Gleason is also the author of How to Invest If You can't Afford to Lose, a free e-book that has good advice on how to use low-cost index funds to build a market-beating portfolio.

Curious to know whether it is safe to own stocks now, I recently spoke with Gleason. Here are excerpts from our far-ranging interview.

 

Real Money: Market-timing is the focus of your research. Please explain.

Gleason: The "experts" say market-timing is impossible. Nevertheless, in the mid-'90s I began using my finance background and computer programming skills to run simulations on various theories I had. I did this because I needed to know how the markets worked, and the books I read didn't answer my questions. After two years of trial and error, failure, my models started to become predictive of market movements. So then I started the Web site to test my theories real-time with the public as peer reviewers. My approach is mathematical and doesn't use charting or traditional technical indicators. I focus on the broad trends in stocks, bonds and gold.

 

Although your model is proprietary, please give us some idea of what factors it pays attention to.

I look at earnings and a couple of precise economic indicators I've devised. Specifically, my model looks at valuation, vector and velocity. Vector is the direction of the market, and velocity is the market's rate of change. Success requires that all combine to support a decision.

 

What did your timing strategy say about stocks a year ago?

I saw severe danger for stocks in October 2007. Two months later, in December, I warned my subscribers. In January 2008, the model went negative, and I issued a "sell" alert. The S&P 500 was at 1366. The market then fell 35% over the next several months. In December 2008, my model issued a "buy" at 816, and a week later sold at 876. Subscribers made 7% in five days.

 

What does your model say about the S&P 500 now?

At a recent 815, stocks are a "buy," and there is room to the upside. A bear market rally of 5% or more is possible.

 

You have been cautious on bonds "for years," but long-term Treasuries were up 22% in 2008. Did your model fail you? What is your outlook for bonds in 2009?

U.S. Treasuries surged due to a worldwide flight to safety. The rest of the bond market had a bad year, however. High-yield bonds fell 22%, Intermediate-A-rated corporates fell 6.2%, and long-term tax-exempt bonds fell 6.9%. TIPS lost 2.8%.

My bond model doesn't predict yields. Instead, it looks for periods when you'll make a capital gain from falling rates. Today, my model likes high-quality corporate bonds with a five-year duration.

 

Are TIPS attractive at 1.89 for the 10-year?

I recommended TIPS in November 2008, and we're up 6% so far. The yield then was at 3.0%. But I'm neutral now, because the yield is too low. I need at least 2.5% before committing additional capital.

 

You don't like stocks. You don't like bonds. What do you like?

Vanguard's Intermediate-Term Investment Grade bond fund (VFICX), which I recommended at the beginning of January, seems safe for now.

But you are correct. I'm cautious on most asset classes and will patiently wait for opportunity.

 

Your gold model has had a buy since 2003, at $328. How does the gold model work?

It has two parts. First it defines the fair valuation, and then it determines the direction gold is moving. I was bullish in 2003 and am now neutral. I believe gold is fairly priced at a recent $868. I'm over 20% in gold, and the volatility never bothers me. It's an insurance policy against economic disaster.

 

Tell me about your "Balanced Portfolio."

It has a mix of stocks, bonds, REITs, money market, international stocks, small-cap value stocks and gold. The Balanced Portfolio has beaten the S&P every year since 2000 and is only about 50% in stocks. It beats major pension funds over all time periods. In 2008, it lost 22% vs. 38% for the S&P 500. Both results were terrible, which is why I use a timing strategy.

You can read more about the Balanced Portfolio on my Web site and in my book.

 

Oil is setting up for a big rebound, you believe. Explain.

At some point I will move into oil, because it's the one thing everyone must use, and it's in an unstoppable depletion trend. But since oil is in a steep downtrend, I'll wait for the turn before buying.

 

Oil production is the "major clinker" to world economic growth, you say. Explain.

Oil under $60 a barrel causes exploration work to decline and rigs to go dormant. Low prices are dangerous. The world needs a steady supply of increasingly small and expensive oil discoveries, because the older fields are rapidly depleting. Oil prices will spring back ferociously at some point, because new discoveries can't make up for the decline rate. This "spring-back" will occur even if global growth stalls.

 

You write that traditional asset allocation methods will not serve the long-term goals of investors for the next year? Why? What will work?

S&P 500 companies need a free-spending consumer. But demographic trends and debt mean a switch to saving. Less spending will mute corporate earnings growth. Many firms will go out of business or merge away. Buy-and-hold investing worked from 1982 to 2000. Don't expect big portfolio returns again. Saving money works, however. Some investors may wish to time the markets to take advantage of volatility opportunities or to reduce risk.

 

The Fed is trying to reduce long-term rates for two reasons, you say? Why?

The Fed wants low interest rates to make stocks look more attractive than bonds. If stocks keep falling, then pension funds and annuity insurance companies will fail. The government also needs low rates because of the many mortgage resets coming in 2009-2010. Unless these mortgages reset at low rates, people won't be able to pay their bills, and we'll see more foreclosures.

 

We have deflation in the form of falling housing prices and a falling stock market. But with government debt growing at an annualized rate of 15%-16%, when does deflation stop and inflation take over?

If you pour water into dry garden soil, it's absorbed for a time but then water suddenly pools on the surface. The Fed will print money until the "flow" exceeds the asset value destruction and then inflation will surface. It's coming. I expect stabilization and then 5%-7% annual inflation for the next twenty years to dissipate the accumulated debt.

 

If we get 5%-7% inflation for two decades, what should I buy? Sell?

Inflation is tough on most paper assets. Equities will discount the inflation and require lower PE ratios. Existing long-term bonds will also be hurt. A 10-year bond would require at least 2% over the inflation rate to induce investors to hold bonds as rates rise. REITs, commodities and collectibles will do well. Look for the dollar to weaken. Investment in multi-family rental buildings purchased at the lows will do extremely well and create millionaires. Start watching now for distressed buildings with cash flow but in good areas.

 

You think Obama may announce higher energy taxes after he's in office. Why? And if this happens, how do we make money on this?

If you believe the geology of oil depletion, then it's critical to move our economy into alternative energy. With oil under $60 and gas at $2, there's no incentive at present to move away from oil until prices spike again and to new highs. I think Obama will tax carbon energy to make solar, wind and nuclear competitive and force the transition process. This will also raise revenue for infrastructure development. To make money, watch government policy directives and buy where they're putting their focus.

 

The biggest threat to the dollar is breaking the link to oil? Please explain.

Oil is priced in dollars and nations need dollar reserves to buy it. If nations continue to lose confidence in America's finances, they will switch to a currency basket for commodities and the dollar will slide rapidly.

Debt is a big problem but in our fiat money system it can be managed because the debt is denominated in dollars, not euros or gold. Japan and China are our major creditors and will cooperate because their export driven economies need America for now. Oil depletion is a much bigger issue than debt because you can't defeat geology with financial chicanery.

 

In December, the Fed asked Congress for authority to issue bonds. Since that's the Treasury's job, do you smell a rat?

Absolutely. The Fed is taking on warrants and preferred shares from banks and soon an ownership interest in other companies. They'll market these assets to sovereign wealth funds by selling bonds or will go with an "aggregator bank" and sell it from there. It's a smokescreen to sell off America's asset base to foreigners at a big discount. It will soak up offshore dollars while stabilizing the system. This is a consequence of debt.

 

What is your book about?

How to Invest If You Can't Afford to Lose explains how to use asset allocation to lower risk. I also share my views on several issues related to money management. Market-timing isn't appropriate for most investors. However, market-timers must also maintain portfolio balance and not exceed allocation limits.

[You can find the book at Mr. Gleason's Web site and click on the picture of the book.]

 

You live in Arizona, far from the "smart money" in New York and Boston. Does distance provide clarity?

Peaceful rural living and without debt fits my temperament and helps with objectivity and dispassion.

Thanks, Mr. Gleason.