This week marks the ninth anniversary of this column. With 468 columns under my belt, the temptation to just regurgitate old material can sometimes be compelling, but I've successfully resisted.
The gyrations and "crash" of the markets this past week, however, prompted me to thumb through the archives and revisit my column of March 26th, 2001, entitled, "Hanging Ten on the Kondratieff Wave." It was about the economic cycles described by the Russian economist, Nikolai Kondratieff who was exiled to Siberia for 20 years for discovering that economies go through 55-year cycles. The Soviets at the time had no problem with the "bust" part of the discovery. Their ideologues didn't want to acknowledge the "boom" possibility.
So, here we are once again in what appears to be an economic crisis comparable to that of the 1930's. Here's what I said back in 2001 in the column that was triggered by that year's market crash and economic recession:
"The Russian's hypothesis was that economic, social and cultural forces create business cycles that repeat through generations. The cycle's apparent lengthening is due to increased life expectancy. Technology has driven most economic surges --- whether it be railroads, telephones, airports or the Internet. The blowout and decline, in every case, has resulted from over-borrowing that fueled speculative excess. This has lead to the 'renunciation of debt' and a deflationary period marked by a recession that typically lasts about 10 years."
Today we could add the invention of derivatives and what Alan Greenspan championed as their ability to reduce risk by spreading it worldwide. Kondratieff, if alive today, would be pointing out that any boom's collapse is triggered by companies who can't pay their loans and that go bankrupt. After inflicting a great deal of pain, the system cleanses itself over about a 10-year period. Imagine. This was a Russian economist who had this all figured out in the early 1900's.
When I last wrote about the wave, it was in 2001, when the stock market had cratered. In that period, there wasn't so much debt as there was common stock. There followed a time, the go-go '90's, when business had preferred to "borrow" money in the form of stock instead of loans. When the stock market cooperates by being "hot," companies finance growth by selling stock instead of borrowing. Why? Because they never have to pay interest and they never have to pay the money back.
In this crisis, all the leverage came from borrowed money, which people expect to get back --- plus interest. A sideshow of today's crisis is Warren Buffet. Like a career women who "wants it all," he invests $5 billion for 7 percent ownership of Goldman Sachs. He collects 10 percent interest (actually a dividend) per year for his investment, and he has an option to purchase another 7 percent for another $5 billion. Why did Goldman need his money? Because they had probably borrowed as much as $30 for every dollar of their own equity in the firm. Goldman has survived, but other extreme borrowers have been sucked into the undertow of the Kondratieff wave.
For retirement savers with at least 10 years until retirement, this turmoil has been a godsend. Someone with $100,000 last September had probably lost $20,000 as of last Tuesday, but this year's downdraft sets the stage for 10 percent average annual returns going forward. By any historical measure, stocks are suddenly a good deal. Someone depositing $10,000 per year for the next 10 years --- plus what they earn on today's remaining $80,000 --- will have almost $400,000 by September, 2018. Riding the Kondratieff Wave leads me to the pleasant thought of a wet T-shirt contest where the shirts all read "Crash Survivor."