Evidence for the Existence of Two Long-Wave Cycles

December 1, 2000

A recent discovery has shed new light on our understanding of economic cycles. Specifically, we have found evidence to support the existence of two long-wave cycles—both of which have historically been confused for a single long-term cycle, or the "K-Wave." If our findings prove correct, cycle theorists will be forced to revise and reevaluate their understanding of the long-term forces which influence price behavior of all traded assets.

Our conclusion is based on a simple review of historical price trends. By examining long-term charts of several major commodities, and separately, of major stock market indexes and consumer price indexes, we see very clearly the major tops and bottoms for each asset class. If the conventional thinking that a single 50-60 year long wave cycle controls price movements for all asset classes is true, then there should not be any discrepancies between the major tops and bottoms in the respective asset classes. Such, however, is not the case.

Conventional cycle theory posits the existence of a long-wave economic cycle commonly known as the Kondratieff Wave, or K-Wave, named after its discoverer, the Russian economist Nikolai Kondratieff. This cycle is said to be anywhere from 50 to 60 years in length and is said to influence the price trajectory of all asset classes, including stocks, bonds, commodities, currencies and real estate. However, an inter-market analysis of these asset classes relative to one another yields the surprising (yet obvious) conclusion that the price trends of the two major asset classes—financials and commodities—are not in synch, and in some cases are diametrically opposite. The question then arises as to how the same super-cycle could be controlling the price trends of both asset classes if they are trending in opposite directions? The answer is simple: it cannot be. Instead, the inescapable conclusion is that there are actually two long-wave cycles, close enough together in time to be confused for the same cycle, yet distinctly separate. Both exert their influence over the two asset sectors—the one for commodities and the other for financials (which includes stocks, bonds and real estate)—as two separate cycles entirely.

With the aid of long-term charts showing price trends in commodities, stocks, and overall consumer prices we are able to isolate the long-wave cyclical influences governing the course of prices for each. We are furthermore enabled by this method to determine the existence of two separate and distinct economic cycles, both of which share nearly identical periodicities and which are close together in time, yet which exert influence over two separate asset classes.

Using this methodology, the K-Wave will be found to be a cycle with a definite 60-year periodicity as measured from bottom to bottom which exerts its influence mainly over commodities. Since the bedrock for the commodities sector is the grains (since no economy can survive without the sustenance provided by them), we must turn our attention to long-term trends in grains prices. In doing so we discover that a clear-cut bottom in grain prices (principally wheat) was established in 1940. From that bottom, grains prices proceeded to trend higher over the next decade, building a base from which a major blast-off of prices would occur into the late 1970s and early '80s. From this peak, grains prices began an overall slide which has persisted into the final decade of this century. Indeed, grains prices seemed to have posted yet another major bottom late this year, a bottom from which another 60-year cycle will begin.

This analysis is confirmed by the fact that most commodities have put in major long-term bottoms between late 1998 and 2000. The CRB commodities index saw a major reversal nearly two years ago and has been trending higher every since. Oil prices, of course, have followed this general upward surge in raw goods prices by achieving a 10-year price high. All of this confirms that the long-wave commodities cycle has posted an important bottom from which a new inflationary cycle (for commodities) has likely begun. This distinction is important, for while the overall trend in hard assets in the coming years will be toward inflation, the overall direction of financial assets (e.g., stocks, bonds, real estate, etc.) will be toward deflation.

Interestingly, the first commodity to top at the peak of K-Wave inflation in 1980—gold—will be the last commodity to bottom at the trough of K-Wave deflation in 2000. Already, gold shows signs of being at or near this critical reversal point, a reversal which should take place by the end of this year (and it has already been presaged by the pronounced reversal of many leading indicator gold mining stocks). When it finally does, it will officially mark the end of a major bear market in commodities and the beginning of a new bull market.

The other long-wave cycle has a 55-60 year periodicity and governs the course of financial prices excluding commodities. This cycle we will call the Jubilee Cycle since the foundation for its existence is laid forth in the Old Testament book of Leviticus, chapter 25:8-55, in the Bible. The Levitical laws governing the Jubilee year, which was to be observed by Old Testament Israel, provided a time of release from debts and obligations (including slavery) every 50th year. This had the effect of cushioning the adverse reaction from the long-term buildup of debt and production over the course of two generations. Obviously, since forgiveness of debt was a grand object of the Jubilee, the Jubilee Cycle itself can be considered as a more of a financial cycle than a commodities cycle, since debt is more commonly used in transactions involving stocks, bonds and real estate. So we have here the basis for two separate long-wave cycles—one governing commodity price trends and the other governing financial price trends.

The last Jubilee Cycle bottom occurred between 1950 and 1955. This is quantifiable by referring to the long-term historical chart of both the Dow Jones Industrial Average (considered the benchmark for U.S. stock prices and as such, a useful reference for overall financial trends) as well as a long-term chart showing consumer prices. Both of these charts point to the early 1950s as being a time of base-building for a long-term rise in financial asset prices, a run that has continued unabated…until now. Since we have entered the "hard down" phase of the current Jubilee Cycle (defined as the final 8-12% of the cycle), it is not surprising that financial markets have begun to break and are on the verge of crashing. (In the case of the Nasdaq Composite, the crash has been underway for several months). This downward tendency will continue as the dominant feature of the U.S. financial sector until the final bottom of the Jubilee Cycle.

As indicated above, the overall trend in the financial sector in the next 5-10 years will run counter to the trend for commodities and will be one of runaway deflation. By contrast, the 55-60 year Jubilee Cycle bottoms sometime between 2005-2010 and, until it does, will bring about a drastic change in the financial, social and political landscape of America. It will also usher in a period of economic depression unseen in 70 years and most likely unparalleled in breadth and scope. We base this projection on the fact that unlike the Depression of the 1930s, not only is the 55-60 year Jubilee Cycle coming down, so too is the 120-year Master Cycle (a harmonic of the Jubilee Cycle). This will compound the depth and severity of the coming depression and bring about cataclysmic changes to the American infrastructure and superstructure. It will be a time when valuations for the highly favored financial sector are reconsidered; at the same time, valuations for the beaten down and shunned hard asset sector will also be reassessed. The balance of favor will turn toward long-neglected commodities such as gold and grains, and will turn against stock and real estate. Such will be the effect of these overlapping long-wave cycles.

Note: Clif Droke's recent radio interview with Tom O'Brien on the Tiger Financial Network can be downloaded from the archives section at TFN's Web site at www.tfnn.com.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

The purity of gold is measured in carat weight.

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