UNDERSTANDING KONDRATIEF WINTER

from longwave cycles written MARCH 2009 !!

"Destabilization comes from the popping of bubbles, particularly when economic inflation is low, such as now. Therefore, let us review our bubbles. Tech stocks in the 1990’s certainly deserved some money, and the Internet deserved some VC backing. But the spending on the dot.com’s was clearly overkill, and we can see that by the bankruptcies of all but a handful of dot.com’s.

All the talk about the emergence of a New Economy vanished when in March 2000 the law of gravity caught up with the speculation of the late 1990’s, resulting in the wiping out of $4.6 trillion in investor wealth in Wall Street, a sum that, as Business Week pointed out, was half of the U.S. Gross Domestic Product and four times the wealth wiped out in the 1987 crash. After the Nasdaq crash burst the tech bubble, we piled into houses. Was that smarter or dumber than dot.com’s? Dumber, of course! Houses?!?!?! Where is the new technology in that? We had houses 1000 years ago! How on Earth is it logical to pay twice as much for a house than the price it was sold for only three years ago? That is absurd! And yet we piled in because we had no place better to put our money, i.e. we had fewer and fewer value-driven business opportunities to pursue.
Time-tested principles of prudent mortgage lending will inevitability return, and houses will once again be regarded merely as places to live. Perhaps you do not yet believe that housing is a bubble. Fine. I’m sure you will see otherwise. But, you know, even if house prices were to just level off (which they definitely will only do in a pipe dream), then their run-up is still insane, and symptomatic of a society that is piling into undeserving investment vehicles.

What’s next? Nothing. There are no further assets that we can lever up. Sure, we are presently piling into 30-year U.S. Treasuries, for the reasons I provided in Part 5, but Treasuries are 100% debt anyway, so they cannot be levered up. As is normally the case during the early part of Kondratieff Winter, real estate is the last great bubble. And now that the Fed has run out of asset classes to inflate into bubbles, the next major step will be destabilization and debt-deflation."