Why the Kondratiev cycle matters?
Success boils down to two things: hard work or luck. If hard work alone guaranteed success, why aren't factory workers or plowing oxen the ones who succeed? We tend to believe hard work leads to success because successful people attribute their achievements to effort, linking ability to outcome. If they admitted luck played a role, would anyone still look up to them?
Of course, without effort, success is just a pipe dream. What luck gives, luck can take away.
What is the Kondratiev cycle?
There are four cycles: the long Kondratiev cycle (technological revolution, 50-60 years), the medium-long Kuznets cycle (real estate/construction, 15-25 years), the medium Juglar cycle (equipment investment, 7-10 years), and the short Kitchin cycle (inventory, 3-4 years).
World Kondratiev cycle division (from Zhou Jintao, Tao Dong Zhou Qi Lun)
(Source: Huachuang Securities)
(Source: Huachuang Securities)
The Kondratiev cycle begins with an innovative technological revolution. Currently, we may be in the depression phase of the fifth Kondratiev cycle, awaiting a new technology to trigger the recovery phase. In the 1920s, Soviet economist Nikolai Kondratiev proposed a 50-60 year long economic cycle driven by science and technology, known as the "Kondratiev cycle." It has four phases: prosperity, recession, depression, and recovery. Starting with an innovative technological breakthrough, the first 20 years are prosperity, where new technologies disrupt and the economy grows rapidly. Then comes a 5-10 year recession with slowing growth. The next 10-15 years are depression, lacking growth momentum. Finally, a 10-15 year recovery phase incubates the next major innovation.
(Source: Huachuang Securities)
Where are we now?
- Each Kondratiev cycle is accompanied by the rise and fall of major countries' relative positions — Ray Dalio, Principles
The world is in the Kondratiev depression phase. The US is in a real estate downturn, Juglar recovery, and active inventory destocking. China is in a real estate downturn, Juglar recovery, and passive inventory destocking. The global economy is in the depression phase of the Kondratiev cycle that began around 1991. Historically, the cycle is driven by technological revolutions and industrial shifts. The current question is whether ChatGPT-led AI innovation can catalyze a new Kondratiev cycle. On the Kuznets cycle, both China and the US are in a real estate downturn. China's cycle started with housing market liberalization in 1998, peaked in 2011 in terms of real estate investment growth, and is now in its late stage. The US real estate cycle began a new upswing after 2010, peaked after the 2020 pandemic, and is now in early downturn. On the Juglar cycle, both China and the US are in the early stage of a new equipment investment cycle. On the Kitchin cycle, both are in inventory destocking: China is transitioning from active to passive destocking, while the US lags slightly and is still in active destocking. Looking at restocking drivers, both countries are in the early stage of a new Juglar cycle, so future restocking may be driven by Juglar expansion, but could be suppressed by the real estate downturn. China's three-cycle nested model: no complete Kuznets cycle since 1998, two Juglar cycles, six Kitchin cycles. After this inventory trough, restocking may be driven by electronic equipment, electrical machinery, general equipment, steel, non-ferrous metals, etc.
- Chinese-style modernization within the Kondratiev cycle
By 2035, the next Kondratiev prosperity phase may arrive, coinciding with the first step of China's strategy to become a modern socialist power — basically achieving socialist modernization. By 2050, the Kondratiev cycle may reach the next prosperity peak, corresponding to the second step — building a prosperous, strong, democratic, culturally advanced, harmonious, and beautiful modern socialist country.
(Source: Huachuang Securities)
The Next Kondratiev Cycle
The fifth Kondratiev cycle is expected to begin around 2020-2039, led by AI technology, supplemented by new energy and life sciences, peaking by mid-century. This cycle will likely surpass the previous four, bringing historic changes to human society and unprecedented wealth creation. In my earlier article What Makes a Great Company? Nvidia's 100x in 10 Years and the Landmark AI Wave, I discussed the importance and investment opportunities of the AI revolution. I will follow up with industry analysis on AI.
