MTA webcast series summary: The LongWave

I decided I will start capturing the notes I take during webcasts or meetings I attend that are relevant to this blog's purpose.

Below is a summary I sent in email form on the webcast I just attended concerning the LongWave presented by Ian Gordon of the LongWave Group. Typically there are also slides that accompany the presentation. If you are interested in these or have other questions, please contact me and I will send to you directly...keep in mind that these are notes I took as a 3rd party and are the presenter's thoughts, not necessarily mine.

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Today I had the pleasure of listening to a webcast of the Longwave theory (also known as the Kondratieff Wave) which has to do with generational economic cycles. This theory was first proposed by a Russian Economist (Kondratieff in the early 20th century) http://en.wikipedia.org/wiki/Nikolai_Kondratiev and is pretty famous, especially because it's expectations are playing out in similar time frames and because it analyzed back to the 1700's and the beginning of the US and continues to play out.

This theory breaks an economic period into 4 seasons (Spring -rebirth, Summer -growth, Autumn-Speculation/inflation, Winter-Crash/Cleanse) of roughly 60-80 years and the attached chart should be read from the bottom up and used while reading the summary below. I think it is apparent that the interest rates help show the potential long waves through time and the ebb and flow of cycles and how those rates effect other markets. According to this theory we are in our 5th winter since the Revolutionary War and it is far from over (really just begun according to the author).

Here is a summary of the notes I took below...

-Summer is always the season of inflation/interest rate peaks (latest one was the 60s/70s) and autumn of speculation (90s/2000s)
-Entering the 30s depression, the US was actually in pretty good shape. Debt was pretty low, and it was primarily govt. debt (instead of consumer). The debt/GDP ratios are misleading back in the depression because GDP fell 45%...so the main driver of the ratio peaking, wasn't debt, but was GDP dropping (denominator effect).
-It allowed for the govt. to increase its debt because it could be paid back from GDP growth (since GDP could realistically be expected to grow thru time and thus the decline by the 50s to less than 150% D/GDP). This time is different, it is debt driving the ratio of GDP and it is unclear GDP will ever get to a level that sustains the debt increase at 350% GDP.
-The winter period typically cleanses the debt that was built up during the speculative autumn period; in the 50's there was very little consumer and corporate debt (coming out of winter and entering spring)...a very conservative and scared of reverting generation-apprehensive...fuel to kickoff spring. In the previous winter season over 10,000 banks went under
-A peak in interest rates tells us that autumn is around the corner (and that interest rates will soon fall); biggest bulls occur in autumn (1980)
-The autumn period is the speculative period. It is when debt explodes because confidence is high and most assets (stocks, bonds, real estate) do well (1982-2000)
-There is typically a small recession after the summer period before autumn kicks off (1866, 1920, 1981)
-Autumn speculative themes: 1820s- midwest US land grab; Canal buildings; 1860s- railroads (many went bankrupt in the next winter); 1920's- industrial expansion/consumer starts borrowing from corps/US largest creditor; 1990s-internet boom/housing
-The fed has interefered with true stock and asset valuations...delaying the inevitable; Yes, things are different than the Great Depression, but not necessarily any better. US is now largest debtor nation when in the 20s it was the largest creditor...maybe not even richest...globalization/competition pressures...a lot larger now so growth is slower (the Microsoft effect)...
-The longwave group expects things in the future to be much worse than Great Depression because of debt...whether that is a longer time period or a deeper pain is yet to be determined...likely a combo of both. Now debt is on the consumer versus then it was on the govt which will be a major issue going forward.

Some investment themes the LongWave group holds:
-Dow 1000 expectations gotten from a number of different ways, but primarily because of the 1:1 Dow:Gold Ratio expectation that has held through time (2nd page of presentation). Gold over the long run does opposite of stocks, so basically an investment decision should be either/or not both.
-In previous winters, the market fell to almost 50% of the previous season's low...1921=Dow ~$65 and bottom at ~$40 in 1933; 1981=Dow 800 so projection =Dow 400 at winter's bottom.... which means on 30 stocks with a P/E of 5 would mean about $2.60 earnings on average per company...not sure about this methodology with fiat currencies.
-"Sure not going to see Dow 14,000 any time soon.
-"I'm convinced stock market will eventually reflect reality TPTB (the powers that be) won't be able to control forever like they have interfered the last 12 years"
-"Greenspan messed with rates and bottom should have been a lot sooner and harder after 2000 top"
-Stocks are best in Spring and autumn
-Gold is best in Winter (now) and Summer
(my 2 cents) keep in mind that it is a ratio which doesn't mean that they both can't go down...just that one will perform better than the other and/or go down less
-Every major longwave bottom had a 1:1 Dow:Gold price except the 1930s. This is because the fixed price of gold was at $20.67...if was at market would have hit 1:1 (my 2 cents: it hit 2:1 for arguments sake...so maybe that is the conservative target)
-Expects deflation and debt will overwhelm govts eventually creating a new monetary system; expects Euro to fail..similar to 30s when Austria and Britain currency status quos were upheaved
-(my question) - The timing of the waves is not near as important as the events...need to know where events occur in the cycle to know when seasons will change; things like fiat money and human lifetimes throw the timing off making it less reliable. If US was on gold standard like in the 30s would have been completely different today
-"you can predict price or you can predict time, but you cant predict both"
-Expects 2012 to be a bad year...primarily due to GANN cycles and the 20 year and 2nd year in the decade cycle (1932, 1982, 1992, 2002)

In full disclaimer he got his clients all into gold in 1999 with the expectant coming winter...he got out of stocks. he has been in gold since and will continue to hold until the Dow/Gold ratio is 1:1 (he expects to actually undershoot it because of the overshoot of the ratio in the 90s). he suggested that land, food, guns, etc will be other good investments...things to become self sustainable. Expects currencies to basically stop working and industry shuts down preventing transportation of goods, etc.