Kondratieff Vindicated? A Look at the K-Wave
Thursday, November 27, 2008 14:10
Kondratieff
Nikolai Kondratieff was a Russian Professor who, after the Russian revolution of 1917, was tasked with developing the “Five year plan” which researched and analyzed factors regarding economic growth for the Soviet’s. Kondratieff published his work in 1926 and because his findings seemed critical of the stated policies of Joseph Stalin, Professor Kondratieff was removed from his position at the Institute for the Study of Business Activity. He was later arrested and sentenced to prison until 1938, when his case was re-opened. The 1938 trial ended with a death sentence. He was executed in that same year.
His Theory
Through his research, Kondratieff argued that capitalist economies experienced long cycles, or waves, of boom and bust. These cycles would last 50-60 years in duration. His published work of 1920 suggested the coming decade would experience an expansion and a peak, or plateau. He referred to this topping cycle as Autumn. His work further suggested that the period of 1929-1949 would experience a “Winter,” or a depression. It was only after his theories were realized did Kondratieff’s work gain international attention.
Four Phases
Spring: Period of Price Inflation & Economic Growth. Growth emerges from a depression through government involvement which puts upwards pressure on prices (Inflation). These growth phases generally last 25 or so years and is characterized by increased employment, wages and productivity as well as technological innovation.
Summer: Period of Stagflation. The ever increasing economy reaches its limits. The growth of the Spring period creates shortages of resources. The economy becomes less efficient due to the excesses of the previous expansion. The imbalances of this period, Kondratieff argues, lead to social unrest and war. The War of 1812, Civil War, World War I, Vietnam, and The War on Terror came during this period of which is defined by the end of the great expansionary Spring. This period also marks a shift to a more conservative social thinking, a drop in output, increase in unemployment and unusually severe recession. Although this primary recession is short lived lasting only three to five years, it is key in altering perceptions and the structure of the economy.
Autumn: Deflationary Growth and Plateau: A period of relatively flat growth along with mild wealth accumulation. The economy becomes driven by consumption and so a vicious increase in leverage and debt is achieved. This period lasts 7-10 years and is characterized by selective industry growth. The excesses of an unpopular war causes changes in the social structure which adapts a more liberal viewpoint.
Winter: The Depression: Characterized by a three year collapse and fifteen year readjustment period. This was viewed as a healthy cleansing of previous excess. All future excesses are realigned and a basing period is eventually formed at which the start of a new expansion will result. Technologies of the previous expansion are cheaper and more available.
The Kondratieff Wave (K-Wave)
A look at the graph of the K-wave (above) shows the accuracy of Kondratieff’s theory. It predicts the great expansion of the 1920s, and 80s and 90s. The great depression of the 30s and 40s and the crash of 2000 leading to the next great depression.
Where are we now? Kondratieff beleived that capitilist economies would experience a boom and peak in 2000. We all remember the tech bubble and 2000 stock market burst that occured in that year. By looking at the K-Wave chart you may conclude that he was wrong this time. After all, the stock market did recover (somewhat) and we entered the 2003-2007 bull market however, if we look at the stock market in “Real” terms, we can clearly see that it has been crashing since 2000 (and continues).
It is important to look at the stock market in terms of “Things,” whether it be gold, silver oil, or commodities. When you do this, you can see if we truly are in a bull market or if we experiencing price increases due to excesses in the money supply, liquidity and debt.
The chart below illustrates the crash of the Dow Jones in “real” terms since 2000. Notice the line was steadily rising all throughout the 80s and 90s bull markets. This was an indication that the market was strong, and prices were not artificially inflated due to excesses in liquidity. The line began falling in 2000 and continues to fall. Even as the Dow Jones, in cash terms, was experiencing new all time highs in 2006 and 2007, the line was falling. This dislocation between the cash index and real index rarely ever occurs, but when it does you should pay close attention!
Was Kondratieff Vindicated in 2008? If you followed his theory, you would have sold in 2000 and not re-entered the market until 2010 (The year Kondratieff predicted a bottom will occur). So far so good. If you compare his theory to the market predictions of the major wall street firms over the past 10 years, Kondratieff’s theory is, by far, a more reliable gauge.
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