
FTSE stock market stagnation since 1998, data from Yahoo Finance
As world stock markets take another cold plunge again today, even the most rational and fundamental-focused investor takes a sharp intake of breath and wonders when a corner will be turned. Obviously, if the eurozone got a grip of its debt problem, things would begin to improve. But leaving such common sense to one side, this is precisely the kind of febrile climate that encourages one to explore stranger waters.
One step removed from goldbug hysteria and palmistry is economic wave theory. The more comprehensible end of the spectrum focuses on the logical and simple fact that businesses will leverage themselves more when things are going well, and then have to deleverage and contract when economic times sour. This is all sensible enough, and accounts for the basic cycle of boom and bust.
A more subtle variation of this is the Kitchin cycle, which is the manifestation of an information lag. It takes time for businesses to both recognise and act on fresh market information, for example by expanding & buying new stock or converselylaying workers off & restricting inventory. The Kitchen cycle is therefore thought to operate over about a 4 year term.
A slightly slower wave is the Juglar cycle, which operates over about an 8 year cycle. This measures not how business use the resources they already have available to them, but how the invest in creating new resources, for example building a new factory or power plant. These things take longer, so the Juglar cycle is a longer than the Kitchen one.
Beyond this territory, we enter more speculative economic wave theory. At a 20 year cycle level, some believe a Kuznets cycle operates, reflecting world movements in migrant populations and the effects they have on GDP. Kuznets applied a mathematical filter to economic data to reveal his cycle. Unfortunately, application of the same filter on white noise (random data) also reveals this cycle, suggesting it is an artifact of the filter rather than a real event, although arguments continue to this day whether it is real.
If the Kuznets cycle is controversial, the Kondratieff (or Kondratiev) wave is in the realm of the fabulous. It suggest an even longer 40 year cycle and suggests that the economy has relatively quiescent (though possibly volatile) periods alternating with more steady booms in activity. The theoretical basis to the Kondratieff wave is that it reflects the emergence of revolutionary new technologies and their impact on the economy. Some have gone so far as to suggest that the period between about 1983 and 1999 was one of the booming phases (reflecting the microchip revolution), implying we’re now in the middle of one of those volatile but stagnant intervening times.
While it all sounds fantastical, if one projects backwards it’s tempting to selectively choose facts to fit the theory. For example, the period of 1965 – 1983 was equally stagnant and volatile as the past 12 years, in terms of stock market fluctuation. And before that, 1950 – 1965 showed marked increases in valuations. Further back in time, 1929 – 1945 coincided with the Great Depression and WWII, whereas before that were the Roaring Twenties. If Kondratieff wave theory has a kernel of truth, then the current volatile stagnation will stretch until about 2016, although the last two years before then should show signs of steady growth too. So only a few more years of trouble left…
To finish on a more optimistic (although probably even less well-founded) note, I must mention the Elliott Wave Supercycle (or Grand Supercycle Theory). This speculates that there is a 250+ year broader supercycle of oscillating economic activity. The most recent one is thought to have begun in the early part of the 19th century, beginning with the Industrial Revolution. If true, we still have another 50+ years of boom, before the world economy drifts into between two and three centuries of relative waning.
See, it’s not all bad!
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