Articles

Jan. 6, 2004

Kondratyev Theory Introduction

Perhaps the best I can do is start by introducing a little about myself, how I came to learn about the Long Wave and the impact it had on my trading profits.

In 1968, I was an Electrical Engineer in Aerospace in Southern California. As part of a lecture series hosted by my apartment complex, I learned about the exciting profits to be had in Commodity trading. Being young and with little capital the benefits of speculation appealed to me. For the next six years, I devoted my full attention to trading commodities even using student loans for funding.

The early 1970s was a period when computers were coming on strong. Most major universities had top flight computer facilities. Armed with a tape of historic prices, unfortunately with many errors, I spend evenings and weekends in the computer center isolating different cycles and experimenting with technical charting methods. Much of this research was based on methods developed by H.M. Gartley back in the 1930s.

About this time, I had the good fortunate to meet a few very successful investors who over the years acted as my mentors. The problem I had in isolating patterns and trading methods on markets was each time I found a successful and profitable pattern it would fade with little warning. The scope of my research continued to expand to include longer and longer timeframes in an attempt to tie shorter patterns together.

Probably the main event to get my attention was the corn blight of early 1970s. I had asked an old trader at a brokerage house one time why the margins on grains were so high in comparison to the average price ranges. He just laughed and told me to wait. After the corn blight hit I went back to the old guy - lets call him Victor and he began to teach me about the Long Wave. After reading Schumpeter (Business Cycles) it became clear where the problem lay with technical analysis.

Technical and even fundamental analysis of any market is limited to the known. Short term patterns reverberate around current market conditions. When systemic changes take place, the information derived from traditional analysis becomes worthless. The corn blight was one of those changes. The WTC attack was another

These are pivotal points from which society derives direction. Perhaps we cannot accurately predict such times of change, but we can use the Long Wave to help identify periods of systemic risk.

Using the Long Wave my mentor was able to profit from the Corn Blight of the 1970s. Using the Long Wave I was able to avoid the worst of the downside of the last bear market including the WTC Attack. Further I was able to anticipate a period of systemic risk following the election (or appointment) of Bush. These are extreme examples. Many more subtle shifts occur all the time giving a lead in to the next popular mood. The more one orders history in Long Wave terms the greater the continuity of events.

In December 1974, I began a Stock Market newsletter called the Kondratyev Wave Theory. In the first letter I was fortunate to project both the lowest point of the Stock Market and the end of the 1974 gold bull market. For the next 10 years, I publish the newsletter and advised investors on market timing of stocks, interest rates, gold and currencies. From 1984 to 1998, I took a sabbatical from writing about the Long Wave, but certainly not from its use. Retiring in 1998 I once again starting writing about the Long Wave and expanding my research.

Each researcher of the Long Wave has added perspective and interpretation. My work has departed from traditional areas and concentrated on mood. It is impossible to understand the future and the potential changes ahead without anticipating the mood in which those changes will be felt. The shift towards a 1950s McCarthyism caused by the WTC Attack was difficult to put in context without an understanding of the mass paranoia of the time. Similar conditions existed at the end of WW II as Communism swept the world.

Do conditions drive the mood or does the mood dictate conditions? I am of the opinion there is an interaction. However, in the use of the Long Wave when making projections, anticipating mood change is very powerful. It was clear well before the WTC Attack the mood of the nation was drifting once again towards the paranoid. Events catalyzed the mood. The unfolding paranoia very close in mood to the late 1940s and early 1950s falls directly on the Long Wave time line.