A bear's bear

There is a time for stocks and a time for gold. Now is the time for gold, Ian Gordon says

April 2, 2009 at 7:14 AM EDT

Anyone wondering what a bear's bear sounds like need only spend some time with Ian Gordon, a Vancouver-based investment adviser and market historian whose genial nature seems at odds with his decidedly grim outlook. Basing his views on an interpretation of market cycles going back more than 200 years, the president of Long Wave Analytics has been consistently accurate in his forecasts in recent years. And if he is right now, much worse is yet to come.

Can you explain how your thesis works?

I sort of extended Kondratieff's economic cycle into something far bigger than he had ever intended. [Nikolai Kondratieff was a Soviet economist who concluded in the 1920s that capitalist economies endure recurring booms and busts over long cycles running up to 60 years.] I quickly discovered that it was very easy to recognize exactly where you were in the cycle.

You divide the cycle into the four seasons of the year and say that right now we're at the beginning of a long winter. Why is that?

'We're only really at the beginnings of this massive collapse of the debt structure. Much as the central banks are trying to feed money into the system, the collapse basically takes money out faster than they can put it in,' Ian Gordon says. (Laura Leyson for the Globe and Mail)

I consider the seasons to be very appropriate. The present cycle started in '49. The spring started with the bear market ending that year. Spring ended in '66, when that bull market topped in June, with the Dow just under 1,000. ... Spring is the rebirth of the economy, and stocks perform as the economy performs.

And what happens when spring turns to summer?

We have always had an inflation in the summer of the cycle. The reason is that there was always a war. And it was always financed through paper money printing. In the first cycle - and I'm using the U.S. - it was the War of 1812. In the second cycle, it was the U.S. Civil War. In the third, it was the [First] World War and in the fourth cycle, it was the Vietnam War.

When I started to write about this in '98, I knew exactly that we were in the autumn bull market [which always follows], and I knew that, given the massive increase in stock prices up to that point in time, we were much closer to the end than the beginning.

Which obviously leads us to winter.

When the stock market peaks - you can go back to the 1873 stock market peak or 1929 or 2000 - you go into the Kondatriev winter. The winter is really the death of the economy, because debt has to be taken out of the system. And that's what's occurring now.

I could anticipate all this simply by looking at all the previous cycles, knowing that the stock market peak would be the indication that we were going into the winter and that the debt bubble would burst.

So why didn't this happen back in 2000 when tech stocks blew up?

Because [then Fed chairman Alan] Greenspan wouldn't let it. He brought interest rates down to 1 per cent [by 2004] and flooded the banking system with money.

Where do we sit now?

We're only really at the beginnings of this massive collapse of the debt structure. Much as the central banks are trying to feed money into the system, the collapse basically takes money out faster than they can put it in.

So all those government efforts to remedy the problems are going to come to naught?

My own feeling is it could be the end of paper money. ... The central banks and the treasuries' response to all this is to just continue to increase the debt. They're trying to get the credit lines open again, but I ask myself: Who's there who can actually take up the loans?

But the markets appear to be rebounding. How do you explain this?

In '29, the [market] peak was on Sept. 3, when the Dow hit 381. The first crash bottomed on Nov. 14, 48 per cent below the point from whence it had begun. Then you got a massive rally [because of government monetary intervention]. Into April, 1930, it recovered [almost] 50 per cent.

I think we're very much at that same point again ... where people think that the government is starting to control the problems.

What about the argument that another depression is unlikely, because of all the economic, fiscal and social measures designed to prevent such a nightmare from reoccurring?

I just don't think that those measures are going to work. The U.S. consumer is absolutely tapped out, and that's who you have to depend on for your economy.

So it would be wrong to assume you're advocating a heavy weighting in stocks?

There's a time to be in stocks and there's a time to be in gold. When you're in one, it's because the other doesn't work. In this kind of environment, the only thing that has ever made sense is gold, because people will be so scared of anything else.

Based on your interpretation of Kondratieff theory, when do we see spring again?

The last spring really only started after the [Second World] War, and the war basically stopped the Depression. This time, the United States is in a much more difficult position. Going into the last Depression, it was far and away the world's largest creditor nation. Today, it's the world's largest debtor nation. So its efforts to try to overcome the effects of the Depression are going to be offset somewhat by its ability to borrow.

Getting back to the market, you obviously don't see this as anything more than another bear rally.

Ultimately, the stock market has to reflect the reality of the economy. If we were to emulate 1929-32 in the stock market, that would be an 89-per-cent loss in stock prices. I have a target for the Dow of 1,000 points at the bottom.

Boy, you're going to be a barrel of laughs Tuesday at a Night with the Bears (the Toronto event is sold out).

Having written about this and studied it, I honestly wish it wouldn't happen.

Do you ever depress yourself?

I do. But I hope that I've prepared myself and those that I've advised to basically look after themselves in the best way they can, given what we could see was going to happen.

MEET THE BEARS

In Friday's paper, Globe Investor presents its third bear in a series. Professor Nouriel Roubini is a globally renowned expert in the field of international macroeconomics and a professor of economics at New York University's Stern School of Business. Professor Roubini is speaking at A Night with the Bears in Toronto next week.