Crashing global stock markets, debt defaults, overproduction, falling prices,
tumbling interest rates, global debt deleveraging, and the clear necessity
for austerity, they are all classic long wave forces now in full tilt,
producing the perfect storm in a Kondratieff long wave winter. Only long wave
theory explains the economic and financial events now unfolding daily in the
global economy and financial markets.
You still have time to prepare for the final crisis phase and debt collapse,
but don’t delay. The global economy is now unequivocally in the final years of
the long wave winter debt purge and what will be a sharp decline in corporate
efficiency. Once this storm passes the global long wave economic reset button
will be tripped, and the new global long wave spring season will begin.
The Russian economist Nikolai Kondratieff was the first to observe and
document the remarkable recurring long wave patterns in the global boom and bust
cycle, driven by global debt and overproduction. He published his findings in
the 1920s. His work anticipated the next downturn that unfolded as the Great
Depression. Politicians appear to be incapable of seeing beyond a single
election cycle. Politicians have ignored the evidence for the long wave once
again. Most economists have as well, although a few are starting to pay more
attention as the long wave facts are now difficult to ignore.
Some of Kondratieff’s original charts indicate just how far ahead of his
contemporaries Kondratieff was in understanding the dynamic ebb and flow of
international free market capitalism. There are those that claim he only
discovered an agricultural commodity cycle. The charts below and his own words
suggest he discovered a long wave dynamic cycle that permeates the entire
economy and all of society. He wrote, “The long waves, if existent at all, are a
very important and essential factor in economic development, a factor the
effects of which can be found in all the principal fields of social and economic
life.”
Political and monetary policies have exacerbated and
magnified the natural long wave forces at work in the global economy and
financial markets. The global economy now finds itself in a blinding blizzard in
the Kondratieff long wave winter season. Many are unprepared and under the
delusion that government intervention can and will save the day. Government
meddling only makes matters worse. Investors or businesses that count on
government policies to save them will be sorely disappointed. The long wave
winter season will run its course and the current perfect storm will shatter the
illusions of government as savior of international free market capitalism.
Keynesianism will die a merciless death in this long wave winter storm.
Federal Reserve Chairman Bernanke has admitted that
he does not understand why the economy has not responded to the aggressive
monetary stimulus of lower interest rates and quantitative easing, so now he
tries the twist. Bernanke should read Kondratieff and the findings at the System
Dynamics program at MIT, which has validated long wave theory. The long wave is
the natural cycle of creative destruction in a free market economy; ignore it at
your peril.
The long wave turn from winter to spring is just as natural as winter
invariably giving way to spring in the natural seasons of the year. Only long
wave theory explains the combination of the current economic and financial
market conditions, where excessive debt levels and overproduction are now
chipping away at corporate efficiency, forcing investor around the world to
discount the present value they are willing to pay for future cash flows. Future
corporate margins and therefore cash flows are rapidly becoming uncertain as
prices received plunge from overproduction funded with too much debt. In short,
global financial markets are getting an old fashion haircut, maybe even a buzz
cut.
The fact that free market capitalism goes through a long wave rough patch is
a natural law of sorts in free market capitalism. Don’t mess with mother nature.
The Obama Administration has been shocked to discover that fiscal stimulus has
failed to generate the expected jobs. The president should expand his reading
list. He is now in line to lose his job along with millions of others around the
world. In addition to Kondratieff, the president should put Ludwig von Mises’
Human Action, Adam Smith’s Wealth of Nations, and Bastiat’s
The Law, on his reading list. Government should not try to do what only
a free market, free trade and individuals in pursuit of purpose are capable of
doing. Human liberty and freedom, unhampered by government intervention can
achieve great things. It is the only solution to the global problems produced by
a long wave winter.
Entrepreneurs, new businesses and innovation in existing businesses are the
only viable engines of growth and job creation. Substantially lowering corporate
taxes for small business and closing tax loopholes will cause the economy to
boom and create jobs. Enterprises funded by government in exchange for their
political contributions are destined for failure. The politicians involved in
any such bribery and conspiracy with taxpayer funds should be sent to jail.
Without free market forces and individual responsibility, and swift and harsh
punishment for failure, capitalism will not function correctly. Seed stolen from
farmers and planted in winter is doomed to failure. It only harms the real
farmers and reduces future crops in their natural season.
On the bright side, corporate profits have held up remarkably well in light
of the long wave winter forces in play, a testimony to management and the
resilience of free market capitalism in crisis. Profits have been driven by
emerging market demand, increases in efficiency, lower interest rates, payroll
reductions through layoffs and low wage growth. Business has cut to the bone to
deliver profits, and there is nothing left to cut. Unfortunately, the global
economy is now in a long wave winter storm. Businesses are facing a global
collapse in demand, in addition to political interference and stifling
regulation. These forces are idling production and putting extreme downward
pressure on prices. The CRB is plunging as overproduction swamps global markets
with an excess supply of products and services. The long wave forces in play are
now beginning to erode corporate profits.
Global leaders are in shock at the specter of a sovereign debt default that
is shaking the global financial system to its core. The hopes pinned on emerging
markets are fading fast, as even the economies in China, Brazil, Russia and
India cool as anticipated during the long wave winter. The perfect storm is
gaining strength. Emerging markets are stumbling; corporate profits will now
take a hit when the global economy can least afford it.
The global economy is now in the final crisis years of the long wave winter
season that will be cruel to corporate profits. The long wave is essentially at
its heart a boom and bust cycle of corporate efficiency produced by human
action. The winter season is driven by overproduction, this exists in goods and
services, which puts downward pressure on prices received. Prices paid are also
falling, but in a long wave winter storm prices received will fall much faster.
This occurs when excessive debt and the inevitable debt deleveraging by
consumers, businesses and governments is creating a severe decline in demand.
The overproduction feeds additional price declines and additional contracting
corporate margins.
The long wave boom and bust cycle of corporate efficiency is eventually
recognized by global investors searching for a piece of corporate profits to buy
in the form of publicly traded stocks. This is occurring now. Every long wave
contains two bull markets and two bear markets. The spring and fall seasons of
the long wave of rising corporate efficiency and expanding margins are bull
markets, the summer and winter seasons of declining corporate efficiency and
declining margins produce bear markets.
It takes a while for investors to catch on. The bear market of the global
long wave winter began in the late 1990s in most developed markets. It is now in
its final years of rapidly deteriorating corporate efficiency and investors
around the world are recognizing the squeeze facing corporate profits. There are
other long wave forces at work, but the ebb and flow of corporate efficiency and
profits is critical to bull and bear markets. Profits are the mother’s milk of
stocks, and the milk production will plunge as this long wave winter storm plays
out.
The current bear market will run its course along with deteriorating
corporate efficiency. The demand destruction of global debt deleveraging will
drive corporate margins and profits lower into the expected long wave bottom of
2012-13. A severe global bear market will take stock markets much lower as
corporate efficiency and profits are squeezed into the long wave winter
bottom.
If you have never seen a long wave in real data, you have never seen a
long-term graph of the U.S. 30-Year long bond. Interest rates are the price of
money. During a long wave advance, the demand for money is growing and its price
is rising, during a long wave decline, the demand for legitimate uses for money
is shrinking and its price is falling. The U.S. long bond is a great proxy for
the price of money. The demand for borrowing money and its price is falling.
The demand to borrow money by legitimate borrowers that understand what it
takes to earn a dollar, i.e., those that have a chance of paying it back, is
declining. They do not want to borrow money at this time. For years, my call for
a U.S. 2% 30-Year bond and a 1% 10-Year bond at the bottom of this long wave
winter has been in place. I see no reason to change that call now. The low in
the price of money will coincide with a low for stock prices from late-2012 to
mid-2013. The perfect storm of this long wave winter season is driving the price
of money lower. Since Chairman Bernanke has called for low rates into mid-2013,
maybe someone showed him this chart. Kondratieff would no doubt have loved this
chart, which confirms his theory concerning the dynamic ebb and flow of
international free market capitalism is not subject to the vagaries of misguided
Keynesian manipulation.
The current business cycle is the final business cycle of the long wave
cycle. What few investors and traders are aware of is a method of technical
analysis that suggests that a Kondratieff long wave divided by 144 produces a
miniature long wave cycle, a Wall cycle. There are nine Wall cycles in every
business cycle. By tracking these Wall cycles both investors and traders can
discover more optimal times to buy and sell to reduce risks and maximize
returns. This applies whether they buy stocks for the discounted present value
of future cash flows, growth, or just to trade the cycles. Unfortunately, global
markets are in Wall cycle number six of the current business cycle. This is a
third last and weakest cycle, so prepare for outsized volatility and price
declines into the bottom of this cycle.
Investors are panicking, even though global markets are experiencing
something as natural as a winter blizzard in January. Before it is over, this
global bear market will present investors with the greatest discounted buying
opportunities for future cash flows since the early 1930s. Keep much of your
power dry; 8-16% dividend yields on great global franchise companies are coming
to a stock market near you before the perfect long wave winter storm gives way
to a global long wave spring in 2013. Those great buys and dividend yields will
be compounded many times over during the coming long wave spring season.
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