Jonathan Chevreau - Financial Post
Tuesday, June 10, 2003
The long-awaited Canadian summer is just about here. Unfortunately for investors, we may still be deep in winter -- the Kondratieff winter, to be precise.
Nikolai Kondratieff was a Russian economist who Josef Stalin consulted as to when capitalism would fail. According to Canaccord Capital's Ian Gordon, Kondratieff described instead a long business cycle which ebbed and flowed but never broke entirely. That's not what Stalin wanted to hear, so he threw Kondratieff into a gulag and there he perished.
Gordon, 60, took his B.A. in history; his bearish newsletter, The Long Wave Analyst, features on its masthead George Santayana's famous quote that "those who cannot remember the past are condemned to repeat it." Bulls committed to equities, whether as investors or vendors, may as well stop reading now.
Gordon believes we are currently recapitulating the 1930s bear market and are in the beginning stages of a deflationary depression, similar to the thesis Robert Prechter Jr. takes in his bestselling book, Conquer the Crash.
This is admittedly not the official view of Canaccord Capital, although the brokerage is known for its independent thinking.
Those still with us will be familiar with other prominent bears, such as Richard Russell, Martin Weiss and Nick Guarino of the Wall Street Underground.
Gordon reads them all, as do I. But then I also took Y2K seriously. If that bothers you, I invite you to disregard Gordon's thesis and read instead the latest magazine cover story on the "Top 10 Equity Mutual Funds you absolutely must own now." If, on the other hand, you buy Gordon's take on the long Kondratieff cycle, you have a possible road map of what lies ahead and a logical investment strategy flowing from it. In essence, it's cash and gold stocks. That's in line with Dow Theory Letters' Richard Russell, although Russell also likes high-yielding utility stocks and U.S. tax-free municipal bonds; Russell also suggests speculators take a flyer on the bear market rally with exchange-traded funds that track the Dow Jones industrial average (Diamonds), the S&P 500 (Spyders) or the Nasdaq 100 (Cubes), albeit with stop-loss orders on them.
Now back to the doom and gloom.
The current fourth Kondratieff cycle began as spring in 1949 and became summer in 1966. Throughout these first two benign seasons, just about everything rose in price -- stocks, commodities, real estate, inflation and even gold stocks.
Autumn arrived in 1982 and continued to 2000. Throughout the autumn credit and stock prices soared, although savings, interest rates and gold stocks gradually slipped.
Winter began in 2000 and will extend to about 2016, Gordon predicts. Most financial assets will fall in price, especially stocks and real estate. The major exception is gold stocks: Gordon expects gold will hit US$1,000, US$2,000 an ounce or more before winter is done.
When they hear this, most of his clients sell their equity funds and stocks at whatever prices then prevail. A bear market rally like the past few months is a good opportunity to jettison whatever remains of those asset classes, in Gordon's view. His clients hold mostly short-term debt and gold equities, the latter mostly gold juniors. Those with ladders of strip bonds can hold them to maturity, Gordon says in an interview.
While negative on stocks, he doesn't believe his market timing abilities are honed enough to sell short. He views gold positions as a sufficient alternative to shorting stocks or stock indexes. He believes gold is a good hedge against either inflation or deflation.
Since most experts can't make their minds up about that one, the traditional "insurance" allocation of 5 or 10% to gold makes sense to me.
But what do mainstream economists think about the Kondratieff winter?
Douglas Porter, senior economist for BMO Nesbitt Burns, says "the theory is a little 'out there,' but there do seem to be long periods of time where productivity growth (and therefore GDP growth) is well above average and long periods where the reverse is true. This would broadly fit the Kondratieff theory of long upwaves and downwaves." However, Porter says, if anything, "we are arguably in an upwave period that started sometime around the mid-1990s, so talk of a deflationary depression anytime soon doesn't really fit with the program." Martin Barnes, managing editor of Bank Credit Analyst, also accepts the premise of long wave cycles but "I just don't buy his [Gordon's] timing. To say we're in a downwave now doesn't fit at all. It only makes sense for us to be in an upwave at the moment if we work back to the 1930s." Nonetheless, those who read Gordon's warnings in 1999 would have benefited.
If nothing else, it argues in favour of caution and not jumping 100% back into resurgent markets, which may only be liquidity-induced sucker rallies.
Personally, I continue to be bearish for RRSP investments and bullish for non-registered investments.
Private views of the economy depend very much on job security. As the saying goes, when your neighbour loses his job, it's a recession. When you lose your job, it's a depression.
And, if God forbid, your spouse loses a job too, you know the deep freeze of the Kondratieff winter has truly arrived.
Tuesday, June 10, 2003
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