From the Summer 2008 issue of Canadian Business magazine
Ian Gordon is so bearish you'd think he eats tree bark and berries. An investment adviser and market history buff with Bolder Investment Partners in Vancouver, he subscribes to a controversial theory first promulgated by Russian economist Nikolai Kondratieff in the 1920s that suggests markets follow a regular long-term pattern of expansion, euphoria and then disaster. As Gordon explained to senior writer Matthew McClearn, his interpretation of Kondratieff's theory suggests we're at the beginning of a long winter that will lay waste to our capital markets - and it's time to hibernate.
Please describe the Kondratieff Cycle in a nutshell.
It's a long cycle of approximately 60 years. The first half of the cycle is a rising economy, followed by a plateau period, and the last quarter is a deflationary depression. I've divided the cycle into the four seasons of the year. Spring is the rebirth of the economy, summer is when it reaches its fruition, autumn is the feel-good period, and winter is when the economy dies. The onset of each of the seasons is indicated by either a bear market bottom or a bull market top in stock prices.
Where are we in the cycle today?
Our current cycle started in 1949 with a bear market bottom when the Dow hit 161 points. The spring ended when the Dow peaked at just under 1,000 points in 1966, and summer ended with a bear market bottom in 1982 when the Dow hit 777 points. And winter started with the Dow peak at 11,750 in January 2000. Yes, the Dow has hit higher peaks since then, but I believe that was the onset of winter.
If you understand economic history, you can easily see that where we are today is akin to where we were in 1929. Most investors are very complacent, because we've basically enjoyed nothing but growth since 1949. Certain other people have seen this, but most people think I'm a loon.
You say "winter" began in January 2000, but things haven't been all that bad since. Why not?
That's entirely due to the actions of the Federal Reserve and central banks around the world. When we did get that peak and the Nasdaq started to collapse, [former Fed chairman Alan] Greenspan panicked and brought interests down from 6% to 1%. He flooded the banking system with money, easy credit fostered another big boom in real estate, and stocks followedbecause so much money was available. The stock market loves low interest rates.
How bad will it be?
It's going to be every bit as bad as the 1930s, and probably worse. The Principle reason for the Depression was debt. The major portion of our current debt buildup occurred from 1982. Right now, the total U.S. debt is almost 400% of GDP. In 1929, it was only about 170% of GDP.
If we repeat the 1929-1933 experience in the U.S., we're going to see a GDP that halves. We're going to see a stock market that loses 90% of its value, and we're going to see home prices lose 80% of their value.
What's an investor to do?
You have to go to the safest investment of all during catastrophic times. That happens to be gold. The run to gold in the early 1930s was huge, and I think the same thing will happen again.
How do you think investors should play gold?
I think you have to own the physical. I've been in gold since 2000, and so have my clients. I've also gone into the junior gold sector rather than the seniors, simply because the juniors are levered to a rising gold price. You have to be very fussy about which ones you invest in, but for the most part I've found it fairly lucrative.
In winter, you go into defensive mode. Obviously, you want to own your home, but you don't want to invest in real estate. You don't want to be in stocks. And you want a great defence by being in cash and gold. It's that simple.
The benefits of diversification have long been emphasized. Other than gold and cash, what's available?
That, for most people, will be the kiss of death. Nobody was talking stocks in 1982. There was no interest in the stock market until the bull market started to blossom in 1984. More and more people came in since then, and more and more mutual funds and hedge funds were developed, and every avenue was explored to get people's money into the investment field. I believe that game's over.