U.S. and that these
levels are not healthy nor sustainable. Rather than having the government try to stimulate us out of
this crisis, the only real solution is to have financial institutions, households, and businesses
restructure debt back to pre-bubble levels.
Clear Demographic Trends Make Our Debt Issues Even More Pressing
Imagine that you earn $70,000 and have debts of $500,000, you are 50 years old and your income will actually
decline substantially as you move toward and into retirement. Or if you got laid off and now only earn $50,000
in your new job? It makes the $500,000 burden even more insurmountable. This is the situation the U.S. is
facing today. Our GDP is going to decline substantially in the next few years making our unprecedented debt
burden even higher 800% to 900% of GDP!
Are you aware that the Baby Boomers have peaked in their spending cycle and will be spending less, earning
less and saving more in the years ahead? As Boomers move on to becoming empty nesters and retirees, theywill no longer need those big houses, big cars or all the clothes, food and daily spending that went along with
raising children. The Boomers will match their consumption pattern to their new stage of life. This massive
economic slowdown will have a dramatic effect on our economy because there simply are not enough
consumers coming in behind them in the next decade to fill that void. Exactly how is massive government
stimulus going to work when our biggest group no longer needs larger houses, cars, etc.? What is it,
specifically, that the government believes it is going to stimulate? Just ask the Japanese after the peak of
their baby boom and housing bubble they tried unsuccessfully to stimulate in the last two decades.
We must acknowledge the predictive power of DEMOGRAPHICS. The power to forecast economic
change is at our fingertips! As a society we know exactly when consumers will spend, save and borrow
as they go through stages of life. HS Dent has been forecasting for 20 years using the Spending Wave(Chart 3) that the U.S. economic engine, driven by the consumption spending of Baby Boomers, would
peak around late 2007 (also see The Great Boom Ahead, 1994, p.35).
After that, this previously free-spending group would be
more focused on saving and paying down debt as they
prepare for retirement. Our readers were warned many
years in advance of a seismic shift in how our economy
operates! We also forecasted a 12- to 14-year downturn in
Japan in the late 1980s when most economists thought
Japan was the country of the future.
The Process: Reduced Spending andDebt
We have already entered what we call the winter season
in our economy marked by lower consumer spending and
falling prices with the following turn of events:
Consumers spend less and borrow less.
Copyright 2010, HS Dent Publishing
2www.hsdent.com
2,200,000
2,700,000
3,200,000
3,700,000
4,200,000
4,700,000
5,200,000
1956 1966 1976 1986 1996 2006 2016 2026 2036 2046 2056
Immigration-
adjusted Births
Lagged for Peak
Spending
The Spending WaveBirths Lagged for Peak in Family Spending
Chart 3Source: HS Dent
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Businesses sell less, so they borrow less, employ fewer people and pay less in wages.
Falling spending, falling wages, rising unemployment and declining debt levels lead to deflation in prices
and reinforce the lower spending cycle.
This cycle cannot be fully broken by stimulus spending as Japan has proven. The government did not create
this boom the Baby Boomers did as they raised their families. Hence, the government cannot stop the naturaldecline in spending and the restructuring of unsustainable debts. We must work to make the decline and
restructuring as quick and painless as possible, not try to stop it.
This movie attacking a slowdown in consumer spending with stimulus spending by a government has been
made before. After a major real estate and debt bubble in the 1980s that was fueled by the growth of their own
Baby Boom generation, the Japanese tried to endlessly stimulate their economy. They are still trying today.
Its been 20 long, miserable years, and they are still in the tank! Their government debt (not including
retirement issues like Social Security and Medicare) is now 210% of GDP and climbing fast versus the U.S. at
87% of GDP (not including Social Security and Medicare). Is that where we want to be a decade from now? The
notion that stimulus spending is the key ingredient to jumpstart an economy is not just flawed, but is based
on a myth that this approach worked in the U.S. in the 1930s.
The Deleveraging of Debt in the 1930s
Many economists and market pundits point to stimulus spending as the way the U.S. pulled out of the Great
Depression. ITS NOT TRUE. Stimulus spending in the 1930s eased the pain of the day, but it did not cause
a recovery. It was the rising spending wave of the Bob Hope generation from 1942 1968 along with lower
costs and lower debt levels that ultimately led to a sustainable long term boom. During the 1930s the U.S.
went through a painful process that eliminated a massive amount of private debt. Because private debt was
brought down to manageable levels, once we emerged from World War II the U.S. was in a fabulous position
to grow. Chart 4 shows how extensive the restructuring of business debt was in the 1930s.
Despite the rise in government debt, overall debt ratios fell dramatically and that was a good thing. This time,
however, much more of the debt is consumer debt, and even more is debt for leveraging investments in our
financial institutions. That is why you see massive defaults on mortgages and the sudden meltdown of so
many major banks and financial institutions in addition to
credit card charge-offs and other reductions in consumer
debt.
There will be a much greater financial meltdown to
come between late 2010 and late 2012 thats why
you need to protect yourself now!
The Ticking Time Bomb Despite theRecovery, Rising Defaults fromMortgages Underwater
The economy has been recovering since the summer of
2009 due to the direct and indirect government stimulus
programs. But unemployment remains near 10%, and
worse, more homes continue to fall below their mortgage
Copyright 2010, HS Dent Publishing
3www.hsdent.com
U.S. Debt Since 1929as a percentage of GDP by category
Chart 4Source:SG Global Strategy, Bloomberg, US Federal Reserve
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value leading to continued rises in defaults. Deutsche
Bank estimates that the number of mortgage holders who
were underwater in the first quarter of 2009 was
approximately 26%. By the first quarter of 2011, it
estimates that number will grow to 48%! By 2011 28% ofmortgage holders will be severely underwater, 20% will be
mildly underwater and another 20% will be borderline
(Chart 5). Given that we predict the economy worsens we
expect these numbers to be substantially higher.
The trigger for this ticking time bomb will be rising
adjustments or resets to risky mortgages later this year.
Chart 6 shows the estimated number of mortgages in
different categories that are due for an interest rate
adjustment, or reset, from 2006 through 2012. Just as
sub-prime mortgages caused so much havoc in 2008 andearly 2009 when they were resetting, it will be option
adjustable rate mortgages (option ARMs) and Alt-A
mortgages (no documentation loans) that cause problems
in late 2010 and 2011.
These resets, with their higher interest rates, along with
the devastating level of unemployment and the continued
drag of foreclosures, will combine to push values further
down and leading to an even greater avalanche of
defaults. The next big surge hits between July and
October of 2010, with an even larger surge into Septemberof 2011.
The last banking crisis and meltdown seemed to come
from nowhere in 2008. The next such crisis is likely to
emerge equally as suddenly between August and
October of 2010. You need to be selling stocks and real estate ahead of this debt crisis!
Understanding this combined debt and demographic storm is only part of the equation. To prepare and
prosper in the years ahead, we must have an understanding of how this crisis will be resolved. The answer is
deflation. Most people assume that a period of deflation is a simple opposite to inflation; therefore, deflation
is a time of falling prices. While that is true, it does not convey the immense power of a deflationary period.
In a period of deflation, the prices of most consumer goods as well as investment assets across the board like
real estate, stocks, commodities, oil and even gold, go down. It is a time of conservation and the survival of
the fittest.
Consumers see their investments fall, business owners have less revenue, and companies employ fewer people
and pay those they do hire less. Deflation requires very different investment and business strategies than
what we would do during inflation. Most of us have never experienced deflation. Our issues have always
centered on lower or higher rates of inflation, which over time meant that assets like investments and real
estate tended to go up. That period is over. Deflation, with all of its complexities, is not just a forecast but is
as inevitable as winter following fall.
Copyright 2010, HS Dent Publishing
4www.hsdent.com
Positive Equity34%
Modest Equity18%
BorderlineNegativeEquity23%
NegativeEquity13%
Severely NegativeEquity 13%
Positive Equity21%
Modest Equity12%
BorderlineNegativeEquity20%
NegativeEquity20%
SeverelyNegativeEquity 28%
DB estimates that 26% of homeownersare currently underwater
and sees the percentage rising to 48%by 2011.
Homeowners Underwater
Chart 5Source:Deutsche Bank August 5, 2009 Report
Mortgage Resets
Chart 6Source: T2 Partners
We arehere
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Why is this the case? As the U.S. went through a long-term growth season in the economy, many different
forces began working together to feed our growing consumption. One of the areas that saw the biggest change
was real estate. The price of real estate, which is the biggest cost of living for most consumers, on average
doubled from 2000 to 2005, putting a new home out of reach for the new generation of families entering oureconomy. How can our kids have the American dream of owning a home if it costs $700,000 for a starter home
in California or Miami? This exploding bubble in prices came from an unprecedented expansion in household
borrowing power (home equity loans, no money down, cash out refinancing, very low interest rates, loose
lending standards) and coincided with a demand for spending and very low interest rates. The borrowing
capacity of the average household almost tripled. Lenders went nuts as they thought real estate could never
go down, so there was no risk in lending against real estate. This was the mistake the Japanese banks made
in the 1980s. This should not have been allowed to occur in the U.S., but it did!
This process of a bubble in prices and then a crash is not new. In the late 1990s stock prices got unreasonably
high, peaking in early 2000 and then crashing back down to reality from 2000 - 2002. The real estate bubble
in Japan peaked in 1991 and then crashed, never to return to past levels. The same is happening now withreal estate prices, energy prices and stocks, especially in emerging markets like China. Unfortunately, because
the last and largest part of our bubble was fueled with massive amounts of debt, the pain of the bursting
bubble will be much greater than anything we have experienced in the last 75 years!
One way to illustrate the thirst for borrowing is to look at the ratio of debt to discretionary spending (Chart
7). In the 80s, this measure was about 65%. As we go through the 90s consumers took on even more debt. By
the time we get to the 2000s the measure of debt to discretionary spending is more than 130%! As Baby
Boomers reached the peak of their spending cycle, we borrowed at a feverish pace. Now, the reality is setting
in, and its not pretty.
Deflation, not Inflation Despite the Massive StimulusWhen assets deflate in price we have three choices: the loans have to be paid as structured, canceled
(foreclosure) or written down (modified). Because there is not enough income generated to pay these debts
outright, we are left with cancellation and modification, which creates incredible pain for the lenders, the
banks and investors who fueled the boom. On the positive side, this removes or reduces the debt from the
books of companies and consumers, which brings the cost
of real estate, living and doing business back down to
affordable levels. After this deflationary process, the
general standard of living begins to grow again, which is a
good thing for your kids and grandkids!
Deleveraging is the same as a business going through
debt reorganization. This process happens when a
business is viable, but is currently unable to pay its
bills. Doesnt that sound like a lot of the U.S. today -
the leading economy in the world, but debt-laden?
Businesses seek reorganization to restructure their
debts and avoid an all-out liquidation. That is where
we are as a nation and many other countries face a
similar crisis.
Copyright 2010, HS Dent Publishing
5www.hsdent.com
0%
20%
40%
60%
80%
100%
120%
140%
Yea
r
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Household Debt as % Disposable Income1946 - 2009
Chart 7Source: Federal Reserve Z1
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We need to restructure and write-off debts that are no longer in line with the underlying assets, such as the
commercial real estate and homes that they were lent against. Trying to treat the problem of excess debt by
taking on even more debt is like trying to take more heroin to kick a heroin addiction detox is the only
solution you have to get the heroin out of your system first!
Our government is trying to convince us to spend more, borrow more and take more of the drug that has
caused us so much pain. Its reasoning? So that the country will not have to go through the painful detox
process of deleveraging from too much borrowing, no matter how unrealistic or unsustainable this effort is.
Our forecast is that the U.S. government and many others will be forced to stop stimulating in such an
irresponsible manner. Their massive stimulus programs will fail in the second half of 2010 losing the
confidence of an already skeptical public, and many foreign governments and investors like China will balk at
funding continually increasing massive U.S. deficits.
From studying centuries of credit and asset bubbles, we are able to arrive at a very conclusive forecast: by late
2010 we will go back into the process of deleveraging in order to deal with the massive credit bubble, and we
will suffer through the ensuing deflation in prices and assets. The only question is, Do we take our medicinesooner by greatly reducing our stimulus spending, or do we drag this out for many years and make it worse
by continuing to try to prop up these inflated asset prices and debt with even more borrowing? But recall that
a deflationary environment requires very different investment and business strategies from an inflationary
environment like the 1970s. We want to help guide you through a brief economic period that will be unlike
anything you have seen in your lifetime.
At HS Dent our mission is to help people understand change. We show you how you can see key
economic trends that will impact your life, your business, your family and your investments over your
lifetime. We specialize in providing a unique type of long term insurance against major negative
economic surprises by providing you with clear research and forecasts we develop by using our unique
forecasting tools. We alert you to the opportune times as well.
We accurately forecasted the peaking of the
housing bubble in 2005/2006 and the peaking of
our economy between late 2007 and early 2010.
This same approach allowed us to alert readers to
major new growth areas and opportunities in The
Great Boom Ahead in 1993 at a time when most
economists and books were bearish. Our analysis
has led us to forecast the next global boom from
2020 2035 and the ultimate rise of India over
China in the decades to come. In Chart 8 we
outline a rough forecast of the Ticking Time
Bombs that are likely to generate a very sharp
stock crash in the Summer and Fall of 2010. The
Dow could go as low as 3,800.
Copyright 2010, HS Dent Publishing
6www.hsdent.com
October
September
August
June
April
March
February
January
May
July
Accelerating
Mortgage Defaults
Very Disappointing
2nd Qtr GDP
China / India
Tighten
China Bubble Bursts
Iran Tensions,
Terrorist Strikes,
Oil Spikes
Mildly
Disappointing1st Qtr GDP
Further Default Threats in Europe
Austerity Programs
Greece Default Threat
2010
Minefield ofTicking Time Bombs
Chart 8Source: HS Dent
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Summary
We see a number of ticking time bombs that point towards a crisis in the 3rd quarterof 2010:
1. Mortgage defaults accelerate due to rising mortgage loan resets between July and October
of 2010
2. Rising geopolitical tensions and terrorist events into the summer, especially around Iran
3. Consumers slow again as stimulus fades with disappointing GDP report for 2nd quarter
GDP
4. Continued threats of government defaults in Southern and East Europe as the recovery
there continues to fail
5. Continued rising long term interest and mortgage rates into late 2010
6. The unprecedented bubble in China bursts after the U.S. and Europe slow again
We see a number of big surprises just ahead:
1. Another Major Stock Crash between August and December of 2010
2. The Second Major Real Estate Crash to Follow between Late 2010 and Late 2012
3. Gold falls and the U.S. dollar rises
4. Rising Tax Rates for Years to Come
5. The Sale of a Lifetime on Stocks, Bonds and Real Estate Ahead
Cash, cash flow and good credit will be the key for prospering from this once-in-a-lifetime deflationary
downturn wherein you can buy real estate, companies, stocks, boats, cars, etc., at the lowest prices you may
ever see. It takes patience, research and analysis to arrive at the conclusions that can financially secure you
and your familys future. Please join us by signing up for our monthly newsletter, 7 CD course, webinar, andtwo-day seminar. The future starts now! Learn how to protect and prosper!
(PLEASE SEE THE NEXT PAGE FOR A SPECIAL OFFER!)
Copyright 2010, HS Dent Publishing
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