Kondratiev is alive and well. Not literally, of course. Nikolai Kondratiev (sometimes written Kondratieff) died in 1938 in the Russian gulag. So who was he and why would he even be thought about today?
Kondratiev was a Russian agriculture economist who, while working on a five-year plan for the development of Soviet agriculture, published his first book, The Major Economic Cycles, in 1925. Over the following years he carried out more research during visits to Britain, Germany, Canada and the United States.
In his book and in a series of other publications he outlined what later became known as "Kondratiev Waves".These were observations of a series of supercycles, long surges, K-Waves or long economic cycles of alternating booms and depressions or of periods of strong growth offset by periods of slow growth in capitalist societies. These waves or cycles were at the time calculated to last from 50 to 60 years, or roughly a human lifetime in those days.
This was not the first time existence of long cycles had been noted. Two Dutch economists, Jacob Von Gelderen and Samuel de Wolff, had previously argued the existence of 50 to 60 year cycles in a publication in 1913. A 50-60 year cycle of catastrophe and renewal was also observed and recorded by the Mayans of Central America and by ancient Israelites. Other studies have indicated there was a similar cycle of long economic waves in the time of ancient Greece and Rome. Today, with man living longer, the Kondratiev long wave may be stretching to 70 years or more.
Kondratiev applied his theories to capitalist societies, most notably to the US from the time of the American Revolution. His undoing came in 1928 when he published his Study of Business Activity in the Soviet Union that came to much the same cycle conclusions for the Soviet economy that he had noted for capitalist societies. He fell out of favour with Josef Stalin, who saw his treatise as criticism. Kondratiev was arrested and following a series of trials he was banished to the gulag, where he died.
Kondratiev's theories, however, lived on. Initially he identified three phases of the long economic cycle: expansion, stagnation, recession. This was eventually expanded to four: inflationary growth (expansion), inflationary recession (stagflation), deflationary growth (plateau), and deflationary recession (depression).
Kondratiev waves were first given the name by Josef Schumpeter in his book Business Cycles, published in 1939. A French economist, Francois Simiand, later proposed naming the ascendant period of the cycle "phase A" and the descendent period "phase B". Later still, others divided the Kondratiev wave into the seasons: spring (inflationary growth), summer (inflationary recession), fall (deflationary growth) and the winter (deflationary recession/depression).
While Kondratiev wave theory was originated by an economist, it is not recognized by many mainstream economists who are more proponents of the business cycle or economic cycle. The business cycle itself refers to a cycle of expansion or boom followed by a period of contraction, stagnation or recession. They believe that the business cycle does not follow a predictable pattern.
Today, one of the major proponents of and experts in Kondratiev wave theory is Ian Gordon of the Longwave Group (www.longwavegroup.com) .
Below is a table summarizing the four Kondratiev phases and their characteristics:
|Kondratiev Phase||Best Investments||Worst Investments||Characteristics|
|Spring (Expansion) |
|Stocks, Real Estate and Commodities slowly rising||Bonds (interest rates remain low and stable)||Low inflation, healthy banking system, growing savings, growing corporate profits, Technological innovation|
|Summer (Stagflation) |
|Commodities, Gold and Real Estate||Stocks and Bonds (rising interest rates)||Inflation, debt growing (corporate), stagnate growth and profits, emotional war|
|Autumn (Plateau) |
|Stocks, Bonds (falling interest rates) and Real Estate||Commodities and Gold||Debt levels soar (consumer), wealth disparity, stock market euphoria, low inflation|
|Winter (Depression) |
|Gold, Cash and Commodities in late cycle||Stocks, Real Estate, Bonds (interest rates fall but rise with credit crunch)||Deflation, debt collapse, trade conflicts, social upheaval, economic war|
The second table summarizes the generally accepted phases of the Kondratiev long wave cycle since 1784 in the US. The emotional war of summer and the economic war of winter are noted. The Kondratiev autumn has often been given a tag name. It is usually characterized by massive debt growth and speculative bubbles. It is interesting to note that the debt growth and speculative bubbles continued into the start of the current Kondratiev winter.
|SPRING (EXPANSION)||SUMMER (RECESSION)||AUTUMN (PLATEAU)||WINTER (DEPRESSION)|
|1784-1802 (American Revolution 1775-83)||1802-1816 (War of 1812)||1816-1834 (Era of Good Feelings)||1834-1844 (Mexican American War 1846-48)|
|1844-1858 (Mexican American War 1846-48)||1858-1864 (Civil War 1860-65)||1864-1874 (Reconstruction)||1874-1896 (Spanish American War 1898)|
|1896-1907 (Spanish American War 1898)||1908-1920 (WW1 1914-18)||1920-1929 (Roaring 20's)||1929-1949 (WW2 1939-45)|
|1949-1966 (Korean War 1950-53)||1966-1981 (Vietnam War 1962-73)||1982-2000 (The Information Age)||2000 - ? (War on Terror? WW3? 2001-?)|
It is not my intention here to go through all the various phases of the current Kondratiev cycle. Many believe that the markets entered the K-Wave winter with the stock market tops in January 2000 (Dow Jones Industrials) and March 2000 (S&P 500, NASDAQ). The TSX Composite made its high in September 2000.
The DJI, S&P 500 and the TSX Composite did make higher nominal highs in 2007 above those seen in 2000. However, in inflation-adjusted terms the highs for the DJI and the S&P 500 were lower. The NASDAQ was nowhere near its 2000 highs. The TSX Composite, driven by strong commodity bull markets in energy, gold and metals & mining, did see new inflation-adjusted highs.
The discussion here will focus solely on the main characteristics of the Kondratiev winter.
Their failure to make new inflation-adjusted highs in 2007 confirmed that the markets had entered a long-term bear market. The 2000-2002 high tech/internet crash wiped out all the gains made from April 1997 for the S&P 500. This was the first time since the onset of the great bull market of 1982-2000 that the stock markets not only took out the previous year's low, but the low for the year before that as well. The financial crash of 2007-2009 then took out the low of 2002, another confirmation that the stock markets had entered a long-term secular bear market.
Before embarking on a discussion of the Kondratiev winter's key characteristics, the chart below from the Longwave Group shows the four long economic waves in the US.
There are numerous characteristics of the K-Wave winter. What follows is an examination of a number of the key characteristics.
Best Investments - Gold and cash
|Market||Cumulative % Gain (Loss) all calculated |
from Dec 31, 1999 to Nov 30, 2011
(no consideration for dividends)
|Cash (1 month Cdn Treasury Bills)||2.3%|
|TSX Gold Index||250%|
|Dow Jones Industrials||4.8%|
Confidence is shattered
Since 2000 we have experienced a series of shocks that have changed the world and shattered confidence. On January 31, 2000 the consumer sentiment in the US as measured by the University of Michigan reached its zenith at 112. The most recent survey had the index at 64.1, up from a low of 54.9 in August 2011.
Confidence has been shattered by a series of events. They include panics, collapses, war and terror. Some of them are as follows:
High Tech/Internet Panic - 2000-02. The NASDAQ, where many of the high tech/internet stocks were listed, lost almost 75% from March 2000 to October 2002.
9/11 - September 11, 2001, and the attack on the World Trade Center and the Pentagon that launched the war on terror.
Afghanistan - war, 2001 to present.
Iraq - war, 2003 to present.
Housing collapse - 2006 to present. In the US, housing starts peaked at around 1.6 million in 2006. The most recent number was down 60% from that, at 628,000. The Case-Shiller Home Price Index peaked at 206.35 in April 2006. The most recent number was 139.49, down 32%.
Financial Panic of 2008 - The collapse triggered by the subprime crisis was highlighted by the bankruptcy of Lehman Brothers and the government-backed bailout of the US banking system known as TARP. The S&P 500 fell 58% from its peak in October 2007 to its nadir in March 2009. It was the biggest stock market collapse since the Great Depression.
Eurozone Sovereign Debt Crisis - 2010 to present. The Eurozone debt crisis is centered around five countries known as the PIIGS (Portugal, Italy, Ireland, Greece and Spain) all of which have high debt-to-GDP ratios and all of which have seen their debt downgraded and their interest rates rise. They lurch from one crisis to the next as they attempt to find a solution. A collapse could mean the end of the euro as a currency and a need to bail out both European and US banks.
Stock markets enter a bear market
The earlier chart showed that the DJI has barely broken even over the past decade while the S&P 500 and the NASDAQ are in negative territory. Periods of sharp market drops (2000-2002, 2007-2009) are, however, punctuated by powerful bear market rallies (2002-2007, 2009-present). The 2002-2007 bear market rally ended badly with the collapse of 2007-2009 that was more devastating than the 2000-02 collapse.
As noted earlier, the 2000-2002 crash wiped out almost five years of gains, the first time since the great bull market of 1982-2000 that the market took out the previous year's low. The 2007-2009 collapse took out the 2002 low, confirming that the market had entered a long term secular bear market.
Could another collapse be under way? The S&P 500 officially entered bear market territory in October 2011 as it was down 21% from its April 2011 highs. For the moment at least the lows of 2010 are intact, and if the market holds then the lows of 2011 would be a higher low. An official bear market would be once again underway if and when the 2010 low is taken out. If that does not happen in 2011 then the focus would shift to the 2011 market low.
Interest rates rise and fall BUT GENERALLY REMAIN LOW
US interest rates as measured by 30-year Treasury prices rose steadily (yields fell - prices move inverse to yields) from 2000 to 2003 during the high tech/internet panic. After peaking in June 2003 interest rates rose but were largely stable through to 2008. The financial panic of 2008 saw the Federal Reserve lower interest rates aggressively, sparking a sharp rally in US Treasuries.
Since then US long bond rates have shifted between rising and falling. Interest rates have fallen for most of 2011 in response to the Eurozone sovereign debt crisis. Thus far, December 2008 has been the nadir for US long Treasuries. The official Federal Reserve rate is zero to 0.25%.
Interest rates tend to fall during periods of economic weakness. They rise during periods of economic growth. During this cycle, interest rates have been forced lower by the monetary authorities in an attempt to stimulate the economy. Yet the Western economies remain weak, with sluggish or negative growth. The monetary authorities (the central banks) control short-term interest rates whereas the long rates are more market oriented. Long interest rates fall as the result of liquidity provided to the markets by the central bank. But if a credit crunch develops, as is currently being seen in Europe, long interest rates and can rise quickly.
Real Estate prices peak, then collapse
US housing starts and the Case Shiller Home Price Index were discussed under "Confidence is shattered" above.
Inflation falls; possible move to outright deflation
Since the end of 1999 the CPI in the US has gone up almost 36% or roughly 3.3% per year. During that period there have been a number of months when prices actually fell. The monetary authorities have always worried about deflation. That is why they moved aggressively to lower interest rates and employ quantitative easing (QE), in order to combat deflation. There has been an occasional month when the CPI declined, but to date there has been no sustained period of deflation. The current year-over-year CPI is up 3.8%, which is considerably higher than the monetary authorities would like. Ten-year US Treasury notes yield about 2.0%.
Debt deleveraging is by its very nature deflationary. But QE is inflationary. John Williams at Shadow Government Stats (www.shadowstats.com) has suggested that inflation is considerably higher than reported. Using the methods in place in 1980, SGS calculates that the real rate of inflation over the past year is 11.1%. Since 1999, prices have gone up 192%. The SGS numbers are not seasonally adjusted. It is a stark difference from the officially reported CPI.
No matter, at this time there is little sign that the US is moving into outright deflation. On the other hand, Japan has experienced low inflation and often negative inflation since 1990. With QE the real risk becomes inflation as the financial system is flooded with more and more money. Inflation happens when it takes more and more money to buy the same good. In an extreme the market can move into a period of hyperinflation. There is little sign of that yet, but there are those who believe that instead of a deflationary depression the Western economies would enter an inflationary or hyperinflationary depression. An extreme example of a hyperinflationary depression was the German hyperinflation 1920-1923.
Trade conflicts grow
One of the events that helped tip the US into the Great Depression was the passing of the Smoot Hawley Tariff Act of 1930. The Act raised import tariffs on thousands of items and set in motion a vicious trade war. Instead of having the intended effect of protecting US jobs at the time, it had the opposite effect as global trade dried up. Unemployment rose sharply instead of falling.
Today there is no sign of any similar legislation on the horizon, despite the sniping by the US against China which has thus far not provoked any severe retaliation by the Chinese. The Chinese have, however, cut back on their buying of US Treasuries. Up until now the US has run a huge trade deficit, buying their goods from China and paying in dollars with which the Chinese have been buying US Treasuries.
There are trade tensions in the world today. The European Union was built around one economy - Germany. Germany is the world's second largest exporter and has according to the numbers from The Economist the world's second largest current account balance. With the odd exception the countries around Germany run negative balance of trade. Germany exports half of its exports to those countries. In this respect the European free trade zone is a one way street. The result has been stagnant industries in the peripheral countries around Germany development of black markets and protection of some industries along with a contracting tax base.
China operates in a protected trade environment. This is the source of the sniping that comes from in particular the US to try and force the Chinese to open their economy further. So far the Chinese have refused as their version of a protected economy has been positive for the Chinese economy. Recall as well after WW2 both Germany and Japan brought their economies back from the brink behind a protected economy. Germany and Japan today are number two and three in terms of balance of trade. The US is the world's largest exporter.
These tensions have not as yet turned into a trade war. If trade wars were to break out, however, it could as in the past be quite harmful to the global economy.
The largest corporate bankruptcy since 2000 has been Lehman Brothers, which collapsed in 2008 with over $690 billion in assets. While there have been some high profile corporate bankruptcies over the past decade, the actual number of corporations declaring bankruptcy each year has not been particularly large compared to individual bankruptcy. In the US individual bankruptcies make up 96% of all bankruptcies. The most recent high profile corporate bankruptcy was the derivatives and futures dealer MF Global, with $41 billion in assets.
It was only in the late 1990s that the annual number of bankruptcies surpassed one million in the US. It peaked at almost 2.1 million in 2004. In 2006 it plunged to just over 600,000. Since then it has built up again and in 2010 almost 1.6 million bankruptcies were seen. Preliminary figures for 2011 suggest that once again the number of individual bankruptcies in the US will be well over one million.
The number one reason individuals go bankrupt in the US is because of medical issues. Some 45 million Americans are not covered by any health insurance and many more only have marginal health insurance coverage. Any serious accident or illness can push them towards bankruptcy.
Sovereign debt collapses
Sovereign debt defaults are not as unusual as one might expect. Since 1950 alone over 50 countries have defaulted, some more than once. Default has in many cases just meant debt rescheduling. In the 1980s there was a Latin American debt crisis. In 1998 Russia defaulted and almost brought the global banking system down, most famously with the collapse of Long Term Capital Management (LTCM). During the 1930s dozens of countries defaulted, including many European and Latin American countries. The US has not defaulted, although during the recent debt ceiling crisis it technically could have defaulted if an agreement had not been reached.
That several European countries are potentially on the verge of defaulting because of the Eurozone crisis is therefore not surprising. It doesn't take a Kondratiev winter to bring about sovereign debt defaults. But the period does seem to bring on more of them. From 1931 to 1933 some 18 countries defaulted at the height of the Great Depression. European defaults included Germany, Greece, Hungary, Romania and Turkey.
The euro currency is also considered by some to be on the verge of collapse (See "Is this really the end?" The Economist, November 26). As the Eurozone crisis deepens, the calls for the European Central Bank to act more forcefully get louder. The calls are for the ECB to act as a lender of last resort, as the Federal Reserve does. Many believe that the ECB must provide unlimited liquidity by cutting interest rates and embarking on QE. How far the Eurozone will go towards the brink is unknown at this time but brinkmanship appears to be the order of the day.
The massive intervention on November 30 by the Western world's major central banks (the US-Fed, the UK - BOE, Canada - BofC, Switzerland-SNB and Europe-ECB, plus Japan-BOJ) signalled the seriousness of the crisis. On top of that, China's central bank (PBOC) reduced reserve requirements - another sign according to many that matters have gone from bad to worse. Whether this puts the crisis on a temporary hold or has a longer lasting impact remains to be seen. Many believe it is postponing the problem to another day. But in today's fast-moving markets, another day could be the very next day.
Banking collapses, like sovereign debt collapse, are not new. Throughout history there have been bank collapses. In the 14th century a default by Great Britain brought down the Florentine banks that at the time were the largest and most powerful in Europe. The Great Depression saw the collapse of thousands of banks. The late 1980s and early 1990s saw the Savings & Loan crisis in the US, when hundreds of S&Ls collapsed due to a real estate collapse. It doesn't take a Kondratiev winter to bring on a banking crisis. But it is during the Kondratiev winter that a banking crisis reaches its zenith.
This time it has been no different. Following years of deregulation, increased leverage being employed (many of the institutions that collapsed or were bailed out in 2008 employed leverage of 30 to 1, a previously unheard-of amount), increased complexity of financial innovation and the use of derivatives, massive growth of a shadow banking system (investment banks, hedge funds and others), the incorrect pricing of risk (AIG), predatory lending (Countrywide), weak and fraudulent underwriting practices, easy credit conditions and the failure of the so-called "gatekeepers" (auditors, analysts, securities regulators, directors), the world was brought to the verge of a systemic banking collapse in 2008.
In order to prevent that, there was a massive bailout of the banking system, particularly of those considered "too big to fail" (even as thousands of smaller banks were allowed to go bankrupt). Three years later the world could again be close to a systemic banking collapse because of the Eurozone crisis. Sovereign defaults in Europe could translate into a European banking collapse that could spread to the US banking system because of the linkage of financial innovation in the form of derivatives, particularly credit default swaps (CDSs). Many of the conditions that caused the 2008 collapse remain in place today. The banks, particularly the US banks, have lobbied hard to prevent any re-regulation of the banking system.
Corporate and banking scandals
As with sovereign debt collapses and banking collapses, corporate and banking scandals are not new. History is replete with them. The 1980s saw insider scandals and the names of Ivan Boesky and Michael Milken became synonymous with corporate greed. The film Wall Street saw its protagonist Gordon Gecko declare that "greed is good". The early part of this past decade saw corporate leaders hauled off to jail in scandals including WorldCom, Enron and others.
The financial collapse of 2008 has thus far seen few taken to jail as was seen during the high tech/internet collapse of 2000-2002. The crimes of overstating profits and understating risk were, however, quite similar. The poster child for corporate greed during this crisis has been Bernie Madoff. As the current banking crisis unfolds there may be more who are forced to pay the price of what many consider to be corporate greed.
Political and social upheaval
As the Kondratiev winter has progressed, political and social upheaval has increased. In the US (and in Canada to a lesser extent) the political system has become polarized between left and right with name-calling, smear campaigns and dirty tricks raised to new levels. Europe has been at times ablaze with social unrest, protests, strikes and riots particularly in Greece but as well in Italy, Spain, the United Kingdom and others. In North America the Tea Party of the right and Occupy Wall Street of the left have brought protests. The Occupy Wall Street movement has resulted in conflicts with the authorities although to date in North America the clashes have been tame compared to those in Europe.
In some respects the Arab Spring movements in the Mid-East are also a part of growing social unrest. As the banking crisis intensifies and unemployment continues to rise, the expectation is that social unrest will become an increasing part of the political landscape with the potential for further clashes with the authorities.
As unemployment and poverty grows there is usually a search for scapegoats. This can lead to xenophobic politics, from movements of the far right in particular. The rise of Nazism in Germany in the 1930s was as a result of years of high unemployment, poverty and financial collapse following WW1. Europe in particular has seen a recent rise in xenophobic political parties that attack immigrants and other non-natives. Better integration of immigrants in Canada and the US has prevented most of the problems that have at times occurred in Europe. An exception has been the issue of laws being passed in some southern US states and the wall being built between the US and Mexico to deal with illegal Latin American immigrants.
There has been much comment over the past few years about the collapse of what was known as the political middle. This is a result of the movement towards a polarized society of left and right. As conditions during the Kondratiev winter become more chronic (unemployment, poverty, protests) there is a "blame game" that it is the other party's fault. This makes it difficult to come up with solutions and governments can become dysfunctional with little being accomplished. It also leads to more protests and the potential for riots and others forms of political and social unrest.
The risk of war increases
An economic war has taken place during all previous Kondratiev winters. Wars are primarily an economic event although some can be more emotional than others. Wars during a deep recession or depression are often the economic catalyst that helps end the recession/depression.
1st cycle (1835-44) - Mexican American War 1845-48
2nd cycle (1875-96) - Spanish American War 1898
3rd cycle (1930-49) - World War Two 1939-1945
4th cycle (2000-?) - War on Terror? WW3? 2001- present
The current Kondratiev winter has seen wars almost since it started. The events of 9/11 triggered the so called "War on Terror" that resulted in the invasion of Afghanistan in 2001 and Iraq in 2003, primarily by the US. While the US is in the process of reducing troop numbers in both countries, the wars continue. The Arab Spring that got underway in Tunisia in December 2010 led to revolutions in Tunisia and then Egypt, followed by a civil war in Libya and civil conflicts in Bahrain, Yemen and Syria. There were numerous protests in other countries including Algeria, Iraq, and Jordan, Morocco and Oman and lesser protests in Kuwait, Lebanon, Saudi Arabia, Sudan and the Western Sahara. There was also conflict between Israel and the Palestinian territories of the West Bank and Gaza.
The West under NATO intervened in the Libyan conflict, along with a few Arab countries on the side the rebels. It led to the overthrow of the long time dictator Gadhaffi. There are now discussions underway that could lead to intervention in Syria. War drums are beating between the West and Iran over Iran's alleged nuclear program, and that they may be trying to obtain a nuclear bomb. Iran has the world's second-largest reserves of natural gas and fourth-largest reserves of oil.
At the heart of some of the conflicts is oil. The regions where these conflicts are taking place produce 65% of the world's oil. The world's two big economic powers, the US and China, are competing in the same regions for oil, the economic engine of the world. This conflict is also manifesting itself in the South China Sea, a potentially oil-rich area in China's backyard where there has been ongoing naval manoeuvring by both China and the US. There are many who believe that the next global conflict will be between the US and China, despite their current close trade ties. The world is running out of many commodities and these two are competing for the same dwindling resources.
There are many who believe that the 21st century will be a century of wars. That of course can be said of any century with more people were killed as a result of war during the 20th century than in any century before. The wars of this century are expected to be economic wars related to oil and commodities, followed by wars for water and food as global warming intensifies ( Climate Wars - Gwynne Dyer, Oneworld Book, 2011).
Debt levels rose but are falling following bankruptcies and defaults
From 2000 to 2008 consumer debt in the US grew over 100%. Since then it has actually contracted by 4.5% from the 2008 peak. Mortgages outstanding are down 6.5% from the peak while consumer debt is off 4.5% from its peak. (The two did not peak at the same time.) Consumer debt, however, has started to rise again while mortgages continue to contract. Rising consumer debt levels at a time when the consumer still has exceptionally high debt to income is while positive for the economy and retail sales could be potentially destabilizing if the consumer is once again put in a position that it is necessary to deleverage.
The situation is similar in Canada, where the housing collapse has yet to take place and consumers have a debt-to-income ratio of 150%. These kinds of numbers for consumers are comparable to countries with debt-to-GDP ratios of 100% or higher.
Corporate debt is largely unchanged since its peak in late 2008. Corporations are sitting on record amounts of cash, however, that cash is not being invested in a climate of uncertainty. What has grown is government debt. US public debt has increased 86% in the same period that consumer debt has fallen 4.5%. The US was forced to increase its debt ceiling in August 2011 and early in 2012 it is expected to hit its current debt ceiling. The US debt-to-GDP ratio is now at 100% and would be higher if one counted the debt of Federal agencies such as Fannie Mae and Freddie Mac. The two mortgage behemoths are both considered to be insolvent.
The fall in debt levels for the consumer is a part of the deleveraging that takes place during the Kondratiev winter. The Kondratiev winter is all about debt collapse and deleveraging.
Gold and gold equities rise in the face of financial and economic crisis
As the earlier table showed, gold bullion and gold equities have for the most part been the best performing sectors since the Kondratiev winter got underway in 2000. Overall commodities led by gold, metals and oil have been the major strong performers.
Gold bullion is like the canary in the coal mine. When times are good, gold is likely to underperform. This was seen during the Kondratiev autumn from 1982 to 2000, when gold topped in 1980 at $850 an ounce and then collapsed to about $250 in 2001. But during periods of economic stress, as was seen during the Kondratiev summer of 1966 to 1982, gold outperforms. It is interesting to note that since the world came off the gold standard in August 1971 gold has gone up over 3,900% while the DJI has only gone up just over 1,200%.
Gold was not free trading during the Great Depression but it is interesting to note that gold was revalued up by 70% from $20.67 to $35 in 1933. Homestake Mining, the pre-eminent gold mining company during the Great Depression (now Barrick Gold ABX-TSX, NYSE), rose 56% during the same period that the Dow Jones Industrials (DJI) was falling 89%. By 1936 Homestake was up roughly 545% from September 1929 while the DJI was still down roughly 50% during the same period.
In August 1971 US President Richard Nixon took the world off the gold standard. At the time the US$ was fully convertible into gold at a price of $35 an ounce. If the US were to back its debt today with its stated gold reserves it would require a price of almost $55,000 an ounce. In August 1971, $1,000 bought 28.5 ounces of gold. Today it would buy about 0.6 ounces.
The US$ has lost roughly 98% of its purchasing power over the past 100 years. Yet for over 200 years the purchasing power of the US$ held (with exceptions) quite steady at around 50 ounces of gold per $1,000. One exception was during the American Civil War, when the purchasing power of the US$ plunged. A decade later it had returned to roughly its previous levels. That held until the 1933 revaluation of gold.
Some might argue that the world is better off without a gold standard. Living standards have increased but so has debt. US GDP has grown roughly 1,200% since 1971 but US public debt has grown over 1,800%. For the consumer and corporations it has grown even faster. In effect debt has fuelled the growth in living standards. When the debt reaches unsustainable levels a period of deleveraging is needed in order to bring things back into balance.
As the world's population grows (6.8 billion and counting), the strain on the world's dwindling resources is showing and the planet is at risk due to man-made pollution. With no anchor for the world's monetary system, hyperinflation becomes a risk as there are no constraints on the ability to print money (QE). History is abundant with the collapse of societies due to climate change and pollution, and there are more currencies that no longer exist than currently exist today. Gold as money has, however, been a constant for thousands of years.
The chart below demonstrates the loss of purchasing power of the US$ in terms of gold.
Many have said that gold has been in a bubble. Yet compared to earlier bubbles such as gold during the 1970s (up over 2,300%) and the NASDAQ during the 1990s (up over 1,000%), the current gold rise is quite orderly. From its lows in 2001 near $250, gold's rise has been punctuated by numerous corrections. Sharp rises have been punctuated by periods of prolonged corrections. The current correction, for example, has now lasted three months. Yet during its 10-year rise gold has not once taken out the previous year's low - not even during the fierce correction in 2008. That is a sign of a powerful bull market and not one that has yet to move into bubble territory. A bubble is usually the last phase of the cycle. That suggests that the best for gold may be to come.
The Kondratiev winter drags on for years. Even during the Kondratiev spring, summer and autumn there are periods of contraction, but they are generally over in a few months. During the last Kondratiev autumn there were recessions or slowdowns in 1986, 1990-92, 1994 and 1998. But none were as steep as has been seen over the past ten years. US unemployment has been persistently high, while more are falling into poverty. These are signs of something much deeper and more prolonged.
Kondratiev winters in the past ranged from nine years (1835-1844) to 22 years (1874-1896). On average they have lasted 16.3 years. The current K-Wave cycle has been the longest recorded to date. The current K-Wave cycle got under way in 1949 and saw a spring (1949-66) of 17 years, a summer (1966-82) of 16 years and an autumn (1982-2000) of 18 years. If the current winter cycle were to last as long as the previous seasons in the current cycle, then it could continue until sometime between 2016 and 2018. If it were to last as long as it did during the "Long Depression" of 1874-1896, it would not end until 2022.
No matter how one looks at it, the current Kondratiev winter has several years to go. Things may well get worse before they get better. The stock market could fall to new lows. Gold could soar to new highs as the crisis deepens. The current solutions are band aids when what is required is a cleansing that allows the debt to be written off and deleveraged. The banking system may well go through another systemic crisis as was seen during the 2007-2009 collapse. The longer the crisis is postponed through the use of tools such as QE, the worse it might actually be when it does arrive.
The good news is that winter is followed by spring. What can't be discerned is the precise position in the Kondratiev winter. Is it still December or has it moved into March? The best guess is, it is still in January. Kondratiev must be looking at all of this with some degree of satisfaction that his theories are alive and well.