Watling and the Kondratieff wave: bonds near long period of rising rates

Watling of Longview thinks bond yields follow a Kondratieff wave. We (Ter Veer and I) don’t share that opinion: the bond cycle lasts about 65 years against about 54 for the Kondratieff wave.

But that is not the main message: we have had a period of more than 30 years of declining bond yields and in the past you often saw then a long lasting reversal of rising bond yields. You can be easily wrong for more than five years, but as a long term investor you know you can’t expect much from bonds now in the coming decades.

The end of the long period of declining bond yields and the first decade of rising bond yields can go like in the previous long wave:
First a sideways move of 8 to 10 years like 1942-1951 of very low bond yields and slowly rising yields afterwards in the first decade of rising yields. Just like now government debt was extremely high and the FED committed itself to very low rates for years even when the inflation was exploding like in 1947 (19%) and 1951 (9%). It sound familiar but I think it will go differently: when the peiod of about 2% 10 year yields is over you will see in a few years bond yields of 5%+. No guarantee of course, a further long period of sideways going bond yields is possible, Plosser is not that influential.

Watling compares the bond yields with the long cycles of equities and commodities. They don’t move together. That is why it is so difficult to make long waves convincingly visible. There are no indicators that show 100% correct a Kondratieff wave. The real equity prices (S&P500) give the best picture according to us: it says something about confidence, profit margins and the value of business..

We see the long equity cycle different from Watling. We see 1920-1929 as an extreme aberration, overoptimism of the then important emerging economy, the US, just like what happened in the important emerging economy of the 80’s, Japan. The decline of 2007-2009 is according to us also an extreme aberration from the long trend to the downside. That long trend is up, because the West is no longer leading in this long cycle and because profits will continue to rise strongly. Productivity growth will be high because lots of innovations, especially in Emerging Markets.

The commodity cycle is in a structural uptrend that probably not has finished. We agree in this respect with Watling.