I cannot remember such a flurry of interest in cyclical trading theories since the aftermath of the panic of 1987. They used to come by airmail, usually well argued, and now they come by Email often in a more abbreviated form, and repeated to countless other correspondents. If one were old-fashioned, one would think that the facility of electronic communications had led to slipshod thinking. What is easily communicated may not be closely argued or fully thought through.
People are impressed when they come for the first time to the names of the cyclical sages, such as Kondratiev, whom I have actively published, or Kitchen – does anyone talk of Kitchen (with a capital K) cycles nowadays? Then at the trading level there are Jones and Precter – if I have spelled his name correctly. There has been no shortage of able men who have devoted their lives to research of the cycles of the economy or of stock markets. Almost everyone is convinced by them when they are first explained.
Even some first class economists have been involved in the development of these theories. William Stanley Jevons is one of the greatest of the English nineteenth century school of mathematical economics – a splendid economist in every way. He has been ridiculed for giving his classical imprimatur to a theory of an economic cycle which he thought was linked to a 10.45 year cycle of sunspots. World trade and sunspot activity were linked through the effect of sunspots on agriculture, particularly Indian agriculture. Sunspots always seem to be unacceptable to the scientific community. In the late nineteenth century scientific economist could not bring themselves to believe that the sunspot cycle could cause the business cycle. They thought it was Voodoo economics and it probably was. In the twenty first century climatologists cannot believe that global warming is caused by the sunspot cycle. They are probably also correct.
Nevertheless, there is one mathematical fact in Jevons’s theory which still niggles at my mind. In 1878, in an article in Nature, then, as now, a highly respected scientific publication, William Stanley Jevons argued that there were fifty year and ten year cycles – which were later to be named after Kondratiev and Juglar, a Russian and French economist. Jevons said that the ten year cycle coincided with the sunspot cycle which had recently been calculated at 10.45 years. The longer Kondratiev cycle ought therefore to be 5 times the Juglar, or 52.25 years.
All of this was written in the 1870s, though with acknowledgements to earlier work going back to the 1840s. In 1720, the South Sea Bubble had burst. That was then 158 years earlier; in 1929 the Wall Street bubble burst. That was 51 years later. From 1720 to 1729 is a period of 209 years, equal to 20 Juglars or 4 Kondratievs. It must, presumably be a coincidence, but it remains a fact that between the first and second great crashes of modern finance exactly 20 sunspot cycles occurred, and that Jevons’s rule would have allowed him to predict the 1929 Wall Street crash in 1878, 51 years before it actually occurred. Of course 51 years is itself the period of the Kondratiev cycle.
The Daily Reckoning Australia