subject: What Can We Learn From The Kondratieff Long Wave Theory [print this page] Nickolai Kondratieff was an economist who lived from 1892 - 1938. He was a brilliant economist who was able to study and write about economic cycles in the stock market. What can we learn from the Kondratieff (K-wave) long wave cycle theory. The Kondratieff wave cycle states that economics tend to move in fifty to sixty year durations. It has been stated that history repeats itself. This theory truly works on that premise.
This theory is based on four distinct phases of economics. These phases are inflationary growth, stagflation, deflationary growth and depression.
The phase of inflationary growth is sort of the beginning of the economic cycle. The economy begins its expansion with slow rising prices, minimal and stable interest rates. Because of the conditions which exist, stock prices begin to rise. After the inflationary growth cycle, the stagflation (recession) cycle begins. This cycle has rising prices, increasing interest rates, inflation and increasing debt. Investors who missed the boat at the beginning of the inflationary growth pattern will tend to jump in to the market during this phase.
The economy cannot sustain itself at this pace of growth and eventually achieves the plateau known as the deflationary growth cycle. This cycle contains sharply rising stock prices, a small amount of economic growth, and sharply rising debt. This could be considered the sucker phase for investors. The sharply rising stock prices will drag in those who have been patiently waiting on the sidelines. These investors are the type who buy high and sell low. They are always a day late and a dollar short.
The final economic stage is depression. This cycle has falling prices, increasing commodity prices, rapidly falling profits, falling stock prices and stable interest rates. The savvy investor is smart enough to see this cycle coming and will either short the market or purchase commodities. These investors are the ones who are able to make money in whatever cycle the market is in.
During the 2008 - 2010 period, the government tried to soften the economic blow as economic cycle moved into the depression phase. They pumped massive amounts of money into the economy and increased the national debt to the point that it will now exceed 62 percent of the Gross National Product in 2010. The nation simply cannot sustain this much debt. Something is going to need to change. Many economists are concerned about this very issue.
It would have been interesting to have been able to watch the economy if nothing had been done, and the economic nature of things been allowed to run its course. There would have been more pain and politically, it would not have been good. However, would we now be in a better position as the economy moves out of this cycle and begins the inflationary growth cycle? Has government only served to delay the inevitible?
What we can learn from the Kondratieff wave cycle theory is that sometimes it is best to let things run the course. I learned from my macro economic classes that government does have a factor in the economy. Sometimes however, it might be better if they chose a lighter touch with their policies. They are kind of like a child who gets into a mess and then makes decisions that make it worse. The child is only trying to avoid the punishment but ends up making things worse than if he had only bucked up and admitted the mess he was in. A perfect example of this happened years ago to my nephew. He went up to visit his grandma who lived close by. After many hours together, she stated that perhaps it was time he go home. He said "Grandma, it's dangerous down there". He was in trouble and had run.
As stated earlier, the savvy investor watches the signs of the economy similar to how a farmer watches the seasons. He or she knows when it is time to change their investment strategy. Perhaps you too can become a savvy investor.
