Welcome to Finance and Fury, the Furious Friday Edition

Today is a follow on from Last FF ep – on K waves – if haven’t listened – worthwhile to go check

Today – is the cycle relevant today with central banks – and go through the most recent cycle – meant to start in 1949 and end this year

First – Summary from last week – K-wave – summarises the long term cycles of economies in capitalist countries – Each cycle has it sub-cycles – which are dubbed as seasons as broken down into four sub-cycles – Each K wave is a 60 year cycle (+/- a few years here or there) – then the internal phases that are characterized as seasons: spring, summer, autumn, and winter:

  • Spring: Increase in productivity, along with inflation, signifying an economic boom
  • Summer: Increase in the general affluence level leads to changing attitudes toward work that results in a deceleration of economic growth
  • Autumn: Stagnating economic conditions give rise to a deflationary growth spiral that gives rise to isolationist policies, further curtailing growth prospects
  • Winter: Economy in the throes of a debilitating depression that tears the social fabric of society, as the gulf between the dwindling number of “haves” and the expanding number of “have-nots” increases dramatically

Key indicators

– In a K Wave theory – the two most common indicators are inflation, interest rates and asset prices – back in Nicolai’s time – these moved freely – but not anymore

  1. Inflation – it is targeted by central banks and the measurements are skewed
    1. Data being skewed – not the cost of living but the basket of goods selected
      1. What makes up the good? I break it down into two – Essentials and discretionary
      2. Look at the prices of the two – One has been going up massively whilst the other is declining – goes which?
      3. Essential – food, health care, petrol, housing, education – all up massively – over CPI increase
      4. Discretionary – TVs, clothes, computers – stuff you buy off Amazon – going down massively
    2. Targets – money is introduced into the economy to create inflation – but lowering interest rates –
  2. Interest rates – it is controlled not on supply and demand factors – but on the determination of monetary authorities
  3. Asset prices – Shares, property and commodities – depending on the stage go through corrections, gains or stagnation

Let’s look at each of these through the cycles – see if they line up 

  1. Spring – 1950-1966 – longest period in cycle – around 25 years
    1. Inflation – starts to rise – due to consumption starting to increase
      1. Australia saw a spike in inflation in 1950 – went to almost 25% – but then dropped heavily to almost 0%- inflation used to be more volatile before being targeted – but by 1966 was back to about 5%
    2. Interest rates – normally fairly flat initially – towards end of cycle start to increase
      1. Interest rates were 5% then went to 5.5% but averaged around 5% for the whole time –
      2. This is a large factor which contributed to inflation back then – but the spike was likely due to price increases due to limited supply coming out of WW2
    3. Shares – Start to rise as well in the spring time – and they slowly did –
      1. Average annual ASX return of 12.52%
      2. Had 4 negative years – nothing major – 3%, two 7% and one 12%
    4. Property – also is meant to increase – it did – 50s to 66 saw mild increases at average of wage earnings
  2. Summer – 1967-1981 – around 5 to 10 years
    1. Inflation – quickly rising inflation – towards the end meant to see double digit levels if inflation
      1. From 67 rose from about 5% to 15% by 1976 – and stayed around the 10% margin until early 1980s
    2. Interest rates – are rising to combat inflation – normally soaring
      1. Credit growth builds heavily – whilst interest rates increase – inflation also goes up – so real debt levels isn’t so bad
      2. Rates went from 5.38% in 2967 to 7.25% in 1970 – then to 10% by 1974 – then to 13% by 1981
    3. Shares- The share markets normally go through a bit of a correction as well or just make no progress and stagnate
      1. Average annual ASX return of 17%
      2. Had the corrections mid and end of cycle – 73 and 74 lost 23% and 27% respectively
      3. Then in 1981 and 1982 at end of cycle lost 13% and 14% back to back –
    4. Property – From 67 to 75 saw some decent increases – prices went from $160k to $220k – 37% gain in about 8 years – but then stagnated and went down slightly until 80s
  1. Autumn – 1982 -2000 – around 7 to 10 years – this is the period when things start getting a little out of sync
    1. Inflation – starts to drop – which it did – trended down from 1981 till the RBA and other central banks set inflation targeting in early 90s –
      1. Went from about 8% to close to zero with the implementation of inflation rate targeting in 1993
      2. Inflation did spike towards 2000 – but only to about 5% –
    2. Interest rates – falling heavily – which they did
      1. Creates a credit boom which creates a false plateau of prosperity that ends in a speculative bubble
      2. Rates kept rising though – 1982 were 13.5% and went up to 17% by 1990 –
      3. But dropped after this – from 1990 to 1992 – went from 17% to 10% – then down to 7% in 2000
    3. Shares – market prices rise heavily to a peak and crash
      1. Average annual ASX return of 16%
      2. Rose in 1983, 85, 86 by 67%, 44% and 52% respectively
    4. Property – meant to increase as well and started massively in the mid 90s – went down between 1980 and 1987
    5. Bonds – also rise a lot – which they did slightly – but not much
  1. Winter – 2000 – 2015 or 2020 depending on measurements – meant to be 3-year collapse and 15 year reset
    1. Inflation – Prices start to fall – actually went up – from 2000 to 2005 went from 2.5% to 5% – so not the expected result
      1. But since then inflation is down – despite monetary policies best efforts
    2. Interest rates – normally are meant to slowly increase – however – 2000s then has been trending down – and no massive signs of increasing
      1. Cash is the best investment normally in winter – but the interest rates dropping has created a situation where it really isn’t a good option – guarantees a real negative return over the medium term
    3. Shares – see a banking crisis – saw that in 2008 –
      1. Average annual ASX return has been about 8.91% since 2000 – Has been in winter – but have had a limited ability to rebound through fundamentals
    4. Property prices are meant to fall off or stagnate – what did we see – from 2000 the mother of all property booms –
      1. Nothing to do with the cycle – but credit growth – borrowings and interest rates falling
    5. Best investments are cash and gold – as shares and bonds (or debt) are in free fall for the first few years – but then go nowhere for a while
      1. But over the past few years – International shares were one of the best investments – however gold and precious metals has been going well
    6. The breakthrough for this phase comes from confidence – it comes from the overall market sentiment


So is this wave still true?

Yes – I believe so – but with different time spans –

I personally think that waves still exist – but they have been subverted by intervention of monetary policy –

The issues

  1. But interest rates don’t move freely anymore – inflation doesn’t move freely anymore –
  2. Debt levels also no longer have a market response – people respond in market manners to them (borrowing more when rates are low)
  3. K wave was on point up until the winter cycle – remember – Central banks – RBA started controlling interest rates in an effect to get inflation in mid 90s – after which property and share boomed


Implications for 2020 and Beyond

  1. Based on Professor Thompson’s analysis, long K cycles have nearly a thousand years of supporting evidence. If we accept the fact that most winters in K cycles last 20 years this would indicate that we should be coming out of the Kondratieff winter that commenced in the year 2000 soon – but does it feel like it? First – look at the approximations of this theory –
    1. Based around the analysis and probability – we should be moving from a “recession” to a “depression” phase in the cycle about the year 2013 and it should last until approximately 2017-2020 – but there has been no economic recession or depression on the GDP measure – as it has been silent – GDP can be manipulated by changing currency (for exports) or government spending – or even adjusting potential GDP – look at a graph – used to have big swings of up 6% down to -1% – but average much larger – then since 2000s – hasn’t moved above 2% in real terms – if anything trending towards 0%
      1. Looking around in the economy – may seem like it there is a recession talking to the average business owner – but looking at the share market and bond price performance – not so much
      2. Why? What K missed and what Thompson negated was the immense power over markets that the Fed and Central banks would play – but it is only masking the issue with high asset prices doesn’t mean a booming economy – why in the winter period – when shares and property are meant to stagnate – the real growth has still been increasing
      3. Characteristics of Winter –
        • Share and debt markets collapsing – Only shares dropped in 2008/09 – while bonds had good year – but since they have both been going up
        • Massive debt defaults – haven’t materialised due to record low-interest rates for prolonged periods of time
          • If rates go up – may see these two materialise
    2. But like all cycles, K wave analysis is more “descriptive than prescriptive” – it does help to provide insight into our current economic condition – that what rise must fall – the longer the delay is manipulated through low cost of money and printing to put money into assets occurs – the worse the winter can be
      1. Over the winter cycle – the FED and the ECB, instead of prolonging the agony through trillion of credit expansion, should have let winter happen = liberate the “international market” and let it intelligently and efficiently do what it has done 18 times before – not a smooth ride, but even with central banking intervention – not smooth either
      2. World bankers if they understood how cycles work instead of trying to control them – may comprehend and deal with the crisis – but letting it happen – instead they panicked and mis-diagnosed it as a credit/monetary problem – turning it into a credit/monetary problem since the 1980s
      3. But the monetary and government policies of increasing legislation to reduce free-market abilities and technological innovation have prolonged the winter


What if we were never allowed to go into winter?

  1. The crash of 2008 wasn’t as bad as it needed to be – the fire of the market didn’t clean out the failing companies (banks) but made them stronger
    1. The share market collapsed in value by a lot – but the problems were masked through bailouts
  2. But markets so have the ability to recover – they just need to be let to do their thing – but not under the guise of regulations or monetary policy – but peoples innovation and ingenuity
  3. But the Major point – K Wave theories are only prevalent in Capitalist economies – would go further and say a free market – Where the market has adjustments based around incentives – But since 1990s – we don’t like in a free market economy when inflation is set (Goodhart’s law) and the interest rates are controlled – Puts a kink in the theory

Thanks for listening!

Australian Interest rates – https://www.loansense.com.au/historical-rates.html

ASX Returns –  https://topforeignstocks.com/2017/06/14/the-historical-average-annual-returns-of-australian-stock-market-since-1900/

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/


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