Within both of the 20-30 year phases of the Kondratieff Wave (disinflationary and inflationary phases), there are contra-trend sub-phases. As I have discussed several times over the past year, I believe we are now in a contra-trend correction in a long term inflationary period which began between 1999-2003 and which will last until the 2020's.
It's useful to look at the last time this happened. With the chart of the Implicit Price Deflator, the standard of total US inflation as measured by chain-weigted real GDP, one can see in the smoothed rate of change that inflation leaped up in the late 1940's and early 1950's, off the 1949 low, but then subsided again to a final low in the early 1960's. Then the amazing inflationary balloon began into the 1973-1974 top, on a rate of change basis, or 1980 on a nominal basis.
However, even in the early 1960's when the lull in the long term inflationary wave occurred, inflation remained higher than it had ever been during the deflationary wave in the 1930's. But I can remember my grandfather, who had lived well in the 1930's on his railroad bonds while putting three children through college and university, saying it was time to load up on bonds again. It wasn't, and he lost hugely not only from subsequent interest rate rises but also due to the collapse of the US railroads. Nevertheless there was a time from the mid 1950's to early 1960's when inflation subsided and bonds did modestly well on a trend basis. Stocks also did quite well as they always do when rates are declining somewhat and inflation is modest. While cycles never repeat exactly, I believe that's where the economies and markets are today.
In 1998 and 1999 the weekly news magazines all had cover stories on deflation, and Paul Krugman, then professor of economics at M.I T., wrote his infamous "The Return of Depression Economics". (Krugman is currently a political hack writer for the New York Times.) Gold and oil were on their lows as Krugman's book went to press in 1999, as were most commodities, and nearly everyone expected the beginning of another 1930's debacle.
Skip over to 2004 to 2007, and nearly everyone became a raging inflationist by 2006 as in the early 1950's. As in most things, most people are wrong at major turns and for a few years thereafter. Then they get wiped out again when the trend changes again just after they got comfortably onto the new bandwagon. That's human nature, and why it's ideal, although very, very hard to do, to attempt to become a contrarian. We are almost all of us, by nature, in almost all ways, like sheep following self-proclaimed shepherds and trend projections.
My impression is that Alan Greenspan saw this lull in inflation coming and that his bond "conundrum" musings of 2005-2006 were a heads-up, as had been the famous "irrational exuberance" remarks of the late 1990's. I think he was saying, if we heard, that we shouldn't get too wild for inflation and do something to monetary policy that would make the coming lull far worse.
That said, how long does this lull last? Frankly I can only guess, based on current conditions compared to the 1950's and 1900's. On a smoothed trend basis, inflation is running at 2.5-3% now compared to under 2% in the 1950's. Plus we know that the disinflationary period from the 1970's to late 1990's was far milder, on balance, than from 1929 to 1949. These facts are due to the incredible modern inflation machine known as the social democracy and currency debasement regime. The chart of PPI is ten years old, but it shows the inflationary departure which began in 1933 and that was confirmed by a breakout from the 200 year range in 1949-50. There is virtually no chance that the long term trend since the 1930's is going to change any time soon, as it is due to political sentiment which still growing world wide.
For the current question it's sufficient to note the 250 year PPI as the reason why the current lull will not get too severe or last too long. My guess is that inflation will not get below 2% and the lull will not be more than two to three years in the absence of a major economy crashing for reasons other than "normal" economics: massive corruption or financial collapse, revolution, or a catastrophic natural or man-made disaster. The two hundred years from 1750 t0 1950 were filled with all of those classes of events, but producer prices traded in a range. Nor is it easy to say exactly when the lull began. We sense we are in one now, but did it only start last July or what that just the last inflationary binge of the first leg up? Again, my guess is that it could last another year or two but with volatility that will keep us confused. We already see that the markets have "inflation days" now when commodities, interest rates and forex go up, and then "deflation days" when they all go down. This past week was a classic in that regard, containing both kinds of days. I expect that will continue.
But by and large, a lull in inflation and a lull for increases in rates is bullish for stocks over the longer term as it was in the 1950's and 1960's. Even when inflation is increasing it does not kill the stock markets if it does so gradually, until it gets "too hot", as it didn't really do until 1966-69.
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