The Ins and Outs of the World’s Most Accurate Forecasting Model
By Harry Dent, Founder, Dent Research
Every time we have a major collapse in stocks, experts declare it a “black swan event.” Or, at the very least, they say it was “totally unpredictable.”
That’s just B.S!
Major stock market collapses are totally predictable and I’ve developed a model — the first of its kind — to prove it.
And just in time, too. This new bubble model gives me new insight and critical information about the coming stock market collapse, which I’m going to share with you today.
Let’s start with a simple truth: everything occurs in cycles.
Something only seems unpredictable because you’re not yet aware of the cycle driving it.
Of course, there are millions of cycles in motion all of the time. We can’t possibly be aware of every single one. Our brains just aren’t wired that way. But, if you focus on key cycles, that fog of unpredictability clears enough for us to see clearly down the road.
Track the right cycles and you can see and understand things others don’t, including when a bubble has inflated and — more importantly — approximately when it’ll burst – and most important, how much.
For starters, through my decades of research, I know that the most extreme bubbles aren’t random. They typically occur in the economic fall season, which is the third and peak stage of the 80-Year New Economy Cycle.
Simply understanding that our economy moves through four “seasons” once every 80 years — or a human lifetime — empowers us to see ahead of the curve. It’s how I saw the 2007 peak in the U.S. and Japan’s 1989 peak, to name just two examples.
So with the right cycles, it’s easy to see a bubble building, and to know whether it’ll become extreme or not.
What we need to know next is when it will burst, and how bad the fallout will be. To find out, we first need to know the five key principles of bubbles…
The 5 Key Principles
Key Principle #1:
Bubbles begin when stocks or any financial asset start growing faster than the linear or fundamental trends, most often well after the bottom of the last major correction or crash.
As this trend builds, investors increasingly buy just because the market is going up faster than usual, for a long enough period of time to give them confidence in their decision.
Greed and speculation start to take hold.
Fundamentals fly the coup.
This is the Bubble Origin.
Key Principle #2:
Bubbles build exponentially for several years — typically five to six years in stocks (and often longer in real estate).
Key Principle #3:
The greater the bubble, the greater the burst.
Bubbles vary in intensity, which determines both their height and how big their crash. The biggest blind spot I see is that people think that the greatest cities and stocks can’t go down much because they are so special… that’s why they bubble the most. But then they crash the most as well. It’s Newton’s third law of physics: equal and opposite reactions.
I calculate the Bubble Intensity by taking the “Times Gain” — how much it increased in value expressed as a ratio (instead of a percentage) — and divide that by the length of time from origin to peak.
This allows me to compare bubbles in different asset sectors to historical ones, especially if their durations differ.
Key Principle #4:
Bubbles burst at least twice as fast as they build, more so with stocks than commodities or real estate.
The typical stock bubble is about five to six years in length, with a 2.5 to three-year crash after the peak. This was the case with the stock bubbles in the late Roaring ’20s and the ’90s in tech stocks as well as the Nikkei bubble of 1989 and the Dow bubble of 1929.
The typical real estate bubble is about eight to 10 years, taking about as long to unwind as it did to inflate because property is far less liquid than stocks and people are less likely to sell something that they use for living or business.
Key Principle #5:
Most important, bubbles tend to go back to where they started (the Origin Point). Sometimes they’ll not make it all the way down, and more so in real estate. Other times they’ll drop a bit lower.
That’s why it’s so important to identify where a bubble started. Knowing that, along with several other factors, gives us a good idea of where the crash will end.
These five principles are the “rules” of my bubble model. The “base line” is the male orgasm chart from Masters and Johnson.
Orgasmic Stock Markets
Before I go on, let’s address the elephant I just catapulted into the room.
Yes! I use the Masters and Johnson male and female orgasm charts as an analogy for stock market (and other) bubbles, quite simply because they are so damn similar. You’d have to be blind not to see it.
In my new best-seller, The Sale of a Lifetime, I illustrate this point dozens of times with charts that prove I’m not a crackpot on this analogy. I don’t have the space luxury to do that here, but I can say that practically 99% of all bubbles I’ve ever studied follow the same pattern as the male or female orgasm (the latter typically has three peaks whereas the former has only one).
The Nikkei Bubble and burst from 1985 to 1992 (as I’ll show you shortly).
The Dow Bubble from 1924 to 1932, and again from 1974 to present day.
The Nasdaq Bubble from 1995 to 2002.
You name it, and the correlation is clearly there.
Now for the Action!
When applying my Bubble Model to a sector, market, or asset class, I look for several key factors.
First, when did the bubble start?
To find out, I draw a line through the fundamental trends starting from the last bottom. Where the market, sector or asset diverges above that trend — and keeps diverging exponentially — is the Bubble Origin.
The bubble then grows exponentially until it has a final orgasmic-like surge, like the Nasdaq from late 1998 into early 2000. That’s when you know the peak is getting close. As that top is approaching, I can calculate the intensity of the bubble and compare it to other bubbles (past or present).
And thanks to my model, I don’t have to know the exact top to calculate the potential downside when things roll over. I know, in advance, how quickly the selloff will likely be and about how low it will go.
As I said earlier, once the bubble starts to burst — and it typically does so violently, losing 30% to 50% right off the bat — I can estimate about how long the crash will take by calculating the time it took to reach its peak and simply halving it.
That’s why calculating the real Origin Point is more important than just looking at the last long-term low before the last bull market began.
When it’s all said and done, this is what it looks like with one of the more recent bubbles that played out fully:
Note that the Nikkei stock bubble didn’t go quite back to its bubble origin point. That’s because the rest of the world was in the greatest stock and economic boom in modern history – greater than the Roaring ’20s as I alone predicted back in the late 1980s. The actual crash was 64% whereas the model would have predicted 77%. But the bottom did occur right at the 50% of the bubble boom timeline calculation.
The hardest thing is predicting the peak because bubbles get so irrational at the top. That’s why I always warn investors to get out sooner rather than later. Once the fire starts, the exits quickly get plugged by everyone trying to escape at once – especially the leveraged traders and hedge funds!
A Look at 5 Other Stock Market Bubbles
Using my model to compare the most prominent stock bubbles in modern history, you can see similar dynamics and parameters to the Nikkei bubble.
The major bubble preceding the Nikkei’s rise and fall was the infamous Roaring ’20s bubble that peaked in September 1929. Its Origin was very late 1924, with the peak in late 1929. That was a 3.8-times gain in just five years, giving it a bubble intensity of 0.78, similar to the Nikkei bubble.
My model projected that the crash would take just 2.5 years to lose 74%. The actual crash was worse, sacrificing 89% by July of 1932, but right on with the timing of the bottom.
The most intense bubble yet in the developed world was in the Nasdaq in the 1990s!
The Nasdaq bubble Origin was in very late 1994. It peaked in early March of 2000, having exploded for 5.2 years. The gain was a whopping 6.8-times, giving it a bubble intensity of a very high 1.3!
When the bubble burst, it took almost exactly half the time to lose 78%. My model projected a possible loss as high as 85% versus 78% actual, so the bubble almost erased itself completely as usual.
The Shanghai Composite saw the most dramatic emerging-market, short-term bubble from very late 2005 into October 2007, with a 5.2-times gain and Bubble Intensity off the charts at 3.0! We won’t see that again for a long time.
The crash bottomed in early November of 2008 at 72%, right on target timewise. My model had calculated the maximum loss at 81%.
Then there was the Biotech bubble, with its Origin in early 2012. It enjoyed a 4.2-times gain into mid- 2015, with a bubble intensity of 1.12. It’s first crash saw a loss of 40% in just 2.5 months as did the Nasdaq bubble, the Nikkei bubble and the Roaring ’20s bubble.
My model projects that this bubble is not yet done unwinding. We could hit losses of as much as 75% by late 2017 before all is said and done here.
The last sector to peak in the U.S. — the best house in a bad neighborhood — is the S&P 500 in late 2016. Most stocks around the world peaked sometime in 2015 and have little or no chance of seeing new highs in a hurry (if ever again). But the prime large-cap stock indicator in the U.S. made a slight new high in August 2016, with the Dow and Nasdaq following suit.
When applying my model to the S&P 500, I can see that the index saw its third and final bubble origin in early March 2009. It has enjoyed a 3.2-times gain into August of 2016. That gives it a bubble intensity of 0.44 – more typical.
My model now projects a 69% crash into early 2020, with the crash most likely starting between now and early December 2016.
I think we could slam into an even lower point before most of my fundamental indicators turn positive again in late 2022 forward, dropping by as much as 80%. That would take this stock bubble back to its point of Origin in late 1994.
That’s why you really need to tread carefully in this market and why you must not miss the premiere of Revolt 2016 on October 11 at 1 p.m. (ET).
This is not just the greatest crash and debt deleveraging cycle since the 1930s, it’s the biggest political, social and business revolution since the American Revolution and the Industrial Revolution of the late 1700s, and the greatest civil unrest since the Civil War… buckle your seatbelts!
See you then.