Understanding the Kondratiev Cycle and the Stock Market

stamp, macroIn the late 1920s, a Soviet economist by the name of Nikolai Kondratiev proposed the existence of an overarching generalization that defines the greater movements of the markets over the course of 54-60 years (ie. two generations of a workforce’s career span). Similarly to how it is that the Elliot Wave theory defines market cycles as being a function of the booms and busts surrounding innovation, the associated growth of new technologies, and then the setbacks of over leveraging and overproducing said technologies to the point of over saturation.

While Kondratiev’s theories were very specifically formulated to demonstrate plausibility, he was executed a decade later for his work. Today, the Kondrativ Cycle has taken on renewed interest in the way that suit helps economist to define and evaluate business cycles in accordance to their relationships with the technological advancements that we leverage into society through business. By taking a moment to understand how it is that this cycle works, we can start to see its relevance to today’s financial depression.

The Kondrativ Cycle theory defines the growth and collapse of the overall economy as being a function of its dependence on technological innovation. An innovation comes into the market place, is developed in a way that creates a period of prosperity, saturates the market, and then leads to an economic depression as the economy becomes overwhelmed with debt and speculation. During this final period, bad management decisions begin coming to light, liquidity seizes up, and economies begin to deleverage through a combination of bankruptcies and deleveraging (sound familiar? We’ll get specific about how this applies to today’s markets in a follow-up article). Once debts and misallocated capitals have been fully purged from the economy, it is argued that the economy is then again in a position to gear up for a new ‘long-wave’ cycle all over again.

To date, it is argued that there have been approximately 4-6 Kondratiev cycles that have taken place over time. These cycles started with the Industrial Revolution (as it pertained to the Cotton and Textile industries) and Railroad/steam engine, and then moved to represent booms associated with mass production, the introduction of electrical motors, the petrochemical industry (ie. oil and gas), and then most recently the information technology industry. In digging into each of these eras, it can be seen how technologies were introduced, leveraged, and over-supplied to a market, before being generally abandoned in favor of deleveraging.

For example, the way in which the information industry became over saturated in the early 2000s is somewhat apparent by the way in which dotcom and fiber-optic companies collapsed is argued to support the beginning of the end of the information-technology wave cycle. From this over-saturation, we can see how it is that debt levels proceeded to expand and then collapse over the course of the second generation of labor, resulting in the economic recession in which we live today.

In looking at how it is that the Kondratiev wave demonstrates an over-arching theory describing the general swings of the markets, we can start to make observations about how it is that we are currently in the midst of a late-stage cycle, and can potentially predict the emergence of the next technological growth trend.

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