Yelnick has received some questions regarding whether the Kondretioff Wave conditions have been satisfied, which would be another supporting condition for a new bull market, or whether a major deflationary debacle awaits. Like all cycles, the K Wave is more descriptive than prescriptive (Elliott Waves are more prescriptive than cycles), but provides enormous insight into our current economic condition.
The K wave was identified in the '20s by Kondretioff, a Russian economist who studied capitalist systems. When asked by Stalin in the '30s if the Great Depression was the collapse of capitalism predicted by Marx, he said no; based on his work, the West would rise again. For his insight, he was sent to the Gulag. Unfortunately for him, he never returned. Fortunately for us, his work filtered out.
The K wave is a 54 year cycle (+/- a year or so) with internal phases that are sometimes characterized as seasons: spring, summer, etc. Spring phase: a new factor of production, good economic times, rising inflation. Summer: hubristic 'peak' war followed by societal doubts and double digit inflation. Fall: the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble. Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression. A 'trough' war breaks psychology of doom. New factor of production emerges, happy days are here again, cycle begins anew.
K-wave I: 1789 - 1842. New factor: canals. 20 good years. 1812, peak war. US invades Canada, gets slapped back. White House burns. 1815-1824, inflation, turmoil, weak Prez (John Quincy Adams), end of Federalist rule. 1828, Andy Jackson elected, false plateau of prosperity. 1837, Bank of US cancelled, severe depression, deflation. Ends with trough war, Remember the Alamo! we win Texas from Mexico.
K-wave II: 1843-1896. New factor: RRs. 1861, peak war. 1865-1873, reconstruction, inflation, Prez impeached. Turmoil. 1873, RR fiasco, financial panic. First bought of deflation as Civil War inflation ended. False plateau of growth. 1879, return to gold standard. Second RR bubble bursts. Deflation continues. Ends with trough war, Remember the Maine! we conquer Spain's remaining colonies.
K-wave III: 1897-1949. New factor: oil/autos. 20 good years. US becomes world economic leader. 1914, peak war to end all peak wars. 1919-1925, inflation, turmoil, scandal (teapot dome). Coolidge becomes Prez. False plateau. Roaring 20s. 1929, Crash. Depression. Severe deflation. Ends with trough war, Remember Pearl Harbor!, Pax Americana.
K-wave IV: 1950 - 2004 (?). New factor: aerospace. 20 great years. American Century. 1966, peak war: Vietnam! Rising inflation. Wage and price controls. Oil crisis. Nixon resigns. Vietnam war is lost, American innocence gone, stagflation, Prez Carter blaming malaise not on government but on the people. 1980, Reagan elected. Morning in America. Volcker kills inflation. False plateau! Greed is good. 1990s, deflation in Japan, dot-coms in US, Greatest Asset Mania of All Time, bubble bursts, now in longest bear market since 1930s. On schedule, trough war, Remember 9/11! we go into nation building.
Most of the primary K-Wave predictions have been satified. We have had the K-Wave false plateau followed by a speculative bubble. We have had deflation in commodities for a while, and some currency deflation (eg. Japan). We have had enormous rolling debt repudiations: Mexico, Asian Flu, Long Term Capital Management, Telecom bubble companies. We have started our trough war (War on Terror). NYFD is heroic again!
Is the cycle turning? In timing the K-Wave would nominally end now, in the period of 2003-2005. But two caveats. First, in previous cycles we had much more severe economic disruption - the downturns in 1840s, 1880s and of course 1930s were considered depressions. Second, the new factor that leads us out of economic hardship should be emerging. It might be broadband/wireless - the always-connected world - but that was the subject of much of the bubble! So while the new factor is apparent, the K-Wave Spring recovery is not yet emergent. Both caveats suggest more trouble ahead, and more likely bottoming in 2004 or later than now.
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Posted by: ctrdl | Tuesday, September 25, 2007 at 08:59 PM