Chart of the Month – August 2020

Baby Boomers Make Way for Millenials

A Kondratieff Wave (K-Wave) is a long-term economic cycle, indicated by periods of evolution and self-correction, brought about by technological innovation that results in a long period of prosperity.1 Many chartists have tried to apply the Kondratieff Wave to stock market cycles and over the last four Kondratieff waves this has been reasonably successful. The waves were anywhere from 45 to 60 years in duration and many scholars simply used fifty years as the average.

Nikolai Kondratieff was a Russian economist who posited that western capitalist economies were defined by long periods of boom (growth) followed by devastating busts.  Kondratieff published a paper in 1924, in which he drew the following conclusions:

      1. Prosperous years were most common in capitalist economies during the upswing periods.
      2. Agriculture suffered longer and more frequent than the industry during price downswings
      3. Major technological innovations were conceived in downswing periods but were developed in upswing periods
      4. Gold supply increased, and new markets were opened at the beginning of an upswing
      5. The most extensive and devastating wars occurred during periods of an upswing2

 

Kondratieff studied many metrics to arrive at his conclusions and because he was predominantly known as an agricultural economist, most people attribute his findings to agricultural cycles, but these cycles may well have been the result of the dominant generation of the day. This would explain the extension of the wave from 50-60 years before 1950, to 60-70 years today as the average lifespan of the generation has increased.

Each K-Wave is made up of four segments that Kondratieff named seasons. These seasons have economic characteristics that can be linked to behavioral characteristics as indicated by the comments in brackets:

  • Spring: Represented by new growth, new companies, new factors of production and new ideas (new generational growth of young ambitious entrepreneurs)
  • Summer: Represented by an extended period of growth during which institutions become inefficient and set in their ways (the dominant generation is getting fat and happy)
  • Autumn: The inefficiencies that started in the Summer lead to productivity losses and higher inflation which usually end in speculative bubbles (the dominant generation becomes greedy and looks for quick fixes and quick gains)
  • Winter: Excess capacity worked off by massive debt repudiation, commodity deflation & economic depression. A ‘trough’ war breaks psychology of doom (this is the end of the power cycle for that generation and they yield to the new dominant generation)

Where are we in this cycle?  It can never be pinpointed exactly.  One could argue that in the last 10 – 20 years there have been multiple attempts to enter the winter phase of the cycle, beginning with the bursting of the tech bubble, followed by the popping of the U.S. real estate bubble.  However, in each instance, a full winter depression was avoided due to the intervention of governments and central banks.

So, did we simply have a mild winter and are already moving to spring? As the millennials grow up, we are seeing a new entrepreneurial generation take hold? Disruptive technologies abound, and Artificial Intelligence is beginning to open bold new frontiers.  These are clear characteristics of Spring.

This leaves two final questions, can we progress to Spring without the pain of a long Winter, and if so, has the cycle been broken?

1 Investopedia
2 Developing Attitude Towards Learning. R.F Mager 1984 page 27

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