Let’s start with a history class! Who knows about the hero, rather the martyr, of economics, Nikolai Kondratiev and his brainchild, the Kondratiev Cycles or K-waves? If you don’t, here’s a little crash course to get you updated with one of the most frequently used economic cycles.
The relevance of cycles or trends is vast. The very fact that we study history and apply historical data to predict the future implies that cycles exist and relying on that we muster clues to brace ourselves for what’s going to happen next. We can apply this concept of rotation to financial markets and understand how, when and why economies grow (same applied for when they shrink too!).
A book of controversy back in 1920s, which subsequently led to the execution of Nikolai in communist Russia, The Major Economic Cycles, describes the research about the long term economic cycle. Driven by a spectrum of indicators, the data of investment profits, agro-economic status, prices, technology along with debt buildup and repudiation hold central importance to the derivation. The key concept falls into a sinusoidal graph representing a time period of each wave of about 40-60 years. Basically the theory stated that the capitalist economy of the west (which was the sample portfolio of the research) wouldn’t disintegrate after the 1929 Great Depression and that this was a normal course for the mercantile credit system. The truth went against the belief of Stalin and thus this work was withheld for about two decades.
No matter the gruesome beginning, today the K-waves are highly resorted to. Over the years they have been through sophisticated changes and can be segregated with the following defining points (K-seasons):
- Spring: marking a recovery from the previous winter, this is the phase of renewed productivity, rising inflation and good economic times.
- Summer: the phase of presumptuous boom
- Autumn: the corrective phase of a false plateau followed by a speculative bubble and an eventual market crash
- Winter: the cleansing phase feat. Economic depression and psychological doom.
Considering decades of supporting evidence, this theory places us amidst a K-winter, which began sometime around 2000. But does it feel like winter? Interests rates are almost zero, some in negative as well, the equity market doesn’t look bearish and there’s definitely no repudiation of debt, rather globally we seem to be borrowing more! Acting like the warmest jacket, we have central banks to our rescue with their interest rate policies as the fleece to that jacket. K-waves (or any theory for that matter of fact) are descriptive rather than prescriptive. It is how the financial institutions read the signals and enact in avoiding financial crisis. Lowering the interest rates have prevented the crisis expected, rather it has promoted inflation.
But is this interference changing the route of the age old theory of K-waves or just delaying the eventual cleansing process, which will likely be more brutal? With their policies, are the institutions delaying the following K-spring or negating the depression associated with a K-winter all together? These are a few questions that time can unravel the answers of.