The long-wave's main predictions are about the economy, rather than financial markets. Although the two are linked, they do not necessarily do the same thing. It is not unusual for good economic performance and bad stock market performance to go together, or versa. That said, the long-wave can still help us to make investment decisions.
Despite being deflationary, winter is not the worst season of the long-wave for risky assets. In fact, it is summer – when inflation really takes off – that has the worst effect on the stock market, as well as upon copper, gold and government bonds. Nevertheless, both the current winter and the early 20th century winter have been unkind to the stock market. With deflation far from over, the returns are likely to remain poor on equities for some time to come.
Of course, falling stock markets over the long-wave winter will sow the seeds for the boom of the spring. The time to buy stocks will likely come before the end of winter, when valuations and the public mood are at despondent lows. The low point for stocks during the winter of the 20th century came early on, after the stock market collapsed by 90 per cent within the first couple of years.
It seems probable that the stock market has yet to make its low this time round. A low, single-digit price-earnings ratio for US equities could be one signal that the fantastic buying opportunity has arrived.
The deflationary pressures of winter are kind to the government bond market. US Treasuries have gained in price over the course of every of the four long-wave winters of the past two centuries. With further deflation and economic turmoil on the horizon, government bonds could easily reach new highs before winter eventually gives way to spring.
Bonds continued to do well into the first couple of years of springtime in the two winters of the 19th century. By contrast, the end point of the last long-wave winter also marked the high point for bonds. When the thaw arrives, shedding bonds in favour of stocks is advisable, as springtime will ultimately punish fixed-income assets.
Gold is another asset that comes into its own during a long-wave winter. Deflation is good for the yellow metal, which has tended to gain in real terms during all of these periods since 1775. It did particularly well during the last winter, the Great Depression of the 1930s. It is repeating this excellent performance during the present bout of inclement weather.
As with bonds, gold kept rising right until the end of winter in the two slumps of the 19th century. After its explosive performance in the 1930s, it tailed off before spring arrived. In light of its great showing to date during the current winter, the peak may well come prior to the change of season. For the moment, though, further gains are the likeliest outcome.
Future seasons: our best guesses
Today's long-wave winter will probably end some time around 2018. Stocks and industrial commodities such as copper are strong candidates to benefit in the following season. Previous springs have lasted between 14 and 18 years, which might therefore take us to somewhere around 2032 and 2036.
China and the other major developing economies will almost certainly be at the forefront of this boom. In fact, the next springtime could be the most spectacular yet, as it will the first globalised spring. In the last such season, China was suffering Maoist repression, while Brazil and India were also far from beginning to realise their massive potential.
Competition for scarce natural resources will, as ever, lead to the inflation of the long-wave summer. Tensions may well be running high between the western winners of yesterday and tomorrow's leaders in Asia and elsewhere. Summertime is a traditionally a season of conflict, with the last four summers hosting the Napoleonic Wars, the American Civil War, World War One and the Vietnam War respectively. Economic rivalry could easily play a part in triggering conflicts around the middle of the next century.
