Cycles are a reality of life. Whether or not it be such things as 4 seasons of the year; life cycles; planetary cycles etc. Much of our lives is defined by cycles. Well they seem to be real at a much higher level – the way the world expands and contracts from a sociological and financial perspective. We will look at a number of cycles and show how eerie and accurate many of them have been historically. Today, many of the cycles are providing huge warning signs…..
First the Kondratieff Wave Theory (K-Wave). This theory was founded by Nikolai D. Kondratieff, a Communist Russia era economist who noticed an approximately 50-year cycle in European agricultural commodity prices and copper prices. Kondratieff believed that these long cycles were a feature of the economic activity of capitalist nations, and that they involved periods of evolution and self-correction. His theory has been expanded to look at complete long economic cycles.
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Lets have a look at the Kondratieff Cycle and see how the world is positioned today related to this cycle. First the Kondratieff Cyle is basically is a long-term cycle present in capitalist economies that represents long-term, high-growth and low-growth economic periods. Right now we have entered in the low growth period which also sees falling stock markets and recessionary/depressionary conditions.
We have seen a period of much more significant growth in the ‘summer season’ of the last cycle from 1982 to 2000 for one primary reason – the greatest debt build up in history. If you look at the chart below the growth in this 4th cycle up has been much more significant than prevous cycles. It is based on debt, technology and the fact that this is believed to be the end of a super cycle. Lets have a look at how debt has grown in all sectors before we review the K-Wave:
The level of debt growth has seen increadible rises since 2000. It hasa gone from $87 to $199 trillion (as of today it is well over $200 trillion and rising daily). That is 129% increase since 2000. And the growth since 2007, the beginning of the last financial crisis has also been a staggering $57 trillion or 40%. That is a staggering amount in less than 10 years.
Debt parties are a great deal of fun when the party rises at full steam. It tends to draw more and more people there until finally, one group at a time, they crash and burn. We have seen this with oil and gas and the commodity sector overall. Now we are seeing it with low quality bonds that are now crashing in price and currencies as it is a race to devalue your home countries currency to stay competitive. It is all failing and stocks are at the beginning of this deflationary collapse.
Now a look specifically at the Kondratieff Cycle:
The chart is fairly complicated but great to spend some time on it as it presents many interesting details. Really the most important aspect of the visual is the top and the bottom charts. The top one reflects the high levels of growth – the summer phase, which is then followed by the peak in the fall. In current day terms, that was in 2000. We have now entered the winter phase since then which is the most difficult period.
In the winter phase, which again started in 2000 and is expected to go until 2020 to 2022 range, you generally see a major contraction that cleanses the excesses from the previous summer/fall period. This includes deflationary pressures like we are seeing today with commodity prices collapse, high yield bonds beginning their descent and Emerging Markets, led by China, seeing economic and stock market failings. It will come to the West, but developed economies will generally be the last brick to fall.
The West has been in the midst of it since 2000 but their governments ability to take on massive debt; households ability to do the same; and major Central Banks led by the US Federal Reserve, European Central Bank and the Bank of Japan taking on massive amounts of debt on their balance sheets and bringing interest rates to zero or for that matter below (Bank of Japan announced that yesterday and much of Europe is seeing negative interest rates – yes investors pay to have their money in banks or will get less money than they put in with government bonds – everything is backwards today so you cannot invest like you did during the boom phases.
Society has to pay the price for the massive build up of the balance sheets of Central Banks as well as the massive debt build up. There is no free ride in this world. Now a quick look at a Kondratieff chart of wholesale prices and the correlation with the K-wave:
When you have wholesale prices collapse, you see all asset classes collapse. The saving areas are high quality cash instruments and the highest quality bonds. All other assets tend to collapse, one after the other. The red lines highlight many of the worst economic period in the worlds history and they coincide with the down cycle of the K-wave.
This winter phase is expected to be one of the worst. Even worst than the last one that went from 1929 to 1949 which included the 1929 stock market crash; deep depression; terrible deflation; and finished with world war. How can we beat that – I do not want to even go there and can only hope that world leaders make some very smart decisions to minimize the damage worldwide. So far their solutions to the problems are questionable at best. I will give the leaders one thing – they do whatever they can to protect things short-term to make sure the crash does not happen on their watch. Well, this kind of luck has to run out fast. There has to be a reaction to all the actions taken since 2000 as well as the entire growth phase from 1982 on.
Founder & Chief Investment Strategist