Well, Harry, on the topic of demographics, how will current demographics within the United States influence the direction of the next decade?

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1 Harry Dent studied economics in college in the 70s, graduating with his MBA from Harvard Business School, where he was a Baker Scholar. However, finding economics to be vague and inconclusive, he became so disillusioned by the state of his chosen profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance where identifying and studying demographic, technological, consumer and many, many other trends empowered him to forecast economic changes. Since then, he s spoken to executives, financial advisors and investors around the world. He s appeared on Good Morning America, PBS, CNBC and CNN/FN. He s been featured in Barron s, Investor s Business Daily, Entrepreneur, Fortune, Success, U.S. News and World Report, Business Week, The Wall Street Journal, American Demographics and Omni. He is a regular guest on Fox Business s America s Nightly Scorecard. Harry has written numerous books over the years, including The Great Boom Ahead, The Roaring 2000s, The Great Depression Ahead, and The Great Crash Ahead. Harry s latest book, The Demographic Cliff, How to Survive and Prosper During the Great Deflation of , shows why we re facing a great deflation after five years of stimulus and what to do about it now. Today, he uses the research he developed from years of hands-on business experience to offer readers a positive, easy-to-understand view of the economic future.

2 Harry Dent For the benefit of readers who are not yet familiar with your work, can you please give a high-level explanation about who you are, your background, and the focus of your research. Well, I started out as a business consultant. I got an MBA from Harvard Business School, was top in my class there and I got out and worked for Bain and Company, which is one of the largest Street consulting companies in the world in business strategy. And after doing that for two years I said, This is great, I love business strategy, but big companies are just too slow for me. So I started doing the same type of consulting to smaller businesses and new ventures in California. And it was out of that, in business school and Bain and Company, that I really learned about the product lifecycle and how it's always four stages and you have to have a different strategy for each stage. Well, I ended up seeing the same thing was true for the broader economy. I now have a four-season model of 80 years for the economy where investors and businesses have to have a different strategy for each season, and that's not something that stock brokers and financial analysts and economists understand. But most importantly when I was consulting to these smaller businesses, they were all growing rapidly appealing to young new baby boomers back then in the early 1980s, because young people start new trends. So I had to really study the baby boomers and that's where I tripped onto demographics. I realized how large the baby boomer generation was, I learned everything about them, and then found out that the U.S. government surveyed households every year from cradle to grave and everything they do and when they spend, borrow, and invest, and then even down to potato chips or camping equipment or whatever you want to know.

3 Then I realized, Wow! This is unbelievable. People do predictable things as they age. And this new generation's come along and they're going to create booms and busts, but they're also going to create booms and busts in every sector, even after they stop spending at age 46, is what I found, they are going to be spending in healthcare and other areas, so it's just like I stumbled onto the Holy Grail and I've spent ever since refining these economic and technology four-stage cycles and refining demographics. In 1998 I discovered the spending wave, the correlation between the 46 year lag for peak and spending on the birth index, and then later I adjusted that for immigration to make it more accurate. In 1989, one year later, I discovered the correlation between the workforce growth, young people entering, old people exiting, and inflation. The spending wave was an obvious correlation when I saw it, but it took me a while to figure out that young people are expensive and cost everything and produce nothing. And the inflation of the 70s ended up being caused by the baby boom, not by politicians and central bankers. So what I've learned is that people drive our economy. We can project the booms and busts, inflation and deflation, spending and investing, borrowing, and all these sectors like house buying, and governments just react to it all. When we have inflation they'll raise rates to fight it. When we have deflation, which we have now, which we predicted decades ago would occur when the baby boomer stop spending and slowed down, then they'll push money into the economy. They'll lower interest rates to try to fight the inflation. But governments don't drive the trends. And, with demographics,you can see around the corner. I was able to see simultaneously, unlike any economist in the world, the fall of Japan in the late 80s coming, and the greatest boom in history in the United States, Europe, and countries like Australia. So that's just one of many things we've been able to predict. We can see around the corner with demographics and other cycles that I've uncovered.

4 Well, Harry, on the topic of demographics, how will current demographics within the United States influence the direction of the next decade? Well, we've already seen a peak, as we predicted 20 years ago in my first book, in the baby boom spending in Japan hit their peak in 1989 and 1996, kind of a double peak, and that's why they had their big down turn in the 90s. This trend continues to point down. It bottoms between 2020 and 2023, six or nine years from now. Secondly, there's a second what I call demographic cliff, the title of my new book, coming with the affluent sector, because the average person peaks at age 46. But the 10% to 20% who are still spending money and benefiting from the quantitative easing and the markets going back up temporarily, they peak in their early 50s. So this group, they may be just 20%, but they control 50% or more of the spending because of their higher incomes. This group is going to fall off the cliff and slow down on their spending by the end of this year, so demographic trends only get worse. And more importantly, there's this cascade of demographic cliffs from Japan to the U.S. and next is Europe. Europe peaked later, and Europe is already in trouble and southern Europe and central Europe start going off the cliff this year, in the next couple years, and very steep slide. And the country that is going to have the steepest slide of all is going to be Germany, and everybody thinks Germany's going to hold up Europe. So demographics only get worse and governments have no idea the tide that they're fighting and these stimulus plans just aren't going to work at some point. Well, what does that translate into for investors over the next three to five years, people who are investing in the U.S. stock market? What do you think this translates to them? Well, in addition to these demographic generational cycles, we have a number of other cycles -- a geopolitical cycle which turned negative when the tech wreck got ugly in 2001, and then 9/11, and it still points down into late That does not bode well for stocks in the world.

5 We've got a commodity cycle that peaks every 30 years, which has been pointing down since 2008 and which we predicted. That does not bode well because it hurts emerging countries, and they are the one growth sector left. Then it ends up hurting China because China exports the most to these emerging countries. So it's causing slowing in China and that's kind of a vicious cycle. In general, because of quantitative easing, which is massive, massive stimulus, companies have been able to buy back their stocks with all their cash flow. I mean, they're not expanding, but they're buying back their stock and improve their earnings per share. Low interest rates forced down long-term and short-term by the government are lowering their borrowing costs, and so their earnings have gone up, their stocks have gone up with all this money being pushed in the economy, and we have already seen the Dow peaking over the 17,000 mark. We. We've got what we call megaphone pattern where each bubble takes us to new highs in the stock market, but then each crash afterwards takes us to new lows. This very obvious ominous pattern says the Dow is going to go a little higher than 17,000, then it's going to go to something like 5, somewhere between 5,000 and 6, in the next couple of years. So we have the biggest crash in stocks ahead of us when demographics kick in throughout Europe and then kick in more strongly in the United States; when stimulus just naturally fails. Because stimulus is artificial, it's borrowing from the future, and it's like increasing debt and we do have debt levels rising in the government because they're not curbing their budgets and stuff; they're just stimulating with fiscal deficits, monetary stimulus. So when this fails, and we're starting to see signs of that, when governments stimulate, every time we have QE1, 2, and 3, what we note -- unlike economists who keep saying, well the economy's getting better -- no, it's good for three to four quarters after a strong stimulus, and then it fails, despite the stimulus, for three to four quarters.

6 And we have a final cycle, a business cycle that points down from early 2014 to late So all four of my key cycles point down early 2014 to 2019, and the patterns of how these things work out would suggest that 2016 to 2017 is the biggest danger period for stocks. So that's what we're looking at, and the Dow could hit 5,000 to 6,000 by 2016 or So again, the biggest crash we've seen in our lifetimes -- something that's going to rival the crash of the 1930s, which was a similar debt bubble burst, debt detox, I call it. It's going to be more like that than even the crashes in the 1970s. So should investors be looking at foreign markets right now as a hedge against the U.S. market, and if so which? No, I wish they could but they can't. All you have to do is look at the last crash, 2008, the stock markets went down around the world. China only went from 12% growth to 6% grow, nowhere near recession. Their stock market fell 7%, more than the U.S. Now, Australia did not have a recession, but they came close. They didn't have a sub-prime crisis; they didn't have a real estate crash like we had. Emerging markets went down more than the U.S. Small cap stocks, large cap stocks, and of course Europe went down. They had one of the biggest crises. And so there is nowhere to hide, and not only that, gold went down in the second half of Silver, commodities, oil crashed, real estate obviously. We had a bigger real estate crash

7 in the years that followed the 2008 crisis than we saw in the Great Depression, and there's more to come there. So there is nowhere to hide for investors; you have to protect your profits and gains from the bubble. You have to lock them in. You have to let the crash happen. Then when we get to the type of targets we're looking at, somewhere during or after 2017, then you buy again. In the longer term, the best buy opportunity is going to be around 2020 or so when we feel like the worst of this whole downturn is over, so that's a long way away. This is a time basically to preserve your capital. And then aggressive investors, what do you do? Well, if the market's going to go down you can short stocks, you can short gold. I would not do it with leverage. I would just do it with inverse ETFs. And there are big profits there, but it's going to be a violent market, so you have to have the risk tolerance for that. So there seems to be a lot of ominous undertones to what you're saying right now. But what do you think are the top major threats that investors should be concerned about the rest of 2014 specifically? Well, first of all, the U.S. rebound is weak, as we expected. And the real estate rebound, which everybody says is now sustainable, a whole new bull market, most of it is speculative buying; 50% or more of the sales are cash sales. Applications for mortgage purchases -- real families buying real homes -- have been flat to down. So this is not a real recovery and that's going to falter, and that's a factor. Europe's situation is unstable at best. So Europe, it's not going to take much to trigger a bigger crisis in Europe and their demographics start to get worse, especially for

8 Germany, Austria and Switzerland, the strongest countries there, just when they think they're turning around. Germany s downturn ahead looks exactly like Japan's did to me in the late 80s, just when Japan looked like they were on top of the world. A big surprise, I think, and it's already occurring, is this vicious cycle of commodity crisis, now that our 30-year commodity cycle has peaked and the world is slowing down. That hurts emerging countries' stocks and their best export industries and their growth slows, and then that backs up on China's exports, which is 35% of its GDP and the largest manufacturer in the world. And then when China's exports slow down they buy fewer commodities. They are the biggest purchaser of most commodities in the world to feel their giant growth and population, but also their manufacturing and export machine. So commodity prices go down and the cycle just gets worse. So I think that's a bigt trigger. China is another, with its greatest bubble in the world. They have over-invested in industrial capacity, condos, infrastructure, commercial real estate, malls and offices. They have over invested in everything.. They have enough vacant condos and homes in China to account for the next 10 to 15 years of rural to urban migration. And their demographics: their workforce has peaked earlier than any other emerging country, because of the one child policy stretching back 50 years. And 10 years from now they're going to go off a cliff like Japan. So the China bubble bursting is probably the biggest thing to look at in this kind of commodity price, emerging country, crisis. The subprime crisis was the surprise that nobody saw that triggered the last bubble burst. And when the economies are this stretched with untenable demographic trends, and when debt is now higher in most countries than it was before the last financial crisis, all it takes is a trigger. I mean, this thing is ready to blow. Four states had a subprime crisis in the United States, and the whole world went down. Obviously that was because the whole world had these debt and demographic imbalances, not just because of four states.

9 All it's going to take is a blow up in Europe or more cracks in China, and we're seeing cracks in China already. They are having to bail out wealth management products and subprime lenders, agricultural co-ops that are blowing up. They are starting to see a debt crisis. And the rich, the biggest sign to me, the smart money, the richest people in China are fleeing. They are scared the government is going to confiscate their wealth, pollution is off the charts, and they want their kids to get an education in England and Australia, in New Zealand, Canada and the United States. So they are fleeing. The rich have disproportionate wealth and income there; they are also the smart money. And when they start to flee it's a sign that the bubble is getting ready to blow in China. That's going to be the biggest surprise of this decade and the coming years is going to be China bubble blowing up and everybody thinks they are going to save the world, and Germany basically faltering when everybody thinks they're going to save Europe. Slight tangent, then, what are the implications of that? Isn't China the largest lender to the U.S.? Well, they hold the most U.S. dollars in foreign exchange reserves. They are tapering back on that. That's not in Treasury Bonds and that's one reason we think Treasury Bond yields could go up in the early part of this crisis before deflation and the slowdown drives them down again. So we see some real buying opportunities in Treasury Bonds sometime soon. That's something we're look for. But China is the second largest economy in the world, and it's the fastest growing. Even in difficult times it grows 6% to 8%. In good times it grows 12% plus. So China is kind of like the U.S. coming into the Great Depression. They are the great exporter. They are the great new emerging country in the world. The downturned U.S. was the steepest, and was the biggest trigger for the Great Depression. Yes, by buying goods from countries like the United States, they are kind of putting money into the global economy. So when they stop doing that, it's going to be bad for the global

10 economy. More important, Chinese are the leading foreign buyers of real estate, especially in the English-speaking world. Southern California they're buying up. Sydney and Melbourne in Australia, they are just being totally consumed by Chinese buyers. Local people can't afford to live in those places anymore. San Francisco, Vancouver, London, so it's also going to trigger when the China real estate bubble bursts it's going to destroy massive wealth by these rich Chinese, and then they're not going to be able to go around the world and buy up real estate anymore, and so that's a replay of Japan in the late 80s. Japan was the up and coming country and they were buying real estate around the world from the wealth of their real estate and stock bubbles and then that whole thing blew and then everything blew. So China is a big deal and most people just don't see this coming. You touched on quantitative easing, or the use of quantitative easing by the U.S. before. What do you think will be the longterm effects of America's decision to use quantitative easing to get us out of our predicament? All it does is kick the can down the road. No politician, no central banker wants to have a Great Depression on their watch. But it's just like a drug; we've had a debt bubble, an addiction to debt since the early 70s. We grew deficits and government budget deficits and trade deficits to fight the 70s recession. But then when the boom came on we just kept borrowing more and more. Government and private sectors borrowed even more and even faster than government. So we've had this debt bubble and a financial asset bubble, and there's only one way these end. They have to be reset; debt has to be written off and restructured. Financial assets fall and get back to where the next generation can afford housing, and can afford to invest for their future and retirement. But you can't at stock valuations today. So what all quantitative easing does is keep you from having this debt detox, from this financial asset and debt deleveraging. And so it puts off the crisis, and by adding more money to the economy, by pushing up financial assets even more, by

11 giving money, by pushing money into the banking system, banks don't have to write down these loans, which would be the best thing that could happen in the American households and businesses is to get these massive debt loads off their backs. So all they are doing is pushing off the crisis and making it worse. And worse than that, I call it killing the golden goose. The economy needs booms and busts. It needs inflation and deflation as part of the innovation machine, and free market capital is the very thing that has made us wealthy countries in the developed world. Quantitative easing kills that machine; it doesn't allow the economy to rebalance. It doesn't allow innovation to set back in. Japan is the proof of that. Japan's economy should have turned around in 2003 when their eco-boom came along. Now it's not a big eco-boom, so it wouldn't be a big turnaround, but it didn't turn around. Housing didn't turn around when that generation got of age to buy houses, because Japan is in a coma economy. This quantitative easing does not allow debt to rebalance, does not allow innovation, as I said, and therefore you don't get to the next boom. We call this the economic winter season. It follows a fall bubble boom season in history and you don't get to spring, the next boom, unless you go through winter. This is a way of not going through winter and not rebalancing. So that's really the worst consequence; it's not inflation. We've always said deflation is the trend. Governments are using inflation to fight deflation and this debt deleveraging. So it's not inflation that's going to be the price of it, it's going to be killing the golden goose and making a bigger crisis down the road. This is the worst policy I've seen in all of history and history is not going to look well on it. All right, well let's switch gears a little bit and talk about President Obama's medical solution here, Obamacare. What long-term effect will Obamacare have on the U.S. middle class? Already more people or businesses are looking to work parttime instead of full-time to get around this. Here's what it comes down to. We are in total absolute la-la land about entitlements.

12 Our life expectancy has been going up, which sends Social Security and Medicare/Medicaid out of whack. We should be retiring at 75 not 65.Nowadays the average person retires and qualifies for all these entitlements until they die around 85. That's 22 years on the dole. You work 40 some years and are retired 22 years. You can't do that. And we've got a smaller generation coming behind the baby boomers, and even smaller in many countries other than the United States. This is not even remotely feasible even in a good economy and we're going to have a bad economy over the next decade, which is going to cause a decline in contributions and lives and benefits and needs. So Obamacare just increases healthcare entitlements on top of something we couldn't even afford in the first place. So it's going to fail. And it s going to take a crisis for the American public and citizens around the world to realize we can't retire at 63 and get Social Security and healthcare benefits for everybody. Retiring later is the biggest solution. If we pay into the system longer, we retire later, that's the biggest single solution to correcting this imbalance. But we're also going to have to look at what we can afford to give to people, especially in healthcare, because 80% of the unfunded entitlements of $67 trillion in the United States, overwhelming any other debt in our country, is healthcare, not Social Security. So we're going to have to decide what people can get from the government and what they can't and we're going to have to means test in all types of things. So you're going to see massive restructuring of entitlements in the coming decade. Boy, whoever the next president is going to be, I wouldn't want to be that person. Harry, I don't know if you can comment on this right now, but are you able to say what you're looking at or where you're investing right now or where your organization is investing right now? Well, we have Cycle 9 Alert with Adam O'Dell. He's short, long, he just does whatever, and he's got a great track record in that.

13 You can't just have the traditional investment strategy in this kind of bubble boom, bubble burst economy and just saying, Well, I'm just going to be in a diversified portfolio of stocks. You're going to get crucified, just like people did in 2008 and Net gains have been, adjusted for inflation, zero since 2000, with all this volatility. For me personally, as an entrepreneur, I ve invested in my own business. I've invested in 15 other businesses. Most of those are going to fail and venture capitalists know that. I'm just looking for maybe two of them to pay off big and then that's what it's looking like out of 15. With my investment money I am in cash right now and looking simply, without leverage, to short the small caps stock index, the Russell 2000, because that'll tend to go down the most. Okay, great insight. The final question: what can the average investor do right now to protect his or herself? There are two simple things you can do, because it's better to be able to sleep at night and this is going to be a violent market, I think, for the next six years off and on, and especially the next two to three years, the best thing to do is simply take your gains, sell real estate that's not strategic to your life or your business, sell vacation homes, particularly, if you have them because you're going to be able to buy much cheaper, especially if you don't use them that often and you just have it because they go up. Sell stocks, sell commodities, get in cash. Cash and cash flow is king because the price of everything is going to go down. All financial assets are going to go down and you're going to be able to buy whatever you want in the coming years at $0.10, $0.20, $0.30, $0.40 on the dollar. And that's how people made fortunes in the 1930s.

14 In Australia I've gone to Hamilton Island. It's one of the nicest places in all of Australia, and I learned that a guy bought it in 2003 after the 2002 recession crash for $150 million. He bought that for $0.10 on the dollar. The airport there was worth more than that. It's a $2-3 billion dollar island today. You buy stuff when it's down. The dream beach house, don't buy it now. Get in cash and cash flow. It's only going to take, I think, a year, this year, to see if I'm right. If I'm right about this next crash, we're going to start to see the signs of it probably in the next couple of quarters. So just be safe for a year, and then if I'm right, it's going to take two to three years for this first major crash to play out. Then we're going to start telling people to buy things again, in certain emerging countries, like India and Southeast Asia, Mexico, and Turkey. We're going to want to buy into the best healthcare sectors, biotech, medical devices, pharmaceuticals, things like that will benefit once we've bottomed. So be safe, sleep at night. There is one good hedge that is not that risky, and it's the U.S. dollar index. The U.S. dollar was the one thing that went up versus other currencies in the 2008 crisis in the second half when things melted down. It went up 27% when gold went down 33% and silver 50%. So you can put a certain amount of your money in an ETF like UUP, which tracks the U.S. dollar versus six major currencies around the world. That's another place that can actually grow without the volatility of stocks crashing, if we're right about this crash. And the dollar hasn't had much downside when it's gone down, because it's the reserve currency and in a deflation environment, it favors the U.S. dollar. We have the most dollars around the world out there, and when we get this deleveraging and destruction of debt and all this sort of stuff the dollars get destroyed and that makes them more valuable. It's something the gold bugs don't understand, and we've been right about it and they've been wrong about.