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James Kupfer

Overview Not well known in most financial circles, the K-Wave (as the Kondratieff Cycle is also known) is a roughly 50-70 year economic business cycle. The cycle was first publicly identified by a Russian economist, Nickolai Kondratieff, who wrote an article about it in The Review of Economic Statistics.

According to Kondratieff, within the primary cycle 50-70 year cycle there are four minor cycles that he labeled Spring, Summer, Autumn and Winter.

Here is a very abbreviated breakdown of how the cycles are delineated, with the primary focus being on Autumn and Winter: - Spring: Mild / beneficial inflation, i.e. the late 1940’s to 1966. - Summer: Runaway inflation, i.e. 1966 to 1981. - Autumn: Price stabilization or mild deflation, i.e. the 1980's - recently; Easy accessibility to cash; Global stock market euphoria and boom; Real estate prices soar. - Winter: Stocks, commodities and real estate prices drop in a "bear" market. Interest rates drop significantly over time, thus leading to a rise in bond prices. Coupled with the other markers of a Winter K-Wave, economic growth is limited or non-existent.

Are We In Another Winter Period? It has been widely reported in the media that housing prices are dropping across the United States and globally in many countries, which is a major hallmark of a K-Wave Winter. Additionally, the major U.S. and international equity markets are well off of their peak level for 2007, with many forecasters calling for a recession in 2008. These are additional markers of a Winter period. Finally, the U.S. Federal Reserve began lowering interest rates in late 2007 as called for in a Winter period. So far, this would seem to indicate that we are in the beginning of a K-Wave Winter period.

Implications If this does in fact prove to be another Kondratieff Winter then the financial forecast is bleak, according to Kondratieff's analysis. Each cycle lasts, on average, a minimum of ten years. If you assume that the Winter period began in 2006-2007, then there is still approximately a decade of Winter left. Meaning that, for 2008 and beyond a convergence of historical lessons points to a severe drop in equity, commodity and real estate prices, a rise in bond prices, and limited to negative economic growth overall. While this may obviously not come to pass, it does present food for thought.

Here is a little bit of history for you: the last Winter period in the U.S. began in 1929 - i.e. the Great Depression.

The Bull Argument While interesting, there is no proof that the Kondratieff Cycle actually exists. His work is not widely known, and subsequently, it also has not been throughly vetted within the economics community.

Additionally, there are many well-respected economists who are bullish about the long-term prospects of the U.S. and global economies. If their forecasts are correct then Kondratieff's forecast would have proven to be incorrect, and least in this case.

Finally, just because the "primary" trend, according to Knodratieff, is downward does not mean that many stocks will not increase in value or that even the major indicies in generally will not have periods of positive gains.