Because these long-term waves involve inflation-to-deflation cycles, they affect not only stock markets, but also bond rates and the prices of commodities, and affect the value of currencies as well. Kondratieff waves are referred to seasonally - winter, spring, summer and fall - with the alternation from winter to summer being paramount of course. An image of these cycles is at right, from the Wikipedia article (cited & link above). If you have a copy of the Elliott Wave Principle book, you'll find a chart of these cycles in Figure 7-2 on page 186. Kondratieff winter is a time period of rising deflation, meaning lower prices for commodities and equities, implying stronger currency values (at least, for those currencies having staying power), as well as lower interest rates and higher bond prices. Well we certainly have been seeing these! Commodities markets topped out, somewhat after stock prices topped out; and subsequently, bond prices also moved to peak levels. Many people believe that bond prices will drop greatly, thus introducing inflation ("reflation") and even hyperinflation. Some of these are among the ones urging people to buy gold as an inflation hedge. However, while that may be a good strategy at the right time, the Kondratieff winter cycle is saying that it's premature.When did the Kondratieff wave peak - perhaps 2000, or 2007/2008? I would select 2008 because that is when commodities markets of all kinds, ranging from oil through to agricultural and other commodities, reached massive peak levels ... from which they have crashed. [Interestingly, after I wrote these words, I see that whoever wrote the Wikipedia article states that: "The current cycle most likely peaked in 1999 with a possible winter phase beginning in late 2008."]This should confirm a massive inflation Kondratieff-wave peak in 2008. If we conservatively decide that this cycle would shorten to, say, 48 years, then the next peak wouldn't be until 2056. And we might not see a true low until approximately 2030. Now, if we think that the peak in equities was earlier, such as the year 2000 in real (inflation-adjusted terms), we might not see a good stock-market low until approximately 2024. (By the way, for Elliott Wave analysts, this is likely one reason why some or many are counting as if we've only completed the first wave down, with much more to go in both price and time.) And that's assuming that the Kondratieff cycle is relatively short!
What about the dividing up of the cycle into four 'seasons', namely, the Kondratiev Spring (improvement – plateau) and Summer (acceleration – prosperity) of the ascendant period and the Kondratiev Fall (recession – plateau) and Winter (acceleration – depression) of the downward period? Let's take a look at that - if we think that the cycle could be short, like the 48 years idea (which might - or not - fit with the Elliott Wave (I) that I discussed at a post last weekend at my UBTNB3 blogspot), and if we also think that the real stock market high was in 2000, then the "winter" phase might finish its accelerated glide-path downward in .... 2012.
But is there hope that we didn't really see the highs of the last inflationary cycle, so that we might get new highs in both equities and commodities before it really tops out? First of all, as mentioned in my prior post, the fact that many equities markets already cut under the 2002/2003 lows - AND the fact that on a real (inflation-adjusted basis), the 2007 stock-market highs really were not above the 2000 highs at all - tends to show that the equities peak is behind us. The commodities peak, if it was a fifth-wave peak out of an Elliott Wave triangle (or in some cases a possible diagonal or B-wave high), must also tell us that the commodities boom already topped out. I must also place reliance on viewpoint of Tim Wood (Tim has his own Cycles News & Views which is among the "other sites of interest" listed at the right side of the page here), who immerses himself in cycles analysis including Kondratieff waves, and who tell us that we remain in just the beginning of the down-wave in this cycle.
Here again, I'm going to borrow a bit from another of the articles posted publicly by Tim Wood at FinancialSense Online on March 20, 2009: It Ain't Gonna Work III. As I've mentioned, Tim incorporates Kondratieff waves (sometimes called "K-waves") in his work. Here are Tim's comments on a checklist of what to expect for the Kondratieff "winter" phase as it continues:
[W]e are dealing with K-wave winter and K-wave winter is a natural part of a long-term economic cycle that must take place before a new cycle can begin. This cycle, the markets and the economic disaster we are all facing is far bigger than the Fed. For the benefit of newer readers I have again included a few of the signposts surrounding K-wave winter.These comments from a cycles analyst like Tim Wood should be very sobering. They don't tell you how to trade short-term, but they should be considered in deciding whether (or what) to invest in for the long term. Or, whether to postpone any investments until a true bottom is in place. Here's where we will cross-reference to a few of the long-term perspective charts from ChartoftheDay (the ones they make freely available with appropriate reference to them). We can start with the one from yesterday:
“Global Stock Markets Enter Extended Bear Markets”
This should be obvious to all.
“Trends During Winter: Stocks Down, Bonds Up, Commodities Down”
I would say that this is still on track.
“Interest Rates Spike In Early Winter Then Decline Throughout”
In June 2004 the Discount rate was at 2.00%. By June 2006 it was at 6.25% and since August 2007 the Fed has been forced to cut the Discount rate back to .50%. So, this too seems to fit and now the Fed is targeting long-term rates as well.
“Economic Growth Slow or Negative During Much of Winter”
This too should be obvious to all.
“Commercial and Residential Real Estate Prices Fall”
This obviously began back in 2006 and is still in a major slump.
“Bankruptcies Accelerate and High Debt Eliminated by Bankruptcy”
This has obviously begun and is no doubt related to the housing and credit bubbles.
“Social Upheaval and Society Becomes Negative”
We are only just beginning to see this.
“Banking System Shaken and New One Introduced”
The banking system is now only beginning to be shaken. There should be much more to come.
“Free Market System Blamed and Socialist Solutions Offered”
This has not yet happened, but just wait.
“National Fascist Political Tendencies”
More to come.
"Debt Level Very Low After Defaults and Bankruptcy"
This has not happened.
“Trade Conflicts Worsen”
This basically has not happened.
“View of the Future at a Low Ebb”
This has not happened as everyone seems to be looking for the bottom.
“New Work Ethics Develop Since Jobs are Scarce”
If I can assure you of one thing, it is that this has not happened.
"Greed is Purged from the System"
I can absolutely assure you that this has not happened yet.
“Real Estate Prices Find Bottom”
This has not happened.
“There is a Clean Economic Slate to Build On”
Not happened yet.
“Investors are Very Conservative and Risk Averse”
Again, this has absolutely not occurred.
“Interest Rates and Prices Bottom”
Not happened.
“A New Economy Begins to Emerge”
Has not happened
“Stock Markets Reach Bottom and Begin New Bull Markets”
This is still a long ways away.
So far, these signposts remain on track and ultimately they are telling us that these reinflation efforts will fail, and that in the end any bout of inflation that is sparked will ultimately end with the deflationary grind into the K-wave winter low.
Chart of the DayThat information alone doesn't tell us that the downturn cannot be over - but it does confirm that we are dealing with a cycle that's of a much bigger dimension than most of the downturns previously recorded during the (relatively short) history of the United States. So, next take a look at my March 28 post, Dust beginning to settle on the residential real estate market, which includes their chart of real estate going back to the late 1970's. You'll see that we're simply seeing the possibility of a bounce off the drastic drop back to the levels of perhaps 1979. The current recession is already longer than those of the late 1960's to 1980 time frame, and how far we've fallen in such a short amount of time helps to confirm the cycles views that this will be more similar to the one of 1929, at least. This implies that any bounce we see in the real estate market will be only temporary relief. Also - don't take comfort in any news that the number of sales may have increased. When volume increases while prices are declining, that's a bearish sign. What we'll need to see are sales decreasing noticeably when price declines less ... followed by increased sales while prices begin to rise. That won't mean that real estate prices are ready to scream upward, but just that the bottom might be done.
While the stock market has rallied nicely since bottoming on March 9th, the economy continues to struggle. For some perspective on the current economic recession, today's chart illustrates the duration of all US recessions since 1900. As today's chart illustrates, the five longest recessions all began prior to 1930. The length of the current recession (now entering its 16th month) is above average and equal to the longest recessions (1973 & 1981) since the Great Depression.
By the way, the fact that real estate prices have fallen to late 1970's levels is a signal that we cannot rule out stock market prices to do something similar, as K-wave winter unfolds. Actually, when you look at the Elliott Wave work embodied in the book by Frost & Prechter, Elliott Wave Principle, you'll see that if we have indeed finished Elliott Wave V to complete Supercycle (V) and now somewhere along the way to Circle IV, one common Elliott Wave target would be the low of wave (IV) which is indicated to be either 1974 or 1982. This would place the stock market on a par with the real estate market.
Now - keep in mind that the ChartoftheDay analysis of the real estate market showed inflation-adjusted figures. For that matter, their inflation-adjusted figures of the stock market also show that equities have crashed much more drastically than our current inflated dollars show. But if Kondratieff winter continues its deflationary course, then with the dollar strengthening relatively to other asset classes including stocks and commodities, we can expect the equities markets to look much lower in the "real" nominal dollar basis too.
Here's a chart of oil to serve as a proxy for commodities. If the idea that this is a drop from an fifth-wave thrust out of an Elliott Wave triangle is correct - an idea I reviewed in a prior post here under the "oil" label - then oil as well as commodities also have farther to fall in the Kondratieff winter, once a current bounce has run its course.
Here's another quote from the collective authors of the Wikipedia article on this topic:
Most cycle theorists agree, however, with the "Schumpeter-Freeman-Perez" paradigm of five waves so far since the industrial revolution, and the sixth one to come. These five cycles are
*The Industrial Revolution—1771
*The Age of Steam and Railways—1829
*The Age of Steel, Electricity and Heavy Engineering—1875
*The Age of Oil, the Automobile and Mass Production—1908
*The Age of Information and Telecommunications—1971
According to this theory, we are currently at the turning-point of the 5th Kondratiev.
It's a very interesting view, to see these various "ages" worked into long-wave cycles. The article contains some other interesting references, including an article about Martin A. Armstrong (who apparently is to remain imprisoned until the year 2012 - what a cycles guy!). We've referenced the Armstrong confidence-cycle model, including in a post here yesterday. There's a paper that's supposed to be written by Armstrong just in February 2009, which among other things points to the current market decline as more of a "waterfall" than a spike move down, therefore having much less probability of bouncing or rallying very high or recovering very quickly. Given that the Armstrong model shows lower levels going into the mid-2011, we'd expect him to agree that the markets can be expected to trend lower no matter what level of bear-market rallies occur in the meantime. (Some additional good reading: History Suggests Markets May Suffer Further (The Enlightened American, 3/26/09).)
One take-away for investors is to think that the industry sectors and stocks that led the last advance, are NOT likely to be those leading the next advance. This doesn't mean that a market such as the Nasdaq market cannot do well, but one would be advised to look within it for those smaller companies within the index that are associated with the sector(s) that are likely to lead the next advance. However, you might want to seriously consider the timing. If you consider that the last Age began in 1971, then the next one may not begin until the year 2021 or 2031. Likewise, if we're going to see a standard business cycle down for 20 or 30 years from the last peak - then even if you measure that as having occurred in 2000 or 2007 (and 2000 again looks likely given that the technology sector peaked out in 2000), the trough is still many years away.
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