Weathering Out The Winter
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 whether 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.
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 accordingly. I will suggest the necessary steps to avoid losses and prosper from market turmoil when it unfolds.
Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized market technical analyst and trader. Involved in the markets since 1997. Chris’ mission is to help his clients boost their investment performance while reducing market exposure and portfolio volatility. Chris is also the founder of TheGoldAndOilGuy.com, a financial education and investment newsletter service. Chris is responsible for market research and trade alerts for of its newsletter publication. Through years of research, trading and helping thousands of individual investors around the world. He designed an automated algorithmic trading system for the S&P500 index, which solves his client’s biggest problem related to investing in the stock market: the ability to profit in both a rising and falling market. He is the author of the popular book “Technical Trading Mastery – 7 Steps To Win With Logic”. He has also been featured on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and dozens of other financial websites. Chris is a graduate of Seneca College where he specialized in business operations management.