To be honest I had thought with the dot-com bubble bursting that Inflection Point projected by the Perez refined Kondratieff long wave model (k-waves) had been successfully navigated by 2003. I had hoped the matured macroeconomic understanding along with entities such as SEC, which had not existed back in 1929, had enabled such a smooth landing for us when the k-wave had crossed past the threshold for the Inflection Point. Clearly those were an expression of my hopes and not the actual K-waves themselves talking. Once I went back and entered the performance data into the model it was clear that all we had done was not revaluate the assets, as is required in the Inflection Point, but rather simply shift those valuations into other areas. This was clearly demonstrated by the DOW moving 2000 points higher in 2007 to 14000 from its heights in the year 2000 of 12000.

Previously the Perez K-wave model had articulated the length as well as the phases within the k-wave with fine accuracy and high fidelity. However there had never been a way to measure the actual economic impact in the amplitude, or height, of the distinct S-curve in the first half of the wave relative the second half (Installation vs Deployment Periods in Carlota Perez's terminology). One of the benefits of all this networked information being online these days was in providing me with an opportunity to get the data which has been held constant for 100 years and model it relative to the bottom and top parts of the distinctive S curve. I found that data through the DOW Jones Industrials (DJI) which has been measured now for over 100 years.

After having loaded the data I found that the first half of the current k-wave has followed exactly as Perez has projected it to occur. You will see in the charts below the Installation Period for k-wave 4 is identical to out current k-wave (5). What I did realize however was that the S curve is not symmetrical in its height. The height of the Deployment Periods, top part of the curve, is 3.5 times bigger compared with the Installation Period. Therefore the really good news for those who are worried about what is coming next is that after we navigate the Inflection Point we will enter a "golden age" which is going to be much larger and more stable growth. The "gilded ages" tumult and excesses of the 1920s and the 1990s turned out to be relatively tiny growth rates when viewing the entire k-wave as a whole.

As I am not an economist I didn't trust what the data was telling me enough to publish it on my website. I sent the data and the redrawn charts to Carlota Perez who not only is a brilliant economist but one that understands Kondratieff waves explicitly. She was teaching a seminar in Estonia but responded enthusiastically to the application of DOW data as a way of validating not only the phase's lengths but also for the first time measuring the amplitudes relative to the phases and periods. With the approval of a macroeconomist and Kondratieff specialist, I therefore decided to post the data here on the web. For those who have read the proposed standard model are in for a treat as well as I have not yet gone back and redrawn the new shape of the S curve into the model yet.

We will walk through the data explaining both the DOW and the k-wave lifecycle so that the comparison of an economic model to Wall Street performance is as clear as my limited writing skills can make it. What is the DOW? The DJI has been measured for 100 years while keeping its methodology for valuation unchanged. No other investment measure for Wall Street has run continuously for the last 100 years. The only change to the value of the DOW is as a result of investors buying stocks in the 30 companies which constitute it. The following chart shows the DOW and its weighting through the valuations which investors have placed on the 30 companies.

It should not come as a shock to you that the energy companies with the huge run up in oil prices are two of the top four companies in the DOW. Nor should it be a surprise that the largest DOW component is a technology company which is at the core of the current k-wave in IBM.

However if you look at the snapshots for the DOW which is below the graphic on the left, you will not be able to discern much more detail than simply over the last 100 years, the DOW has moved upwards.

When we compare just the trend lines for investors via the DOW and the economics of the k-wave we again get a reinforced relationship between the DOW and the core technologies powering the k-wave. We see that the investors are late, but not by much, in starting to invest in and raise valuations for the companies developing the new technologies.

We see that investment is not an exact science and therefore relatively quickly the investors overvalue the new core technologies. Since the diffusion of the core technologies is not quantifiable other than through the new products in display the windows, the investors get overly exuberant. This leads to a market revaluation of equities and assets which we now understand to be stock market crashes.

In looking at the comparison of the two curves again we see that the growth in diffusion moves in tandem but the investors are again late due to the timidity produced by the decrease in value of their holdings during the Infection Point period. However they do climb onboard again and the valuations once again begin to grow faster than the core technologies diffusion rates. The core technologies begin to mature and innovation becomes reduced and that's why the k-wave curve begins to reduce the steepness of its curve as it increasingly heads towards a more flattened trajectory. The stock market on the other hand resumes that straight up curve in estimation of value. Therefore the stock market curves look the same for the Installation Period and the Deployment Periods. The only difference is that Deployment Period dwarfs the Installation Period in terms of total growth and value. In the end both the investors and the k-waves core technologies resynchronize as the wave comes to an end. Somewhere around this point the next wave starts and the cycle is again repeated.

The trajectory change from k-wave four to k-wave is occurring in the Inflection Point period outlined by the dotted circle on the chart. When the asset and equities were revaluated downward after the crash of 1929, the banks were allowed to fail which is why that period is still cited as the textbook case for economic deflation. However what occurred in this wave is different because Greenspan recognized the dot-com's bubble formation and raised interest rates which had the desired effect in popping the bubble. He then cut rates to stave off a type of 1929 crash while the administration ratcheted up defense spending and cut taxes. The cumulative effect of all of this spending resulted in the credit crises.

Greenspan had no way of knowing that the revaluations had to occur not only in the technology sector but in every sector. Since technology is the core powering the real growth, all industrial sectors had become overvalued. However with the market awash with cash and artificially low interest rates, the valuations were shifted into other investments in the financial sector. If you take apart where the financial advisors invested people's money, they were most often put overweight into the financial sector funds. Why? Because they had been taking the real estate bubble, which always lags the market, and diversifying it into complex credit swaps, derivatives and other investment vehicles. The net effect was if you wanted to keep up with the Smiths and Jones, you had to invest in the one sector which was booming – finance. The DOW which should have corrected downwards instead reached new peaks over 14,000 as a result!

Of course the real estate bubble inspite of low interest rates ultimately collapsed under its own weight. This exposed what had been painted as the diversification of risk by the financial sector as having been in reality incredibly leveraged bad credit loans of many kinds, though the sub-prime is the one most often cited. The reality was no one should have been getting the market returns which they did from 2003-2007. That occurred only on the back of all of this over investment in very bad credit vehicles. That was the false catalyst driving up individual investors 401k's during that time.

In the prior k-wave, the market tanked and everything almost totally deflated. This time Bernanke, who has a particularly deep understanding of the 1930s depression, acted as quickly as he could. The world followed suit. Therefore our k-wave changed its relative trajectory from one of deflation to one of future inflation. Once the deflation is stopped by all this liquidity being pumped into the banking industry we will all collectively face the new problem of how to bring inflation down. No matter how this done, likely through increasing interest rates, once the inflation is brought to the 5%-6% range the Inflection Point period for the k-wave will finally be over. In the chart box 1 is the pumping back in the liquidity and box 2 is the work to remove the resulting inflation. After that the market will head up in less spectacular growth but in a longer and more sustained fashion represented by the green dots moving up and to the left.

A final thought about the market crash. I am doubtful that Greenspan, Bernanke or any other could have prevented the requisite devaluation in equities in the markets. If the approach underway works perhaps it will become the textbook approach to resynchronize the market valuations with the core technologies which are powering Kondratieff's waves. That textbook approach being pop the tech bubble while quickly stabilizing the market. Then move sooner to pop the residual bubbles which result from the shifting investments seeking unsustainable rates of returns in other sectors. Finally without real transparency in business for the marketplace this will remain a highly emotional and speculative side effect of every k-wave.

What the crash validates for the model is very significant. As horrific as the crash is, it does validate Perez's refinement for k-waves. What the model tells about potential futures for humanity is another interesting by product of this model as well.

Model Index