Friday, January 2, 2009

Ian Gordon: A Full-On Depression

This Forecaster Sees A Full-On Depression

By Hewitt Heiserman, Realmoney.Com Contributor | 3 January 2009

In the fall of 2007, Ian Gordon of Vancouver, B.C.-based Bolder Investment Partners published a 31-page article on the company's Web site explaining how an "explosion of debt" made possible by a "worldwide fiat monetary system" will decimate stocks and eventually the U.S. dollar. With the S&P 500 down 37% in the last year, Mr. Gordon's contrarian scenario is playing out as he expected. I recently spoke with Mr. Gordon, an expert on the Kondratieff wave, to hear his views on the U.S. economy, China and gold.

RealMoney: Please tell RealMoney readers about the Kondratieff cycle. How did you get interested in this theory?

Gordon: I love history, and that's what my degree is in. In 1983 I started a subscription to a monthly newsletter written by Donald Hoppe, which was called The Kondratieff Wave Analyst. It drew many parallels from previous Kondratieff cycles. Mr. Hoppe ceased publication in 1993, but I retained all the copies that I received and draw from them extensively in my interpretation of the Kondratieff cycle, which I periodically publicize on my Web site, The Longwave Analyst.

Nicolai Kondratieff [1892-1938], a Russian economist, theorized that economic cycles in a capitalist system last about 60 years. Capitalist economies grow in the first 30 years of the cycle, plateau in the next 15 years, and then collapse into a depression in the last 15 years.

Last year you said a Kondratieff winter "is now under way in earnest and nothing can stop it. The ensuing credit contraction will be devastating ... it will result in a destructive and frightening deflationary depression." What factor or factors told you we were "in winter"?

Spring in the present Kondratieff cycle started in 1949 and ended in 1966. Summer is when the economy achieves its fruition. Summer ended between 1980 and 1982. Autumn is the "feel good" period; it's when we have the biggest bull markets in stocks, bonds and real estate. Autumn ended in 2000 with the stock market peak in that year, just as the previous Kondratieff autumn ended with the Roaring Twenties stock market peak in September 1929. Winter is the season in which the economy dies, as debt is cleansed from the system.

Although winter began with the stock market peak in 2000, the first seven years were mild, because former Fed chair Alan Greenspan lowered interest rates to 1% and flooded the banks with money. All this money had to go somewhere; it went into real estate and back into stocks. And it added horrifically to the already enormous U.S. debt burden. Debt in the U.S. increased by 50% between 2000 and 2007.

I knew the jig was up after those Bear Stearns funds failed in July 2007, because they were invested in subprime debt, and this was a signal the Kondratieff winter had arrived, because it was the sign that the enormous debt bubble was bursting. This is what happens in the Kondratieff winter.

When you speak of a Kondratieff winter, does this apply to the U.S. only? Or is it a worldwide problem?

We're all in this together; no country can escape it. Countries that took on the most debt— whether government, corporate or individually— will be the hardest hit.

You see a parallel between China today and the U.S. in the 1920s?

China will not bail us out. In fact, China is the U.S. of the 1920s and 1930s. She will fall hard in this Kondratieff winter. No country is immune… The sheer size of worldwide debt this time around makes the aftermath of 1929 look insignificant. Then, it was mostly an American affair. Europe did not join our "Roaring Twenties" extravagance because they were already reeling from the destruction of World War I [[and, in particular, the UK had a much easier time in the Great Depression; largely escaping its consequences: normxxx]].

This time the world partied too hard and too long. Now, the piper must be paid; most of the debt must be washed out of the world economies. This deleveraging process will bring significant strife to creditors and debtors. The process is just beginning, and already we've witnessed government bank bailouts in many countries [[and general unrest and even riots in several countries: normxxx]].

The primary purpose of the Kondratieff winter is to "cleanse the economy of debt," you say. Just how bad is our debt situation?

Terrible! Total debt, which includes government, financial, corporate and consumer, is $53 trillion. Debt per GDP in the United States is currently 357%. In 1929, it was 163%, and even that amount caused a depression.

To prevent a slowdown in business activity, the Federal Reserve in the last year has lowered the fed funds rate to between zero to 25 basis points, from 4.25%. Meanwhile, the Fed's balance has increased 140%, to $2.1 trillion, to provide liquidity to banks. Can't we stimulate our way out of debt?

No. The Fed thinks the way to re-start the economy is to get people to borrow even more. But the people won't. Also, the banks have stopped lending.

The U.S. dollar is poised to fall hard as creditor nations sell greenbacks to stabilize their own economies and banks, you say. But the U.S. Dollar Futures Index (DXY) has rallied since last summer. Who is right?

The dollar rally is a short-term phenomenon. In the longer term, the dollar is toast, not only as the world's reserve currency but probably as a currency in its present form. There's just too much debt behind the dollar. And this debt is being added to on a massive scale as we speak.

Who in their right mind would buy U.S. debt? The only way it can ever be repaid is through inflation. Unfortunately, we are now in a huge debt deflation, which means U.S. debt and all debt for that matter becomes an even bigger burden. The dollar is the worst of all the fiat currencies out there. The end of the international fiat currency madness may be near. Maybe the world will be forced to return to an honest money system based on gold.

What steps must President Obama take to fix this mess? Can he fix it?

No. I had hoped the president-elect might be a force for change. But it's "business as usual," thanks to the bankers. He has surrounded himself with a coterie of washed-up financial advisers, whose only remedy for the catastrophe they and their ilk created is to throw more money— i.e., debt— at the problem. If Alan Greenspan had not interfered in the process of debt elimination following the stock market peak in 2000, we would have endured far less economic and financial pain.

The incoming president inherits a Kondratieff winter depression that is likely to be far worse than the 1930s. Because U.S. debt per GDP is 2.5 times greater than in 1929, Obama lacks the money that was available to President Roosevelt to try and remedy the situation. By the way, President Roosevelt's stimulus programs did not cure the Depression anyway; World War II halted the Depression.

[[By spending 6 times as much as was spent during the entire depression— then trashing all the materiel that was purchased with that money!: normxxx]]

The demand for gold will be "enormous," you predict. Why?

Demand is already enormous. As this crisis worsens, demand will get even bigger. In times of distress, people flee to gold. It is the money of last resort and is no one's liability.

The world produces just 80 million ounces of gold a year. This is so small when compared to the world's population. More importantly, it's a miniscule amount when compared to a much smaller population that can afford to buy gold. Theses people won't buy a few ounces; they'll buy thousands of ounces to protect themselves.

The Dow-gold ratio is 11 times [[now (2/20/2009) closer to 7.5 times : normxxx]], meaning the Dow at 8330 can buy 11 ounces of gold. How low does this ratio fall before stocks reach their bear market nadir and gold reaches its bull market zenith? This ratio peaked in July 1999 at almost 40 times. Since, the price of gold has outperformed paper (stocks). This trend will continue.

The ratio has never fallen under 1.0 times. But I think we'll reach 0.25 times, meaning it'll take just one-quarter of an ounce of gold to buy the DJIA, or as I like to say, "All it will take is one British sovereign." [First issued in 1489 for Henry VII of England, a British sovereign is a gold coin that weighs 0.235 troy ounces.]

My bear market target for the Dow Jones Industrials is 1000 points. Don't forget, the bear market bottom for the DJIA in 1932 was 90% below the peak. And this bear market will emulate the 1930s bear. My gold price target is $4,000.

What is your outlook for energy stocks?

I am very bearish on all commodities, including oil. This collapse in the debt bubble is deflationary, and the economy is sinking into a depression. The Fed can't reinvigorate the economy until debt liquidation has run its course. Anyone who is bullish on commodities has to be bullish on the economy. I am not.

Anything else we can do to protect ourselves?

Get out of debt and get out of investments in real estate and stocks. Instead, own cash, gold and gold equities. The share price of Homestake Mining increased by 600% between 1929 and 1936.

When do the robins start chirping again?

Spring arrives perhaps 10 or so years from now, when most of the debt is eradicated and savings are replenished. It arrives when the mood of the masses is one of despair.

Thanks, Mr. Gordon.

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Know What You Own: Exchange-traded funds that take a bearish view include the MacroShares Oil Down ETF (DOY), PowerShares DB Commodity Short (DDP), PowerShares DB U.S. Dollar Bearish Fund (UDN), ProShares Short Financials (SEF), ProShares MSCI Short Emerging Markets (EUM), ProShares Short Oil & Gas (DDG) and the ProShares MSCI Ultra Short Japan (EWV).

P.S. Profit From Doug Kass' Predictions
Nov. '07: Kass warns current market top is doomed to go into a death spiral. Oct. '08: he calls a market bottom but, amid the gloom, sees signs of intermediate recovery presenting investor opportunities. Get his forecasts first at RealMoney Silver.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

  M O R E. . .


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

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