What Assets Should Be Bought in the Later Stages of the Kondratiev Depression? - Huxiu#
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Highlights#
In the later stages of the depression, the allocation of major assets should focus on cash, with gold held in a defensive mindset, and bonds bought at a low point if one is more aggressive. ⤴️ ^31c4274e
Current news is already saying that gold is the new preferred safe-haven product. At the same time, the high-interest-rate environment has made fixed-income products more aligned with market demand. With these two points already emerging, does it mean we are in a depression period?
Near the turning point of the Kondratiev depression cycle and recovery cycle ⤴️ ^a350da6b
This aligns with the earlier points about gold and bonds.
Common point: both belong to the "positive feedback caused by capital contraction" stage.
Positive feedback refers to the price signals of rising or falling, which are linearly extrapolated by capital and entrepreneurs, believing that future trends will continue to rise or fall, thus actively increasing or decreasing capital investment, leading to self-fulfilling expectations. ⤴️ ^f3aff265
The Kondratiev depression cycle amplifies the positive feedback of capital contraction, causing the economy to deviate from long-term balanced growth, while the Kondratiev recovery is the feedback convergence of capital contraction, returning the economy to long-term balanced growth. ⤴️ ^f3682ca4
The Federal Reserve's monetary tightening has also caused an increase in interest rates and the dollar index. ⤴️ ^972c1570
This also confirms the Federal Reserve's reduction of liquidity.
Currently, deflation is only occurring in China, but the turning point of "depression → recovery" should be a global deflation, so this turning point has not yet arrived, and it is likely necessary to wait for the U.S. to enter a recession and interest rate cut cycle in a certain year, at a certain low point of global demand. ⤴️ ^87407128
Does this mean my job will be affected? A decrease in global demand.
The crisis caused by the bankruptcy of some financial institutions, large enterprises, or small economies is different from the sudden drop from prosperity seen in 2008; it is the despair after repeated struggles between hope and disappointment, seeing the crisis approach and giving up efforts, actively choosing to "lie flat." ⤴️ ^9aee370a
Repeated torment, followed by giving up resistance.
Therefore, some say that because of AI, we have now entered the Kondratiev recovery cycle, but it should be noted that all technological advancements are backed by capital, especially the current AI algorithms represented by GPT, which heavily rely on chip computing power and energy consumption. Unless there is a revolutionary change in energy or materials in the short term, or ultra-high-performance chips, the progress of algorithms will soon encounter resource constraints and lose economic benefits.
In addition, in the short term, the capital cost in the era of high interest rates does not support burning money. If money cannot be continuously burned, the changes in AI may not be significant. ⤴️ ^f33556e6
I strongly agree with this point; AI is just an applied technology, and the underlying aspects have not changed much. Simply put, the current computing cost of AI is too high to be widely used; this reminds me of Tesla's autonomous driving and low-cost strategy, which seems to be the right thing to do.
What Assets Should Be Bought in the Later Stages of the Kondratiev Depression?#
This article analyzes the four stages of the Kondratiev cycle and the characteristics of the later stages of the depression, discussing what assets should be purchased during this phase. The author points out that the allocation of major assets in the later stages of the depression should focus on cash, with gold held in a defensive mindset, and bonds bought at a low point if one is more aggressive. In terms of stocks, the consumer sector and overseas pharmaceutical stocks have ongoing opportunities. Technology stocks generally perform poorly during the depression and recovery phases, with real opportunities arising in the prosperity cycle. In terms of commodities, the dual decline in supply and demand in the later stages of the depression makes it unlikely for most varieties to exceed previous highs.
• The allocation of major assets in the later stages of the depression should focus on cash, with gold held in a defensive mindset, and bonds bought at a low point if one is more aggressive.
• In terms of stocks, the consumer sector and overseas pharmaceutical stocks have ongoing opportunities.
• Technology stocks generally perform poorly during the depression and recovery phases, with real opportunities arising in the prosperity cycle.
The Two Major Driving Forces and Four Stages of the Kondratiev Cycle
Cycles are the most important force affecting investment at the macro level, with long Kondratiev cycles lasting up to 50 years and short cycles like the 40-month inventory cycle. Judging the turning points of short cycles is crucial, but for long cycles, the most important factors are the driving forces. Because the cycles are too long, turning points are not a specific moment. However, by grasping the driving forces, one can better understand the rhythm of the cycle.
In the previous article "Making Money in Life Depends on the Kondratiev Cycle, Knowing Where We Are Is Important," I focused on analyzing the two most core elements in the Kondratiev cycle: capital expenditure and technological revolution, both of which have peaks and troughs. The capital cycle is a subjective cycle influenced by human sentiment, while the scientific development laws in the technological revolution dominate the objective cycle, with the latter affecting the former. Thus, the interleaving of their peaks and troughs forms four stages:
1. Prosperity Stage: Technological Innovation Upward & Capital Upward
In this stage, new technologies continuously promote the growth of capital expenditure and improve production efficiency, so high growth does not trigger resource constraints. Therefore, while experiencing rapid growth, it can maintain relatively low inflation.
2. Recession Stage: Technological Innovation Downward & Capital Upward
In this stage, the marginal returns of new technologies on productivity improvement decrease, while capital continuously increases investment to maintain the original economic growth rate, leading to the initiation of resource constraints, rapid cost increases, triggering large-scale inflation, and several significant economic crises, resulting in bubble bursts.
3. Depression Cycle: Technological Innovation Downward & Capital Downward
Capital investment unsupported by innovative activities cannot be sustained in the long term. Coupled with severe fluctuations in resource prices, the Kondratiev cycle enters a depression cycle, where not only speculative activities disappear, but many normal business operations are also disrupted.
4. Recovery Stage: Technological Innovation Upward & Capital Downward
New technologies begin to emerge, but due to poor corporate profits, there is no new investment. Only stimulated by low interest rates, the surviving enterprises' operations gradually return to balanced levels.
Some believe that "it does not apply to A-shares," which misunderstands the Kondratiev cycle. It is not a stock investment theory; it is primarily an economic theory that explains price cycle phenomena. Therefore, in terms of investment, the Kondratiev cycle mainly addresses the allocation of major assets, as each stage has the most suitable investment varieties—even if it relates to stock trading, it cannot tell you what to buy in A-shares, but rather whether it is appropriate to buy stocks now.
The conclusion of the previous article "Making Money in Life Depends on the Kondratiev Cycle, Knowing Where We Are Is Important" is that we are currently near the turning point of the Kondratiev depression cycle and recovery cycle. Although this turning point is a stage and difficult to pinpoint accurately, understanding the reasons for the formation and different manifestations of the "depression and recovery" stages is still very important.
What Will Happen in the Later Stages of the Depression?
The stages of depression and recovery have a common point: both belong to the "positive feedback caused by capital contraction" stage.
Positive feedback refers to the price signals of rising or falling, which are linearly extrapolated by capital and entrepreneurs, believing that future trends will continue to rise or fall, thus actively increasing or decreasing capital investment, leading to self-fulfilling expectations.
During the depression stage, due to a lack of innovative motivation, technology becomes less vibrant from maturity, and the efficiency of capital investment declines. Economic expansion gradually slows down, resulting in investment contraction and increased inventories, long-term declines in neutral interest rates, and economic growth increasingly deviating from long-term equilibrium levels. The depression period is not completely devoid of technological innovation; for example, the current depression cycle has seen a new energy revolution triggered by rapid cost reductions in photovoltaic wind power and lithium batteries, leading some to believe that the Kondratiev recovery cycle has arrived early.
Technological revolutions do not just create a new industry but enable most traditional economic sectors to improve efficiency. The previous four revolutions—steam engines, railroads, electrification, automobiles, and information technology—have brought significant changes to most industries and ordinary people's lives. However, upon careful analysis of the new energy revolution, photovoltaic wind power and lithium batteries mainly replace traditional energy sources, neither creating large-scale new demand nor significantly improving production efficiency across industries.
Without large-scale incremental demand, once large-scale capital expenditure occurs, it quickly leads to overcapacity and insufficient demand, which in turn validates the characteristics of the "Kondratiev depression cycle."
In contrast, the capital expenditure expansion triggered by the internet revolution during the Kondratiev prosperity cycle saw a surge in entirely new human demands, which did not lead to severe inflation or overcapacity. The effects of these two technological revolutions occur at different stages, reflecting the differences in the Kondratiev cycle.
The difference between the stages of depression and recovery is that the Kondratiev depression cycle amplifies the positive feedback of capital contraction, leading the economy away from long-term balanced growth, while the Kondratiev recovery is the feedback convergence of capital contraction, returning the economy to long-term balanced growth.
Why Does Positive Feedback Amplification and Convergence of Capital Contraction Occur?
In the previous article, it was mentioned that the turning point of the Kondratiev "recession → depression" is a cyclical low point in commodity prices. The reason for this low point is oversupply. For example, around 2015, on the supply side, capital expenditure led global commodities to peak in capacity expansion, while on the demand side, after the internet revolution passed the peak of smartphone replacements, the diminishing marginal utility of technological revolution caused demand shrinkage, compounded by other short cycles, collectively producing this low point in commodity prices.
The low point in commodity prices led more and more people to believe in recession and depression, thus reducing capital expenditure. Since this round of capacity expansion mainly occurred in China, it led to the supply-side reform that began in 2016.
The initial intention of capacity contraction was merely to address the issue of excess capacity, but if the decline in investment does not coincide with efficiency improvements, the result will only lead to further demand shrinkage. This is the contraction of private investment that began in 2018, where the more capacity is reduced, the more excess it becomes, effectively entering the "positive feedback amplification" stage.
From the perspective of the Kondratiev depression cycle, an industrial policy or economic policy, regardless of its original intention, will produce a strong "feedback amplification" effect as long as it aligns with the characteristics of the long cycle, leading to a deviation from the policy's original intent.
Of course, during this stage, economic policies will continuously correct themselves, using loose monetary or fiscal expansion to respond to the alternating contractions of capacity and demand, which also causes capacity not to decline in a straight line but to experience multiple fluctuations.
For example, in 2020, countries implemented comprehensive fiscal expansions in response to the pandemic, combined with shipping bottlenecks caused by lockdowns, leading to a brief global commodity bull market. Subsequently, the Federal Reserve's monetary tightening caused an increase in interest rates and the dollar index.
This process of capital contraction, due to "muscle memory," can sometimes lead to alternating inflation and economic recession, and even make stagflation more likely.
In the last Kondratiev depression cycle, due to the oil embargo caused by the Middle East war and the Federal Reserve's aggressive monetary policy, Europe and the U.S. experienced long-term stagflation, with two economic recessions occurring at the beginning and end.
The latter economic recession was connected to the initial stage of the fifth Kondratiev recovery cycle, which was actually also the lowest point of capital expenditure, with a clear bear market mentality, and most enterprises lacked confidence to invest. However, at this time, the economy was far from the long-term growth equilibrium level, and corporate profit levels no longer declined. Coupled with some local industries beginning to attempt the application of information technology, the internal recovery forces within the economy began to slowly break the "positive feedback amplification" caused by capital contraction, entering the "feedback convergence" stage, that is, entering the Kondratiev recovery cycle.
Thus, the turning point from the depression phase to the recovery phase can be a stage lasting several years. In stock market terminology, it is not a "V-shaped bottom," but rather a rounded bottom.
Of course, near the turning point, there are also some economic characteristics, such as the possibility of one or two inventory cycles experiencing severe overcapacity turning points.
Although similar to the "recession → depression" turning point, which is also a low point in a commodity bear market, the causes are entirely different. The low point of "recession → depression" in commodities is an absolute excess due to upstream capacity over-expansion, with high corporate inventory levels; while the low point of "depression → recovery" in commodities is a relative excess after extreme demand shrinkage, where corporate actual inventory levels are not high but are perceived as "too high" due to a lack of confidence among entrepreneurs, reflecting different confidence levels in capital and entrepreneurs.
The fourth Kondratiev depression cycle differs significantly from the previous three. From the perspective of causes, the depression cycle should primarily be characterized by deflation. However, since the transition from the gold standard to the dollar standard greatly increased the government's ability to intervene in the economy, to address the external inflation caused by the oil crisis, long-term high interest rates instead led the global economy into a long-term stagflation, a non-typical characteristic of depression.
However, external policy influences cannot change the forces of the inherent long cycle of the economy. By the later stages of the depression cycle, both GDP and CPI decline, still presenting typical recession characteristics, with long-term high interest rates causing demand recession, ultimately exceeding the speed of capacity decline, resulting in a negative capacity gap. A few months later, CPI stabilized, officially entering the recovery phase of the fifth Kondratiev cycle.
The inventory cycle is a short cycle of 40 months, and the turning points of long cycles are often resonated with other short cycle turning points.
If we boldly speculate, when should this turning point occur?
What Will Happen Near the Turning Point?
Each cycle has its own characteristics of the era. Since China accounts for the highest share of global capacity, it also reflects the highest degree of capacity overcapacity domestically. As some global capacity is shifting from China, the original capacity in China is idled, so this overcapacity may be fragmented; that is, China has overcapacity while regions receiving the capacity transfer experience insufficient capacity and vigorous investment, but the degree of insufficiency is not enough to offset domestic overcapacity.
Currently, deflation is only occurring in China, but the turning point of "depression → recovery" should be a global deflation, so this turning point has not yet arrived, and it is likely necessary to wait for the U.S. to enter a recession and interest rate cut cycle in a certain year, at a certain low point of global demand.
At the same time, starting from the third quarter, the Chinese economy has entered the upward cycle stage triggered by the inventory cycle turning point, which will take another year to complete. After entering a global recession or stagflation, it may take more than another year, with a possible timeframe of 2025 or later.
However, as I analyzed earlier, rather than being a turning point, it is more like a "long season." The turning point of "depression → recovery" is characterized by increasing divergence in inventory levels, several rebounds and returns in stock prices or commodity prices, and crises caused by the bankruptcy of some financial institutions, large enterprises, or small economies. This is different from the sudden drop from prosperity seen in 2008; it is the despair after repeated struggles between hope and disappointment, seeing the crisis approach and giving up efforts, actively choosing to "lie flat."
This is very similar to the psychological characteristics at the bottom of a bear market in the stock market.
Drawing on the deep recession from 1979 to 1982, although high inflation was easing, the speed of interest rate decline was slower, and GDP was declining faster, with manufacturing accelerating outflow and Japanese high-cost performance products sweeping Europe and America. Market confidence was completely absent, with the S&P 500 dropping to a historical low of 9 times PE.
In fact, comprehensive new technologies had already emerged, but near this bottom turning point, the public's view of new technologies was the most conservative period. Most enterprises did not feel any changes, and many believed that technological development had forever stagnated, and that the world would remain this way.
In "Making Money in Life Depends on the Kondratiev Cycle, Knowing Where We Are Is Important," I mentioned the mindset in the early stages of the recovery cycle:
The last recovery cycle began in 1982. At that time, although the two core technologies of this Kondratiev cycle—PC and the internet—had already been born, their impact on public life was too low. That year, Microsoft had just established the direction of operating systems, and the Macintosh, which defined the personal computer style, was born two years later. The world-changing Windows 3.0 system would not be released for another eight years, while internet users were still limited to universities and the military. Ordinary people's lives remained unchanged for many years; they were using a telephone invented 100 years ago, watching a television that had been around for 30 years, reading newspapers that had a history of over 200 years, driving cars that appeared 100 years ago, and the chemical industry's explosive growth was from 30 years ago. Even after 40 years of penicillin's invention, there were no significant drugs that improved human lifespan... To children today, 1982 seems like the Middle Ages.
Therefore, some say that because of AI, we have now entered the Kondratiev recovery cycle, but it should be noted that all technological advancements are backed by capital, especially the current AI algorithms represented by GPT, which heavily rely on chip computing power and energy consumption. Unless there is a revolutionary change in energy or materials in the short term, or ultra-high-performance chips, the progress of algorithms will soon encounter resource constraints and lose economic benefits.
In addition, in the short term, the capital cost in the era of high interest rates does not support burning money. If money cannot be continuously burned, the changes in AI may not be significant.
When interest rates come down, we will be near the "depression → recovery" turning point, and capital will fall into habitual skepticism, with no more investments until a truly revolutionary product, similar to Windows 3.0, emerges.
So the realistic consideration is, what major assets should be allocated in the later stages of the depression?
What to Buy in the Later Stages of the Depression?
The economic depression period is characterized by stagnation in technological progress and capital expenditure, with the price formation mechanism reflecting a dual decline in demand and supply. Especially in the later stages, economic policies become ineffective: tightening policies during inflation cannot solve supply issues, while active fiscal policies during recession lead to debt traps.
Therefore, the allocation of major assets in the later stages of the depression cycle should still be "cash is king," with a defensive mindset of holding gold, and a more aggressive approach of opportunistically buying bonds.
There are no sustainable opportunities in the stock direction; growth stocks will experience a final round of deep declines after a phase of rising following the cessation of interest rate hikes. Consumer stocks are worth buying at the bottom because, after entering the recovery cycle, stocks in the consumer sector are usually the strongest; value stocks perform well but have limited space, easily trapping investors in the last wave of increases. Only overseas pharmaceutical stocks have ongoing opportunities, but domestically, it depends on healthcare policies.
In terms of technology stocks, for long-term investors, this stage is indeed a time to lay the groundwork. Technology companies that shone during this round of prosperity, such as Microsoft and Intel, emerged during the Kondratiev depression period. However, the issue is that from the perspective of 1977, it is difficult to predict that Apple and Microsoft will become tech giants in the future, while the then-leading companies like IBM and Xerox would decline, and Kodak would go bankrupt. Moreover, technology stocks underperformed the market in both the last depression and recovery cycles, with real opportunities arising only in the prosperity cycle.
In terms of commodities, during the depression period, sometimes due to a rapid decline in supply, a short-term supply-demand gap can lead to price increases, such as the two waves of oil price increases last year and this year. It is not ruled out that commodities may experience intermediate trends, but the dual decline in supply and demand in the later stages of the depression makes it unlikely for most varieties to exceed previous highs.
Furthermore, the elasticity of strong cyclical varieties weakens, and price rebounds are merely due to supply declining too quickly, such as panels and pig farming, where capacity planning is too large, and demand always fails to keep up, turning into weak cycles.
After the previous article was published, some wondered if China would have its own Kondratiev cycle. This idea was valid in the past; the Chinese economy indeed had its independent cycle. However, since joining the World Trade Organization in 2001, China has increasingly become the global manufacturing capacity base and the world's factory, "breathing the same air and sharing the same fate" with the global economic cycle. The most typical example is at the beginning of 2008, when the high-level officials were still preventing the economy from overheating, but by the end of the year, there was unprecedented fiscal expansion, with the only variable being the U.S. subprime mortgage crisis.
Once globalization begins, it cannot be fundamentally reversed. Whether it is the decoupling advocated by Europe and America or the technological blockade against China, it cannot change the cycle itself.
Moreover, the leading country in the last Kondratiev cycle was the United States. In the next cycle, although the leading country may not necessarily become China, our influence will undoubtedly be stronger than in the previous cycle.
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