Academic journal article UTMS Journal of Economics

Winter Saeculum

Academic journal article UTMS Journal of Economics

Winter Saeculum

Article excerpt


Incompletely deterministic nature of economic process offers a substantial room for upgrade of a framework that explains prevailing market forces. Market complexity so as the complexity of underlying economic structure requires observation, testing and identification of key developments that determine dominant asset allocation and investment portfolio construction over long periods of time. From portfolio perspective traditional diversification will usually be good enough, although, returns on different asset classes viewed as the part of ongoing Saeculum are likely to materially diverge. Saeculums are born in process of imploding of various asset class bubbles that are formed during prolonged time periods and caused predominantly by massive speculation, momentum, and skullduggery. Positioning and constructing investment portfolio in accordance with particular Saeculum can make generational wealth creation opportunities (Alexander 2002). Core thesis in Saeculum theory is a mean reversion of long lasting economic trends.

At the beginning of the current Winter Saeculum, for which authors believe started in 2008 and still lasts at the moment of writing this paper (May 2016), Mihalina and Krivicic (2008) offered expectations of key economic developments in Croatia. They based their expectations on observations of characteristic market patterns and underlying economy behavior in complementary historic periods, Winter Saeculums, in the long run. Mihalina and Krivicic (2008) concluded that it is likely to expect in a prolonged period: (1) expanding, loose, accommodative monetary policy following a reduced foreign reserve requirement; (2) midterm decline in personal consumption; (3) decline in imports and balancing of balance of payments; (4) decline in real estate prices; (5) deleveraging (Bekaert et al. 2014) coupled with credit supply constraints and parallel downside yield curve shift with especially repressed long term yields. Corporate and investment decision makers need to understand the transmission mechanism in context of forward guidance of further accommodative monetary policy [central bank announcements] and derived relationships - evidently leading valuation driver - that will have substantial implications on performance of various asset classes.


First coherent methodological and logical framework for understanding how economy and market "works" was analysed by Kondriatiev. According to him and numerous other observers of market cycles economy in whole and various asset classes markets oscillate in cycles that can be decomposed by observing dominant, prevailing trends in selected metrics. In Saeculum terminology, Long waves, or K-waves are decomposed to characteristic seasons, K-Seasons or Saeclums, with prime focus on inflation level and its trending. Within the particular K-season empirical evidence show that key macroeconomic figures develop in rising and declining cycles with recognizable patterns of overall long run trends. Major metrics for the differentiation of Saeculums are real returns on capital asset classes so as major trend and starting level of inflation. Saeculum differentiation is clearly shown in Figure 1:

It needs to be mentioned that these findings can be applied both for developed and developing economies and markets but with different length of a particular cycle. Generally developed economies and markets have longer lasting cycles than developing ones. They last approximately 17+/-2 and 7+/-2 years respectfully. Table 1 summarizes some of the selected empirical evidence for developed markets observed during the century long time series data. Taking into consideration country specifics, these results are to some extent also applicable to developing markets.

As presented in Table 1 Winter Saeculums are periods of deleveraging, deflation, weak stock market returns, declining productivity and employment, falling housing prices and other specific dynamics prevailing in the long run. …

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