This question is asked on Interactive investor yesterday at http://www.iii.co.uk/articles/articledisplay.jsp?article_id=10105568&special_id=10060887 where Peter temple states:
Why should an obscure economist liquidated as part of Stalin’s purges in the 1930s be relevant to today’s generation of stockmarket investors?
To get the answer needs a bit of historical perspective. Stockmarket investors have often paid great attention to economists who developed ideas about cycles.
… and much more, finishing:
Kondratiev’s ideas beg a very important question for investors. If the last Kondratiev cycle ended in 2000 and the cycles individually last for 40-60 years, what message does that hold for the immediate and longer term outlook for the markets? If we recognise 2000 as a Kondratiev peak, at least in stockmarket terms, do we face a 20-25 year downturn before economic conditions start to improve.
There are a number of troubling portents. The arguable waning of the US and Europe and economic powerhouses in favour of China and other fast growing emerging markets, the threat of terrorism, global warming, the continuing issues over credit markets and the value of sovereign debt, the sharp rise in the gold price all suggest a period of economic strain consistent with a downturn in a Kondratiev cycle. If you accept Kondratiev’s ideas, it could last for another ten years before some form of innovation or powerful change prompt a recovery in the leading economy of the day and a revival in world trade.
If so, it’s arguably too soon to think of buying equities: parallels with 1930s America might be closer to the mark. High inflation or prolonged deflation could be equally likely outcomes. The benign middle ground of the so-called ‘Goldilocks scenario’ and the investments that prospered in it could be a thing of the past.
It is my opinion that the Kondratieff cycle is still relevant. However the 50-60 year Kondratieff cycle is not a stock market cycle and it was never very relevant there. It is recognized as a cycle in commodity prices, and most of the analyses that I do of long term commodity prices do show a cycle of about 54 years and often 27 years also.
How can a 54 year cycle have a downturn in 2000 when it had one in 1929? The interval is 71 years, far too long for one cycle, but far to short for two. Rather, this 71 year interval is two cycles of 35.5 years and exact multiples of most of the other common cycles reported by Edward R Dewey. Yes, the 2000 year peak in share prices was important, but it is a different long cycle. See http://raytomes.posterous.com/us-stock-market-cycles-of-355-and-71-years and http://raytomes.posterous.com/stock-market-going-down for more evidence of the similarity of stock prices after a 71 year difference between 1929 and 2000.
The cause of the Kondratieff cycle has been suggested to be one of innovation by Schumpeter, but the idea has not really been demonstrated to be valid. My suggestion is that it is ultimately a climate cycle that is magnified because of human population dynamics.
There does exist a climate temperature cycle of 50 to 60 years. It is very evident in the twentieth century temperatures. Crops are affected by temperature so it is not surprising that the cycle should show up in crop yields and commodity prices.
However human demographics also show a cycle of similar period. That is because a one generation negative feedback makes alternate generations have more and less children. This feedback amplifies the fluctuations of both the birth rate and the general healthiness of economic conditions. See http://www.cyclesresearchinstitute.org/kondratieffcause.html for more.