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K-Wave Winter and the Financial Markets

July 1, 2004

Recently I made mention of the fact that we are in the deflationary phase of the 60-year (average) economic long-wave known as the K-wave. Some K-wave experts have divided it into quarters, with the first 15 years known as K-Wave "Spring," the second 15 years as "Summer," etc. We are in the final 10 or so years of the K-wave decline, which coincides with the 120-year Kress cycle bottom in 2014, which makes the K-wave season we're now in "Winter."

Along this line, I received a response from a reader after my last K-wave article in which he stated, "In one of your recent articles you stated your belief that we're in the Winter period of the Kondratieff cycle, and also that the next few years will be good for the stock market (and tech in particular) and for real estate. I don't understand how you can believe in both of these things simultaneously."

The above sentiment expresses a common misunderstanding that many investors have about long-waves or long-term cycles. It is assumed that because a particular cycle has peaked that prices must begin declining until that cycle bottoms. "It ain't necessarily so" would be the reply to this. The financial markets, and indeed, the larger economy, are complex entities influenced by numerous cycles that may be peaking or troughing simultaneously. This explains why a longer-term cycle can peak (e.g., the 30-year cycle peaking in 1999/2000) and yet stock prices can stay afloat and even make higher highs. This is because other dominant cycles are bottoming and turning up along the way and that provides enough support and momentum to keep prices afloat.

Now there comes a point along the cyclical curve, we'll call it the "hard down" phase, in which all the cycles which compose the dominant long-term rhythm are coming down together. That's when you can expect to see crashing stock market prices and a deteriorating economy. But until the "hard down" phase begins (defined as the final 10% of a cycle's duration), you can still be in the declining phase of a long-term cycle and still have a bull market underway depending on which of the shorter-term and intermediate-term cycles are still rising.

In the case of the K-wave, I appeal to one of the great master's of the K-wave, P.Q. Wall, who I recall saying that even in the declining part of the K-wave you can have a strong overall economy. This is because corporate profits are still rising due to low relative values of commodities due to the currents of deflation that accompany K-wave Winter. If we assume a 60-year K-wave, the "hard down" phase or final 10% would be 6 years. So we would look for weakness to set in around 2008 or 2009 based on the 120-year cycle bottom scheduled for 2014. If we presume a 70-year K-wave (which according to expert Ian Gordon is possible), then it could still be a few years away before K-wave Winter begins to exert a dramatic toll on the markets and the economy.

The gentleman who wrote the letter then goes on to ask, "When has a Kondratieff Winter been beneficial to the stock and real estate markets in the past? Not that I am opposing any of these two views of yours, if taken separately....What I don't understand, however, is how you can believe both of these things simultaneously, and how can you be right on both of them?"

That's a fair question to ask. When has a previous K-Wave Winter period been beneficial for stock prices in the past? How about in the 1940s? Most K-wave experts put the bottom of the previous K-wave and the start of a new one between 1949-1954. Let's use 1954 as a theoretical starting point, since it's when the 60-year cycle bottomed (one-half of a 120-year cycle), it's the date P.Q. Wall uses, and that date is close enough for government work since we're talking about a 60-70 year long-wave. Cycle expert Samuel Kress uses 1949-1954 as the bottom of the previous K-wave and the start of the current one. This dovetails nicely with his 120-year cycle which began in 1894 and is due to bottom in 2014. The years 1894 and 1954 are not arbitrary dates. In 1894, America was emerging from an economic depression and this proved to be the transitional time from an agrarian society to an industrial one. The 60-year period ending with 1954 was the transition from World War II era to the so-called Modern Era.

Now the K-wave Winter phase of the previous long-wave was approximately the period of time between 1939-1954. Was this period bad? Not at all. The 1940s saw a war-time stock market rally and a gradual post-Depression economic recovery. It wasn't until the early '50s that the country was hit with another recession (as the K-wave was bottoming). This shows that it's possible to have K-wave Winter and still have overall rising stock prices and a relatively stable economy right up until the bitter end.

Now think about this for a minute - the 12-year cycle bottomed at the end of 2002, which means the new 12-year cycle underway is now up until 2008. The 10-year cycle is due to bottom later this year, which means that the new 10-year cycle will be up until 2009. Taken together, these two cycles exert a powerful impact on the markets and economy. They are part of the 120-year cycle series, and the fact that 10-year cycle always bottoms at the end of the X-4 year of every decade explains why every X-5 year of the last 100 years has been an up year. With all the bears out there calling for a stock market crash and an economic decline in 2005, I have to ask "why?" Why are the bears betting against history...against the cycles? Go figure.

Incidentally, here's another something for the bears to chew on when they talk of an "October Massacre" this fall: Samuel Kress points out that October Massacres only happen when the 6-year or the 10-year cycles are peaking and the other cycles are down. Well this year the 10-year cycle is bottoming and the 6-year cycle doesn't peak until next year. Once again, an October Massacre in 2004 would be precedent setting.


July 1, 2004

Clif Droke is the editor of the Momentum Strategies Report (MSR), a 3-times weekly forecast and analysis of U.S. stocks from a technical perspective. He is also the author of numerous books on finance and investing, including most recently "The New Science of Parabolic Analysis." Visit his web site to subscribe to MSR and for free samples of his analysis at

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

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