Interest rates at lows as long Kondratiev wave cycle comes to an end
I caught this video on Chris Watling about the Kondratiev wave of interest rate cycles via Global Macro Monitor and thought I would post it. CNBC explains the video this way:
The updated reading of the work of 1920s Russian economist Nikolai Kondratiev shows that interest rates have reached the bottom of a 60-year-long wave, and are bound to go up, Chris Watling CEO of Longview Economics, told CNBC.
Kondratieff waves are these supercycles that a lot of people have been talking about in the context of the great leveraging that led to crisis in developed economies. Wikipedia explains:
Kondratiev waves (also called supercycles, great surges, long waves, K-waves or the long economic cycle) are described as sinusoidal-like cycles in the modern capitalist world economy. Averaging fifty and ranging from approximately forty to sixty years in length, the cycles consist of alternating periods between high sectoral growth and periods of relatively slow growth. Unlike the short-term business cycle, the long wave of this theory is not accepted by current mainstream economics.
Think of the great historic busts of 1837, 1873, and 1929 and that gives you a sense of the dates associated with these waves.
I find the whole thing pretty interesting because of the self-reinforcing demographic trends which a great bust ushers in and my own experience with those trends. When I was in elementary school and high school some 25-35 years ago, the educational cohorts coming through my local school system plunged dramatically. This was the period of inflationary recession and bear market (1966-1982). So, long-range planning committees went into action and they foresaw a need to reduce school inventory because inflation was killing them. The school board in the area where I attended school preceded to close down perhaps a third of the primary schools in the decade from 1974-1984 along with some middle schools and high schools. They also went into an economies of scale mode, ending local primary schools for many and starting a system of super elementary schools that took 500 kids each.
Well, predictably, as soon as the long range plans went into action, the area saw a sharp rise in educational cohorts due to natural long wave patterns (the next cohort, Gen Y, was the offspring of baby boomers) and an influx of immigrants into the area. Luckily, the school board had only leased many of the properties and so it could requisition them. And the new strategy of super-sized schools held up pretty well in terms of delaying the consequences of overcrowding. In the end, however, more schools are to be built, some right on the plots were the old schools were shut down and razed some twenty or twenty-five years ago.
My own parents were born right as the Great Depression began and most of my classmates had parents who were Great Depression babies. This was a very small generational cohort because birth rates plunged along with depression. Clearly, a small generational cohort reproduces a small cohort as well and that would explain the baby bust from 1964-1976. I think there is something to concept of demographic trends of this sort reinforcing long-wave economic cycles. I don’t have it figured out but had the school board been thinking along these lines, they would have made vastly different and less costly decisions. Kondratiev cycles are something you don’t often hear discussed when thinking about explanations for generational crises like the one we are witnessing right now.
Just thought I’d put that out there since it’s something I think a lot about.
As for the predicted bear market in bonds, Louise Yamada had some astute comments on this two years ago. Note the highlighted part:
Uber-technician Louise Yamada is now warning that the secular bear market in equities is likely to be joined by one in bonds as well. In the video below, she talks with Bloomberg’s Pimm Fox about her view that bond yields are going to rise over time.
I find her analysis that secular cycles in the bond market are long – 30 years + – compelling. And given, the fact that this secular bull market in bonds has been going since 1981, when Paul Volcker was Fed Chairman, and that short-term rates are incredibly low, there isn’t a huge amount of upside here. Yamada says bond market bottoms reverse quickly, as the one in 1981 did. Ostensibly, this turbo-charged the secular bull market in equities that started right afterward. She says, however, that bond market tops take 2 to 14 years to reverse trend.
Bottom line: bond market tops are usually associated with economic depression. And, unlike in bottoms when inflation is pushed ahead by high capacity utilization, deflation is the order of the day in bottoms. And that means low rates can last for quite a long time.Just ask the Japanese.
Video below
I also believe in long cycles but think that Keynes and Minsky covered them pretty well. There is nothing that I could add that has not already been said by these two. So I do think that as debts are unravelled and paid down that will subdue economic activity for a long time as has been demonstrated by Japan. The US and Europe are following Japan in dragging out the pain. Yet neither had the benefits of japan in that Japan was in depression, when the rest of the world was booming. They could at least afford to carry out this policy because they had very high domestic savings. Which neither the US or Europe have, and Japan is a very homogenous society so collective pain was tolerated. That definitely does not apply to Europe or the US.
As for a bond bear market does that really need a equities bull market? I cannot see that happening. Profits are probably peaking. Though I do think that a bull market in equities will not start until PE is close to single digits and that means a substantial drop in equities or a huge increase in profits which is unlikely with a stagnant economy.
Agree with your comments there, David. The secular bear is still intact and we will see this clearly during the next downturn.
Yes and I fear that this secular bear market will be much longer than would normally happen, because policy has been extend and pretend on a global scale. As for bear bond market that needs interest rates to rise, and as the Fed have said that it will be at least two years before that happens, and I suspect that they will keep ZIRP going until the economy implodes or recovers if they could.
For a secular bear to end there must be a ‘theme’ or story to dig out of it. There is no theme currently (demography, innovation, resources-consumption) so this market will still be bearish.
People is selling ‘developing nations’ theme but I don’t buy it as cost-push inflation will work as a hard limiter. People droll about high growth cyphers, but in absolute terms they are not so huge. Plus a lot of wasted resources and capital for a population that does not have income & consumption levels to pay for it.
In short, developing nations can’t be the centre of the next bull market theme, at least not yet (they depend too much on both investments and external demand).
Not so confident on the bearish bond market though and rates, as long as CB’s keep manufacturing liquidity and solvency rates won’t skyrocket, but we have probabilities of a stagflation scenario rising, so could happen.
Stagflation is the objective. It reduces the burden of debts. Which is why you will not see index linked government bonds for a while.