To expand on what Bill Gross had to say about valuations, which I pointed out yesterday, I wanted to bring out a rather ugly little table showing decades from 1930 - 2000.  The "Growth" number is the average annualized rate of return over that decade.

This is the S&P 500, with the start being at the beginning of the decade, so it covers through 2009 (last decade 2000-2009)

Notice something important - there's only been one other negative decade - the 1930s.

But when it occurred, the next decade was sub-par.

In addition, after the "burst" higher in the 1950s, there were two more decades of sub-par returns.

Why?

Simple: Kondratiev Cycles - that is, "longwave" cycles, which approximate one human life, or 80 years.

And interestingly enough, this is an 80 year period.

What do we learn from this?

We can divide long-wave cycles into four parts: Spring (yellow), Summer (green), Fall (brown) and Winter (white)

During the spring you come out of the negative zone and into the positive.  Growth spurts toward the end of spring, but it is not lasting at a high rate.  That is, you can make money on speculation in Spring, but it is fleeting and easy to overstay your welcome, and find yourself holding something that returns nearly nothing.  Bubbles are rare during the Spring; rather, Spring tends to be the decades of innovation and industry.

Summer is characterized by steady and slow growth. A good time for productive enterprise, and a time when returns in that sort of enterprise will trounce speculative endeavors.  The innovations of the Spring are put to work and built upon - they find practical application in everyday life.

Fall is characterized by speculative manias.  Returns on "risky assets" (stocks) tend to be very strong during this period of time, and frequently beat productive endeavors.  Fall is bubble season, where the innovations of spring and the production of summer is turned into hype.  While innovation does occur during a mania, the value attached to such innovations tends to be unsupportable.  This continues until.....

Winter, when returns are (again) negative as the excesses of the Bubble Season are inexorably forced out - despite attempts to prevent it from happening.

Remember, these returns are all before inflation - that is, not adjusted.  Adjusted for inflation, the negative times are at least as bad as the positive are good, and the summer is close to flat.

Therefore, you want to speculate in The Fall.  Each generation will typically get one "Fall" in which to speculate.  The rest of the time speculation is, to be blunt, a spectacularly bad idea.

You want to innovate in the Spring.  New technologies - not incremental advances, true breakthroughs - happen in the Spring.  The Transistor, for example.

And finally, you want to build industry on those innovations - real industries that have staying power, not speculative crap like "Pets 2.0" - in the Summer.  Integrated Circuits and Microprocessors, for example.

The boundaries for the four seasons are not exactly on the decades, of course; I'd argue, for example, that the real point where "Fall" began was around 1982 or 1983.  But this is close enough.

It also points out the folly, however, that anyone who believes we're going to see high returns in the Stock Market any time soon is engaged in.

In point of fact, it is likely that it will be SIXTY YEARS before we see another sustained period like we did in the 1980s and 1990s; there may be one decade of opportunity before then, but it is very unlikely to be this one - or the next.

This has grave implications for pension funds, annuities (e.g. insurance firms) and anyone else who is now "Behind the 8-ball."  If you chase in this environment, looking for the "20% years", the odds are against you succeeding and will be for the next two decades.

You simply must recalibrate your expectations, and so must our government and other officials.  These cycles - long-wave cycles - are predicated on human lifetimes and we can actually chart them going back hundreds of years.  Tulip Mania was a Kondratiev Autumn, as were the "Roaring 20s." 

But just as we cannot prevent winter from following autumn in the annual seasons, we cannot prevent the cycles that are predicated on longer timeframes from playing out.  Even Alan Greenspan knew of this, and was known to have commented that he was trying to cheat what he knew was Kondratiev Winter in 2003.  To be blunt: He failed - the 2000 decade had a negative return despite his interference - and he sure as hell tried.  Many thought he succeeded and Kondratiev had been repudiated - right up until 2008.

Don't be fools folks.  There will be many who will continue to try to tell you that "this time it's different."

If they're right, it will be the first time in hundreds of years.

I'll take the other side of that bet.