Deflationary K-winter Thesis

[bottletop]

an interesting sunday morning read.

http://www.howestreet.com/story.php?ArticleId=1700

[The Masked Tulip]

A depressing vision of the future.

[Silverity]

A depressing vision of the future.

I consider myself a student of the Kondratyev wave and I can assure you that Ian's views are not universally accepted in that circle.

For a start, he has to stretch the K-wave well beyond it's average of 53 years to accommodate his "winter" hypothesis. Moreover, these "seasonal" subdivisions of the kondratyev upwave and downwave are not part of the original theory and should be ignored as embellishments.

The current (or perhaps just finished) K-wave is generally agreed to have started around 1948 with an inflationary top in 1980 (some say 1973). Using the average of 53 years, that means the downwave finished in 2001. It is no coincidence that gold and other commodities began their inflationary upmoves at that time!

The K-wave is not a stock market or debt cycle, it is a commodity/interest-rate cycle which reflects the shift between hard and soft assets. The downwave (1980-2001) is a deflationary downcycle as Ian Gordon correctly points out. However, due to the inflationary policies of governments which create fiat money out of nothing, this has been counteracted and masked as disinflation. This is where Gordon goes wrong, he is expecting real deflation but government policy suppresses it.

I would also point out that gold and silver perform badly in deflationary/disinflationary environments. 1980 to 2001 proves that.

So now we are on a K-wave upwave which is inflationary and given the aforementioned government policy on money creation, it is going to be a wild ride up to the inflationary climax around 2030. By then gold and silver will be valued in the thousands and hundreds of dollars respectively.

For more on my view on the K-wave and gold/silver, go to www.newerainvestor.com for a free issue of my newsletter which explains this. The free issue link is on the right at "view sample issue here".

[dhpcza]

*edit as its late and im talking ******** without thinking*

Also, just to play devils advocate with the K-wave cycle, what do proponents of said cycle make of this article (note that i do not have enough knowledge to side with any opinion of the K-Wave).

Link to article: http://www.lewrockwell.com/rothbard/rothbard44.html

Edited December 7, 2005 by dazw01842

[Silverity]

*edit as its late and im talking ******** without thinking*

Also, just to play devils advocate with the K-wave cycle, what do proponents of said cycle make of this article (note that i do not have enough knowledge to side with any opinion of the K-Wave).

Link to article: http://www.lewrockwell.com/rothbard/rothbard44.html

As much as I admire Rothbard, he is expecting a degree of accuracy to the K-wave that is uncalled for. It is no more than a tool amongst other tools in the investor's toolbox. I use it to get a sense of the general long-term trends. The graph he shows off periodicity in comsumer prices whould be enough you think to convince others of a cyclical trend, but instead he says unless they are accompanied by depressions or social upheaval, it doesn't count.

The K-wave is not an indicator of social upheaval and depressions, it is simply an indicator of deflationary/inflationary trends. We need to look at other trends and movements to come to some conclusion as to how each influences the other.

For example, two other influential factors will be Peak Oil and the Baby Boomer fiscal threat, how do these combine with the K-wave. If all three are inflationary by nature then don't go for deflation-oriented assets.

[dhpcza]

Dr Bubb, are you an inflation or deflation man when it comes to the next 5-10 years?

[Starcrossed]

Aren't interest rates always higher than inflation? (I know there are arguments that inflation is statistically hidden but bear with me)

In which case, whilst cash may not be the best investment for periods, can it ever actually lose value?

Forgive the possible naivity of the question!

[bottletop]

Aren't interest rates always higher than inflation? (I know there are arguments that inflation is statistically hidden but bear with me)

In which case, whilst cash may not be the best investment for periods, can it ever actually lose value?

Forgive the possible naivity of the question!

Isn't what is important the rate at which the money supply is increasing, not the rate at which a basket of consumer goods varies in price?

M3 in the UK increased by about 10% last year, so presumably you'd need a return of >10% to maintain your spending power. Inflation is after all a monetary phenomenon, the increase in CPI just reflects that (badly)

[joejoe]

Isn't what is important the rate at which the money supply is increasing, not the rate at which a basket of consumer goods varies in price?

M3 in the UK increased by about 10% last year, so presumably you'd need a return of >10% to maintain your spending power. Inflation is after all a monetary phenomenon, the increase in CPI just reflects that (badly)

Just for arguments sake this graph has no bearing on world economics or americas. Derivatives some $250 trillion collapsing is the only thing that matters. think for a second how does interest rates have any bearing on the economy if you looked 1980-1987 interest rates hardly moved same with house prices yet when interest rates rose 1988-1993 house prices skyrocketed now how can that be. Or oil it to has no bearing on the economy year 2000 dow jones at 7000 oil was mid $20 now dow is mid 10000 oil is $65 you get the picture the market is rigged and this debt along with the derivatives can easily be paid down by simply backing the currency with Gold. end of story. id be more worried about your government conscripting you and sending you off to die in the middle east. in the search column of google type in united states government declares bankrupcy 1933.

[MarkG]

In which case, whilst cash may not be the best investment for periods, can it ever actually lose value?

I have a hundred million deutschmark note: its current value is... a bookmark. Which is probably more than it could have bought a few weeks after it was printed.

Frankly, if I was expecting hyperinflation I'd be buying all the gold I could lay my hands on. Personally I expect to see inflation in the price of essentials like oil along with deflation in Western wages...

[oracle]

I have a hundred million deutschmark note: its current value is... a bookmark. Which is probably more than it could have bought a few weeks after it was printed.

Frankly, if I was expecting hyperinflation I'd be buying all the gold I could lay my hands on. Personally I expect to see inflation in the price of essentials like oil along with deflation in Western wages...

that's happening now...but what happens when all tose working baby boomers STOP paying into their pension funds and start to extract earnings from the system???

STOCKS LOWER,.....maybe excepting pharma+care homes

INFLATION LOWER

PROPERTY LOWER AS MORE SUPPLY FROM DECEASED GOES ON SALE...NOT ENOUGH DEMAND EITHER

BONDS....hmmm not much call for them even with plummeting IR's...you might be lucky the first 3-4 years while it looks like IR cuts hold up consumption but after that???

kind of spells default and currency crisis to me.

[jonpo]

This is I think the most important Economic question of our time. inflation or deflation that is the question. I have to say after experiencing the inflation of the last few years. however the more research I do about the Kondrateiff cycle the more I have felt that we must certainly face a deflation in the next 1-2 interest rate cycles this is the only way for the economy to cleanse the malinvestment of the past and the enormous credit expansion that is the legacy of Greenspan. you see the 2001 recession was not deep enough to cleanse the debt from the economy, that is the crux of greenspans conundrum. the bond market is telling him that the winter has not passed and the malinvestment of the last economic cycles lingers like a malignant tumor in the economy. there are simply too many malinvesments.

the redundancies are showing the overcapicity in the economy, the credit is too easy, the banks are making unsustainable amounts of money. the money supply rises month after month do to the creation of credit.

a big deflation could cause a big increase in the value of cash. and a devistating sell off in almost every asset class.

credit implosion will happen when we least expect it and be more violent than 10 Iranian Nukes.

cash will be king

Oh and Checkout this the FED is doing research on deflation !!!

http://today.reuters.com/news/newsArticle....D-DEFLATION.xml

I wonder what it thinks the outlook is for prices? unfortunetly It requires the american public to understand policy measures

man I can feel my credit card burning its way to Michigan Avenue.

on your marks get set.... start saving.

Edited January 24, 2006 by jonpo

[paradox]

The more I read the more confusing it gets, however the moral of this thread seems simple:

To hedge your bets buy gold and commodities, but stay liquid. That way if deflation starts to show itself you can nip out quickly.

Don't be lumbered with something that either doesn't hold its value or that can't sell quickly.

[jonpo]

I'm just loving the irony of the Logical conclusion of the K-Winter in that it rewards most that most unfashionable of pursuits the Saver of capital.

[urban_hymn]

To hedge your bets buy gold and commodities, but stay liquid. That way if deflation starts to show itself you can nip out quickly.

Don't be lumbered with something that either doesn't hold its value or that can't sell quickly.

Remember that unlike gold, commodities are not defensive. If there were global stockmarket declines/crashes then your energy and mining stocks would tank with all the rest.

Look at BP plotted against the FTSE100 this is how I see it - am I right?

http://uk.finance.yahoo.com/q/bc?t=my&s=%5...ff&z=m&q=l&c=BP

[nic]

Remember that unlike gold, commodities are not defensive. If there were global stockmarket declines/crashes then your energy and mining stocks would tank with all the rest.

Look at BP plotted against the FTSE100 this is how I see it - am I right?

http://uk.finance.yahoo.com/q/bc?t=my&s=%5...ff&z=m&q=l&c=BP

BP and Shell together make up around 20% of the FTSE100, so it's not really a good comparison. It would be better to compare them to indexes in which they are not part.

When the stockmarket goes down because of a slowdown in the economy, commodities such as oil may drop as well, because of less industrial demand. This is where gold is a safer bet because it has less industrial use and instead is a store of value.

I would say there are many worse bets than commodities in a recession though. And consider the scenario where a recession is caused by high oil prices.

[urban_hymn]

I would say there are many worse bets than commodities in a recession though. And consider the scenario where a recession is caused by high oil prices.

If the oil price causes a world wide recession then the oil price will consequently correct as demand decreases.

For anybody who wants to prepare for worldwide stockmarket declines/crashes (if that's what you're expecting) then it's gold plus some judicious short selling that will see you through best?

Pick yourself some nice high priced (plenty of ticks) stocks that look vulnerable and study the charts regularly for signs of turning sentiment.

[gone west]

If the oil price causes a world wide recession then the oil price will consequently correct as demand decreases.

I thought this as well, but with peak oil kicking in, we may just have a situation where oil remains expensive, even in a recession.

[urban_hymn]

I thought this as well, but with peak oil kicking in, we may just have a situation where oil remains expensive, even in a recession.

The effects of peak oil (still controversial) or refined oil shortage (fact) have not bitten deep enough yet to keep the oil price up during a worldwide recession imho.

[oracle]

I thought this as well, but with peak oil kicking in, we may just have a situation where oil remains expensive, even in a recession.

yup,and don't think commodities will save you either!!!...if oil stays high then there will be a lot less demand for hyped-up starbucks coffee....only global growth will fuel commodity demand.we might get lucky and have a techno-explosion thet sorts out cheap energy for everybody,but it needs to extend to packaging as well.most of the crud we buy comes in ldpe(oil based) packaging,so maybe the brown paper bag is about to make a startling resurgence!!!!

[gone west]

The effects of peak oil (still controversial) or refined oil shortage (fact) have not bitten deep enough yet to keep the oil price up during a worldwide recession imho.

Peak oil is only controversial to those who feel more comfortable without it's existence. Refining capacity is actually plentiful for light/sweet grades. These reserves are almost gone. Gharwar is in decline.

If the world went into a recession akin to the 1930's, world oil consumption would halve. If we then never increased our demand for oil we would have 130 years of oil left.

2trillion reserve barrels left (most optomistic estimate)/42million bpd (currently 84mbpd)/365=130.5

That is the longest it will last (assuming we have a deep depression).

yup,and don't think commodities will save you either!!!...if oil stays high then there will be a lot less demand for hyped-up starbucks coffee....only global growth will fuel commodity demand.we might get lucky and have a techno-explosion thet sorts out cheap energy for everybody,but it needs to extend to packaging as well.most of the crud we buy comes in ldpe(oil based) packaging,so maybe the brown paper bag is about to make a startling resurgence!!!!

I am relying on a mix of oil and gold. Ready to sell either if the situation changes.

[urban_hymn]

I am relying on a mix of oil and gold. Ready to sell either if the situation changes.

Yeah, I've got a gold, Japan, energy portfolio but I'm constantly fretting that although resources may be in a super cycle they are not recession proof and that there may be better bootfilling opportunities in the longer term. I'm considering flogging my Investec Global Energy as it has stopped motoring for a while now.

Edited January 29, 2006 by urban_hymn

[jonpo]

Do none of you guys think that actually cold hard cash could be the best stealth investment in the current world.

I agree that historically Gold has done well in these types of environments but if deflation kicks off then money supply on the ground will get scarce as people attempt to pay down debt to keep them selves from going under. businesses cannot pay debt as they are getting little investment off of the public because money velocity goes down.

look at the very long term trend in interest rates. I bet It will carry on to Zero in a few years. until we have a really good depression.

[gone west]

Do none of you guys think that actually cold hard cash could be the best stealth investment in the current world.

I agree that historically Gold has done well in these types of environments but if deflation kicks off then money supply on the ground will get scarce as people attempt to pay down debt to keep them selves from going under. businesses cannot pay debt as they are getting little investment off of the public because money velocity goes down.

look at the very long term trend in interest rates. I bet It will carry on to Zero in a few years. until we have a really good depression.

That is why it is important to pay a little liquidity premium for investments. I sleep better knowing I can sell in a few minutes if the market starts moving in unfavourable directions.

[walktothewater]

That is why it is important to pay a little liquidity premium for investments. I sleep better knowing I can sell in a few minutes if the market starts moving in unfavourable directions.

The US market action yesterday was worrying. IMO the US markets are signalling a US recession in late 2006. Virtually all of the performance of the S&P500 since 2003 has been in resource stocks. Despite the long-term beauty of oil, gold, copper, and emerging/asia markets investments. I'm slowly converting to cold hard cash and some short-term bonds (C$, Euros) as a correction will drag EVERYTHING down. Where the US goes so goes everyone. Better to make +2% in 2006 and have lots of dry powder to pick up the bargains, rather than a 10%+ loss and no cash. Its usually never clear where markets are heading, but as the Yanks say, 2006 appears to be a 'no brainer'