Kondratieff in a Nutshell

Kondratieff in a Nutshell

"As a nation of baby boomers nears 60, an army of financial planners from Sacramento to Scituate have mobilized to guide their clients out of equities and into bonds in an effort to offer them income and stability; and why not? History is on their side. Income-oriented investors have enjoyed a secular bull market in bonds over the last 25 years. Over that time period, the 10 year Treasury rate dropped from 14.0 percent to 4.4 percent. Inflation in 1981 was over 12%. Now after flirting with deflation 5 years ago, it is comfortably situated below 3%. Clearly, the last 25 years have been favorable for bond investors. All told, a portfolio of long-term bonds returned to investors a compounded annualized return of 11.8% over that period; clearly a competitive alternative to equity investing at the time."

"What's the likelihood that the next 25 years will match the last 25? The answer's easy: zero. Investment return has just as much to do with the entry point as it does with the exit point."--Jack Ablin, CIO, Harris Private Bank, Harris Outlook, May/June 2006.

Think about 1981 to recently: inflation rates down, interest rates down, oil prices down, gold down, GDP growth rates down, wage growth rates down. Remember the deflationary crash of 1981-82 and the slow melt down and terminal crashes from 1996 to 1999 and 2000-2003?

Then look at what's happened: oil prices and gold bottomed in 1999 and there was inelastic supply to meet marginally increasing demand. Other commodities or crude goods also began making 2-3 decade bottoms. The long bond rate bottomed in 2003. GDP growth rates in the US and elsewhere began returning to rates not seen since the 1960's and 70's. Despite debates on how inflation is measured, everyone agrees it has risen.

This is the same 25-30 year half cycle which Kondratieff first described in the 1920's. Read his short and simple paper in English translation. http://www.geocities.com/deuxsous/KLW.html It is a 50-60 year cycle of business, interest rates and prices. There is no pessimistic "summer-fall-winter-spring" crash and burn message from Oswald Spengler or his modern "perma-bore" (L-V Gave) followers.

Kondratieff is a simple cycle of supply and demand whose top completed in the 1970's in final oversupply at the end of several decades of price and interest rate increases. Then came several decades of the opposite, when supply and prices and rates were run down, and now that is done too, and we're going up once more.