Weekly Insights: The K-Wave: A Longer-Term Cycle Worth Examining

The K-Wave: a Longer-Term Cycle Worth Examining

 

The long-term Kondratieff cycle (also called the “K-Wave”) is based on the study of nineteenth-century price behavior that included wages, interest rates, raw material prices, foreign trade, bank deposits, wars, technological discoveries, public opinion, politics, weather, and other available data. In this educational feature, I will touch upon the basics of this long-term economic cycle, including its possible implications for commodity prices and the economy in the coming months to the next few years.

Nikolai Kondratieff (1892-1938) was a Russian economist whose work became known in the early 1930s when he accurately predicted not only the Great Depression but also the 1920s stock market boom that preceded it. Kondratieff believed the interaction of current events produces a repetitive pattern over a long period. He also believed public reaction is directly influential to the ebb and flow of economic prosperity, and therefore vital to the economy; he saw the public response as waves of change, with its measurement and its effect on the future forming the basis of his theory.

Kondratieff proposed that economic trends tend to repeat themselves approximately every 54 years. This alternating of a “long wave” from prosperity to depression, complemented by many “shorter cycles,” creates a dynamic trend to the economy that becomes predictable.

Like Ralph Nelson Elliott of “Elliott Wave Theory” fame, Kondratieff was convinced that his studies of economic, social, and cultural life proved that a long-term order of economic behavior existed and could be used for the purpose of anticipating future economic developments.

Kondratieff detailed the number of years the economy expanded and contracted during each part of the half-century-long cycle, in which industries suffer the most during the downwave, and how technology plays a role in leading the way out of the contraction into the next upwave.

According to most who have thoroughly studied this long-term economic cycle, the most recent revolution of the Kondratieff Wave began after the global economy pulled out of a deflationary depression in the 1930s. Prices began to accelerate upward after World War II and reached the commodity price blow-off stage in 1980. Since that time, and then after the recession of 1990-1991, the global economy has been experiencing a “secondary plateau.” During this period, consumers and investors became aware that inflation is not accelerating, and disinflation becomes visible.

Paper assets such as stocks and bonds have done well the past few years since neither inflation nor deflation hurt the marketplace. But during the secondary plateau, the first signs of economic problems become evident.

Isolated economies fall into deflationary contraction, and signs such as declining gold prices begin to take hold. During the 1990s, it was the Japanese economy that slid first into deflationary contraction. The recent stock market decline is another signal that the period of economic growth along the secondary plateau is ending.

In the very informative book, “Elliott Wave Principle,” co-authors Frost and Prechter said, “Kondratieff noted that ‘trough’ wars—wars near the bottom of the cycle—usually occur at a time when the economy stands to benefit from the price stimulation generated by a war economy, resulting in economic recovery and an advance in prices.”

Indeed, many analyses of the Kondratieff cycle suggest that the cycle will “trough” around the present timeframe. The present U.S. war against terrorists, or an upcoming war between the U.S. and another country, could be construed as a “trough” war.

By studying this longer-term economic cycle, I can also see it has merit, just as do many other shorter-term cycles. However, I will not immediately rush out and go long on all the basic commodities. Remember, timing is key to futures trading. Longer-term cycles, while valuable in gaining a “bigger picture” perspective of the marketplace, have wide enough parameters that they do not make for good short-term timing methods for trading.

What the Kondratieff wave does is combine with and corroborate other studies and other cycles that also suggest the period of low inflation and recently weak raw commodities prices will not last forever, and in fact, the commodities and inflation landscape may be on the cusp of a major change. In the past few months, we have indeed seen some raw commodities prices start to trend strongly higher after longer-term price lows were established.

 

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