Why does HS Dent not just admit he is plain wrong?

He certainly got his forecasts impressively right in the 1990s. As his website opines: 'When we published The Great Boom Ahead in 1992 and forecast that the Dow would reach between 8,500 to 12,000, most people thought—despite compelling demographic logic—that there was no way that the economy could be that strong or that stocks could rise that high.'

OK so far, he notes: 'We stood virtually alone in forecasting the incredible boom and stock market bubble of the late 1990s, as well as predicting that the unprecedented federal deficit in 1992 would turn into a surplus between 1998 and 2000. We also forecast as early as 1988 that Japan would enter a long-term slowdown and bear market in the early 1990s, and that the slowdown would last into the early 2000s.'

Millennium blunders

However, HS Dent's forecasting skills have failed him badly in the 2000s as demographics have resolutely refused to translate into stock market trends. The correlation that served him so well in the 1990s turned against him in the new century. You see you can get the demographics right and yet investors can choose to jump in the opposite direction, human nature being a bit contrary.

'We forecast that strong demographic-based consumer spending would keep the economy booming and that this boom would be reflected in corporate earnings,' says Dent.

'The problem is that investors have found stocks less attractive in recent years, even as price/earnings multiples have contracted due to the stellar growth in profits—and that stock valuations are still very attractive vs. bond yields now that bond yields are lower than in late 2002. Why would investors shun equities with rising profits? The short answer is investor psychology and new geopolitical trends!'

Fine so HS Dent has grasped the nub of the problem. But he still will not give up, offering this gem of wisdom on his website written in October 2006: 'The most likely scenario now is that the next bubble that started in July 2006 will last for three years, peaking around late 2009. The basic targets for now are the Dow around 20,000, and 4,300 to 5,000 for the Nasdaq. If we saw a 3-year bubble as strong as late 1984 to late 1987, then the Dow could reach as high as 27,000, but that is less likely.'

Less likely!

Where was the bubble rally from 2006-7? What we have had instead is a US housing crisis several years ahead of HS Dent's demographic timeframe, harsher than the softening he predicted (pesky 'investor psychology' again?) and a further stock correction in February 2007.

Surely what we have really learned from the 2000s and demographics is that this science is useless as a stock market predictor and not that hot for real estate. The trouble is that market sentiment swings wildly and what is an acceptable price-to-earnings ratio, or mortgage-to-income ratio at any given time is not a constant in relation to population growth.

It is the old problem about factors that correlate and those that only appear to correlate for a time. And while demographics can obviously aid a manufacturer of vacuum cleaners in likely future demand patterns, it is not a jot of value in determining where the share price of the same company might end up.

The Dow at 20,000 by 2009 is just not on the cards unless the Fed decides on hyper-inflation to bail out a floundering US economy but that would hardly be likely to encourage Joe-public to invest in the stock market. Demographics have a place but not in reading stocks!