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Current position in the K-wave by Mike Alexander 05 September 2001 22:45 UTC |
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A common view of the K-wave has a downwave (or what some call the "B" phase
of the wave) beginning in the early 1970's. The average length of the B
phase is typically 25-30 years suggesting that we should be nearing the end of
the B phase ant the beginning of the next A phase. Empirical work using
some new tools suggests otherwise. It appears that we are about halfway
through the B phase, roughly equivalent with 1929-1930 in the last K-wave as
described below:
In the 1920's Kondratiev showed empirical support for his wave most
dramatically by the wave-like structures shown in 19th and early 20th century
prices. Here is a plot of the U.S. producer price index
(commodity-based):
K-peaks can be seen in 1814, 1864 and 1920 and troughs in 1843, 1896, and
1932. After 1932 what looks like runaway price inflation began and one
can't find the wave any more. Interest rates also show peaks and troughs
of Kondratiev spacing. There were "K-peaks" in interest rates in 1814,
1861 and 1920 that were close to the Kondratiev price peaks shown in the
figure. There was also a major peak in interest rates in 1981.
If we use interest rates by themselves we would call 1981 the most recent
K-peak and the beginning of the B phase. But other turning points, such as
the shift to a lower productivity regime and the stagnation of real wages after
1973, have been used to argue for a much earlier K-peak. An early 1970's
K-peak has the advantage of being approximately 54 years after the previous
K-peak in 1920, that is "right on schedule".
One can deal with tendency of the post-1932 inflation to obscure price
cycles using a concept I call reduced price. Reduced price (rP) is simply
the actual price index (P) divided by the value (Pm) expected from a simple
monetary-based model, that is:
rP = P / Pm, where Pm = aS + b, were a and b are
constants and S is a variable I call monetary stimulation, defined as:
S = (D + M)/GDP where D is cumulative government deficits and M
is money supply
For money supply I use M3 after 1959 and M2 before. (the two were
nearly equal in 1959). I describe the approach in more detail here:
A plot of rP is shown in the following figure in black:
K-peaks are identified in 1864, 1918 and 1981. K-troughs are
identified in 1897 and 1946. These points are very close to Kondratiev
peaks (1861, 1920, 1981) and troughs in interest rates (1901, 1946).
Additional structural features are identified in the reduced price plot.
After the K-peak reduced prices fall to a region called the plateau where they
are roughly constant for a while. Prices then "fall off of the plateau"
and bottom after a few years at the vortex bottom by Brian Berry. After
the vortex they rise to a secondary peak that I call the DG peak (also
after Berry). After the DG peak prices fall to the K-trough, which is
lower than the vortex bottom. Prior to 1932 these structures can be seen in the
raw price plot as shown by the dates on my first figure above. Thus we see
that reduced prices shows the same structure as prices before the onset of
secular inflation after 1932. We can even see the vestiges of a DG-peak in
1937 before secular inflation obliterates all traces of the K-wave.
That is, the transformation of raw prices into reduced prices does not
introduce distortion into the pre-1932 record. But after 1932 we see a
1937 DG-peak (the 1942 peak is purely a war-time effect) and a 1946
K-peak. After 1981 we see a rapid drop to a "plateau" structure.
What this tells us is that reduced prices captures the ongoing K-wave that lies
"underneath" the raw price data. Reduced prices clearly show that we are
still on the plateau.
The recent stock market peak in 2000 suggests that we have arrived at the
end of the plateau period and are in the early stages of descent to the
vortex. My secular market trend model indicated that this peak was the end
of the 1982-2000 secular bull market trend. In real time I had identified
the end in 1999 (prematurely) see:
The relevant webpage is no longer at cybercities, it's at CSF:
The stock cycle analogy suggests the recent stock peak in 2000 =
1929. Confirmation of this will be if reduced price falls down from the
plateau, which it might have started to do (I will be monitoring events in real
time).
Some of you probably have noticed the plot of "ex-ante real rates"
on my reduced price graph in red. These come from a working paper by James
W Kolari and Ariel M. Viale of Texas A&M. Ex-ante real
interest rates can be thought of as investor beliefs about future real interest
rates, that is the future monetary environment. They can
only be obtained using sophisticated econometric models. The rates I plot
were obtained as an output from a three-state Markov switching model (and I
have no more idea what that is than most of you). Dr. Viale kindly sent me
a file of the ex-ante rates so that I could look
for Kondratiev-like structures. I smoothed them with a nine-quarter
centered moving average and plotted them along with my reduced prices.
The plateau period corresponds to a period of high ex-ante rates,
implying "fear of inflation" amongst investors. This period then collapses
to a low-rate regime right around the vortex. At present were are in a
high-rate regime that began after 1980. The fact that it has not fallen
yet suggests that the vortex is still in the future. This observation is
consistent with the end of the plateau location suggested by reduced price and
the stock cycle.
Having provided an empirically well-supported argument for placing us at a
"1930-like" position within the B-phase of the K-wave, the question becomes what
does it mean? This I will address in a future post.
For now, I was wondering if this view of cycle position is what most
readers here expect or is their view of our position different? I would
like to discuss this.
Thanks
Mike Alexander, author of
Stock Cycles: Why stocks won't beat money markets over the next 20 years. http://www.net-link.net/~malexan/STOCK_CYCLES.htm |
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