RR: Your theory is that we're going to have a booming economy from now until 2009 because baby boomers are in their peak productivity and spending years, right?
Dent: The rising tide of spending and productivity increases demand and supply at the same time. When you lag for the birth index, it tracks the economy perfectly.
RR: Why will it end in 2009?
Dent: Because the peak number of people will have hit a peak in spending. The spending peak is at age 46.5 or 47 years today. We're projecting it at 48. If you take the peak births of baby boomers in 1961, spending will be peaking in 2009. In mid-2009, the stock market will take a turn and will go down for awhile.
RR: How long do you think it will last?
Dent: From 2009 to 2023, we're predicting a different economy and stock market [depression]. In our book "The Roaring 2000s Investor," we talk about the seasons to the economy. There's some hogwash in the industry--like stocks are always good investments. Stocks are the worst investment in a bad season.
RR: What investments do you recommend for the next season?
Dent: Advisers in nine to 10 years will want to move into corporate bonds and Japan.
RR: What about small caps?
Dent: When you see a massive crash like '32 or '74, then you buy small caps. They are the best performing stocks in the early years of the next boom.
RR: Does a generation's position in the life cycle affect economics?
Dent: Actually, two generations impact the economy. Now it's baby boomers and echo boomers. Echo boomers are already moving into the innovation cycle at a 22-year lag. Small caps do well at a 22-year lag, and large caps do well at a 46- to 47-year lag.
RR: Your demographic theory on inflation says labor force growth causes inflation. What's happening now?
Dent: Baby busters have driven down inflation since 1980.
RR: But now the echo boom is entering the work force. Will we get inflation?
Dent: The echo boom [labor force entrants] will be offset by the early retirement of baby boomers. Inflation should stay at 1 percent to 3 percent over the next decade.
RR: In terms of investment strategy, your theory is that classic asset allocation doesn't work.
Dent: If you followed Markowitz [the father of modern portfolio theory], you got a 12 percent return versus the S&P's 19 percent [in the 1990s]. It doesn't fit the season, and it has lost business for advisers. You can beat the S&P systematically with the same risk. You have to get diversification within sectors. In large-cap growth, we favor financial services, health care and technology. In international, we like Asia minus Japan.
RR: Backtesting to the '90s, you developed six portfolios based on these sectors. All but the two most conservative beat the S&P, and they all beat Markowitz.
Dent: You can have 80 percent short-term fixed income and still beat Markowitz. You have to understand how to apply asset allocation or you'll underperform the market.
RR: What's wrong with Markowitz's theory?
Dent: One problem is that it's a 70-year study that averaged the seasons: the roaring '20s and the depression. These are totally opposite trends and you shouldn't use the same investment strategy.
RR: Is another problem the client's time horizon?
Dent: If a client invested money for 70 years without changing it, then Markowitz would be the best strategy. For most people it's more like five, 10, 15 or 20 years. You change the allocation when the season changes.
RR: What is your AIM fund strategy? (Dent subadvises the AIM/Dent Demographics Trend Fund.)
Dent: For 2000 to 2009, the fund targets 70 percent to 80 percent large cap, 20 percent small cap.
RR: Why do you see financial services as a strong sector?
Dent: It has to do with baby boomers' spending cycle--ages 21 to 47. The investment cycle starts in the late 30s with financial flows into stocks, mutual funds and investments. There's a primary investment cycle and then investing accelerates. In the mid-'90s, boomers started that cycle.
RR: How do echo boomers figure in?
Dent: In 2003, their household cycle kicks in. At 25 or 26, they get married and buy a lot of stuff. That will accelerate the boom. I tell advisers to make hay while the sun is shining. Stay invested in the best sectors. Don't be putting clients in some namby-pamby Markowitz portfolio.