The model in broad strokes
In economics there is a loosely used term referred to as Long Waves. Most of what people reference when they say Long Waves are really shorter term business cycles. Two examples which are frequently cited are Kuznet cycles (15-25 years) and Julgar cycles (7-11 years). However what we are seeing for the last several years is clearly not the adjustment of those shorter business cycles. Now we need a larger model to understand the dynamics of what is transpiring as we have not seen the likes of the current economy since the Great Depression.
Carlota Perez is a brilliant economist who ten years ago published an update to Kondratiev Long Wave modeling (50 years). Perez's refinements are currently the only model functioning from the fields of economics or finance which continues to describe what is actually transpiring in high fidelity.
The reason why Perez's refined model possesses tremendous value is because it focuses in on tracing what ultimately drives our economy. The most fundamental driver is new core technologies which not only power new companies such as Google and Apple but also serve to remake old line industries such as Retail or Energy serving to make them much more efficient. When one invests in the stock market this is the underlying factor that really changes. Therefore when one looks at the maturation for the core technologies which power each wave we see has occurred as well as what lies ahead.
A summary description of Perez's Long Wave model would be to describe it in having three major elements:
1) The birth of the new core technologies which will power the Long Wave.
2) The subsequent pullback and crash from the over valuations for those core technologies and
3) The lower but much steadier growth rates for the core technologies which follows on after the crashes.
Initially it is investors who see the future value in the new core technologies. It is their investments which start the wave rolling. Investors are looking because the prior wave has run out of steam to power the economy. High unemployment and inflation are hallmarks in the end of a long Wave. The negative economic climate sends the investors out searching for vehicles which can provide better returns than they were receiving.
The few investors start the wave in a process where the few turn into the many. Just as in the 1920s, you and your next door neighbor invest in the marketplace as all boats are rising. However as history as seen four times previously, the market turns into a casino and bubbles form as the manias peak.
We saw in 2000 the initial pullback from dot.bomb crash that Greenspan lowered interest rates and the investors began to shift their investments into other areas such as Real Estate and Banking. However even cheap money can no longer be sustained as the market begins to deflate. The market enters what Perez terms a paradigm shift the market moves down and sideways till the investment community capitulates. This is why Wall Street tears down Main Street without any visible connection. In the last depression, the entire economy was allowed to deflate and we saw a textbook example of what happens when the market is allowed to unwind on its own. This time the governments around the world have tried to dampen the force of the crash and we have not yet seen what we saw in the early 1930s again.
In the second half of the wave we do not see the investment communities drive the core technologies as was the case during the first half. Rather we see large businesses develop the core technologies and we see the market begin a slower but much more sustainable growth. This is why Carlota Perez terms the second half as "Golden Ages" while she calls the run-up of the first half "Gilded Ages."
In the latter 1940s and throughout the 1950s we see market leaders become an oligarchy. There were over 100 car manufacturers at the start of the 20th century. By the 50s we see the big three emerge along with phrases like what is good for General Motors is good for America. This is because the very large companies are the center in the diffusion in the core technologies as the wave continues to build again.
Next Article A Deeper Dive into Long Waves
