Kondratieff Winter has arrived?

I have been watching with interest the developments in the markets the past few weeks.

It is clear by the tone and concern of some very experienced traders that they have never experienced what is currently happening in the credit and stock markets. When traders who have been on the floor of the NYSE for 40 years tell you this is something they have never seen, you better take notice.

While many have said it before in previous economic crisis (and have been proven wrong), THIS TIME IT MAY REALLY BE DIFFERENT.

This got me thinking about an economic theory I have been aware of for some time and have been on the lookout for. It falls into the area of heterodox economics (a term used to cover various "outside the mainstream" economic theories) and involves the concept of market cycles. The theory is what is known as the Kondratieff Cycle.

The cycle is a period of approx 60 years covering 4 distinct phases in a capitalist system. The 4 phases are termed Spring, Summer, Fall and Winter. The event that we may now be entering is known as a Kondratieff Winter.

Each cycle is approx 15 years in length but can be manipulated by government intervention. The key to this theory is it is not necessarily a "time" based theory but an "event" based theory. While the cycles run around 15 years each, much more important than the length of time is identifying the EVENTS that signal a transition from one cycle to the next.

I have not mentioned it previous because it is a very rare occurrence (as I said, it occurs once every 60 odd years) and, until recently, I had not seen enough evidence to indicate we had made the transition. However, it appears we may have now made the transition and, if so, this document could be the single most important piece of information you need to survive the coming winter storm.

To introduce the concept, first the history of Nikolai Dimitrievich Kondratiev:

Nikolai Dmitriyevich Kondratiev, Russian: Николай Дмитриевич Кондратьев (4 March 1892 - 17 September 1938) was a Russian economist, who was a proponent of the New Economic Policy (NEP) in the Soviet Union. He was executed at the height of Stalin's Great Purge and "rehabilitated" fifty years later.

He proposed a theory that Western capitalist economies have long term (50 to 60 years) cycles of boom followed by depression. These business cycles are now called "Kondratiev waves", or grand super cycles. Two Dutch economists, J. van Gelderen (1891-1940) and Samuel de Wolff, previously argued for the existence of 50- to 60-year cycles in 1913. However, only recently has the work of Wolff and Gelderen been translated from Dutch to reach a wider audience.

Nikolai Dimitrievich Kondratiev was born on 4 March 1892 in the province of Kostroma, north of Moscow, into a peasant family. He was tutored at the University of St. Petersburg before the revolution by Mikhail Tugan Baranovsky. A member of the Socialist-Revolutionary Party, his initial professional work was in the area of agricultural economics and statistics and the problem of food supplies. On 5 October 1917, at the age of 25, he was appointed Minister of Supply of the last Alexander Kerensky government, which lasted for only a few days.

After the revolution, he dedicated his attention to academic research. In 1919, he was appointed to a teaching post at the Agricultural Academy of Peter the Great, and in October 1920 he founded the Institute of Conjuncture, in Moscow. As its first director, he developed the institute, from just a couple of scientists, into a large and respected institution with 51 researchers by 1923.

In 1923, Kondratiev intervened in the debate about the "Scissors Crisis", following the general opinion of his colleagues. In 1923-5, he worked on a five-year plan for the development of Soviet agriculture. In 1924, after publishing his first book, presenting the first tentative version of his theory of major cycles, Kondratiev travelled to England, Germany, Canada and the United States, and visited several universities before returning to Russia.

A proponent of the Soviet New Economic Policy (NEP), Kondratiev favored the strategic option for the primacy of agriculture and the industrial production of consumer goods, over the development of heavy industry. Kondratiev’s influence on economic policy lasted until 1925, declined in 1926 and ended by 1927. Around this time, the NEP was dissolved by a political shift in the leadership of the Communist Party.

Kondratiev was removed from the directorship of the Institute of Conjuncture in 1928 and arrested in July 1930, accused of being a member of an illegal and probably non-existent "Peasants Labour Party". As early as August 1930, Soviet Premier Joseph Stalin wrote a letter to Prime Minister Vyacheslav Molotov asking for the execution of Kondratiev.

Convicted as a "kulak-professor" and sentenced to 8 years in prison, Kondratiev served his sentence, from February 1932 onwards, at Suzdal, near Moscow. Although his health deteriorated under poor conditions, Kondratiev continued his research and decided to prepare five new books, as he mentioned in a letter to his wife. Some of these texts were indeed completed and were published in Russian.

His last letter was sent to his daughter, Elena Kondratieva, on 31 August 1938. Shortly afterwards, on 17 September during Stalin's Great Purge, he was subjected to a second trial, condemned to ten years without the right to correspond with the outside world. However, Kondratiev was executed by firing squad on the same day the sentence was issued. Kondratiev was 46 at the time of his execution. He was rehabilitated almost fifty years later, on 16 July 1987.

In my study of the Kondratieff cycle, I have found one document to be the most well written description I have ever seen. Here is a link to the site. The document is a PDF file that is 31 pages long but I highly suggest you read the whole thing.


http://www.thelongwaveanalyst.ca/pdf/08_01_07_News.pdf


The key to identifying the transition from the various seasons of the Kondratieff cycle is not the length of time but the events that signal the transition. Broadly speaking, during a K-wave winter the thing to look for:

-a rapid contraction in credit availability (bank failures, interest rate spikes)
-a sell off in commodities (including oil, copper, silver)
-a rapid fall in GDP
-a flight to currency, gold and government bonds


The charts to tell the story (click on charts to enlarge):


1 month LIBOR vs. 1 Month U.S. Treasury



This is a ratio chart of 1 month LIBOR rate (London Interbank Offer Rate) to 1 month U.S. treasury rates. LIBOR is the rate you want to watch as it is the interest rate the banks offer to each other to lend each other money.

The rate is usually fairly constant (at around 30-40 BIPS above UST) but note the spike the past 3 weeks.

This spike is the seizing up of the credit markets and indicates the degree to which banks have become risk averse and not willing to lend to one another.

This is the start of a credit contraction that will last up to a decade. With it will come a severe recession/depression.


CRB (Commodity) Index



Copper



Crude Oil



Silver



As can be seen, all commodities have begun to collapse in the past 3-4 weeks. This is a key component in a K-wave winter and signals deflation in the world’s economy.


US Dollar



The first signs of a “flight to safety” have begun. Many were wondering why the strength in the USD given all the problems. Could this be a sign that winter has arrived?


If the Kondratieff Winter has begun, where is the safe place to be:

1) Gold and gold stocks (yet to rise after their recent down turn; watch close)
2) Government notes (i.e. cash)
3) Government bonds

I still do not believe long term the USD will be the place to be. I am thinking the "safe" currency will be the Japanese Yen (they have been in deflation for over 10 years now and do not have the debt problems the U.S. and Europe have) but have yet to switch into the Yen in my trading account.

Gold stocks have yet to begin a significant move up. When they do, I will be moving a large portion of my trading account into them.

I have begun re-accumulation of physical gold bullion on a monthly basis with excess personal savings.

If Ian Gordon is correct, this Kondratieff Winter could last into 2020 and will be worse than the 1930's Great Depression.

I think it would be wise to consider how you/your family will do if we really have entered a Kondratieff Winter. I think there is a very good chance we may be there and, if so, god help us all. Safety and preservation of capital will be paramount over the next decade.


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.