Harry Dent: Why Multifamily Wins in a Market Crash

Full Podcast Transcript: Ep #471 – Harry Dent on Why Multifamily is the Best Investment for the Coming Crash

Introduction and Guest Background

Rod Khleif: Hi my name is Rod Khleif and I’m the host of the “Lifetime Cashflow through Real Estate Investing Podcast” and every week I interview Multifamily Rockstars. We talk about how they built incredible wealth for themselves and their families through multifamily properties. So hit the like and subscribe button and get notified every Monday when a new episode comes out. Let’s get to it.Rod Khleif: Welcome to another edition of How to Build Lifetime Cashflow through Real Estate Investing. I’m Rod Khleif and I am thrilled you’re here. I am super excited to interview the gentleman I’m speaking with today. Now his name is Harry Dent. And I will tell you that if you study or stay on top of or track economics in any way, shape or form, you have heard that name. Now Harry got his MBA from Harvard Business School and he studied Economics there—kind of got a little disillusioned by what he thought was vague and inconclusive work around that topic—and so threw himself into studying finance and identifying and studying demographic, technological, consumer and other trends that have helped him forecast economic changes. I will tell you, I saw Harry speak—I don’t know if it was 20 years ago or 23 years ago in Vancouver—and had I listened to Mr. Dent, I wouldn’t have lost 50 million dollars. So I take what he says very, very seriously. Now Harry’s been featured on Good Morning America, PBS, CNBC, CNN, Fox; he’s been in Entrepreneur magazine, Fortune magazine, Success magazine, US News and World Report—I can go on and on. And so guys, listen up—he’s written tons of New York Times best-selling books that have predicted booms and crashes. I’m super excited to have him on the show. Harry, welcome my friend!

Harry Dent: Yeah, nice to be back Rod.

Rod Khleif: Thank you, thank you. I also had Harry speak to my multi-family boardroom mastermind—as you guys know, that’s the group that’s got billions and billions in assets represented by the operators—and I was so impressed with the presentation. I wanted to get him on the show so that the rest of you could hear what he had to say. So, Harry, can you talk a little bit about where you arrive at your conclusions? I know when I first heard you speak, one of the biggest factors involved in any economic predictions—as it were—or trying to get a glimpse into the future are based on population growth, demographics, and spending cycles associated with that. Can you speak to that a little bit?

Analysis of Demographics and Economic Cycles

Harry Dent: Well, you know what I learned really quick when I started studying economics is that economists and politicians think that governments drive economies. I’m like, what? Seventy percent of GDP in the United States is consumer spending; ten percent is capital investment of businesses that only invest if consumers are spending more; and only twenty percent is government—and they’re the laggards. They don’t lead trends. They don’t start new innovations, except occasionally. So people are studying the wrong thing. I studied people. I was a business consultant at Bannon Company, working with Fortune 100 companies and then for new ventures in California in the early 80s when the baby boom was just entering the workforce. I learned two things really quick: this is a different generation—it was a change generation—and there was a boatload of these people. The biggest generation. It was a 10-foot wave versus a three-foot wave of the generation before or the millennial wave afterwards. So I started studying the baby boom—everything about him—and it just happened at that time. In 1981, the first year the US government started doing an annual survey of thousands of consumer households and measured 600 categories of spending—not only total spending and saving, house buying and potato chips for crying out loud—I discovered why demographics were important, especially with the size of this generation. And I discovered, my gosh, there’s a goldmine of information nobody’s looking at. Economists don’t have a clue of this stuff—not even a clue—even after the baby boom caused the greatest boom in history. I saw, Rod, my biggest score—I get credit for forecasting how strong the boom of the 90s would be—even back in the 80s and early 90s when we were in a recession. But my best forecast was the fall of Japan. Japan’s real estate and stock bubble would burst, and Japan would go into a 12-14 year downturn and never be the same because of demographics. Their baby boom came earlier than ours in Europe and the rest of the world. And that, the baby boom itself is a bubble generation because there are so many of them. Everything they do puts pressure on demand versus supply and creates bubbles—even in genes or whatever. So they had the real estate bubble before us. They had the stock bubble, and it crashed—and economists never learn from the Japanese. I’m like, why aren’t economists studying the Japan bubble? How it collapsed and why? Of all things, real estate and stocks came back partially. In Japan, in bad demographics, real estate never bounced back—30 years.Rod Khleif: Wow.

Harry Dent: How do you explain that? You know what I found? Older people, the larger baby boom dying—in real estate—is the only industry of consumer significance that lasts almost forever. Unlike cars, clothes, food, and most of the stuff we buy. So when people die, they become sellers. And so I can’t just measure the buyers like I do in other categories. I have to subtract the sellers from the buyers in real estate—and that explained why even when the millennial generation came in, Japan—again, ahead of us—didn’t get a balance in real estate like we would expect. So I learned demographics was important. I also learned, Rod, only when I went back, that before World War II, everyday people didn’t make much money. They were in what was called a Malthusian trap. Everyday wages were nothing for thousands of years until the industrial revolution came along—and then, more importantly, mass production and the assembly line. The first generation to be middle class and be able to afford a house on a 30-year mortgage was the Bob Hope generation entering the workforce after World War II. They were the first middle-class generation and they created a generational boom, very obvious on a 44-year lag for peak spending back then. Then the baby boom came behind them, much larger on a 46-year lag for peak spending, creating an even bigger boom. So, I was able to document how a 46-year lag for peak spending causes booms and busts in generational cycles. It was just 44 for the Bob Hope generation; it’s 47 for the baby boomers. I adjust for immigrants—both legal and illegal—but economists do all this complex analysis, and I predicted the whole boom—the boom of the 90s would continue such that we would have a weak economy. And guess what? After 2010, we’ve been living on quantitative easing ever since. Oh, guess how long Japan’s been living on printing money to replace bad spending? Since 1997. Their generation peaked in 1996, ahead of us. So demographics has become one of the most important cycles. I said, add technology cycles, geopolitical cycles—my number one theme. I was not a demographic expert—I’ve always been a psycho guy. And I first understood cycles and inflation back in the 70s, when that was a big deal while I was studying history, finance, and so on. I got all the gold above newsletters because gold—playing inflation—was big, and gold is the best hedge against inflation and blah blah blah. So I was that kind of guy. But demographics became important for the first time in World War II. I also had to realize there were other important cycles. There’s a 45-year technology cycle and a 35-year geopolitical cycle. You put those three cycles together, Rod, and I can tell your grandkids when they’re gonna face a downturn as deep as I’m predicting for the next few years. I can tell them decades in advance.

Market Predictions and Bubble Economics

Rod Khleif: And that’s what we’re talking about here. That’s why I wanted Harry on the show, because he is predicting a massive downturn right around the corner. I mean—Harry Dent: Not because of the virus.

Rod Khleif: Right, not because of the virus. So when do you anticipate this thing to begin?

Harry Dent: Well, you know, it did begin in the early 2000s and all cycles would have peaked in late 2019. The virus was the perfect trigger. People don’t understand—the virus was the perfect trigger. This crash was going to happen sooner or later anyway. Governments have been pumping up the economy artificially since the crash of early 2009. Normally, that crash would have lasted another couple of years and then, much more devastatingly, cleared out a lot of excess debt and overpriced assets—but it didn’t. They didn’t allow it. So this bubble’s been waiting for a trigger, and also my 45-year technology cycle—which, by the way, is even more powerful in history than the demographic cycle—was the last of my cycles to hit in late 2019. So we were due, from 2020 to 2022, to go into a deep downturn with the confluence of all my cycles and this artificially sustained bubble. That means it’s going to have to burst even harder. If we’d just taken our medicine in 2008 and let the recession run—from ‘29 to ‘32 in the 2010s, or even a depression—then we would have been over the worst of this long and been in a whole different position. But no, governments decided to take the easy way out. They said, “Oh, we’ll just print trillions of dollars.”

Rod Khleif: Right.

Harry Dent: So that’s not—I don’t know why anybody thinks that could possibly be good policy, including Warren Buffett, major bankers, and prominent economists. This is the stupidest single thing I’ve seen in all of economic history. Everybody’s saying, “Oh, well, the government’s just trying to prevent recessions.” But they have to print exponentially more money every time we go down. We just printed as much in eight months as we did in seven years after the last downturn.

Rod Khleif: I want you guys to hear what he just said. We just literally printed in eight months more money than they printed over seven years after the 2008 crash. That whole quantitative easing thing—and so…

Harry Dent: …just to deal with a short-term virus.

Rod Khleif: Right, right.

Harry Dent: They’re gonna have to print a lot more than they keep doing. And you see, kid, the point is I’ve been telling people that when the government prints more money, it gets to a point where it’s so rampant and ridiculous—it’s like a typical addiction cycle. It takes more and more of a drug to keep you from coming down, and then one day you just pass out—either dying or going into rehab. We’re going into rehab.

Rod Khleif: Why is the stock market doing so good, Harry?

Harry Dent: Because all this money is being printed. Normally, what central banks like the Federal Reserve do to stimulate the economy is lower interest rates to make credit more available—hoping people will borrow more and help stimulate the economy. They tried this in 2008-2009. It didn’t work: everybody was already over-borrowed—corporations, governments, consumers, everybody. People had already bought houses twice as big as they could afford and refinanced three times. So what they realized by accident—after doing a first round of quantitative easing (injecting a trillion dollars into the system, probably three or four trillion globally—that’s just to keep the banks from falling down—was that it didn’t stimulate lending. Instead, by pushing up asset prices, stocks went up more than bonds and even real estate. What you’re doing in quantitative easing is not getting money into the banking system and consumers; you’re simply buying from a fixed pool of financial assets, largely owned by financial institutions. You’re injecting trillions of dollars into that same pool of assets, which just pushes their prices up for no good reason. How could you explain stocks going way higher—twice as high today than they were at the beginning of the last downturn—when the recovery in the economy was only 2% growth, the weakest recovery in history? Because central bankers found that by pushing up asset prices, they created a wealth effect. And by the way, demographically, I’m the only person on earth who knows this properly: the top 20% are not just 20% of the economy—they’re 50%, because they make and spend a lot more money. So the top 20% got even wealthier from these measures, while the average person doesn’t have many financial assets. For example, someone might have a 120-grand home in Omaha near Warren Buffett. They didn’t get a big kick from this scheme. Affluent people did, and especially the top 1% and 0.1%. So financial assets made rich people spend a lot more money. Here’s my definition of our 2% growth economy: Zero growth for the everyday person on Main Street; 4% for rich people who aren’t making more money otherwise, having all their stocks go up like crazy—and this reinvestment creates a bubble. It creates artificial wealth that doesn’t immediately get spent, though a good bit does, and that’s the only thing driving our economy.

Rod Khleif: Wow.

Harry Dent: So that wealth is artificial. By doing that, though, the difference is this: I think we had about 240 trillion in financial assets globally before the 2008 crisis. And now, before this one, we have 477 trillion—counting personal real estate on top of commercial real estate, stocks, bonds, gold, silver, and all this stuff—in an economy that’s weaker than it was, with less robust demographics than in 2007. That bubble is going to have to burst.

Rod Khleif: Are you talking about the valuation there? The valuation has effectively doubled since 2008.

Harry Dent: Yes. Stocks, real estate—they’re overvalued. Corporate profits haven’t grown since the first bounce in 2009. Companies have been using cheap money to buy back their own stocks, causing earnings per share to rise twice as fast as their actual corporate earnings. So that’s artificial too.

Rod Khleif: And they’re borrowing money as well, I guess? Borrowing on top of that?

Harry Dent: They’re borrowing cheap money to buy back their own stocks, leveraging their capital—taking cash from full shareholders’ cash flow or adding debt—to speculate in their own stocks. In net terms, the only net buying of stocks since 2009 has been corporations buying their own stocks. Retail investors, institutional investors, and foreign investors, if you net it all out, are slightly negative. Corporations are buying down their stock prices, and then, what are governments doing? Buying their own bonds to push interest rates down and allow them to manage more debt. They would never be able to float all this unprecedented debt—especially Japan in a free market.

Rod Khleif: So, guys, this isn’t conspiracy stuff. We’re not off the deep end here—we’re talking about common sense. The printing of trillions of dollars; corporations doubling asset values in a market period where there’s nothing to account for—it’s just fluff. And then, corporations buying their own assets. So how bad is it going to get, Harry? What do you think’s going to happen when that proverbial “hits the fan”?

Harry Dent: Well, it’s really clear. There are two long-term things that happen when you reach a generation peak, like the Bob Hope generation in the late ’60s. You tend to get about a 12-14 year downturn where people aren’t spending until the next generation comes along—a 40-year cycle. Think: 26 years up, 14 years down—that’s been the rhythm. You get about a 50% reduction, long-term. When you get a bubble, like the roaring ‘20s or a bubble like this, stocks can crash 80% to 90%—at least a 70% drop minimum. And so there will be a much bigger crash because things are so overvalued. These stocks have no relation to mainstream economics. In fact, my spending wave indicator—this 46-year lag that predicts when spending peaks—indicates that when stocks peaked, say in February of this year at almost 30,000 on the dollar, they were 120% overvalued compared to where the spending wave naturally would place them. So you’re going to have a big correction to get back to reality. I’ve had this target date since the 80s when I predicted the boom and the subsequent downturn. By late 2022—give or take—I expect the market could drop to about 5,000, which is around an 85% drop. The NASDAQ might fall even more; the S&P, similarly. Companies have not grown their corporate profits since that initial bounce in 2009, and with all these buybacks and cheap debt, it’s all artificial.

Rod Khleif: Wow.

Harry Dent: And as an example, in real estate, I valued it at its last peak—back in 2006—where it was about 21% overvalued by my demographic model, which looks at net demand (peak buyers minus sellers). Now, even though real estate is only about as high or a little higher than it was in 2006-2007, it is 42% overvalued because net demand is much lower. All this buying is the same as what corporations did: it’s too easy, too cheap. People are just buying more because loans are so accessible. For instance, I might have a six-thousand-square-foot house and then trade up to seven-thousand square feet. My mortgage broker might say, “What are you doing with that six-thousand-square-foot house, Harry? You should have an eight-thousand-square-foot house.” It’s artificial. So real estate is even more overvalued. In the last bubble, real estate was only 20% overvalued and fell by 34% because it overcompensated. I’m expecting about a 50% drop in real estate—more in high-end, everyday homes less, coastal areas versus places like Omaha, Chicago, Kansas City, but that’s the general ring. People don’t conceive that something like this could happen twice in a row. It’s devastating. And remember, in the last bubble in the 1930s, all financial assets—real estate, stocks, bonds—fell by about 50%. So if you lose 50% of 477 trillion, you’re talking about roughly 232-240 trillion disappearing—that’s three times global GDP. To put that in perspective, in the U.S. we have about 125 trillion in financial assets versus a 21 trillion GDP. So if half of that is wiped out, that’s over 60 trillion—three times GDP gone. That’s bubble economics: you create something artificial, and now you see it, now you don’t.

Recommendations for Multi-Family Investors

Rod Khleif: Yeah, let’s shift gears because we’ve just scared the shit out of everybody. Now, because it’s going to get ugly, one thing you indicated previously is that you don’t think this is going to last a long time. I believe you put out a forecast through 2023. Why do you think we’re going to rebound quickly?Harry Dent: Okay, and here is where economists are saying, “We won’t have a quick rebound; we’re in for a lost decade—10 or 12 years,” just because it happened in Japan or in the 1930s. What I’m telling people is that we already started what I call the winter season. I’ve been predicting a winter season since the baby boom peaked in 2007—it would last from 2008 to 2023. That steady, steep demographic decline began in 2008. We had a deep recession—we avoided a full-blown depression with total deleveraging. Look back at the long depression from 1929 to 1942: the first crash hit hard, then there was a secondary slump from 1937 to 1942. We had a mini depression in 2008-2009, but it was cut short. Now, however, we’re going to face the “big” depression on the back end. But then it’s going to be over because demographic trends—the millennial generation—will drive recovery. I can even pinpoint, roughly, the date for the next boom: around 2036 to 2037, similar to the buyer’s boom for the baby boomers around 2007. It won’t last as long as the baby boom period, and it won’t be as steep, but we will come out of this—and much of the world will too. In the emerging world, Southeast Asia and India will dominate the next boom. Remember who dominated the last boom? The U.S. and North America were once emerging countries in the early 1900s and the roaring 20s. Now, East Asia—first Japan, then Taiwan, South Korea, Singapore, Hong Kong, and eventually China—saw a massive surge. They doubled or more their GDP per capita in 20-30 years. They’re the epicenter of this bubble. The US and North America were once the emerging countries; now they’re developed. That’s the greatest bubble we’ve had. And while I don’t even want to go into China—where real estate is priced at 11 times income, or 22 times in Hong Kong, with 78% of net worth in real estate—in the U.S., it’s about 30%—the point is, these valuations are unsustainable.

Rod Khleif: Wow. They’re going to get creamed, okay. Well, which may or may not be a bad thing because of their military posturing and all this stuff—but let’s talk for a minute. My listeners are multi-family investors or aspiring multi-family investors.

Harry Dent: Thank God they are.

Rod Khleif: Yes, that’s what I want them to hear from you, because again, we’ve just scared the shit out of you. But I want you to hear what Harry’s got to say about the asset class that we invest in. So please, Harry, reassure them about where they’re at—if they’ve got cash-flowing assets.

Harry Dent: Yeah, well, you have to understand: unlike many recessions where some asset classes go down and others hold up, in a bubble crash almost all financial assets fall. There are two things that hold up best: the highest quality bonds (the 10- and 30-year Treasury bonds, which even went up in value during the flash crash in February-March) and cash-flow positive rental real estate—not commercial real estate, but residential and medical facilities. So, multifamily apartments and single-family rentals usually hold up and sometimes even see rents go up because nobody is buying—loans become nearly impossible to secure, even for billionaires—and with a gloomy outlook, why would anybody buy? Rents hold up. Now, properties will still decline somewhat with the real estate cycle—they won’t drop as much as commercial buildings and, in fact, residential won’t fall as much as commercial. But the point is, rents and cash flow tend to be more resilient. If you come into a downturn with cash—either from selling over-inflated real estate or stocks or businesses—you’re in a good position. You might even find that some of your marginal properties, ones that aren’t as strong cash flow-wise or that seem overvalued, become attractive acquisitions. In a downturn, there will be lots of foreclosures. Imagine you’ve got a portfolio of apartments or single-family homes generating strong cash flow, and many others are failing. Banks will be asking, “What do I do with these properties?” You can step in and say, “I’ll take over 50% or 60% of these assets—better than fire sale prices—without even putting money down because I have the cash flow.” Cash means you can take over properties even when getting a new loan is nearly impossible. So, my strategy is to have a combination of liquid cash and solid, cash-flow positive assets. That makes you king in a deflationary spiral. Even if you don’t want to buy additional apartments, you can purchase stocks or businesses. Remember, it wasn’t just Joseph Kennedy who did well in the Great Depression—he came in with cash and bought businesses. Even the mafia, making tons of cash in illegal booze during the roaring 20s, turned into loan sharks during the Great Depression, and if a borrower defaulted, they’d take over the business. The key here is: build and maintain cash and cash flow. I believe stocks might be peaking as soon as next week—or at the latest by the election.

Rod Khleif: Wow, okay. So, guys…

Harry Dent: …the leading indicator for everything is that real estate is holding up best because inventory is scarce. Builders didn’t come back strongly after 2008, and inventory is limited. People are panic buying. The stock market is going to lead this downturn—just as real estate led the last downturn. So, when you see stocks begin to crash, that’s your sign. I’d advise taking a hard look at your portfolio. Don’t be afraid to raise cash by selling properties that are most overvalued—and then target, today, the apartment buildings or single-family homes that you can pick up cheaply. In single-family homes, you also have the option of renting them out during the downturn and selling later when the economy recovers. One measure to evaluate your risk is to compare your property’s downside potential: the best case might be the lows from 2009-2011 and the worst case the levels from early 2000. If you see a lot of downside potential, consider selling now and re-buying something similar a few years later. But remember: maintaining strong cash flow is vital. In a downturn, many will fail. Imagine that foreclosure situation: you have strong cash flow from your properties, while others can’t pay their bills. Banks will have few quality buyers. With cash in hand, you could acquire 50% or 60% of those failing properties, even without needing a bank loan. Cash combined with cash flow truly makes you king.

Rod Khleif: Value is irrelevant—it’s all about cash flow, period. And the other thing is, as you mentioned, there are new renters coming into this cycle as well—retirees, for example. I mean, their rental demographics are shifting.

Harry Dent: This is a godsend to your industry, Rod. I didn’t realize it until I spoke at a big apartment conference last year in Dallas. I’ve been telling people in multifamily that the millennials—by the way, their prime renting age peaked in 2018-2019—first enter the rental market before they buy, get married, have kids, and eventually purchase a home. So that peak happens earlier. Now, the downturn will keep the rental market buoyant for the reasons I mentioned. But there’s also a new trend: baby boomers are a changed generation. Every sector they enter, they bring change—not necessarily through their intelligence, but because circumstances force them to adapt. Baby boomers grew up in good times. They didn’t experience the hardship of the Great Depression like the Bob Hope generation did. So they didn’t save or overspend; they simply spent. Now that they’re moving into retirement at record rates and many don’t have a solid retirement plan, they’re realizing that the only way to fund their retirement—since they were not prudent savers—is to sell their oversized homes (like a typical McMansion) and use all the equity to fund retirement rather than reinvesting in a downsized home. So increasingly, more baby boomers aged 55 and older are renting instead of buying or downsizing. That’s the new boom. And let’s be honest: who would you rather have as a tenant—a 22-year-old who parties every weekend or a mature, responsible tenant likely to stay for 20 years? I know of an age-restricted asset in Sarasota—just under 100 units for 55 and older—that’s always 100% occupied with a waiting list. They rarely leave because, well, why would they, if it’s working for them?

Rod Khleif: We’ve got an asset.

Harry Dent: They have higher incomes and are more responsible.

Rod Khleif: Right. And just to recap: things are about to hit the fan. It’s going to be really ugly, but where crisis exists, so does opportunity. I remember Jay Abraham’s phrase—ethical opportunism or compassionate capitalism. There’s going to be tons of opportunity. Cash is going to be king—not just your ability to raise it, but also your cash flow. I’m planning on raising cash with partners to strategically acquire these assets. Forewarned is forearmed. I’m not trying to scare you—Harry isn’t here to scare you—but to prepare you.

Closing Remarks and Additional Resources

Harry Dent: I’ve been one of the most bullish economists in history, but every great boom is followed by a significant downturn. We’re experiencing a short period of adjustment. This has been the greatest economic expansion since the late ’80s and ’90s—we’re living in prosperous times. This is just a big hiccup on the way.Rod Khleif: Yeah, and remember guys—when crisis hits, rents tend to remain steady while asset prices fall. That’s why we’re in the right business. It’s not something to fear—rather, it’s something to be aware of and to get excited about. Harry puts out a newsletter—visit harrydent.com. Do you want to talk briefly about your monthly newsletter?

Harry Dent: Yeah, we have a paid monthly newsletter which, especially in times like these, I highly recommend. Go to harrydent.com and sign up for the paid version because it’s critical information right now. We also offer a free weekly newsletter, where every week you get an article from me and my partner, and every other week, I do a video rant of about 10 to 15 minutes. It’s a great way to get to know us. So, visit harrydent.com, which is also mentioned in the story. I’d advise you to get on my HSN forecast because I’m telling you—this is going to be a wild ride.

Rod Khleif: Well, listen my friend, I really appreciate you adding so much value today. And to all our listeners—forewarned is forearmed, so get ready. Don’t fear it; get up to speed and learn this business as fast as possible so you can capitalize on the opportunities that are coming. And if you can, spend some time with me at my boot camp—you’ll be glad you did. Harry, thanks again, my friend. I appreciate you coming on today.

Harry Dent: Thank you Rod. Good luck. A sale of a lifetime is coming—if you see it coming, it’s more of an opportunity than a tragedy.

Rod Khleif: Sale of a lifetime—and this could truly be the biggest opportunity we see in our lifetimes. Thanks, buddy. Take care.