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Creative Destruction

Posted on this blog considers the virtues of “creative destruction” exhibited by the ancient Aztecs every 52 years in their ritualistic Tying up the Years ceremony. Much like the Mayans, they were able to use their supreme knowledge of mathematics and astrology to track the super-cycles evident in nature to mitigate their effects and thus emerge from climate cycle bottoms in better condition than otherwise. They knew that the cycle of destruction and renewal was inevitable and calculated the 52 year period, remarkably similar to the Kondratieff cycle, based on an integration of the solar, celestial and human gestation cycles.

It suggests that given we are in the late stages of the Kondratieff cycle that we could also benefit through managing our own “creative destruction” to cope with the new realities of a Kondratieff Winter. I proposed this very notion in he November 6th commentary in the Blog section by proposing that the Fed should have instead held rates steady to use the ensuing destruction to carve away the excesses most needing to be removed from the system.

Creative Destruction
Friday, August 17, 2007

Creative Destruction is discussed in the book “Predictions” by Theodore Modis too. Modis has this to say about the theory, “this concept of creative destruction is not new and in fact preceded Schumpeter by over 300 years. The Aztec Indians had a ceremony every 52 years they called ‘Tying up the Years.’ This ceremony culminated with the renewal-of-the-fire ritual to ensure that the sun will rise again. In this ritual they performed a rite in which pottery, clothes, and other belongings were voluntarily destroyed, and debts forgotten. Such voluntary destruction of assets would seem unacceptable to us today. Thus, excluding a major war, it is difficult to imagine a source of destruction for Western society in the middle-1990’s that would cause large-scale material damages and trigger the next growth phase of the Kondratieff cycle.” Interestingly enough this book was written before 9/11. We may now have that source of destruction needed to trigger the next growth phase, the war on Terrorism.

The Kondratieff Wave could it be possible that what has happened to Wall Street and the world economy has been rooted in the unfolding of the Kondratieff Wave? This is not something that has been concocted by Wall Street analysts as a tool to make a fortune. It is, however, one of the important concepts I took away from the book “Predictions” by Theodore Modis. This book so moved me that I flew to Geneva to meet Dr. Modis and we have been good friends since. I am discussing the Kondratieff Wave because it might just have some significance in how so many investors have lost so much money these last few of years.

What is this Kondratieff Waves? The Kondratieff Cycle is a theory based on a study of nineteenth century price behavior including wages, interest rates, raw material prices, foreign trade, bank deposits, and other data by a Russian agricultural economist named Nikolai Dimitriyevich Kontratyev (Kondratieff). Kontratyev was convinced that his studies of economic, social, and cultural life proved that a long-term order of economic behavior existed and could be used for the purpose of anticipating future economic developments. The wave averages 54 years in length. Depending upon whom you ask the current cycle of the Kondratieff Wave began in 1949 and some cycle theorists believe we are currently in the last phase of this cycle, the phase where the destruction takes place. Professor Modis, who I call one of the fathers of the “S” curve, would call this the maturation phase. This phase typically ends an existing stock market rally with a thud and optimism quickly turns into pessimism a nd a financial panic and stock market crash takes place. The economy rolls over into the next contractionary phase, which is characterized by deflation and the start of an economic depression. From this stage, debt is cleaned out and the Wave bottoms.

I find it is interesting to note that some cycle theorists believe the Kondratieff Cycle is due to bottom out in 2003. In Europe the collapse has been more complete with the European Internet Market Exchange actually closing its doors. Could it be that we have gone through Schumpeter’s Creative Destruction process with respect to Wall Street and our clients and we are nearing a point where the acceleration phase of the Kondratieff Cycle begins again? Is it possible that the destruction of our most precious assets (our clients) was in the cards all along and necessary to “Tie Up The Years” like the Aztecs did every 52 years?

The Mayans From the book “Predictions,” Theodore Modis makes the following commentary, “all Middle American civilizations, including the Mayans with their extraordinary refinement in mathematical and astrological knowledge, used two calendars. A ritual year of 260 days ran in parallel to the solar year of 365 days. The least common multiple of 260 and 365 is 18,980 days, or 52 years. From we get the following, “the Mayans were known for their intricate tracking of this cycle and by embracing the inevitability of the cycle, but not as a destiny but as a tendency, they were able to mitigate its effects and emerge from the cycle bottom in better condition than otherwise would have been possible.” At the end of each 52 year cycle, the Aztecs performed the ritual discussed above called “Tying Up The Years”.

We may be in the process of tying up the years of the last 20-year bull market, or not. See, while this business of 52 year cycles and the various phases of the Kontradieff cycle are interesting, even compelling to quite a few, the practicalities of investing and planning your life around a 52 year cycle are, well, let’s just say it requires no small degree of patience and perhaps even faith.
No matter what phase of Kontradieff’s cycle we are in now, we know that the next 20 years are likely to be totally different that the last. It will take new ideas that most investors are not used to, namely risk management. It will require expert “Tactical Asset Allocation” with the ability to move between different sectors and asset classes as opportunity presents itself. Buying the dips and hedging on rallies will be the order of the day. Neutral strategies are likely to be the best going forward.

Source: Dorsey Wright & Associates 1/6/03