The previous two posts on the Kondratiev Wave discussed the debt cycle and monetary base as the basis of the K-wave cycle. The goal of those articles is to show that there is nothing magical in the fact that the economy is experiencing secular cycles with the duration of 50+ years. In fact it’s not more magical than the Galileo pendulum in Pisa and is also no less practical. The same way as the good knowledge of Scriptures saved Galileo from having his heels burned, the good understanding of K-wave can save the investor from burning his money betting against the trend.
In this article I will introduce the K-wave seasons and their effect on the economy and stock market.
The four seasons of the Kondratiev wave are Spring, Summer, Autumn and Winter and there are many ways to chart them. Let’s go straight to the one precious thing we have - the Dow Jones Index. This is the chart of Dow Jones for 105 years:
I think the idea to split the whole cycle into four seasons was quite genius. What you see is that the Summer is “too hot”, Winter is “too cold” for the economy. The other two seasons are just right and the market is celebrating that. The seasonality works perfectly, the distance between cycles is averaging around 18 years.
Another thing to notice is that the Autumn of 1920-1929 was too fast, too much. That was the time when ordinary people were allowed to leverage the brokerage accounts 5:1 and even 9:1. I guess if you allow people do something stupid they’ll do it, until the supply of greater fools does not fade.
The free market system works very well, but unfortunately, by some magical reason, all the profits are privatized while all the losses are later socialized. All the system has to offer is to let the public participate in the promised profits when times are good, but only the smartest ones will leave the ship early before the music stops. The main purpose of these articles is to give inquiring minds the tools to understand the turmoil we are in and to prepare emotionally and financially. In the fist few articles I’m discussing the basics that many people already know, but later on I plan to share my understanding of the current situation and invite into the discussion the subjects of proper financial planning or even profiting.Kondratiev wave and the world
The seasonality of K-wave in different parts of the world is not synchronized (and this is very good). The short list of the seasons according to my understanding (as of mid-’08) is:
- USA - Winter
- Britain - late Autumn or early Winter
- Australia is probably late Autumn/early Winter as well
- European Union is in Autumn and hopefully they don’t jump into Winter together with US and Britain
- Japan is finally in Spring, they got out of Winter in early ‘08 and jumped straight into first Springtime recession
- Most of the Asian countries, BRICs and Eastern Europe - Spring and Summer
The reason this situation is good is that it is a natural anchor that prevents different parts of the world from going into deep inflation or deep deflation. While every monetary base in particular is either expanding or collapsing, the price distortions are crossing the borders and get averaged with trade partners’ prices, and that helps to stabilize the world’s economy. Will the cycles ever synchronize? Let’s leave this problem to our grand-kids to decide 
- Next article will cover the basics of the Autumn. It is impossible to properly start with any particular season, because every season roots are coming from the previous season. So I will have to loop those articles somehow
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3 Comments
Andy,
Just wanted to say that I really appreciate this set of articles and look forward to your future posts.
Thank you Speaker73
Andy,
Yes, I too have found them insightful and look forward to learning more.
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