05/27/15   Kondratiev Wave

Editor’s Corner

Ron Rowland

Fed Chair Janet Yellen gave a speech in Rhode Island last week. She said the Fed was still likely to begin raising interest rates later this calendar year, despite recent economic setbacks that may have delayed the original timetable. She went on to say that subsequent rate increases are expected to be slow and gradual.

Larry Kudlow penned an op-ed piece that was published in today’s issue of Investor’s Business Daily. In his view, “Yellen is offering a back-to-the-‘50s approach to interest rates.” Indeed, short-term interest rates typically ranged between 1% and 2% for most of the late 1950s and early 1960s. Inflation was nearly absent in that era too, running about 1.5%. With short-term interest rates so low, it is nearly impossible to get an inverted yield curve, an event with a great track record of predicting recessions.

Mr. Kudlow concluded that a policy of slow rate hikes is not a bad thing, as long as the country avoids President Eisenhower’s mistakes of trying to overtax and overregulate the economy. The mostly likely outcome in his view is, “No boom and no bust. No inflation and no recession.”

Upon reading this, I couldn’t help but do the math, and figured it had been a little more than 62 years since Eisenhower took office. If we are just now repeating a cycle that began that long ago, we are indeed talking about a long-term economic cycle. My thoughts then turned to Kondratiev Waves.

The famed researcher of long-term economic cycles is Soviet economist Nikolai Kondratiev, who first published his works in 1925. He observed that economic cycles typically last from 40 to 60 years, and these cycles now bear his name – Kondratiev Waves. The four major theories explaining these long-term economic cycles are technological innovation, demographics, speculation in finite resources, and debt deflation.

It is easy to see all four of these theories at work in the past cycle. Technological advances have been nothing short of astounding with the advent of space travel, microelectronics, and biotechnology. Demographics are playing a role with populations of developed countries leveling off and aging, while emerging nation populations are rapidly expanding. These same demographic shifts result in shifting demand for land, food, housing, energy, and basic materials. Lastly, it is hard to argue that we are not currently experiencing a heavy bout of debt deflation. Maybe Kondratiev knew a thing or two about economics.

Investor Heat Map: 5/27/15


Health Care returned to the top of the rankings a week ago and extended its stay another week. Technology kept second-place honors, although both it and Health Care lost some momentum over the past week. Consumer Discretionary finds itself two spots higher this week, but it was the result of weakness in other sectors as opposed to new strength. Those weakening sectors included Financials and Materials, with Materials falling two spots to fifth. Industrials and Consumer Staples remained steady in the middle of the pack. Telecom moved a step higher on a relative strength basis but gave up its last shred of positive momentum. Energy dropped another spot lower and flipped over to red in the process. Utilities has been either last or next-to-last slot for sixteen straight weeks and shows no signs of improving. Real Estate remains on the bottom for a sixth week and fell deeper into the red.


Last week the style rankings were very compressed with only nine points separating the top from the bottom. Today, the situation is only slightly better with an eleven-point spread. All three Growth categories remain in the top-five, although the relative order is somewhat interesting. Small-Cap Growth moved two spots higher to unseat Mega-Cap for first place honors. Large-Cap Growth held its #2 spot, and Mid-Cap Growth is in fifth. This creates a capitalization barbell with the two ends, Small- and Large-Cap, showing superior strength to Mid-Cap Growth in the middle. The same phenomenon is not evident on the Value side of the style-box, as the three Value categories line up in capitalization order with Large-Cap Value in seventh, Mid-Cap Value in ninth, and Small-Cap Value on the bottom. Small-Cap Value was the weakest performer this past week. It is starting to separate from the rest of the pack and is in danger of losing its upside momentum.


There is no change in the top four global categories this week. The top of the list is headed up by China, which expanded its lead over second-place Japan. The UK and EAFE round out the group of four at the top. World Equity and Europe swapped places in the middle of the rankings. The US Dollar jumped against all major currencies this week, causing headwinds for foreign equity performance when translated back into greenbacks. As a result, the US continued its recent climb out of the basement, this week edging Emerging Markets aside to land one notch higher in seventh. Canada was on the bottom a week ago, but it was still in the green at that time. Today, it moved up a step, although it is now displaying negative momentum. Latin America was walloped for more than an 8% loss over the span of six market days. Its rebound attempt that commenced in mid-March has come to an abrupt end.

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“But this long run is a misleading guide to current affairs.
In the long run we are all dead.”

John Maynard Keynes, 1923


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