If you are here to understand how the modern or current Long Wave Model functions then by all means please read on.

K-Waves or Long Waves or Kondertiev's describe the state of development and diffusion in core technologies which power the economy. K-waves are a techno-economic statement which describes how core the core technologies are being consumed and used in the economy and how that consumption affects economic expansion.

So what does a K-wave look like? The following image is Carlota Perez's 2002 refinement in K-wave modeling. It follows below. To be clear I am not referencing the original legacy Kondratieff model. You may review this link - kwaves.com which lays out Nikolai's original model dating back to 1926. That old long wave model is not what we are using within this model (we rely on the latest Perez update in Long Wave theory). We will talk about the successive phases in a k-wave, taking each phase separately therefore don't worry if the chart means very little to you when you first see it. It is merely reference for you to look at while we walk through the phase descriptions.

The first half of the K-wave is called the Installation period. This part of the K-wave is driven by the investors. We will start our discussion of the k-wave there.

Hallmarks for the Eruption Phase:
Old technologies have already completely plateaued from the prior k-wave. The investors are desperately seeking alternative investments as inflation is trashing returns for their investments. The few investors that do find the core technologies in their infancy for the k-wave start the K-Wave by investing in it. The world has not changed as the core technology is too immature and few understand what is in motion from the new core technology yet.

In the current K-Wave the eruption phase occurred in 1971 with the invention of the microprocessor. The economy features high unemployment & inflation as there was no growth as a result of the old wave and old economy having expanded as far as it possibly could. By the time President Carter had left office inflation was around 16% annually. I don't recall the unemployment figures but they were tough times to find a job as I found out when I left the University of Maryland in 1982.

The previous K-Wave was cored in mass production, automobiles and oil. Those industries had plateaud by the early 1970s.

Hallmarks for the Frenzy phase:
The new technology becomes visible as its valuations begin to rapidly expand. Even the small investors begin to see that the technology is significant as hype begins to flourish. Very quickly stock return expectations begin their dizzying ascent as they continue upward. The economic boom creates an ebullient mood.

In the current K-Wave the frenzy phase began in 1987. This marked the start in the run-up for the once vaunted dot-coms. The dot-coms were completely based on the micro processor technology which is at the core of the current k-wave. The economy rebounded into high growth rates as there was then substantial room for organic growth.

The previous K-Wave (4) frenzy phase was in the 1920's. The gilded age of the roaring 20's featured this same giddy atmosphere as growth rates became almost expected. Traditional benchmarks for financial valuations for corporations go out the window as Price/Earnings ratios become huge numbers; that is if some new startup companies have any revenue at all! If corporations or investors want to play they must play in what Perez termed this "casino" environment for the Frenzy Phase of the k-wave.

In 2008 we are still working through the Inflection Point in our current k-wave. New technology investments have become completely overvalued from the increasingly dizzying upward ascent. A market crash is the typical hallmark for an inflection point which results in a recession.

In the current K-Wave the inflection point began in 2000. The majority of dot-coms failed and their collapse took many traditional companies with them. Economy experiences a recession. Valuations as well as companies fall over like dominoes. Not an orderly pullback but rather like the pop of a balloon.

The previous K-wave (4), inflection point phase was in the 1929. Without the banking regulations and other financial mechanisms to manage the markets, which now exist today, the recession turned into a deep depression. Economic fundamentals were not well understood in the 1930s. As a result governmental regulation and institutions came into existence which dampened the impact of the 2000 inflection point when the dot-coms became dot-bombs. However there are still problems which were not addressed through regulation which came into existence during the current K-wave, such as the subprime mortgage crises which require new regulations for better navigation in future waves. The monetary policies which had been put in place have served to dampen the inflection points impact however they have also extended the current inflection point because the not all of the issues were dealt with. The real estate bubble went completely unchecked and the financial deregulation in 1999 served to create the financial crises which have spilled over into the other markets as a result. Companies such as Enron and MCI would set records in the largest bankruptcies ever witnessed before and some of the largest US financial institutions will fail as well. This is typical for the aftermath of the inflection point.

In the crash of 1929 we saw was the publics confidence completely deflate essentially all at one time and therefore both real estate as well as Wall Street collapsed together. In 2000 it was the confined to Wall Street and the collateral damage to affected industries. That is why after the real estate bubble popped in 2006 we are now seeing the current banking crises. This is new and therefore history is repeating itself; however it does so with some discrete changes as monetary and fiscal policy continues to mature.

This is why economics as a subject of study is an imperative. What economic policy seeks to create is efficiency and equilibrium. Not stasis but an equilibrium so that market shifts are not so sudden as to create the domino effect we saw in 1929 and again in 2000 and 2008. On Wall Street today curbs on trading are put in to slow selling when key indices are dropping too rapidly. What a mature understanding in economics can do for us is to put in curbs for sudden rises so that the changes occur in more linear fashion and are over a much longer span of time. It is the lengthening of time in economic shifts which will serve to allow factors in the market to change without enormous up and down spikes which function only to destabilize market(s).

Hallmarks for the Synergy Phase:
Technology development shifts to corporations in what Perez terms the deployment phase of the k-wave, which is the second half of the k-wave. Businesses use the new technologies to differentiate their products from competitors. "Golden age" breaks out after the recession resulting from the inflection point.

The large companies consumed the smaller tech companies or the technology startup companies merged with one another in order to survive in the prior waves. The competitive environment is steadily climbing during the synergy phase as the market coalesces into an oligarchy of competitors. This time is known as the golden age because growth slows to less spectacular rates but is sustained and becomes very steady. In the second k-wave (1829-1873) four times as much railroad track was laid during the synergy phase compared with the prior phases. The costs tumble as a result of the volume which is now being consumed in the marketplace. Because the current K-wave has been impacted by governmental monetary policies which did not exist in the prior four K-waves, we may experience a shortened synergy phase in terms of steady growth. When the US government borrowed money to fix the liquidity issues they in effect may have borrowed from tomorrow's synergy growth to stabilize the current situation in the markets. As there is little precedent for this type of policy we may see some impacts to the classic Perez/Kondratieff wave today and in future. What they are and how much or if any impact remains to be seen. We are in effect performing an experimental operation on our markets real time at this moment in history.

Hallmarks for the Maturity Phase:
Technology innovation slows for core technology which has powered K-wave to this point. The curve at top of the S begins to dramatically flatten out. Investment returns are flat as well. Economy begins to sour. Both inflation and unemployment return in a large way.

As technology innovation slows commoditization begins to set in. In k-wave four, the maturity phase began in 1959. The 1960s would go on to see decreased economic vitality. By the end of the decade inflation and unemployment began to rise. As a child I still remember President Nixon actually mandating wage and price controls due to the rise in inflation. K-waves were not understood to any degree at that time in history. The Nixon administration and the Fed had no idea how to combat the maturity phase of the K-wave. The economy tanks on fears of hyper- inflation and unemployment.

Please note the chart above shows the shaded area extending into the oncoming k-wave not because the maturity phase typically extends into the following k-wave but rather to illustrate the effects of the k-wave on the mini updates in worldview. We have now finished describing the separate k-wave phases. We can now continue on with the current long wave.

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