The long-term bull market for bonds will turn bearish soon as historical stock market trends repeat themselves, an economist told CNBC Tuesday.
The Kondratiev wave, or K-wave, theory, developed by Russian economist Nikolai Kondratiev during the Lenin era, claims that capitalist economies – and interest rates -- move in super-waves of up to 60 years, with around 30 years falling and 30 years rising.
We are now “very close to the end” of gradually lower interest rates, according to Chris Watling, chief executive of Longview Economics.
“Rates in the U.S. on bond yields peaked in 1981, and hit their low in September/October last year,” he told CNBC Tuesday.
He drew parallels between the current period of quantitative easing and the post-Second World War era, when the West was “trying to inflate their way out of indebtedness.”
“The key today is deleveraging. If we’re at the end of it, bond bear market has begun,” he said.
“If we believe bond deleveraging has got further to go, we’re in a cap on yields until that bear market begins.”
The K-wave theory is rejected by economists including Murray Rothbard, who pointed out that business cycles as we know them have only been in existence for around two centuries – and that some of Kondratiev’s downturns have actually contained long periods of prosperity.
“During one long 30 year fall or rise in interest rates you get both a secular bull and secular bear market for equities – around 15-year bull, 15-year bear,” said Watling. He believes that the commodities market has a similar bull and bear period, but reversed compared with the equities market.
“If correct, this means a secular bull market will begin over the course of the next the few years, and we should abandon commodities,” he added.
“I’m concerned in the very near term that QE is running out, and we may be forming a near-term top,” he cautioned.
“Markets aren’t as cheap as they should be, and the price-to-earnings rating on the Shiller ratio (currently around 22 times earnings) should be much lower.”
The Shiller ratio – a measure of companies’ share price against their earnings per share, adjusted for inflation – has a historical average of 16.