Sunday, February 22, 2015

Kondratiev Waves and Bubbles

I'm reading a 1993 article from a group of researcher named Berry, Kim and Kim (1993).  This article is really good because they predict the bursting of the asset bubble we experienced in 2007 in light of Kondratiev's long wave economic theory. (Yes, the link is Wikipedia, but this entry is fairly accurate). 

Several parts of their article seemed to predict the future quite well.  In 2008, we had a collapse of the real estate market, but we also had rampant high oil prices because speculators were buying up futures.  Sure enough, Berry, Kim and Kim (1993) predicted this out come when they said one of the last acts of the old wave was to create a booming real estate market, and speculation in commodities. We're on the cusp of a new cycle, as the information computer gains of the 1980s are starting to recede. The other translation of our cusp time is slow growth, stagnation and perhaps depression.

 Berry, Kim and Kim (1993) also predicted the current state of innovation as well.  They thought markets would swing from innovation to differentiation, and sure enough, the computer market is in this process right now. Computers from 2007 can do everything computers made today can do. 

Puzzlingly, though, government intervention has led to a robust stock market with low priced resources.  Interest rates are still very low.   CNN says the current NASDAQ boom is different than the last one in 2001.  They say prices will continue to rise.  In 1929, Joseph Kennedy heard stock advice from his shoe shine boy and liquidated his position just in time before the market crashed.  Lately, real estate went up, stocks are very high, and people are starting to report sure money.  In 2005, a rash friend of mine thought the real estate market was absolutely a money maker, and she went into bundling mortgages together in preparation for traunching on the market.  A year later, her company was one of the first casualties of the real estate bust of 2007.  Come to think of it, several friends of mine went into mortgage sales in 2007, and later got their houses foreclosed when they weren't able to work. These friends were unlikely people to go into financial services; one of them was a door to door cable TV sales person, and another installed hot water heaters.  If NASDAQ is a sure thing, look out for the bubble to burst.  This second bubble is confusing, but brought about by government intervention.

The government, although they are trying to get out of the markets, is supporting both real estate and stock markets through quantitative easing.  This is creating a prolonged period of stock gains that seem like irrational exuberance.

Berry, B. J. L., Kim, H., & Kim, H. (1993). Are long waves driven by techno-economic      transformations?: Evidence for the U.S. and the U.K. Technological Forecasting and Social Change, 44(2), 111-135. doi:10.1016/0040-1625(93)90022-Y)