…Nicholas Kondratiev (1892–1938) was a Russian economist in the Soviet Union who was tasked by Josef Stalin to study long-term capitalist economies (U.S., Britain, and France wholesale prices and interest rates) and concluded that there were peaks and troughs in economic activity that lasted roughly 50–60 years. Other economists did similar work that traced similar cycles back to the Romans and even the Mayans that all supported Kondratiev’s work. (Kondratiev was rewarded for his efforts by being sent to Siberia by Stalin. Stalin didn’t like the fact that his theories also applied to Russia and that the capitalist economies would rise again from their depressions. Kondratiev died in a Siberian labour camp.)
This post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) excerpt from an article by David Chapman, for the sake of clarity and brevity to provide you with a fast and easy read. Please note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
Kondratiev concluded that each long wave was driven by technological advances. He identified four distinct phases.
- spring—beneficial inflationary growth, stocks rising, commodities and gold weak;
- summer—stagflation, recession, stock market weak, commodities and gold booming;
- autumn—deflationary growth, stocks booming (bubble?), commodities and gold weak;
- winter—deflation, depression, financial crisis, stock market weak, commodities and gold booming.
While Kondratiev’s study is important, we note that many economists do not buy into it. That is, no doubt, the old adage of stick ten economists in a room and you’ll have eleven different opinions.
Our table below on the Kondratiev Wave Cycles is based on generally consensus as the start and end of each wave. The long Kondratiev Wave is measured stock market trough to trough while the phases are measured trough to top, top to trough etc.
Kondratiev Wave Cycles—The Long Wave
Beneficial inflation, economic growth, stocks up, commodities weak
Stagflation, weak economic growth, recession, stocks weak, commodities up
Mild deflationary growth, stocks up, possible bubble, commodities weak
Deflationary growth and steep recessions/depression, stocks weak, commodities up
|Length of the Long Wave/Technological Drivers of the Long Wave
American Revolution, Indian Wars
War of 1812, Indian Wars, stagflation
“Era of Good Feelings,” Indian Wars, booming stock market
Indian Wars, the Hungry Forties, depression
|60 years/steam engine, cotton, Industrial Revolution, age of steam and railways
Mexican American War, Indian Wars
U.S. Civil War, stagflation
reconstruction, Indian Wars, booming stock market
Indian Wars, the Long Depression
|51 years/railways, steel, age of steel
Spanish-American War, Philippine- American War
WW1, Mexican Revolution, Banana Wars, Russian Civil War, stagflation
The Roaring Twenties, booming stock market
Great Depression, WW2, China Civil War
|53 Years/electrical engineering, chemistry, age of oil, automobiles, and mass production
Korean War, Vietnam War, Cold War
Vietnam War, Indochina Wars, Cold War, Arab Oil Crisis, stagflation
“The New Economy,”
Gulf War, Yugoslav Wars, booming stock market
dot.dom bubble bust, global financial crisis, Great Recession, War on Terror – Afghanistan, Iraq, Syria, Libya
|60 years/ petrochemicals, automobiles, age of information technology, telecommunications
War on Terror -Afghanistan, Iraq, Syria, Libya
|??/age of post-informational technology, artificial intelligence (AI), renewable energy??
Note how war dominates the Kondratiev cycle. All periods experience war of some nature, whether it be ongoing low-level wars—i.e., Indian wars, War on Terror, etc.—or major wars like World War I and World War II. The last major Kondratiev cycle 1949–2009 saw ongoing wars, opening with the Korean War 1950–1953 and ending with the War on Terror 2001–2021. What war will dominate the next period? NATO/Ukraine/Russia, U.S./China, or something else?
If Kondratiev’s studies showed that the long wave lasted roughly 50–60 years, it appears to have concluded the last wave right on schedule. The last wave started with the end of the Great Depression and World War II in 1949 and, we conclude (our opinion), ended with the Global Financial Crisis of 2008.
- The winter of the Kondratiev wave was 2000–2009. The period followed a classic pattern as stocks were weak while commodities boomed.
- While we didn’t have a depression, we had two steep recessions, culminating in what became known as the “Great Recession” of 2007–2009. This was the result of the financial crisis of 2008 that almost collapsed the financial system. If it had not been for the actions of the central banks and governments a depression might have been a possibility. It is no surprise that all might not agree with this analysis.
We come to that conclusion because the next move was the long bull market that got underway in 2009 and economies once again returned to a period of growth driven by low inflation, QE, and ultra-low interest rates.
- The stock markets eventually moved to new-all-time highs in 2013, signaling that the long period of weak stock markets was over.
- Gold topped in 2011, oil had already topped in 2008, and
- the Commodity Research Bureau Index (CRB) topped as well in 2008 with a secondary top in 2011.
Our conclusion is that a new Kondratiev wave cycle got underway in 2009. If the long wave theory continues to hold, the current long wave could end somewhere between 2059 and 2069. As to the current spring phase that has an historical range of 11 to 17 years, average 14.3 years. The current spring phase will have its 13th anniversary in March 2022.
The question now is, are we poised to enter the second phase of the Kondratiev wave—the Kondratiev summer?
- Given the rise in inflation,
- the word stagflation now being bandied about, and
- the recent rise in commodity prices with many of them making multi-year highs
we are seeing some of the prime characteristics of the “summer” of the Kondratiev wave cycle. At this time, we cannot confirm as to whether the stock market has topped. Confirmation could take a year or more.
During the last Kondratiev summer (1966–1982) the stock market topped in 1966. However, confirmation of that top didn’t occur until the stock market failed to make any significant new highs, despite strong rallies in 1968 and 1972–1973. Further rallies in 1976 and 1980 also failed to see any new significant all-time highs. It wasn’t until 1983 that the stock market left the period 1966–1982 behind for good. Gold rallied strongly during the period once the gold standard ended in 1971. Oil prices bubbled higher, thanks to the Arab Oil crisis of 1973 and the Iran hostage crisis in 1979. Other commodities also saw huge moves during this period. Gold did not go into a bubble market until 1976–1980. Commodity prices bottomed in 1968 and topped in 1980, rising some 250%.
We believe the Kondratiev wave cycle can be a useful tool, even though we freely admit the cycles of the Kondratiev wave are usually viewed in retrospect as are many cycles. However, what caught our eye was the resurgent commodity prices (CRB bottomed in March 2020) and the return of inflation that is beginning to look a lot more than just transitory. That, and the word “stagflation” keeps coming up. Stagflation has been a key characteristic of the Kondratiev summer. The period 1966–1982 was a long period of stagflation and ended only when Fed Chair Paul Volker hiked interest rates to unheard-of levels. The result was the very steep recessions of 1980–1982. We have noted that the central banks are trapped following years of ultra-low interest rates. Raising interest rates could spark a steep recession as it could cause problems for the housing market and more. During the last Kondratiev summer 1966–1982 bond prices plummeted (interest rates rose as prices move inversely to interest rates). The U.S. 30-year treasury bond made its final low in September 1981 as the 30-year U.S. treasury bond hit a high yield of 15.1%.
Since the bottom of the pandemic crash in March 2020 record funds have flowed into the stock markets, sparking new all-time highs and what many describe as a bubble. QE and ultra-low interest rates have unleashed a torrent of money printing contributing to the bubble. The pandemic sparked major supply disruptions as economies came back to life. There is the potential for climate change to spark more disruptions. That in turn leads to higher prices and inflation. The resurgence of COVID could also spark more disruptions. We are, we believe, in the early stages of new phase. If we are right, we are on the cusp of the Kondratiev summer and long period of stagflation, recessions, a weak stock market, and booming commodities.
Nothing, however, is coincidental and each component (stocks, bonds, commodities) will top and bottom at different times. The Kondratiev long wave is always measured from stock market trough to trough. However, phases of the long wave are measured from trough to top, then top to trough, etc. Evidence is surfacing that the spring phase of a new Kondratiev wave that got underway with the bottom in 2009 may be coming to an end. The question is, when will we see the final stock market top?
For those interested, there are numerous articles on the Kondratiev wave theory that can be found on the internet. In particular, one we wrote back in June 2006 may be of interest and appears to still be posted. It was titled “Looking Down the Road” and can be found at http://www.321gold.com/editorials/chapman_d/chapman_d_062606.html.
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