Making Money in Life Depends on Kondratieff Waves: Knowing Where We Are is Important - Huxiu#
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Capital expenditure and technological revolution ⤴️ ^76040d3b
We may still be in a Kondratieff depression cycle, or we may have just entered a Kondratieff recovery cycle—there isn't much difference in the years before and after this turning point. ⤴️ ^cdcb07b1
Long journey ahead, be prepared, seize the opportunity
Those small and medium-sized enterprises that emerged during the low-interest-rate era will also enter a brutal clearing phase. ⤴️ ^c0827530
See the risks clearly; domestic interest rate cuts may not last long.
Making Money in Life Depends on Kondratieff Waves: Knowing Where We Are is Important#
This article discusses the importance of the Kondratieff cycle for wealth accumulation in life, as well as the four stages of the Kondratieff cycle and the characteristics of each stage. The author points out that the driving forces of the Kondratieff cycle include technological revolutions and capital expenditure, and that each stage presents different investment opportunities. Additionally, the article discusses the original driving forces of economic growth and the importance of the technological innovation cycle.
• The Kondratieff cycle is key to wealth accumulation in life; seizing the different stages of the cycle can lead to wealth accumulation.
• Technological revolutions and capital expenditure are the core driving forces of the Kondratieff cycle, affecting the length and intensity of the cycle.
• The original driving force of economic growth lies in population increase, while the technological innovation cycle determines long-term economic development.
Making Money in Life Depends on Kondratieff Waves
During the holidays, let's talk about something grander.
There is a saying that "making money in life depends on Kondratieff waves," because Kondratieff studies the cyclical fluctuations of prices, which are directly related to financial investment. It is a long cycle of about 50 years, basically covering a person's entire working life. A person has only one opportunity to enjoy the era dividend brought by the Kondratieff cycle, lasting up to ten years. If one seizes it just right, they can accumulate wealth during this stage.
However, this statement can also easily lead to a misunderstanding that there is only one opportunity for wealth growth in a lifetime. In fact, in the four stages of the Kondratieff cycle, each stage has its own characteristics and the most suitable major assets for investment. For example, regarding A-shares, although the fifth Kondratieff prosperity cycle from 1992 to 2002 was missed, the recession cycle from 2003 to 2010 was the best years for commodities; prices were stable during the prosperity and recovery periods, and commodity performance was average, but consumer technology growth stocks were the best.
Moreover, many people often only focus on superficial aspects when understanding Kondratieff, such as the duration of the cycle and some secondary economic characteristics.
The duration of the cycle depends on its driving forces. There are many theories regarding the driving forces of the Kondratieff cycle, including the monetary and gold changes theory, geopolitical theory, primary product and energy supply theory, and the most influential theory of technological revolution by Schumpeter, which are also the two core elements in the Kondratieff theory of Zhou Jintao, the chief economist of CITIC Securities, namely capital expenditure and technological revolution. The length, intensity, and performance characteristics of each cycle and sub-cycle depend on the relationship between these two factors.
Why choose these two as the core driving factors of the cycle?
Economic Development: A Sad Fairy Tale
Human society developed very slowly before capitalism, often experiencing stagnation or even regression for hundreds of years. However, after entering capitalism, the economy developed rapidly, driven by two major factors: technology and capital. Macroeconomics may not interest everyone, so let's start with a fairy tale.
Little Bear and Little Pig are good friends. One day, they went to the market in the forest. Little Bear made cookies, and Little Pig made bread, hoping to sell them at the market.
Unexpectedly, they arrived early, and there was no one there. Little Bear waited for a while, but the market still hadn't started, and he got hungry. He found he had a dollar, so he bought a piece of bread from Little Pig. After a while, Little Pig got hungry too and used that dollar to buy a cookie from Little Bear.
After a while, the market still hadn't started, and Little Bear got hungry again. He pulled out that dollar and bought another piece of bread from Little Pig, then Little Pig bought a cookie from Little Bear, and so on...
Finally, the market started. Little Bear and Little Pig not only sold all their bread and cookies in advance but also ate their fill. The two little friends held hands and thought, "What a happy morning!"
Let's analyze this fairy tale from a macroeconomic perspective:
Assuming this transaction represents three meals a day, then every day they make 2*3=6 dollars, and the annual GDP would be 2190 dollars. Moreover, each year's GDP is the same because Little Bear and Little Pig's appetites are always the same, and they only have one dollar, so the transaction scale can only reach this level, leading to no economic growth.
However, fairy tales are deceiving, and the truth of life is as follows:
One day, Little Bear had a little bear cub, and the demand for bread increased to one and a half pieces per meal, but he only had one dollar and could only buy one piece of bread. Little Bear pleaded, but Little Pig couldn't help; it wasn't just a matter of one dollar—Little Pig only had so much flour, enough for Little Bear alone.
To ensure Little Bear cub was fed, Little Bear went hungry every day, and eventually, he died, returning the story to the "classical equilibrium" state.
This is the truth about the relationship between economy and population before capitalism. When people are fed, they want to have children, leading to population growth, but the natural resources for food are limited. As food becomes scarce, famines, plagues, and wars can occur, killing off a portion of the population, restoring the balance, and allowing society to begin a new round of development.
The original driving force of economic growth lies in population increase, while the limiting factors are the quantity and utilization of natural resources, as well as capital.
Before the Industrial Revolution, people could not resolve these two limiting factors, resulting in a cyclical pattern of population growth and destruction, with economic growth levels stagnating for long periods.
Until one day, two people arrived in the forest: a greedy banker and a clever scientist, and everything changed. The forest entered the era of capitalism.
The Banker and the Scientist's Fairy Tale
The banker lent Little Bear half a dollar, allowing him to buy half a piece of bread from Little Pig. But Little Pig still didn't have enough flour and production capacity. The scientist said, "Watch me," and invented a method to improve bread production efficiency.
Of course, to expand production, Little Pig also needed corresponding capital investment, so the banker lent Little Pig another dollar.
Although Little Pig and Little Bear had to share part of their income with the banker and the scientist, the overall economic scale increased, so everyone became wealthier and could consume more products. When Little Bear cub grew up, he no longer made cookies but became an artist, expanding the variety of products offered.
This is the classic economic growth model of "supply of production factors, technological progress, savings, and investment transformation": the population keeps growing, continuously providing labor and consumer demand, scientists keep inventing new technologies, companies keep producing and upgrading products, and bankers provide all the funding needs, while growth generates more diverse consumption demands.
Now, we finally come to the theme of this article—"Kondratieff Cycle":
Zhou Jintao's Kondratieff theory is derived from Schumpeter's innovation cycle theory. Technological development is an external factor of economic development, serving as the initial driving force, while capital supply is the economic body's adaptive response to development, acting as a growth amplifier. The former is an asset-side factor, while the latter is a liability-side factor.
The peaks and troughs of innovation, along with capital input and contraction, combine to form the four stages of the Kondratieff cycle—prosperity, recession, depression, and recovery.
Recovery and prosperity are both upward cycles, while recession and depression are both downward cycles, but their driving forces are different;
Prosperity and depression are movements away from long-term equilibrium, influenced by the external forces of the banker and the scientist, while recovery and recession are processes of returning to equilibrium, representing the self-adaptive process of Little Bear and Little Pig.
So why do cycles occur? Because, hidden within this seemingly perfect growth fairy tale, are the seeds of crisis.
The Money-Making Banker
Returning to the fairy tale.
All four of them want to produce more and earn more, but Little Bear, Little Pig, and the scientist have some limitations; they cannot produce as much as they want or invent whatever they wish. Only the banker is an exception; he can lend as much money as he wants.
Most people have a misunderstanding about banks, thinking that banks absorb the money from depositors and then lend it to businesses.
In reality, the money lent by banks is "created" out of thin air, which is quite magical but is the fundamental reason for the high growth of the modern economy.
The process of lending 10 million dollars works like this: the bank's accountant first increases the loan account by 10 million, then increases the enterprise's deposit account by 10 million. Bingo! It's that simple; the entire country's money has magically increased by 10 million, which is commonly referred to as "injecting liquidity."
Of course, in reality, banks have many constraints when lending, such as loan-to-deposit ratios and capital adequacy ratios, etc. However, overall, expanding the credit scale is much easier for banks than for businesses to expand production, and the central bank's ability to inject liquidity has no hard constraints.
The banker, leveraging his credit ability, continuously encourages Little Bear and Little Pig to expand production, upgrading ordinary cookies to royal cookies and ordinary bread to milk toast; he also establishes many venture capital funds to accelerate the transformation of the scientist's achievements; he can even make a painting by Little Bear cub worth millions, creating virtual wealth; and provides everyone with credit cards, issuing housing loans, and fabricating a story about an American grandmother and a Chinese grandmother buying houses, encouraging them to consume in advance to absorb the continuously expanding production capacity...
More importantly, capital expansion has "reflexivity"; capital expansion stimulates production and consumption, while the growth of production and consumption creates a sense of economic prosperity, necessitating more credit expansion.
When things go awry, there must be something wrong. The money from banks cannot just appear out of nowhere; where does it come from? The answer is simple: loans must be repaid. This "repayment" causes both a deposit and a loan to disappear simultaneously, and wealth dissipates.
So the money lent by banks is not money, but credit, "future money."
This "future money" flows between major financial systems, cannot be destroyed, and people view growth as a given, becoming increasingly intolerant of unemployment. However, "future money" depends on people's expectations of the future economy. When expectations improve, bankers will choose to let "future money" generate sufficient returns now; but once expectations worsen, bankers will choose to avoid risks, retract credit, and let "future money" disappear.
This is the capital cycle, where economic growth oscillates between excessive prosperity and excessive depression like a pendulum, with only a momentary pause at the normal position.
Of course, this story has another important character—the scientist.
The Scientist's Innovation Cycle
The banker can transform Little Bear's food from dark bread to milk toast, exponentially increasing demand, and can double Little Pig's factory capacity, but he cannot make Little Bear consume products that have not yet been invented, and his influence on Little Pig's bakery capacity is limited.
In economic terms, capital can stimulate short-term demand, but it cannot change long-term supply levels.
The factors affecting supply, such as population growth, are not subject to human will, so the only way to enhance production supply levels is through improvements in technological levels.
Scientists are the ones who determine "when the future arrives."
The way technology drives economic growth is like what Henry Ford said: "If you asked people what kind of transportation they needed before the invention of the car, they would only tell you they wanted a faster horse."
If the car had not been invented, the modern economy would lack the automotive industry—no matter how strong the consumer demand for travel, that portion of GDP would not exist.
In the short term, the world is dominated by marketing experts who can stimulate demand and bankers who provide consumer credit. However, in the long term, historical development has always been driven by someone creating a groundbreaking invention, causing the entire world to take a significant leap forward. Capitalism began with the energy revolution of the steam engine.
If bankers are the troublemakers who repeatedly create crises, then scientists are the true superheroes who sustain global economic growth.
However, scientific progress does not advance at a constant rate; it often takes decades for a major invention to change the world, which also determines that during cycles lacking significant innovation stimuli, there will either be false prosperity driven by monetary stimulus or difficult clearing after monetary withdrawal.
On the other hand, a revolutionary technology often requires years of transformation and a long social acceptance period. Capital is often reluctant to enter in large amounts due to the lack of certainty in profits, leading to a situation where the technology cycle may rise, but capital investment is insufficient, causing innovative enterprises to rely on slow self-accumulation for development.
The asynchronous nature of the capital cycle and the technological innovation cycle forms the four stages of the long-wave Kondratieff innovation cycle.
Four Stages of the Kondratieff Cycle
- Prosperity Stage: Technological Innovation Up & Capital Up
In this stage, new technologies continuously promote the growth of capital expenditure and improve production efficiency, so high growth does not trigger resource constraints, allowing for high-speed growth while maintaining low inflation.
The prosperity stage of the fifth Kondratieff cycle was from 1992 to 2004, marked by the personal computer and internet revolution.
- Recession Stage: Technological Innovation Down & Capital Up
In this stage, after new technologies have been widely applied, the marginal increase in productivity begins to decline, while capital continuously increases investment to maintain the original economic growth rate, leading to the activation of resource constraints and rapid cost increases, triggering large-scale inflation.
Due to the inability to sustain productivity improvements and capital surplus, several significant economic crises will occur during the recession stage, with bubbles bursting and prices falling back down, experiencing a roller coaster ride, with a temporary stabilization period in between.
The recession stage of the fifth Kondratieff cycle lasted from 2005 to 2015, during which emerging countries began industrialization, and the marginal increase in resource demand led to short-term supply-demand imbalances. Subsequently, due to China's overcapacity, deflation began to be exported globally from 2011, resulting in a bear market for commodities and long-term low interest rates, which in turn created a bull market for consumer technology growth stocks.
- Depression Cycle: Technological Innovation Down & Capital Down
Capital investment unsupported by innovative activities cannot be sustained long-term. Coupled with severe fluctuations in resource prices, the Kondratieff cycle enters a depression phase, where not only speculative activities disappear, but many normal business operations are also disrupted, making it difficult for other assets to yield long-term returns except for safe-haven assets like gold.
The last Kondratieff depression phase was from 1973 to 1982, during which there were two oil crises that had a huge impact on businesses and residents' lives.
- Recovery Stage: Technological Innovation Up & Capital Down
New technologies begin to emerge, but due to poor corporate profits, there is no new investment; only stimulated by low interest rates, the surviving companies gradually return their operations to equilibrium levels. In the later stages, the economy will show obvious signs of recovery, preparing to enter the next prosperity phase of the Kondratieff cycle. Therefore, in this era, real estate, infrastructure, and consumer companies are all suitable major assets.
The last Kondratieff recovery cycle was from 1982 to 1991, during which personal computers and the internet underwent continuous technological iterations, ultimately bringing the world into the era of information highways.
As mentioned earlier, the year 2016 marked the beginning of the fifth Kondratieff cycle's depression phase. So, which stage of the Kondratieff cycle are we currently in?
Where Are We?
The boundary between the depression cycle and the recession cycle is relatively easy to determine, as it often corresponds to the peak of capital expenditure, which usually aligns with the lowest point of a commodity bear market. Thus, the fifth recession cycle began in 2016.
However, is it currently a recession cycle or a recovery cycle? This boundary is more difficult to determine because their lines are the turning points of technological innovation activities and the starting point of a disruptive new technology lasting 50 years.
Many people think of the generative AI that emerged this year, believing that the turning point for entering a new recovery cycle is 2023. However, I think it is still difficult to judge at this moment. Typically, near this turning point, the public's views on new technologies are the most conservative. Most businesses do not feel any changes, and many people believe that technological development has permanently stagnated, and the world will remain this way.
The last recovery cycle began in 1982. At that time, although the two core technologies of this Kondratieff cycle, PC and internet, had already been born, their impact on the public's life was still minimal. That year, Microsoft had just established the direction for operating systems, and the Macintosh, which defined the style of personal computers, was born two years later. The world-changing Windows 3.0 system would not be released for another eight years, and internet users were still limited to universities and the military.
Ordinary people's lives remained unchanged for many years. People were using telephones that had been invented for 100 years, watching televisions that had been around for 30 years, reading newspapers with a history of over 200 years, driving cars that had appeared 100 years ago, and the chemical industry boom was a thing of 30 years ago. Even after 40 years since the invention of penicillin, there were no significant drugs that improved human lifespan... To today's children, 1982 feels like the Middle Ages.
Considering that generative AI may take a long time to truly change people's lifestyles, if people find that ChatGPT's responses do not meet our expectations, it will be difficult for businesses to genuinely change work methods through this technology. People will quickly lose interest, and the investments we see in AI may be fleeting, with capital expenditure and returns potentially remaining in a trough for many years to come.
We may still be in a Kondratieff depression cycle, or we may have just entered a Kondratieff recovery cycle—there isn't much difference in the years before and after this turning point.
More importantly, the biggest factors affecting the market are still high inflation and high interest rates, which is quite similar to the situation around 1982. Previously, investors were predicting the timing of entering the next interest rate cut cycle, but the rapidly rising yields on 10-year and 30-year Treasury bonds prove that investors are increasingly skeptical about whether we can truly return to that familiar low-interest-rate era.
The only thing that does not need to be questioned is that globally, the trend of declining capital activities continues. Those small and medium-sized enterprises that emerged during the low-interest-rate era will also enter a brutal clearing phase.
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