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DOW JONES     Schumpeter cycle wave (Luck i m your father)

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Luck i m your father     posted : 12/02/11   05:49 pm


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Joseph Schumpeter was a Harvard economist and president of the Econometric Society (1940-41). He was author of the two-volume tome Business Cycles (McGraw-Hill 1939). Schumpeter’s cycle research is of particular interest because he was one of the first to attempt to integrate sociological understanding into economic trends. He also presented an integrated approach to cycles that presented the Kondratieff long wave as a larger scale of the smaller cycles. In Business Cycles, he introduced a theoretical model for how all the various cycles fit together.







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"Schumpeter’s model of how all the cycles worked together to produce long waves included Kitchin cycles (the regular business cycle of 3-5 years) and Juglar cycles (7-11 years), with three Kitchins in each Juglar. Schumpeter also wrote of the Kuznets cycles (15-25 years), but didn’t put them in the charts below. The chart depicts the flow of the Kitchin and Juglar cycles integrated in 56-year long wave cycles. Note that Schumpeter’s model presented 18 business cycles in a regular long wave.

Schumpeter was limited by linear mathematics. His ideas needed non-linear dynamical systems to formalize his approach. This is precisely what is proposed at LongWaveDynamics.com, which takes a dynamic systems approach to business cycle analysis, long wave seasons and the Kondratieff long wave cycle, and the smaller cycles used by active traders.

The late market analyst PQ Wall presented a long wave model different from Schumpeter, which was essentially a dynamical systems approach to market cycles. Wall did not describe his approach to stock market and social cycles in terms of dynamic systems, but Wall took what he described as a threeness and fourness approach to cycle divisibility, which was a genuinely novel approach to cycle analysis."


Luck i m your father     posted : 12/02/11   05:49 pm


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After two decades of stock market cycle research from a dynamic systems approach, I have come to endorse Wall’s approach to the business cycles that produces what I have termed long wave dynamics. Below is a chart that presents an inflation adjusted 20-year moving average of returns in the S&P 500. This chart knocks out some of the noise produced by fiscal and monetary intervention, which is for the express purpose of eliminating business cycle; a goal that always manages to elude the interventionist, no matter how well intended their gallant stimulus efforts. PQ Wall was fond of saying, “Politics destroys the money world.” The riots sweeping the world and subsequent tumbling markets demonstrate this observation.

The analytical power of the four-season approach to long wave analysis is clear on this chart. It is also clear on this chart that global stock markets are in the midst of a winter season rally that will surely wane. The spring and fall are seasons of corporate efficiency, which drive corporate profits and stock market gains. The summer and winter are seasons of corporate inefficiency, where overproduction and excess debt are a drag on the profits of the global economy. More debt is not the solution. It is winter, but spring is coming.
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