Bearing down

They’ve been called kooks for predicting currency collapses, riots and food hoarding. But as economic chaos spreads, should we heed the roar of the über-bears?

 

Some bears say scenes like these Greece riots herald the end of capitalism as we know it (Photo: Yannis Behrakis/Reuters)

Ian Gordon is a likable and accomplished guy. Since moving to this country in 1967 to study history at the University of Manitoba, the former Scottish platoon commander has worked as a stock broker and an investment firm manager. Today, in addition to raising capital for junior precious metals outfits, he runs Longwave Group, an economic think-tank based in White Rock, B.C., that has won the respect of billionaire fund manager Eric Sprott. At 69, Gordon comes across like one of those wise old gramps in family movies. He starts most days with a smile as he sets out to walk Pippa, his Staffordshire bull terrier, along the beautiful Serpentine River. “She is off the leash, running, and I let my mind wander everywhere.”

Despite his friendly disposition, Gordon doesn’t attend many social gatherings. “I can’t remember the last time I was invited to a dinner party,” he says. He thinks that’s because he is a “loner” with more acquaintances than friends. But there is another explanation. After all, what Gordon thinks about when he walks his dog would terrify most people—unless they secretly desire to live like Mad Max.

The most high-profile recent event Gordon attended was held in Toronto’s Elgin Theatre in April 2009, in the midst of the global financial crisis. Bay Street butterflies fluttered about, but this was no party. Billed as A Night with the Bears, the event featured gloomy forecasts by market watchers imported by Sprott to warn his clients about the shaky state of the global financial system. Stern School of Business economist Nouriel Roubini, a former Clinton administration adviser, told the crowd not to expect any economic growth for at least two years. Banking analyst Meredith Whitney warned that credit would remain tight. Gordon predicted the Dow Jones industrial average would plummet to 1,000.

The media feasted on the scary projections presented that night, but the warnings were soon drowned out by the cheers and sighs of relief that greeted a market recovery. Two years later, however, the economic picture is even grimmer—and the bears are out of hibernation, roaring like never before. Roubini, commonly known as “Dr. Doom,” now warns that unless global leaders can figure out how to totally redesign the capitalist system, we are facing “unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.”

For Gordon, that’s too optimistic. He is one of the world’s so-called perma-bears who believe capitalism as we know it is destined to implode. They typically prowl the fringes of economic debate, garnering mainstream attention only when things look really bad. But with mounting sovereign debts, anti-austerity riots in southern Europe, and the price of gold soaring, even some moderate financial observers are worrying that market grizzlies might turn out to be right.

Gordon bases his views on a modernized version of a controversial market theory first promulgated in the 1920s by Russian economist Nikolai Kondratiev. His “long-wave theory” states economies follow a long-term pattern of expansion, euphoria and then disaster. As Gordon sees it, the cycle is approximately 60 years long. He compares it o changing seasons, with the first half (spring and summer) a period of growth, followed by a plateau of contentment (autumn), then a deflationary depression (winter).

Based on Gordon’s interpretation of the Kondratieff theory, the current global forecast calls for a long, cold economic winter with a 100% probability of short-term total chaos. “This is a massive upheaval we are predicting,” he says. Simply put, he thinks the money you have in your wallet and in the bank will soon be worth pennies on the dollar, if anything at all. Today’s currencies are backed by nothing more than political promises not to destroy money’s value by printing too much of the stuff, he points out. Yet self-serving governments trying to prop up struggling economies are printing money like never before. As a result, says Gordon, “paper money currencies of the world are all collapsing and will fail.”

Canadians may feel safe because of our economy’s relatively decent health and the supposed stability of our banks. But Gordon insists that Canada’s exposure to the global financial system, our foreign currency holdings, our governments’ spending and our household debt will combine to ensure our monetary system will unravel as well. And when that happens, unemployment, bankruptcies and civilian acts of desperation will soar. “It’s not a happy scenario,” Gordon says. “It’s one that frightens me. But there are precautions we can take.”

When recessions loom, personal finance experts advise consumers to budget for drops in home values and incomes. They suggest making yourself indispensable at work while getting the CV in shape. Preparing for what Gordon envisions would require the kind of disaster planning that took place prior to Y2K, when the Red Cross advised people to stock up on candles and medical supplies.

Gordon currently owns about a year’s supply of freeze-dried food. Although he still holds 90% of his RRSP in stocks, he sticks to gold and silver ventures with proven assets, which he expects to soar in value when monetary systems fail. And to ensure he has emergency liquidity, he has been buying actual gold for more than a decade (no, he doesn’t keep it at home). Forget bricks of bullion, he says, which would be dangerous to carry around in a disintegrating economy, and stay away from certificates that say you own gold or silver in some institutional vault, because those contracts could be rendered worthless. Instead, you can acquire Maple Leaf gold coins that are 1⁄10th of an ounce and British Sovereign coins under a quarter ounce.

Gordon and his wife have discussed the idea of buying a safe house—something more secluded and modest than their current White Rock home—to which they could escape when things get bad. The trick, Gordon muses, is finding a place that’s isolated but still accessible by bicycle, “because if the whole credit system collapses, then basically the economy collapses and there is no transportation.” Luckily, he notes, the limited number of guns in Canada will probably make any crisis safer here than south of the border. Gordon’s family members have taken his warnings to heart, eschewing home ownership to avoid the coming massive real estate losses.

Others are also preparing for an economic apocalypse. Porter Stansberry, head of Baltimore-based Stansberry & Associates Investment Research, isn’t into long-wave theory, but he is as bearish as Gordon. In an online presentation entitled The End of America, which has garnered significant media attention, Stansberry describes what may happen if the world gets fed up with the ongoing devaluation of the greenback and stops accepting it as the global reserve currency. He predicts extensive civil unrest as the savings of millions of Americans are wiped out by the collapse of demand for dollars. Interest rates will rise. Banks will close. Credit cards will stop working. The price of everything, from gas to bread, will soar. Riots will lead to martial law and arrests on an unprecedented scale. “The economy will shut down,” he warns. “It will be like living in a war zone.”

Like Gordon, Stansberry advises planning ahead. “If you live in an urban area,” he says, “I recommend making sure you’ve got somewhere you can go in case there are riots, or food and water shortages. I think there is a very good chance you will see that in the next two years.” Load up on as much gold or silver as you can afford, he urges, because if the currency fails, citizens may suddenly find it against the law to buy gold or move savings abroad. And stock safe houses with supplies for at least six months. “Remember,” he says, “you won’t be able to count on the government during this crisis. Think about it. If the government couldn’t save the city of New Orleans during hurricane Katrina, how in the world will it save an entire country when all hell breaks loose?”

Critics point to Stansberry’s questionable record in advising the public, and the fact his presentation is clearly intended to market his firm’s advisory services. The extreme bears, in fact, are often dismissed as headlinemongers who are better at selling newsletters than managing money. Greg Newman, an associate director of wealth management with ScotiaMcLeod’s Newman Group, is typical when he warns against putting stock in any perma-bear’s advice. “They never seem to see a glass that is half full, no matter what.”

Still, if a massive run on the U.S. dollar were to take place, the scenario Stansberry paints wouldn’t be that far-fetched. History has repeatedly shown that the combination of scarcity of goods and massive unemployment can quickly lead to a rejection of authority. Indeed, research has found that even minor economic gyrations ripple out noticeably into the social sphere. According to a 2005 study of criminal patterns by Statistics Canada, for example, inflation rates influence the levels of financially motivated crimes such as break-ins and car thefts, while increases in unemployment correlate with higher homicide rates. Britain’s Centre for Economic Policy Research has found similar linkages. After studying the decline in U.S. crime rates that occurred in the 1990s, it concluded that a drop of two percentage points in unemployment was responsible for a 9% decline in burglary, 14% drop in rape and robbery and 30% plunge in assault. A single percentage point increase in U.S. unemployment in 1992, the centre projected, would have generated nearly 500,000 more crimes.

And it’s not just the perma-bears who fear economic chaos. Central bankers around the world are in firefighting mode, and experts say they have run out of water. As a result, plenty of influential people are worried about the stability of paper money, ranging from Sprott to U.S. presidential candidate Ron Paul. Some even believe the euro won’t survive the next 12 months. In May, a record 45.8 million Americans (nearly 15% of the population) relied on food stamps for survival, a 12% increase from last year and 34% jump from 2009. More recently, the world’s largest economy flirted with defaulting on its international debt obligations.

This state of economic affairs recently led John Mauldin, a Texas-based bestselling author and adviser to the rich, to introduce his popular newsletter by quoting R.E.M.’s “It’s the End of the World As We Know It (And I Feel Fine).” Mauldin is no extremist; he doesn’t expect the global monetary system to collapse. But he is worried enough to prepare to be proven wrong. “My fondest dream,” he wrote in one recent commentary, “is that I will give my gold coins to my great-great grandkids some 70-80 years from now, and they will be rather embarrassed that their Papa John bought all that much of that barbarous yellow metal instead of more biotech stocks. But as I live in the real world, I buy gold, even though I am optimistic we’ll get through this rough patch; because I simply don’t trust the bas*%*ds who are driving this ship with 100% of my money in dollars, or any fiat currency, for that matter.”

Back in Canada, Gordon insists he would like nothing better than to have his predictions turn out false. And his grim outlook hasn’t harmed his sense of humour. He notes that American market forecaster Robert Prechter, who promotes the Elliot Wave Theory that predicts market movements based on repetitive waves in investor psychology, has called a Dow drop to 400. “Compared to him,” Gordon says, he is actually “bullish.”

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