Nature functions in cycles, each 24-hour period can be divided into smaller
cycles of morning, afternoon, evening and night. The whole year can be divided
into seasonal cycles. Similarly, one's life can also be divided into cycles.
Cycles are abundant in nature, we just have to spot them, understand them and
be prepared for them because they happen wether we like it or not. Likewise,
economic experts have noticed that the world also follows different cycles.
An important pioneer in this field was the Russian social economist, Nikolai
Kondratiev, also called Nikolai Kondratieff, a relatively unknown genius.
Who is Kondratiev?
Geniuses have been known to defend their principles and beliefs, even at the
cost of losing their lives; they may die but their legacy lives on as did Kondratiev.
He was an economist, who laid down his life defending his beliefs. He was the
founding director of the "Institute of Conjuncture", a famous research institution,
which was located in Moscow. He devised a five-year plan for the development
of agriculture in Russia from 1923-1925.
His book, "The Major Economic Cycles" was published 1925, in which his policies
were in stark contrast to that of Stalin's. As a result of this, Kondratiev
was arrested in 1930, and given a prison sentence. This sentence was reviewed
and consequently, he was executed in 1938. What a tragic loss of such a genius,
who was only 42 years of age He was executed because his research proved him
right and Stalin wrong! Nonetheless, his legacy lives on and in 1939, Joseph
Schumpeter, named the waves as "Kondratiev Waves"; also known as "K-Waves".
What are Kondratiev Waves:
The Investopedia defines the" Kondratieff Wave" as: "A long-term cycle present
in capitalist economies that represents long-term, high-growth and low-growth
economic periods". The initial study by Kondratiev, was based on the European
agricultural commodity and copper prices. He noticed this period of evolution
and self-correction in the economic activity of the capitalist nations and
felt it was important to document.
These waves are long cycles lasting 50-60 years and consisting of various
phases, which are repetitive in nature. They are divided into four primary
cycles:
-
Spring- Inflationary growth phase: The first wave starts after
a depressed economic state. With growth comes inflation. This phase sees
stable prices, stable interest rates and a rising stock market which is
led by strong corporate profits and technological innovations. This phase
generally lasts for 25 years.
-
Summer-Stagflation (Recession): This phase witness's wars such
as the War of 1812, the Civil War, World Wars and Vietnam. War leads to
a shortage of resources, which leads to rising prices, rising interest
rates and higher debt, and because of these factors, companies' profits
decline.
-
Autumn-Deflationary Growth (Plateau period): After the end war,
people want economic stability. While the economy sees growth in selective
sectors this period also witnesses social and technological innovations.
Prices fall and interest rates are low which leads to higher debt and consumption,
while company's profits rise, resulting in a strong stock market. All of
these "excesses" end with a major speculative bubble.
-
Winter-Depression: This is a period of correcting the
"excesses" of the past and preparing the foundation for future growth.
Prices fall, profits decline and stock markets correct to the downside.
However, this period also refines the technologies of the past, with innovation,
making it cheaper and more available for the masses.
Accuracy of the cycle in the last 200 years:
The "K-Waves" have stood the test of time, they have correctly identified
various periods of important economic activity within the past 200 years. The
chart below outlined its accuracy.
Very few cycles in history are as accurate as the Kondratiev waves.
Criticism of the Kondratiev Waves:
No principle in the world is left unchallenged, similarly, there are a few
critics of the "K-Waves" who consider it useful only for the pre-WWII era.
They believe that the current monetary tools, which are at the disposal of
the monetary agencies, can alter the performance of "These Waves". There is
also a difference of opinion regarding the timing of the start of the waves.
The wave is being pushed ahead but the mood confirms a "Kondratiev Winter":
A closer study reveals that the cycles are being pushed forward temporarily.
Any intervention in the natural cycle unleashes the wrath of nature while the
current phase of economic "excess" will also end in a similar correction. The
"K-Wave" winter cycle which started in 2000, was aligned with the "dot-com
bubble".
The current stock market rise is fueled by the easy monetary policy, of the
global central banks. Barring a small period of time, from 2005-2007, when
the mood of the public was optimistic, the winter had been spent with people
in a depressed social mood. The stock market rally, from 2009-2015, will be
perceived as the most hated despised rally, and the one most laden with fear.
Every dip of a few hundred points, in the stock market, starts with a comparison
to the "Great Recession of 2007-2009". The mood exudes fear and disbelief
that the efforts of the central banks have not been successful and are unable
to thwart off the winter as predicted correctly by the" K-Waves". The winter
is here and is reflected in the depressed social mood.
How to "weather" out brutal winter:
In the last phase of the winter cycle, from 2016-2020, (which is likely to
test us), the stock market "top" is in place. Economic activity globally has
peaked, terrorism further threatens our lives, geopolitical risks have risen,
the current levels of debt, across the developed world, are unmanageable, and
a legitimate threat of a "currency war" occurring will all end with the "The
Great Reset". Gold will be likely to perform better during this winter cycle.
Get in love with the yellow metal, it's the blanket which will help you withstand
the winter.
Conclusion...:
Cycles are generally repetitive forces, which give us an insight into the
future so as we can be prepared to face it and prosper. Without excessive
intervention, nature is very forgiving, while correcting the "excesses", but
if one meddles with nature, it can be merciless, during the correction. The
current economic condition will end with yet another reset in the financial
markets. Prices will not rise for ever and a correction take hold eventually.
Until then we follow and trade accordingline. I will suggest the necessary
steps to avoid losses and prosper from market turmoil when it unfolds.
