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ECON CYCLE TRADING


Predicting The Future With Kondratieff Waves

08/20/08 08:43:56 AM
by James Kupfer

If you believe in the theory espoused by the late economist Nicolai Kondratieff, then you realize that the economic malaise in the United States is likely to last until at least 2010 and possibly all the way out until 2018.

Security:   NA
Position:   Sell

If you believe in the theory espoused by the late economist Nicolai Kondratieff, then you realize that the economic malaise in the United States is likely to last until at least 2010 and possibly all the way out until 2018. According to Kondratieff, there exists a roughly 50- to 70-year economic business cycle made up of four distinct phases: spring, summer, autumn, and winter. Given the US's economic symptoms, we are now in the painful "winter" phase.

Here is an abbreviated breakdown of how the cycles are delineated, with the primary focus being on autumn:

- Spring: Solid economic growth and mild inflation
- Summer: Stagflation/recession
- Autumn: Price stabilization or mild deflation, easy accessibility to cash, global stock market euphoria and boom, real estate prices soar.


The hallmarks of autumn should sound familiar enough, as they are the economic environment that has been in place basically since the mid-1970s and 1980s until recently. This brings us to the winter phase:

1. Stocks, commodities and real estate prices drop in a bear market
2. Interest rates eventually drop significantly, leading to a rise in bond prices
3. Economic growth limited.


It should now be obvious that all three of these conditions of the winter phase are occurring in the US, and generally across the globe. Both stock and commodity markets are now generally down more than 20%, since their peak and housing prices can be down significantly more than that. Interest rates have been dropping for the last few years. Finally, many pundits and economists have stated that the US is likely in the midst of a recession. As bad as things may seem for the economy and stock market right now, the forecast could be much bleaker. Here is a little bit of history for you: the last winter period began in 1929 with a little something called the Great Depression.

Assuming the theory is correct, then in the best-case scenario, the winter phase arguably began in 2000 and would likely last for a decade, bringing our economic woes to an end around 2010. Under the worst-case scenario, the winter phase began just this year with the recent peaks in stock and commodity prices, which could lead to another decade of economic turmoil that would not end until around 2018. Let us hope for the former.



James Kupfer

Mr. Kupfer is a market professional and amateur stock market commentator. Disclosure: It is likely that Mr. Kupfer has or will enter a position in any security he writes about.


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