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. For perspective, this page was written in 2009.
We are currently in the Winter season of the Kondratieff Long Wave Cycle or K-wave. Skip down to read about that season’s highlights.
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.
Update January 22, 2013: Long Wave Group now has some info for free again on their website, linked above. Groovygirl has located an alternative free site. Click here to go to the page I think will best explain the Winter Cycle’s impact on you. There is a lot of info on this site and I have not gone through it all. But it is free and seems like truthful information at first glance. I highly recommend the monthly updates on the left side bar for updated information. Regarding the Mayan calendar information on the linked website, that is just another long-term cycle theory. There are many out there and they usually overlap in time and description. There are actually 8 long-cycle theories (not all economic) that I have researched, and they ALL hit a low in the 2012-2016 time frame.
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 ended January 14, 2000):
- 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). As discussed above, groovygirl believes we will experience a hyperinflationary depression, defined as a hyperinflation in prices and deflation in debt causing a contraction in economic growth.
- 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 first falling mode right now. For housing, I don’t think they will rise again as the government will mandate it to try and keep the housing market afloat. 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. (Because we have a completely floating fiat currency system in the world now, “cash” will be better held in some currencies more than others or precious metals.)
- 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. A good stat to judge a low in the DOW with the fiat Dollar gimmicks taken out is the gold/DOW ratio.
Why is gold the best investment during the K-winter cycle? Click here. This is a power-point presentation, the reasons for gold investments are in the last portion. Update: the link above will now require a paid subscription.
Some basic reasons to own gold in a Winter K-wave cycle:
- Debt contracts deeply, physical gold (and silver) has no debt tied to it to contract. Almost all other current investment options from stocks to bonds to futures to banking to real estate to currencies have debt tied to them, which make them a higher risk for default and loss than gold during this winter phase.
- Fiat currencies fail or are under extreme pressure or are devalued (lose purchasing power). During these currency devaluations, gold goes up to meet the falling purchasing power of the currency it is denominated in. Gold will preserve the purchasing power of your currency during this cycle.
- Since this is a global crisis, i.e., all fiat currencies will be effected in one way or another, gold will become the preferred global currency either formally or informally.
- Since debt is required to get gold (and silver) out of the ground and there is little credit available, the supply/demand side of gold (and silver) investing will tilt in the favor of higher prices during this cycle. (This will also effect energy/oil.)
- Gold is portable, unlike land. It is an accepted form of value in any country/civilization. We will soon find out that no one wants USDollars anymore.
- Gold will hold its purchasing power over the long-term whether we have a deflation or inflationary (or both) depression during this cycle. Stocks will lose purchasing power in the deflationary or hyperinflationary phase. The reason that this is different than other “seasons” is because the winter cycle will have a currency crisis, not just an economic crisis.
Other generalities of Kondratieff winter cycles:
Unsustainable debt (debt that doesn’t have a “real asset” behind it), will be purged from the system, as it resets.
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.
The good news is that after the Winter cycle, comes the Spring cycle with cautious, but steady growth. All cycles come to an end. The Winter cycle will last 20-30 years and it began in 2000.
Update: you will see many different starting and ending dates for the Winter phase. That is OK. Since the main purpose of the Winter phase is to purge all the excessive debt from the system that was accumulated in the Fall cycle, the GDP to Debit ratio is a key stat to watch. It needs to get below 20-30% for us to even think about the Spring phase.
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.”