Pin the tail on the economic cycle

Where are we in the cycle, would you say? (Click on pic to enlarge.)

Back to Kondratieff

Some people are now revisiting Kondratieff''s theory of economic cycles. Seems to fit winter, at the moment. The above image is modified from this source: smart fellows.

Baby boom, baby bust

Percentages of the population above age 65 in selected countries

Clif Droke (SafeHaven, yesterday) summarises Edward Cheung's work, which relates the Kondratieff cycle to demographics. The most spoiled generation in history is entering its retirement phase and starting to draw on its accumulated wealth, so creating a growing undertow in the financial tide.

2012: Olduvai Theory, sunspots and energy planning

Wm. Robert Johnston's reconstruction of the last Ice Age (at 16,000 BC)

A fascinating article by Brian Bloom in The Market Oracle on 6 August. He ties together a number of threads:

• Regular periodic stockmarket cycles
• Richard Duncan's Olduvai Theory (we've passed the peak of the per capita energy use that built our civilisation)
• The possible role of sunspots in cycles of climate change (allegedly we're heading for a deep global freeze in 50 years' time)
• The sun's movement in relation to the Milky Way, tentatively linked to a 100,000-year glaciation cycle

... and relates them to economic and political issues to suggest that we need to take urgent action to reduce debt and become more energy-efficient.

In case you are tempted to dismiss frontier thinking of this kind, it's worth remembering that many highly successful investors are intrigued by long-wave patterns. For example, Marc Faber is interested in the Kondratieff cycle, among others:

...business cycles do exist. Some economists claim that they occur, according to Juglar, every eight to twelve years. But according to Kondratieff and Schumpeter, you have these long waves that occur. You have a rising wave of about 15 to 25 years, then there is a plateau and downward again for 15 to 25 years. And then you have a drop and the entire cycle starts again. You have all kinds of cycle theory. I am not so sure you can measure the timing of the peak and the bottom, but definitely cycles do exist.

(Interview with Jim Puplava on Financial Sense, February 22, 2003)

The Kondratieff Cycle

Some investment analysts are "chartists" - they try to predict the future short-term movement of the markets, using patterns they think they've seen in the past. There are longer-term patterns too: we commonly talk of a "business cycle" of say 8 or 10 years.

Could there be really long cycles? Nicolai Kondratieff (or Kondratiev) (see Wikipedia article) thought so. His wave takes around 50 years and predicts decades of booms and depressions. His theory still excites professional investors today - see this article about Marc Faber, and Shane Oliver at AMP.

Of course, the question is how exactly to fit the pattern to our present situation. There is a nice graphic presentation here, showing past data and extrapolating to 2010. But look at other sites, too, like this one from 1998 - here the analysis suggests we have already hit the bottom.

Maybe the answer is that such patterns do exist, but the turning points are impossible to predict, so chartists stretch the waves. For example, you'll see in the second chart above (about technology, related to Kondratieff), that the first 3 cycles are set at 50 years, and the fourth at 40.

Sometimes an unexpected dramatic event starts the change, e.g the murder of Archduke Franz Ferdinand in 1914. And British history would have been very different if Guy Fawkes' 1605 plot to blow up King and Parliament hadn't been leaked. So you can't get the timing perfect.

But you can prepare. The two books recently reviewed on this blog explain why we should worry about the state of the US economy (and the UK has similar problems, maybe on a different scale). You don't need to know when the fire will start, as long as you've planned how to leave the building in an emergency.