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The Perfect Storm in a Kondratieff Long Wave Winter

Stock-Markets / Cycles Analysis Sep 24, 2011 - 02:35 AM GMT

By: David_Knox_Barker

Stock-Markets

Best Financial Markets Analysis ArticleCrashing global stock markets, debt defaults, overproduction, falling prices, tumbling interest rates, global debt deleveraging, and the clear necessity for austerity, they are all classic long wave forces now in full tilt, producing the perfect storm in a Kondratieff long wave winter. Only long wave theory explains the economic and financial events now unfolding daily in the global economy and financial markets.


You still have time to prepare for the final crisis phase and debt collapse, but don't delay. The global economy is now unequivocally in the final years of the long wave winter debt purge and what will be a sharp decline in corporate efficiency. Once this storm passes the global long wave economic reset button will be tripped, and the new global long wave spring season will begin.

Nikolai D. Kondratieff

The Russian economist Nikolai Kondratieff was the first to observe and document the remarkable recurring long wave patterns in the global boom and bust cycle, driven by global debt and overproduction. He published his findings in the 1920s. His work anticipated the next downturn that unfolded as the Great Depression. Politicians appear to be incapable of seeing beyond a single election cycle. Politicians have ignored the evidence for the long wave once again. Most economists have as well, although a few are starting to pay more attention as the long wave facts are now difficult to ignore.

Some of Kondratieff's original charts indicate just how far ahead of his contemporaries Kondratieff was in understanding the dynamic ebb and flow of international free market capitalism. There are those that claim he only discovered an agricultural commodity cycle. The charts below and his own words suggest he discovered a long wave dynamic cycle that permeates the entire economy and all of society. He wrote, "The long waves, if existent at all, are a very important and essential factor in economic development, a factor the effects of which can be found in all the principal fields of social and economic life."

Index Numbers of Commodity Prices

Political and monetary policies have exacerbated and magnified the natural long wave forces at work in the global economy and financial markets. The global economy now finds itself in a blinding blizzard in the Kondratieff long wave winter season. Many are unprepared and under the delusion that government intervention can and will save the day. Government meddling only makes matters worse. Investors or businesses that count on government policies to save them will be sorely disappointed. The long wave winter season will run its course and the current perfect storm will shatter the illusions of government as savior of international free market capitalism. Keynesianism will die a merciless death in this long wave winter storm.

Federal Reserve Chairman Bernanke has admitted that he does not understand why the economy has not responded to the aggressive monetary stimulus of lower interest rates and quantitative easing, so now he tries the twist. Bernanke should read Kondratieff and the findings at the System Dynamics program at MIT, which has validated long wave theory. The long wave is the natural cycle of creative destruction in a free market economy; ignore it at your peril.

The long wave turn from winter to spring is just as natural as winter invariably giving way to spring in the natural seasons of the year. Only long wave theory explains the combination of the current economic and financial market conditions, where excessive debt levels and overproduction are now chipping away at corporate efficiency, forcing investor around the world to discount the present value they are willing to pay for future cash flows. Future corporate margins and therefore cash flows are rapidly becoming uncertain as prices received plunge from overproduction funded with too much debt. In short, global financial markets are getting an old fashion haircut, maybe even a buzz cut.

The fact that free market capitalism goes through a long wave rough patch is a natural law of sorts in free market capitalism. Don't mess with mother nature. The Obama Administration has been shocked to discover that fiscal stimulus has failed to generate the expected jobs. The president should expand his reading list. He is now in line to lose his job along with millions of others around the world. In addition to Kondratieff, the president should put Ludwig von Mises' Human Action, Adam Smith's Wealth of Nations, and Bastiat's The Law, on his reading list. Government should not try to do what only a free market, free trade and individuals in pursuit of purpose are capable of doing. Human liberty and freedom, unhampered by government intervention can achieve great things. It is the only solution to the global problems produced by a long wave winter.

Entrepreneurs, new businesses and innovation in existing businesses are the only viable engines of growth and job creation. Substantially lowering corporate taxes for small business and closing tax loopholes will cause the economy to boom and create jobs. Enterprises funded by government in exchange for their political contributions are destined for failure. The politicians involved in any such bribery and conspiracy with taxpayer funds should be sent to jail. Without free market forces and individual responsibility, and swift and harsh punishment for failure, capitalism will not function correctly. Seed stolen from farmers and planted in winter is doomed to failure. It only harms the real farmers and reduces future crops in their natural season.

On the bright side, corporate profits have held up remarkably well in light of the long wave winter forces in play, a testimony to management and the resilience of free market capitalism in crisis. Profits have been driven by emerging market demand, increases in efficiency, lower interest rates, payroll reductions through layoffs and low wage growth. Business has cut to the bone to deliver profits, and there is nothing left to cut. Unfortunately, the global economy is now in a long wave winter storm. Businesses are facing a global collapse in demand, in addition to political interference and stifling regulation. These forces are idling production and putting extreme downward pressure on prices. The CRB is plunging as overproduction swamps global markets with an excess supply of products and services. The long wave forces in play are now beginning to erode corporate profits.

Global leaders are in shock at the specter of a sovereign debt default that is shaking the global financial system to its core. The hopes pinned on emerging markets are fading fast, as even the economies in China, Brazil, Russia and India cool as anticipated during the long wave winter. The perfect storm is gaining strength. Emerging markets are stumbling; corporate profits will now take a hit when the global economy can least afford it.

The global economy is now in the final crisis years of the long wave winter season that will be cruel to corporate profits. The long wave is essentially at its heart a boom and bust cycle of corporate efficiency produced by human action. The winter season is driven by overproduction, this exists in goods and services, which puts downward pressure on prices received. Prices paid are also falling, but in a long wave winter storm prices received will fall much faster. This occurs when excessive debt and the inevitable debt deleveraging by consumers, businesses and governments is creating a severe decline in demand. The overproduction feeds additional price declines and additional contracting corporate margins.

Long Wave Prices and Corporate Efficiency

The long wave boom and bust cycle of corporate efficiency is eventually recognized by global investors searching for a piece of corporate profits to buy in the form of publicly traded stocks. This is occurring now. Every long wave contains two bull markets and two bear markets. The spring and fall seasons of the long wave of rising corporate efficiency and expanding margins are bull markets, the summer and winter seasons of declining corporate efficiency and declining margins produce bear markets.

It takes a while for investors to catch on. The bear market of the global long wave winter began in the late 1990s in most developed markets. It is now in its final years of rapidly deteriorating corporate efficiency and investors around the world are recognizing the squeeze facing corporate profits. There are other long wave forces at work, but the ebb and flow of corporate efficiency and profits is critical to bull and bear markets. Profits are the mother's milk of stocks, and the milk production will plunge as this long wave winter storm plays out.

The current bear market will run its course along with deteriorating corporate efficiency. The demand destruction of global debt deleveraging will drive corporate margins and profits lower into the expected long wave bottom of 2012-13. A severe global bear market will take stock markets much lower as corporate efficiency and profits are squeezed into the long wave winter bottom.

If you have never seen a long wave in real data, you have never seen a long-term graph of the U.S. 30-Year long bond. Interest rates are the price of money. During a long wave advance, the demand for money is growing and its price is rising, during a long wave decline, the demand for legitimate uses for money is shrinking and its price is falling. The U.S. long bond is a great proxy for the price of money. The demand for borrowing money and its price is falling.

The demand to borrow money by legitimate borrowers that understand what it takes to earn a dollar, i.e., those that have a chance of paying it back, is declining. They do not want to borrow money at this time. For years, my call for a U.S. 2% 30-Year bond and a 1% 10-Year bond at the bottom of this long wave winter has been in place. I see no reason to change that call now. The low in the price of money will coincide with a low for stock prices from late-2012 to mid-2013. The perfect storm of this long wave winter season is driving the price of money lower. Since Chairman Bernanke has called for low rates into mid-2013, maybe someone showed him this chart. Kondratieff would no doubt have loved this chart, which confirms his theory concerning the dynamic ebb and flow of international free market capitalism is not subject to the vagaries of misguided Keynesian manipulation.

Long-term US Treasury constant maturity

The current business cycle is the final business cycle of the long wave cycle. What few investors and traders are aware of is a method of technical analysis that suggests that a Kondratieff long wave divided by 144 produces a miniature long wave cycle, a Wall cycle. There are nine Wall cycles in every business cycle. By tracking these Wall cycles both investors and traders can discover more optimal times to buy and sell to reduce risks and maximize returns. This applies whether they buy stocks for the discounted present value of future cash flows, growth, or just to trade the cycles. Unfortunately, global markets are in Wall cycle number six of the current business cycle. This is a third last and weakest cycle, so prepare for outsized volatility and price declines into the bottom of this cycle.

Investors are panicking, even though global markets are experiencing something as natural as a winter blizzard in January. Before it is over, this global bear market will present investors with the greatest discounted buying opportunities for future cash flows since the early 1930s. Keep much of your power dry; 8-16% dividend yields on great global franchise companies are coming to a stock market near you before the perfect long wave winter storm gives way to a global long wave spring in 2013. Those great buys and dividend yields will be compounded many times over during the coming long wave spring season.

David Knox Barker is a long wave analyst, technical market analyst, world-systems analyst and author of Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, Updated and Expanded Edition (2009). He is the founder of LongWaveDynamics.com, and the publisher and editor of The Long Wave Dynamics Letter and the LWD Weekly Update Blog. Barker has studied and researched the Kondratieff long wave “Jubilee” cycle for over 25 years. He is one of the world’s foremost experts on the economic long wave. Barker was also founder and CEO for ten years from 1997 to 2007 of a successful life sciences research and marketing services company, serving a majority of the top 20 global life science companies. Barker holds a bachelor’s degree in finance and a master’s degree in political science.  He enjoys reading, running and discussing big ideas with family and friends. 

© 2011 Copyright David Knox Barker - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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