The Seasons of the Kondratieff Cycle
Credit for these ideas is given to Nikolai Kondratieff, the great Russian economist, who was imprisoned by Joseph Stalin for reporting that capitalism will survive even though it undergoes extreme stresses and strains along the way during these long-wave cycles. More specifically, credit for the application of the Kondratieff cycles is given to our good friend Ian Gordon, a British/Canadian stockbroker, who is also a financier of junior gold mining companies. For a thorough explanation of the Kondratieff cycle, we strongly suggest you visit Ian’s Web site at www.thelongwaveanalyst.ca. Following is a brief overview of the Kondratieff cycle theory and Ian Gordon’s application to a successful investing strategy.
This is the start of a new Kondratieff cycle. It is characterized by the start of a new period of credit expansion (monetary inflation). The best investments during this period of time are stocks and real estate. This timeframe is characterized by a nervous apprehension and apathetic mood, because people still remember the unpleasant bankruptcies and impoverishment that characterized the ending of the prior Kondratieff cycle. But during the spring “season,” which is the birth of a new 60- to 70-year cycle, employment and consumer confidence begins to grow, inflation begins to creep slightly higher from a very low level at the start, and stocks begin to rise slightly off their major bear market bottom. The latest spring began in 1949 and lasted through 1966, when the stock market hit a major peak.
This period begins with people still remaining cautious, but as business conditions become more robust, confidence grows. As confidence grows, people and corporations begin to spend more aggressively, and monetary policy becomes more aggressive. Summer is the period when inflation as measured by general prices reaches its highest point. Real estate soars, gold prices rise dramatically, commodities boom, debt builds up greatly, and businesses spend on capital goods; but as excesses begin to build, various sectors begin to overbuild so that profits begin to disappoint. Accordingly, stocks hit their peak, even as commodities and gold reach dramatic highs and real estate hits new highs thus far in the cycle. The latest Kondratieff summer began in 1966 and ended with the commodity and gold price blow-off in 1980.
This period is characterized by the buildup of extreme confidence after interim excesses are usually partly removed by a recession early in this season. Stocks boom even as inflation and commodity prices decline. Gold is a lackluster to poor investment during this period. However, with declining interest rates and soaring bond prices, real estate booms and hits still newer highs. But as debt reaches astronomical levels, mal investment occurs, thanks to massive amounts of money creation, and the capital goods sector overbuilds so that price margins begin to decline. Stocks hit their peaks for the cycle at the end of the autumn as profits decline, and debt, which has been built to enormous levels, becomes impossible to service. It is during this period when massive debt combined with oversupply begins to cause the rate of inflation to decrease. In other words, autumn is a period of disinflation. While autumn is the “feel good” season, the stage has now been set for the Kondratieff winter, which is the contraction phase of the 60- to 70-year Kondratieff cycle. The current Kondratieff autumn began in 1980 and ended with the top of the stock market for the current cycle in 2000.
The Kondratieff winter is the period of time when the excesses of the long-wave credit cycle are purged from the system through massive default and bankruptcy. The moods of this period are despair, panic, fear, and concern. Prices fall rapidly. Consumer confidence drops dramatically. Debt is wiped off the books because people and companies cannot repay it. Internationally, the monetary system collapses, which leads to rising gold prices as confidence is lost in paper money. A major credit crunch develops and interest rates spike, especially for anything other than perfectly creditworthy borrowers, of which there are very few. Unemployment rises exponentially until all the excesses are wrung out of the system. The current Kondratieff winter began in 2000 when overall equity prices lost an enormous amount of their value. At this point in the K-winter, central bankers have been fighting the inherent deflationary forces with enormous amounts of credit, created out of thin air. Ben Bernanke has said he would fly helicopters that shower money from the skies if that is what is needed to overcome deflation. And Alan Greenspan’s monetary promiscuity has resulted in the greatest housing bubble ever known to humankind. At present, the U.S. is engaged in what some people think is the beginning of World War III, and it is conceivable that enormous amounts of monetary inflation will be created to fund this war and also to seek to overrun the massive deflationary forces that are now building with each and every new helicopter money drop.
When will the deflationary forces of the Kondratieff winter take over? There is no way of knowing, but in an effort to keep our fingers on the pulse of the enormous battle between the forces of inflation and deflation, we have established our Inflation/Deflation Watch, which we report on every week to our paid subscribers. Few questions are more important to us than this one, because when the deflationary forces hit, the only investments that perform well are cash and gold and, toward the end of the K-winter, bonds, after rates peak. We hope you join us in our quest to stay on top of this issue.