ECONOMIC DEPRESSION

To make sound investment decisions in the coming months and years, it is necessary to understand the general trend of financial and economic forces from here on forth. In this regard, one should take a look at another long-wave theory that has been observed in general prices and economic activity.

In the same way there are different scale swings in stock prices as described by Dow Theory and the Elliott Wave Principle, there are varying scale "business cycles" in economic activity. Economic observers have identified a 3- to 5-year Juglar cycle, 9- to 10-year Kitchen cycle, 16- to 22-year Kuznet cycle & 50- to 60-year Kondratieff "long-wave" (each named after their respective discoverer). Of these cycles, the Kondratieff Wave is of particular interest here.

As outlined above, in American history there have been three complete Kondratieff Waves and we are currently in the midst of the fourth. The first long-wave started in 1789 and peaked in 1814 along with a price spike stemming from the War of 1812. Following a primary, post-war recession, an "Era of Good Feelings" took hold that was eventually broken by a secondary depression that lasted until 1843.

Following the low of 1843, the second long-wave began and brought prosperity up until an inflationary spike in 1864 associated with the Civil War. The price spiral was broken by a primary recession, and a disinflationary boom got underway in conjunction with the "Reconstruction" and "Railroad Prosperity" following the Civil War. In 1873, there was a severe financial panic and the economy sunk into a lengthy secondary depression that lasted until 1896.

After 1896, the third Kondratieff upswing got underway. It peaked in 1920 along with a sharp spike in prices following World War I. As interest rates shot up to historic highs, a sharp primary recession hit between 1920 and 1921 and the spike in inflation was broken. Thus began the epic disinflationary boom of the "Roaring Twenties". The pervasive euphoria, reckless speculation, and careless overindebtedness of the 1920's ended abruptly in 1929 with the Great Crash on Wall Street and the beginning of the Great Depression.

After the long-wave bottomed in 1942 (some believe in 1937) another Kondratieff wave upswing got underway. Between the late 1930's and the 1970's there was a broad upswing in economic activity and prices. This topped-off with a severe inflationary spiral during the late-1970's and early-1980's. Surging prices were halted by a severe primary recession between 1981 and 1982 during which the discount rate peaked at a historic extreme of 14 percent and unemployment rose to its highest level since the Great Depression. With the spiral of inflation broken, a disinflationary plateau phase got underway along with a classic speculative blow-off that continues to this day. During the past decade-and-a-half stock prices and debt levels have soared as a Roaring Twenties style boom has occurred in the economy, thus seeting the stage for a major bust and economic depression.

There are clear signs that right now the world economy is on the verge of entering a secondary depression like occurred during the 1930's. While the U.S. has thus far been spared, a major downswing is evident in the Asian economies.

By the late-1980's one of the largest speculative bubbles in history had developed in the Pacific Rim where stock and real estate prices were rising exponentially for decades. That bubble has since burst and the Asian economies are now sinking into deflationary depressions.

The breakdown in the Asian economies started after 1989 when the Japanese stock market peaked (see above). Since the top in the Nikkei Average at nearly the 40,000 mark, Japanese stock prices have fallen more than 60 percent and a similar collapse has occurred in Japanese real estate prices. This deflation in the value of stocks and real estate has had a devastating effect on the Japanese economy and regional banks and financial institutions that have huge holdings in such assets. At present, the Japan economy is mired in recession and there are increasing financial problems. The potential impact of Japan's woes on the world financial system can not be overstated. By the late-1980's nine of the ten largest banks in the world were Japanese. Thus, a breakdown in Japan's financial system entails a worldwide breakdown. That such a breakdown is underway was highlighted during the final weeks of 1997 when Hokkaido Takushoku Bank Ltd., one of Japan's largest banks, and Yamaichi Securities Co. Ltd., Japan's fourth-largest brokerage, went under.

While the speculative bubble continued to grow throughout the world economy as Japan has been sinking into depression, in late 1997 and 1998 the deflationary bust spread through Asia, Latin America and started impacting the European and American economies. The global contagion of deflation has increasingly captured international attention as the currencies, stock markets and economies of countries like Thailand, South Korea, Malaysia, Indonesia, Brazil, Argentina, Venezuala and Mexico have collapsed. At this point most of the world is plunging into depression as had started Japan earlier.

Given that the Kondratieff Wave secondary depression is taking hold in the major Asian and Latin American economies, it is only a matter of time before the downturn spreads to Europe and America's financial and economic systems. While a hint of panic started to be felt with the mini-crash in U.S. and European stock prices in late-October of 1997 and during the third quarter of last year, both times stock prices climbed right back to record heights and economic conditions remained healthy. The seeming financial and economic stability may not last during 1999, however.

The message of long-term economic and stock market cycles is clear. The U.S. economy and stock market are due for a prolonged, large-scale decline. Since the DJIA looks like it may have reached a potential Grand Supercycle top above the 11000 mark and given how Asia and Latin America is suffering a dramatic financial and economic breakdown, it is relatively clear that a major Kondratieff Wave downswing is likely close-at-hand for America. A second 1930's-style Great Depression could come next.

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