In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.
–Eric Hoffer – Longshoreman, Philosopher
The links on this page will lead you to very important information.
K-waves are long, super cycles in economic history. Since groovygirl is a long-term investor, I am interested in studying these types of cycles. Click here for more info from wiki.
The following is a short summary of basic information from the Long Wave Group click here.
Side musing: the Long Wave Group believes that we will have a 1930’s style depression with contracting credit, debt, and prices and no inflation. I disagree on this one point and believe we will end the winter cycle in a hyperinflationary depression, deflation in debt, inflation in prices, because the US Dollar is not tied to anything tangible. The dollar will continue to lose purchasing power, driving up material prices, thus the impact of inflation. The dollar of the 1930’s was limited by its tie to gold, although “adjusted” by FDR. We did not completely leave the tie to gold until the Nixon administration. Having said that I do think it is possible to have a phase of deflation in prices prior to the hyperinflation phase. This is one reason why this cycle will be very hard to navigate for businesses and investing opportunities. It will be very different from anything we have seen in our lifetime.
The Characteristics of Autumn Investment Cycle (start of last autumn cycle was April 12, 1982):
- Confidence level: increasing confidence, extreme confidence and then euphoria in the markets and business cycles. “Euphoria” is defined by the dot.com market of the late 1990’s.
- Inflation level: falling throughout the period. Although inflation in prices rose to some extent during this period, wages and asset value “kept up” with inflation (and most of all, the price of debt) and in some investments overtook it.
- Credit level: massive increase in credit, especially to the consumer. I think we all realize the growth in the US was driven by the creation of credit and thus debt to the consumer. However, income rose enough to pay off debt and thus create more debt and the cycle continued.
- Interest rates: interest rates fall during this phase. Because of the wide growth, credit is cheap and available to all. During this time, interest rates do not need to be brought artificially low by government as growth and expansion sets the rate.
- Best investments: stocks, bonds and real estate. All these investments did very well during this period, surpassing inflation.
- Indication of season change: bull market peak for DOW and bottom for gold. In inflation-adjusted terms, the DOW peak was 1-15-2000.
The Characteristics of Winter Investment Cycle (start of the winter cycle was January 15, 2000):
- Confidence level: concern, then, fear, panic, and despair. We are between concern and fear right now. By the end of 2010, we will be in full fear mode.
- Inflation level: fall of inflation quickens into outright deflation. The government is trying hard to fight against this. We are in stagflation at best right now. We will have inflation in prices because of a currency crisis, not economic growth. We are experiencing a deflation in debt (or credit).
- Credit availability: following credit crunch, virtually, no credit. We are in credit crunch mode right now. It will continue to freeze and then disappear. The only credit available will be government mandated.
- Interest rates: fall in credit crunch, then rise, then fall much lower. We are in the falling mode right now. For housing, I don’t think they will rise again as the government will mandate it. However, the rate of return on bonds will rise (as this is the only way they will sell) and this rise will affect certain sectors of business. Mainly, it means, no growth and no investment.
- Best investments: gold, cash, and then also bonds after credit crunch.
- Indication of season change to Spring: bottom in DOW. Remember, we will have a currency crisis and hyperinflationary depression (deflation in credit/debt availability and inflation in prices/expenses). It is possible to have a DOW at 30,000 with no additional real value. The stock market will continue to lose value throughout this season.
Why is gold the best investment during the K-winter cycle? Click here.
Other generalities of Kondratieff winter cycles:
Economic depression: this means no economic growth and/or a decline in activity. We are seeing the beginning of this now. No credit equals no growth….period. This time around we will have a deflation in debt as well as an increase in prices. This happened after the Civil War. The government (North and South) printed huge amounts of currency to pay for the engagement. After the war, there was no credit, banks were tapped out and no European government wanted to risk money in the aftermath of a war zone without high returns (Europe had their own depression to deal with). Thus no credit (or deflation in debt) and too much printed money chasing too few raw materials and goods. We will experience this same thing…..a hyperinflationary depression.
Currency crisis: winter cycles involve some sort of currency crisis. Precious metals become very valuable during currency collapses. During the Great Depression, FDR revalued the US dollar amount to gold. That was the currency crisis, or the reaction to the currency crisis. We do not have that option now as the dollar is not tied to anything of value. US Dollars will become worth less and other countries will move to valuing oil, and other commodities in anything but dollars. The printing press will continue…….making too many dollars chase too few goods. Even if the printing press was not running to full speed, the global economy will start to dump all their worthless dollars in the US (and not purchase them back), and thus the same result….hyperinflationary depression on a national level.
Capital preservation: because there is currency crisis and no credit available to grow, preserving what capital or savings you have becomes top priority (for companies and banks as well as individuals).
Political instability: a hallmark of any winter phase. Hitler rose to power in the economically unstable Weimar Republic (another hyperinflationary depression from the pages of history). Most of our entitlement programs like social security and farm subsidies were developed during the Great Depression to calm the unemployed and starving masses. I would like to make one comment here. No political party or government entity or TV talking head can do anything to stop this winter cycle. Make sure you are putting your resources and energy where they will assist you, your family and neighbors. Be proactive, not reactive.
Crime goes up: desperate people do things they would not do during good times in order to survive.
Relationships become more important than “stuff”: is needed in today’s world.
People panic: most people will not be ready for this. They will panic. They only know the aspects of the autumn cycle. Be ready to educate those who wish to listen and share with those that are suffering.
The world slows down: the winter cycle is a contraction on every level. People who are used to the fast race that always expands will be uncomfortable and impatient. This will be a shift on every level of society. We will have to create new definitions of “success” as a culture.
Infrastructure crumbles: government and business have little money to build new infrastructure, let alone repair what is existing. Prepare for energy outages and supply disruptions in certain areas of the country.
Taxes go up: when governments are laden with debt and can’t print any more money, they tax the people. The first step is CA recent move to collect next year’s taxes this year. Expect more of this.
Money leaves the country: the rich will move their money (and maybe themselves) outside of the US to a more stable environment. In the Civil War, the rich moved to England, in Germany before WWII, they moved to Switzerland.
More information about where to invest during this cycle in this post.
“Always dream and shoot higher than you know you can do. Don’t bother just to be better than your contemporaries or predecessors. Try to be better than yourself.”
William Faulkner
