The Economy: "The Long Wave (aka The K Wave) Cycle"
"The Long Wave (aka The K Wave) Cycle"by David Knox Barker
"The long wave debate rages on. Meanwhile, the global debt berg, the chief product of crony state capitalism, has begun to block the profligate paths of listing ships of state. The confident captains of crony state capitalism are at the helm, sailing into the foggy financial abyss of cascading sovereign debt defaults. The growing black hole of sovereign debt threatens to pull the global economy into its collapsing vortex, the quintessential black swan event. Coming out the other side of the black hole of collapsing debt beyond 2012, we suspect the world will be a very different place.
In various articles published here at The Market Oracle, the writings and interpretations of the work of Russian economist Kondratieff* (1892-1938) have received both praise and excoriation. The fact is that long wave’s advocates and enemies rarely understand the complex forces of the great global long wave cycle. This article will suggest that the remarkable clarity and value that a correct understanding of the long wave brings to global market analysis, and even technical market analysis, is more relevant today than ever before.
At its deepest level, the long wave is a cycle of the ebb and flow of global corporate efficiency. Trends that go too far and then reverse in innovation, scarcity, overcapacity and debt produce the ebb and flow of inflation and deflation in producer and consumer prices that drive the cycle. The study of cycles is the study of trends. The global stock market trends on top of these deeper economic trends are simply market manifestations of the underlying economic reality of the long wave.
When you strip out the noise, and look at a real data chart that presents the ebb and flow of corporate efficiency on a major equity index chart, adjusted for inflation, with the long wave start date labeled correctly, your jaw drops. You suddenly see the Kondratieff long wave in stunning and sometimes terrifying detail, with all its implications.
Without a clear understanding of the start date of the current long wave, relevant analysis is a hopeless and lost cause, as recent pundits have demonstrated. Credit goes to Robert Prechter for first identifying the start date of the current long wave as 1949. We agree with his analysis since real data charts make this case with such clarity. A recent article on The Market Oracle from a respected analyst attempted to debunk the value of the long wave perspective. However, by using an inaccurate start date, such naysayer’s arguments against the long wave are less than meaningless.
Market analysis is really about pattern and trend recognition. Criticism of long wave analysts when they only use “idealized” charts that do not present real data are justified. In our work at LongWaveDynamics.com we prefer to use real data charts, along with an accurate understanding of the true nature of the long wave. As evidence, we offer Exhibit A below:
When you strip out the noise, and look at a real data chart that presents the ebb and flow of corporate efficiency on a major equity index chart, adjusted for inflation, with the long wave start date labeled correctly, your jaw drops. You suddenly see the Kondratieff long wave in stunning and sometimes terrifying detail, with all its implications.
Without a clear understanding of the start date of the current long wave, relevant analysis is a hopeless and lost cause, as recent pundits have demonstrated. Credit goes to Robert Prechter for first identifying the start date of the current long wave as 1949. We agree with his analysis since real data charts make this case with such clarity. A recent article on The Market Oracle from a respected analyst attempted to debunk the value of the long wave perspective. However, by using an inaccurate start date, such naysayer’s arguments against the long wave are less than meaningless.
Click image for larger size.
A few real data charts rise above the others to illustrate the most compelling evidence for the long wave. The inflation adjusted 20-Year rate of return on the S&P 500 is just such a chart. The ebb and flow of the long wave and its seasons jump off the page. This chart is the total return chart, i.e. dividends are included. This chart strips out much of the short-term economic and market noise, providing an undistorted view of how stock investments actually perform over the ebb and flow of the long wave. The patterns are overwhelming. Not only do the long wave and the long wave seasons pop out of this chart, but also if you look close enough, you can even see the Kitchin cycles** (aka business cycles).
Harvard’s economist Joseph Schumpeter, author of Business Cycles, stumped market analysts, including yours truly, for years with his model of 18 Kitchin cycles in every long wave. It was not until PQ Wall corrected Schumpeter’s error and presented new analysis showing there are actually only 16 business cycles in a long wave that the smaller cycle confusion began to clear up, specifically as they relate to the long wave. Once you understand the accurate long wave Kitchin cycle count and the relevance of the distinction for the smaller cycles, a new world of technical analysis opens up to you.
There have been a number of references to my earlier book, "The K Wave" (1995), in articles posted on The Market Oracle. This book represented the last public writing on the Kondratieff long wave by this author. In that edition, written some 15 years before the current global financial crisis, charts demonstrated business cycle #16 and the current long wave ending its global decline into 2009. The book also forecast that accompanying the end of the long wave would be collapsing global stock markets, deflation, an international banking crisis, a global real estate bust, a global debt bust, and a crisis of capitalism, with advocates of socialist solutions reemerging during the crisis. The book has generated renewed interest in our methods of long wave and smaller cycle analysis due to the accuracy of such forecasts. When used prices topped $1,000 last year, work on a new edition accelerated, since it appeared to be offering some value to readers. A new edition of the book has been released as, "Jubilee on Wall Street" (2009). Advance copies were available in late 2009, and the final new edition is now available. The new book updates interested readers on our approach to long wave dynamics and cycle analysis.
Global financial markets are now at the point where the cycles are getting interesting, and highly relevant to your financial survival and returns as an investor or trader. No one would be happier with having nailed the bottom of the long wave in 2009 than this author; it would have been a great call from 15 years out to tell the grandchildren about. Except that I don’t have any grandchildren yet, and unfortunately, you must now be informed that close analysis of the smaller cycles, suggests a different and disturbing debt driven scenario.
Instead of the end of the long wave winter in 2009 which would have sufficiently purged old debt and produced a new long wave beginning, driven by emerging markets, it appears as if aggressive government intervention and central bank policies greatly expanded the last Kitchin cycle. Artificially low interest rates, zero money down and other such foolish pollical buffoonery produced the housing bubble, and turned Kithchin cycle #15 into the bubble cycle. Government foisted aggressive policies on the global economy and markets, trying to stop the natural long wave forces at work in a disinflationary and deflationary long wave winter season. They have only made it worse; kicking the long wave debt reckoning can down the road a bit. Jay Forrester, MIT professor and founder of System Dynamics, in a speech in 2003, laid out this outcome. By the way, for long wave naysayers System Dynamics at MIT has validated the long wave’s existence and the power of its impact on the global economy.
Government intervention and stimulus served to expand the smaller cycles in the long wave. We could have already been entering a new long wave spring season by now, powered by innovation and billions of new participants in the emerging markets of the BRICs and other emerging countries. We do expect emerging markets to blunt this final down leg of the long wave winter. However, instead of a new global long wave boom, we now suspect we are presently only on the front of the final Kitchin cycle of the long wave winter. This is not a good. The current regular business cycle is primarily an inventory build cycle. Government piled trillions of dollars, euros, yuan, yen, etc. in new debt on top of the old debt to juice the system one last time. The sovereign debt strategy will fail, and only further suppress and weigh down the global economy at the worst possible point in a long wave winter season.
In short, we suspect Kitchin cycle #16 will end badly. Its ending will finally bring and end to this long wave. However, if we are reading the long wave winds correctly, a colossal long wave global debt collapse is in the offing as the long wave grand finale into 2012. Our analysis suggests global equity markets will top here in 2010, in the final Kitchin cycle of this long wave, as the global black hole of debt exerts its deflationary gravitation pull, further destroying corporate efficiency. Consider yourself warned.
Forget the Mayans, the politicians in Washington, Brussels and Beijing, by trying to protect the world from financial folly, have foisted upon the global economy a debt bubble encompassing sovereign, state, municipal, corporate and individual debt and filled the world with delusional investors. The graft and greed on Wall Street, which packaged all the bad debt and sold it to unsuspecting investors is not helping. The amount of debt actually does threaten the survival of civilization and international capitalism, as we know it. However, be of good cheer, every trend will go too far and evoke its own reversal.
Washington and other capitals around the globe have no clue of the true depth of the anger that is building against the debt binge they are piling onto taxpayers. The seeds of the global political firestorms they have sown are sprouting and growing rapidly. The emerging political backlash will swing the pendulum back further than it otherwise would have. The rising political anger will be a more effective force now. The tea party regulars are only the cutting edge of a tsunami of political rage that we will anticipate will change the world radically. Even the German socialists are telling the Greeks they cannot consume more than the produce, who would have ever thought a German Chancellor would quote Ayn Rand on the cusp of a global debt collapse.
Just a word on Austrian school economists and thinkers that are often critics of long wave theory is appropriate. The reason for this is likely that Austrians want to attribute business cycles exclusively to government intervention, fiat money and central bank monetary policy. These forces deserve a great deal of the blame and carry much of the responsibility for the extremes of business cycles, large and small. However, what we suspect is that business cycles and long waves are natural phenomena to a large degree. There are natural feedback loops that produce time lags in human action, including economic and market action. Cycles are fields of human action in space-time. Even children demonstrate this simple principle on the playground.
System Dynamics at MIT and the work of Jay Forrester have validated the existence of the long wave due to simple feedback loops. In short, cycles would exist without government intervention and central banking. Government folly gets credit for making business cycles worse than they have to be, but not for creating the fields of human action that produce them. To ignore the overwhelming evidence for long waves and smaller cycles, which is not due to government intervention and monetary policy, shows a lack of a basic understanding of human action."
** Kitchin Cycles: http://en.wikipedia.org/wiki/Kitchin_cycle
Nikolai Kondratiev's "Long Wave": The Mirror of the Global Economic Crisis"
The Global Economy is Facing a "Long Wave" Recession
by Alexander Aivazov and Andrey Kobyakov
http://www.globalresearch.ca/index.php?context=va&aid=11161
Harvard’s economist Joseph Schumpeter, author of Business Cycles, stumped market analysts, including yours truly, for years with his model of 18 Kitchin cycles in every long wave. It was not until PQ Wall corrected Schumpeter’s error and presented new analysis showing there are actually only 16 business cycles in a long wave that the smaller cycle confusion began to clear up, specifically as they relate to the long wave. Once you understand the accurate long wave Kitchin cycle count and the relevance of the distinction for the smaller cycles, a new world of technical analysis opens up to you.
There have been a number of references to my earlier book, "The K Wave" (1995), in articles posted on The Market Oracle. This book represented the last public writing on the Kondratieff long wave by this author. In that edition, written some 15 years before the current global financial crisis, charts demonstrated business cycle #16 and the current long wave ending its global decline into 2009. The book also forecast that accompanying the end of the long wave would be collapsing global stock markets, deflation, an international banking crisis, a global real estate bust, a global debt bust, and a crisis of capitalism, with advocates of socialist solutions reemerging during the crisis. The book has generated renewed interest in our methods of long wave and smaller cycle analysis due to the accuracy of such forecasts. When used prices topped $1,000 last year, work on a new edition accelerated, since it appeared to be offering some value to readers. A new edition of the book has been released as, "Jubilee on Wall Street" (2009). Advance copies were available in late 2009, and the final new edition is now available. The new book updates interested readers on our approach to long wave dynamics and cycle analysis.
Global financial markets are now at the point where the cycles are getting interesting, and highly relevant to your financial survival and returns as an investor or trader. No one would be happier with having nailed the bottom of the long wave in 2009 than this author; it would have been a great call from 15 years out to tell the grandchildren about. Except that I don’t have any grandchildren yet, and unfortunately, you must now be informed that close analysis of the smaller cycles, suggests a different and disturbing debt driven scenario.
Instead of the end of the long wave winter in 2009 which would have sufficiently purged old debt and produced a new long wave beginning, driven by emerging markets, it appears as if aggressive government intervention and central bank policies greatly expanded the last Kitchin cycle. Artificially low interest rates, zero money down and other such foolish pollical buffoonery produced the housing bubble, and turned Kithchin cycle #15 into the bubble cycle. Government foisted aggressive policies on the global economy and markets, trying to stop the natural long wave forces at work in a disinflationary and deflationary long wave winter season. They have only made it worse; kicking the long wave debt reckoning can down the road a bit. Jay Forrester, MIT professor and founder of System Dynamics, in a speech in 2003, laid out this outcome. By the way, for long wave naysayers System Dynamics at MIT has validated the long wave’s existence and the power of its impact on the global economy.
Government intervention and stimulus served to expand the smaller cycles in the long wave. We could have already been entering a new long wave spring season by now, powered by innovation and billions of new participants in the emerging markets of the BRICs and other emerging countries. We do expect emerging markets to blunt this final down leg of the long wave winter. However, instead of a new global long wave boom, we now suspect we are presently only on the front of the final Kitchin cycle of the long wave winter. This is not a good. The current regular business cycle is primarily an inventory build cycle. Government piled trillions of dollars, euros, yuan, yen, etc. in new debt on top of the old debt to juice the system one last time. The sovereign debt strategy will fail, and only further suppress and weigh down the global economy at the worst possible point in a long wave winter season.
In short, we suspect Kitchin cycle #16 will end badly. Its ending will finally bring and end to this long wave. However, if we are reading the long wave winds correctly, a colossal long wave global debt collapse is in the offing as the long wave grand finale into 2012. Our analysis suggests global equity markets will top here in 2010, in the final Kitchin cycle of this long wave, as the global black hole of debt exerts its deflationary gravitation pull, further destroying corporate efficiency. Consider yourself warned.
Forget the Mayans, the politicians in Washington, Brussels and Beijing, by trying to protect the world from financial folly, have foisted upon the global economy a debt bubble encompassing sovereign, state, municipal, corporate and individual debt and filled the world with delusional investors. The graft and greed on Wall Street, which packaged all the bad debt and sold it to unsuspecting investors is not helping. The amount of debt actually does threaten the survival of civilization and international capitalism, as we know it. However, be of good cheer, every trend will go too far and evoke its own reversal.
Washington and other capitals around the globe have no clue of the true depth of the anger that is building against the debt binge they are piling onto taxpayers. The seeds of the global political firestorms they have sown are sprouting and growing rapidly. The emerging political backlash will swing the pendulum back further than it otherwise would have. The rising political anger will be a more effective force now. The tea party regulars are only the cutting edge of a tsunami of political rage that we will anticipate will change the world radically. Even the German socialists are telling the Greeks they cannot consume more than the produce, who would have ever thought a German Chancellor would quote Ayn Rand on the cusp of a global debt collapse.
Just a word on Austrian school economists and thinkers that are often critics of long wave theory is appropriate. The reason for this is likely that Austrians want to attribute business cycles exclusively to government intervention, fiat money and central bank monetary policy. These forces deserve a great deal of the blame and carry much of the responsibility for the extremes of business cycles, large and small. However, what we suspect is that business cycles and long waves are natural phenomena to a large degree. There are natural feedback loops that produce time lags in human action, including economic and market action. Cycles are fields of human action in space-time. Even children demonstrate this simple principle on the playground.
System Dynamics at MIT and the work of Jay Forrester have validated the existence of the long wave due to simple feedback loops. In short, cycles would exist without government intervention and central banking. Government folly gets credit for making business cycles worse than they have to be, but not for creating the fields of human action that produce them. To ignore the overwhelming evidence for long waves and smaller cycles, which is not due to government intervention and monetary policy, shows a lack of a basic understanding of human action."
- http://www.marketoracle.co.uk/Article18343.html
Supplemental links:
* "What Is a Kondratiev Cycle? Who Was Kondratiev?" here:
http://coyoteprime-runningcauseicantfly.blogspot.com/2009/09/economics-
what-is-kondratiev-cycle-who.html
Supplemental links:
* "What Is a Kondratiev Cycle? Who Was Kondratiev?" here:
http://coyoteprime-runningcauseicantfly.blogspot.com/2009/09/economics-
what-is-kondratiev-cycle-who.html
** Kitchin Cycles: http://en.wikipedia.org/wiki/Kitchin_cycle
Nikolai Kondratiev's "Long Wave": The Mirror of the Global Economic Crisis"
The Global Economy is Facing a "Long Wave" Recession
by Alexander Aivazov and Andrey Kobyakov
http://www.globalresearch.ca/index.php?context=va&aid=11161
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