The markets are not always kind to those that dare to have a crack at forecasting the future.
Back in Baltimore the other week, I had a bunch of old investing books delivered to our American office.
I prefer the out-of-date ones to the latest releases. You can see how the same worries go around…and pick up useful clues…and generally observe how someone with the best of intentions can end up looking like a fool.
But you also see that little changes in the financial world, in a way. Take this quote from a 2010 book called The Great Reflation. The author reflects on a period around 1972.
At the time, forecasters were using a cycle known as the K Wave to forecast the future direction of asset markets.
How did they do?
‘Forecasters went on to predict a market collapse and depression rivalling the 1930’s that would occur sometime in the late 1980s.
‘Stocks were indeed poor performers from 1972 to 1982, but that was due to very high rates of price inflation, not the deflation that long wave adherents predicted…
‘After 1982, stocks had the best bull market in history, lasting for 25 years.’
I found that hilarious when I read it. The markets can make a fool of all of us at any time – me included!
However, this does not discredit the idea of a K Wave altogether. Those forecasters put their own spin on it.
A close look reveals its effects may be playing out right in front of us…
A man called J. Anthony Boeckh wrote The Great Reflation. When he brings up the ‘K Wave’, he is referring to the Russian economist Nikolai Kondratieff.
Nikolai put his major work down in 1925. He argued that capitalist economies move in 50-60 year waves.
Generally, we get 30 years of an upswing and 30 years of a downswing.
This is the long-term K wave that Boeckh refers to in his book.
On the upswing of a K wave, we get new inventions and innovation that drive strong economic growth.
These are the periods most likely to unleash Joseph Schumpeter’s fabled ‘creative destruction’ on the world.
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I think it’s fair to say we’re seeing that now.
But there’s usually some shift in the energy base, too.
We can see that playing out now, as well…
A historic shift that will last a century
Take, for example, the latest news from the insurance industry. I know. I know.
Nothing could be more boring – except if you’re in the coal business, when it becomes frightening.
That’s because they’re beginning to avoid the industry completely…as are the banks.
The world is turning away from coal, and, less along, oil.
But here’s the bigger point for today.
We are – if I have my bearings right – currently a touch over halfway into the 5th K Wave.
Every other similar period in previous K Waves has seen huge infrastructure spending, according to Mr Boeckh.
The arrival of the automobile, for example, was a hot invention of a previous K wave upswing.
But the thousands of petrol stations around the world didn’t just appear conveniently straight away.
Slowly, the market built out the infrastructure and business models to make them profitable.
Along came more refineries and supply chains to convert crude and get it to market.
Then came repair garages and insurance and accessories and different models…
It didn’t end there.
The car allowed for the diffusion of the population to the suburbs and set off a boom in housing construction.
And, of course, the Middle East became of high strategic importance…
So, you can see these cycles of innovation can be disruptive to the status quo in many different ways.
Now, we can see something similar playing out in a different way…
Elon Musk is the man for the social mood
In Spain, a company called Endesa plans to invest in 8,500 public charging points for electric vehicles.
Over the five years until 2023, they could also create 100,000 for private clients at homes and businesses. The money allocated so far is 65 million euros.
This is likely to be repeated in countries all around the world.
Much fuss is being made right now about the news from General Motors that it will sack up to 14,800 employees from its North American plants.
That’s an emotive headline.
However, part of the reason is to save money that can be invested in electric and self-driving vehicles.
And while GM’s sales of conventional cars are dismal, Tesla’s sales are skyrocketing.
The investment required won’t stop at charging stations to facilitate this shift.
It will require major investment from the resource industry around the metals like lithium and cobalt just to supply the batteries.
Capital spending will shift to different areas in many different ways.
Detroit’s heyday won’t return. But the electric car equivalent will show up somewhere else – probably in China.
It won’t all happen tomorrow. But the thing to remember is that investors, at all times, aggressively pursue growth opportunities.
That’s why Telsa, for example, commands a massive premium over GM even though its conventional figures aren’t as good.
The same is true of Walmart and Amazon.
Kondratieff never was a stock picker as far as I know. But, at a guess, if he were alive today, he would prioritise companies on the trend toward renewable energy and ‘green’ technology as much as possible. It’s going to run for a lot longer yet.