do I believe in Kondratiev Waves?

Further to my recent blog entry, do I believe in Kondratiev Waves?

Yes and no.

  • I believe they are a useful descriptive tool, and as good a model as any,
  • however they clearly have little or no predictive power. Recent history suggests that the wave has a period of around fifty years, but it is exceedingly difficult to fit postwar economic history to the model, and intuitively it seems unlikely that the model would hold true for both the nineteenth and twenty first century.

I have however used it as an aid to thinking about investing. See the attached diagram, literally on the back of an envelope.

envelope

Assuming that
  • you buy only for capital value, not for dividends,
  • value is global world value, individual shares, markets and countries, could contradict trends.
  • shares increase in value over the economic cycle - the cycle is around fifty years long
  • you want the cash value of your shares to increase over time
  • smaller bull and bear markets will operate against these overall trends
  • any action you take is infinitessimal and will not affect markets

If you buy at point A, the top of the market, then you will have to wait for nearly fifty years, according to the Kondratiev wave, until you can sell again at a profit! If you buy at the bottom of the market point B, then you will never lose money when you sell.

I believe that we are at a point between A and B, probably on the early stages of the fall. On that theory, now is not a time to buy shares if you want capital growth. The situation is likely to change when;
  • we near the bottom of the dip
  • share purchase becomes the most advantageous asset class because other asset classes become even less attractive. For example if interest rates are substantially less than inflation, then investing in shares might be worthwhile, even if you still expect them to fall in value. You can always get a dividend from shares and you have not lost value until you actually sell them. If you can control when you sell, then you can recoup money. Investing in a bank, unless interest rates exceed inflation, you are losing money. There is no equivalent scope to recoup losses by timing withdrawl from a bank. At the moment though, you would be losing money faster by buying shares, and you might need to invest for circa fifty years to see a profit on current share purchases.

My view is that investors should continue to invest, but for the time being put your money into the bank. The time to move back into shares is some time away, but the relationship between inflation and interest rates could make it worthwhile to invest sooner. The current emphasis should be on retaining value, and caution, against the background of a falling market.

The small investor is exceedingly unlikely to make money in the current market, but they should continue to set aside money for when the situation becomes less unfavourable and keep monitoring individual and overall share values.