The economic and inflation "rest period" I have anticipated, and in which we have been for a year or more, needs a better explantion or description. We have good data for the Economic Long Wave going back to the early 19th century, and sketchier but improving data quite a bit further back. I say improving because new documents are still being found and/or understood better in many parts of Europe and the Middle East and are providing better economic history back to ancient times.
The last complete Long Wave Cycle is the one best known to us moderns. Even if we didn't live through it all, we have certainly heard about it from family or read about some aspects of the cycle from the 1949 low up to the 1974 high and down again to the low of 1999-2002. I have drawn it on the charts as a straight line up and down, but if you look at the actual annualized percentage change year-over-year in GDP, PPI, and Implicit Price Deflator (inflation index), you see that it starts with an initial rise off the 1949 low for 6-7 years. Then there is an interval of as much as ten years during which prices do not continue to increase but continue tp stay at the new higher levels. And finally there is a rush of hyperinflation into the final top.
There is evidence for this pattern in the 19th century as well. Some have talked about these three divisions of the rise as Kuznets cycles or Kitchin cycles, but for my purposes they can simply be called phases of the Kondratieff Wave. Also the same process occurs during the disinflation half of the Long Wave Cycle. There was a three phase down segment from 1974 to 1986, a three phase middle period from 1987 to 1999, and a final deflationary fall into the lows. During both the 1949-1974 inflationary period and the 1974 to 2002 disinflationary period there were counter moves. Most people are naturally more comfortable projecting what has happened recently, and with which they are familiar, into the future. But that's not how human institutions, like economies, work. They work well in one way for a while, then get overdone and reverse course.
My best estimate is that last year's commodity price peak and this year's re-test are like 1956-1957, and that the rate of inflation will not accelerate greatly for 5-10 years. It will be a bit up or a bit down but not raging as it has seemed to be in the past few years and certainly as compared to the later 1990's and 2000-2002.
The chart of Aaa rated corporate bonds shows that interest rate turns tend to lag commodity turns by a few years, although they move long term in the same direction as commidities, as Kondratieff showed in his bh groundbreaking work. The top of bond yields was 1981 and the bottom 2003.
Obviously this whole approach is not science but more like epidemiology or historical analysis. Most economists are not comfortable with this type of analysis since most believe that modern Central Banks and Governments, by their credit and fiscal operations, control or direct the economies, and/or that economies are only predictable, if at all, for very short periods of time. Nor do they believe in cycles as a rule. But as I have shown in other posts of this Long Wave series, there are definite cycles in the supply and demand of crude goods (commodities) and of interest rates. It is clear to me that much of the rest of macro-economics flows from this phase shift between over supply and "over" demand every few decades.
Whatever your own views, I believe we will see greater stability in prices and interest rates for a period of some years. I could be early on this or maybe it peaked last year. This will only be obvious in retrospect, but already we have seen a slowdown in the annualized rate of commodity price change in the past year.
If I am correct, this will next be a period when bonds still make sense. Commodity producers will still make money, but prices will have stabilized. Stocks will do well as they did from 1958 to 1966/69 because both commodity prices and interest rates will be manageable and relatively stable, even though they are higher than they were in parts of the 1980's and 90's. Consumer and producer demand will continue to be growing, but more steadily, for the same reasons. It will seem a lot like the "Goldilocks" economy of the 1990's until demand puts too much pressure on supply again toward the end of the "time out" or "rest period" I foresee.
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