Saturday, August 13, 2011

WHO IS HE?


Article from www.kwaves.com

To introduce the Kondratieff Theory, we must go back over seventy years and examine a remarkable story in economic history, encompassed within the life of one still little known man. I am certain that, in time, Kondratieff will rank with the giants of discovery as Einstein and Newton. Like these men, his insights have begun to alter radically and permanently our perceptions of economic history. The Kondratieff wave cycle goes through four distinct phases of beneficial inflation (spring), stagflation (summer), beneficial deflation (autumn), and deflation (winter). Since, the last Kontratyev cycle ended around 1949, we have seen beneficial inflation 1949-1966, stagflation 1966-1982, beneficial deflation 1982-2000 and according to Kondratieff, we are now in the (winter) deflation cycle which should lead to depression.

Professor Nickolai Kondratieff ( pronounced “Kon-DRA-tee-eff”) Shortly after the Russian Revolution of 1917, he helped develop the first Soviet Five-Year Plan , for which he analyzed factors that would stimulate Soviet economic growth. In 1926, Kondratieff published his findings in a report entitled, “Long Waves in Economic Life”. Based upon Kondratieff’s conclusions, his report was viewed as a criticism of Joseph Stalin’s stated intentions for the total collectivization of agriculture. Soon after, he was dismissed from his post as director of the Institute for the Study of Business Activity in 1928.
He was arrested in 1930 and sentenced to the Russian Gulag (prison); his sentence was reviewed in 1938, and he received the death penalty, which it is speculated was carried out that same year. Kondratieff’s major premise was that capitalist economies displayed long wave cycles of boom and bust ranging between 50-60 years in duration. Kondratieff’s study covered the period 1789 to 1926 and was centered on prices and interest rates. Kondratieff’s theories documented in the 1920’s were validated with the depression less than 10 years later.

Today, we are faced with another Kondratieff Winter (depression) when the majority of the world anticipates economic expansion. Each individual needs to weigh the risk of depression in light of Kondratieff’s work.

Accumulation and Consumption
U. S. wholesale prices dating back to 1800 show several periods of accumulation followed by periods of over consumption. Because these periods are statistically difficult to measure our outline follows historical events, pinpointing major changes in trend. During periods of relatively cheap prices, assets accumulate. As prices increase, the consumption of assets are necessary to maintain a standard of living. When new production fails to keep up with consumption, due to relatively high prices, the economy begins to decline to another period of cheap prices, and a new growth cycle begins.

Four Phases of One Cycle A Kondratieff cycle consists of four distinct phases, or distinguishable, dramatic mood changes, the tone of which determines the actions of individuals involved in the economy. The awareness of these characteristics allows for the anticipation of the change in the economy and the psychological mood that will prevail.

SPRING – Inflationary Growth Phase A common premise among business cycle economists supposes inflation as an inevitable part of growth. Government becomes a passive participant in the inflation cycle. Growth begins from a depressed economic base and expands in an ever-increasing spiral. The interaction of the participants within the economy causes wealth, as represented by savings, and the production of capital equipment to be accumulated for the future. The expansion of production and affluence causes prices to rise, and the increased volume of goods requires a higher velocity of money, thus creating a higher price structure.

Historically, the growth phase requires 25 years to complete. During this time, unemployment falls, wages and productivity rise and prices remain relatively stable. The mood of the growth phase is one of accumulation and the desire for new product manufacture.

Accompanying growth is a shift in social demands. As wealth is accumulated and new innovation introduced great upheavals and displacements take place. The process of social unrest builds with growth culminating in massive shifts in the way work is defined and the role of the participants in society.

SUMMER – Stagflation (Recession) Eventually, the continuation of exponential growth reaches its limits. Excess capital produces a shortage of key resources and the economy enters a period where growth creates a shortage of resources. An economy will only support expansion to the limits of its resources, both human and material.

The mood of affluence also brings a change in attitude towards work. As an economy gets closer to its limits inefficiencies build up

The imbalances of this period have been historically exaggerated by what can be labeled a “peak war”. Examples such as War of 1812, the Civil War, World War I and Vietnam, came at the end of a very affluent period. These Wars produce strains on the economy increasing the impact of inflation. A dramatic drop in output, rapid rise in unemployment and unusually severe recession characterize this period. 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. No longer does excess create an abundance. The “Limits to Growth” now define a maximum level of economic activity that traps the economy into consolidation and tight bounds for the next 20-25 years. With the change comes a conservative shift in the popular mood reinforcing the limits.

AUTUMN – Deflationary Growth (Plateau Period) The primary recession occurs out of an imbalance forced upon the economy by real limitations. The rapid rise in prices and changes in production correct this imbalance — at least temporarily. The change in price structure, along with the mood of a population used to consumption accompanied by the vast accumulation of wealth from the past 30 years, causes the economy to enter a period of relatively flat growth and mild prosperity. Due to structural changes and the limits of the existing paradigm the economy becomes consumption oriented.

Excesses of an unpopular war, along with fiscal liberalism, cause popular reaction toward stability or normalcy. A mood of isolationism permeates . The plateau period generally lasts seven to ten years and is characterized by selective industry growth, development of new ideas ( both technological and social ) and a strong feelings of affluence, terminating in a feeling of euphoria. The inflated price structure from the primary recession, along with the desire for consumption, produces a rapid increase in debt. Eventually, wealth consumption expands beyond all practical limits, and economy slips into a severe and protracted depression.

WINTER – Depression Excesses of the plateau period effect a collapse of the price structure. This exhaustion of accumulated wealth forces the economy into a period of sharp retrenchment. Generally, the secondary depression entails a three year collapse, followed by a 15 year deflationary work out period. The deflation can best be seen in interest rates and wages that have shown a historic alignment with the timing of the Long Wave – peaking with and bottoming at the extremes.

Kondratieff viewed depressions as cleansing periods that allowed the economy to readjust from the previous excesses and begin a base for future growth. The characteristic of fulfilling the the expectations of the previous period of growth is realized within the Secondary Depression or Down Grade. This is a period of incremental innovation where technologies of the past period of growth are refined, made cheaper and more widely distributed. Incremental innovation consolidates industries.

The Down Grade sees one final period of recession before transitioning to a new period of growth. The final recession is mild with very low inflation and appears far more severe than it will be remembered for later in the Growth Cycle.

Within the Down Grade is a consolidation of social values or goals. Ideas and concepts introduced in the preceding period of growth while radical sounding at the time become integrated into the fabric of society. Often these social changes are supported by shifts in technology. The period of incremental innovation provides the framework for social integration.

It is important to realize the Long Wave as global. While global issues are of prime importance today with increased air travel and communication, the Long Wave defines a time table for geo political events. The Growth Period is one of political stability. Staring a the peak old alliances become challenged. Through the process of the Down Grade old alliances fail and new alliances are formed. The final stages of the Down Grade is a period of coalescing or “quickening” of the alliances that will govern the next period of growth.













10 comments:

  1. Kli,
    Thanks for posting.
    Looks like everyone is away this weekend.
    I have spent some time reading about the Eurozone/Euro crisis. Seems that nearly all the articles have crisis worsening and the Euro falling. Sometimes though when everyone is thinking the same way, the opposite happens. Maybe they will pump this "Eurobond" idea, and all will be fine for awhile. Yet, if most of the major European banks are truly insolvent, it has to fail eventually.

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  2. Funny Doc - I was thinking the same thing harking back to the SKF/UYG days when up was down and left was right. Whenever I think its the right time to enter, its not. Though I have taken a small position because this doesn't move quite as wildly as a regular leveraged ETF and once its obvious which way its going I think it might be a little late. Every discussion I see on it simply discusses which currency is the least crappy currency.

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  3. Kli - great informative, educational post. Hope eveyone appreciates it as much as I do.

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  4. Doc, they're floating the Euro Bond idea quite heavily in German Media over the weekend (e.g. www.spiegel.de). They're making it sound like the idea is at least starting to get some discussion in government circles. EVen if European banks are insolvent, a Euro Bond with heavy burden on Germany will kick the financial can down the road for at least a while ... however, you may start to see more social unrest once/if Germans realize what kind of game they're being pushed into by their banking overlords.

    Still, the Euro should continue to lose value (and move towards Dollar parity) since a Euro Bod is likely to reveal true Euro weakness more clearly.

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  5. Nice charts. PUgridiron watch out.

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  6. Actually Kli I was going to say the post was very depressing as it all makes so much sense...but Inlet is right regardless of the emotion induced, it is very informative.

    Hey wolf, once again I now question whether to go more into EUO or not. I think both side of the pond are almost trying to make sure both currencies falter...but I think you're right, going that route shows their hand. Of course I go to the site, translate the page and the lead story is....

    "The chairman of the CDU in Schleswig-Holstein has resigned because of a love relationship with a 16-year-olds."

    Is there an honest politician out there????

    Ron Paul had a nice showing in the dopey straw poll.

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  7. I meant to say honest/moral politician out there. Almost a rhetorical question...

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  8. I agree that it would seem that the Euro would have to fall in value.
    I read one article that pointed out that the US finished its QE in June, and this QE kept the US dollar down. Now that it is over (for now anyway), it would seem that the US dollar should strengthen or at least hold steady.
    If Europe is going to create "Euro Bonds", then this would be a form of QE, and you would think that would cause the Euro would fall.
    I am holding January EUO calls.
    Guess we will see what happens.

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  9. I like the calls on EUO ...regardless this trade is getting VERY old..which I believe is the goal...this is a DISTRIBUTION pattern....we will SOON find out........EUO isn't exactly a rocket so don't expect a monster move in the money...heheheh

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  10. interesting article chart..

    http://blog.yardeni.com/2011/08/valuation-gold.html


    http://kiddynamitesworld.com/sp-500-yield-exceeds-10-year-us-treasury-yield/

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