Indian Economic Winter

In 2009 I wrote that India entered an Economic winter and debt would be a problem. Not many agreed. In 2015 even as nifty is higher this view has played out perfectly in terms of the economic impact. Debt has become the centre-stage of all economic discussions. Below is the original update with the indicators that supported this view and still do and an explanation of the Kondratieff cycle so that you can understand where India is in the cycle. The Winter Update articles have been updating on the cycle and the data points as the winter wave plays out and keeps you up to date with the cycle. After the winter will be Spring the Real Birth of a New Indian Economy. Patience pays.

Indian Economic Winter 2.0 - The Final Innings

Indian Economic Winter


20 Feb 2016

Opening Note :-

After much promise I have managed to push myself to publish this note. It was due in Oct of this year but as stocks rallied I waited out till Dec, then we updated all the economic data points to make them current and the problem with India's corporate sector was clear. It should have been published before the Jan crash in the markets but that does not change the facts. In fact the recent events have only reinforced the economic outlook, that the Indian economy has entered it's own economic winter. In fact this story is easier to sell today than it was when I originally conceived it in 2010. Within six months of the 2010 report all stocks high on debt topped out and have been falling for the last 5 years. So the view was proven right in that respect. In the light of the theory India took it's economic pain. But as the data points show, we have not done so completely. The stock market was quick to recognise the coming crisis and funds reallocated capital to defensive consumption and export driven sectors as the currency declined. The economy remained inflated due to negative real interest rates. And that simply drove the market higher hoping that Modi would solve it all. The Nifty hit 9116 without addressing the debts that the corporates had left the banks holding behind. In the last quarter the RBI diktat to banks to come clean, finally, has pushed the process forward. This makes me confident that we are now in the final phase of India's Economic Winter - 2.0, the second coming. The second coming is pushing the financial system to the brink and testing it's limits. I know the RBI has stated publicly to not be scared and that this is normal and not all debts are bad. He may be correct in today's context. But that is not how an economic winter works. There are risks to this strategy because of the cascading effect of winding down of debts that were built over 70 years. You are asking all the participants in business and finance to change the way an entire generation has been functioning. To own up to their debts and pay or there will be consequences. Doing so at a time when the economy is slowing not just locally but globally has a multiplier effect. And add to it the risk of a global deflation. I do not think it is over and ends this easily. This is a generational event and the impact will be far larger than anything I or anyone alive has seen. And because India was under the British Raj, financial history of a previous Kondratieff cycle within India is not available for reference. You have to study the previous cycle from Global financial history to understand what lies ahead for India. The RBI was formed in 1935 from where India's current economic cycle starts from the depths of the great depression. So let me explore all of this to come up with a clear outlook of what to expect going forward from here. 

INDIA'S KONDRATIEFF CYCLE : by Rohit Srivastava PART 2.0


And its impact on the Indian Stock markets and Asset markets. The 70+ year financial cycle surrounding business cycles.

PART ONE 25 FEB 2010-2012 KF Cycle : Update in March 2013   Cycle Update 

Winter Update and follow up Articles on Economic news 2014-2015: Winter Updates

The Kondratieff [Kf] cycle or waves are the brainchild of Nikolai Dmyitriyevich Kondratyev. Ian Gordon provides the most comprehensive explanation for the US markets and his writings are found at and his charts at To simply read the background on the theory visit 


India’s Kondratieff Cycle – Myth and Reality

Every Technician at some point in his career has been intrigued by the KF cycle because it studies economic data like a technical analyst does on a chart and depicts cycles. Cycles carry the power to forecast the future if measured correctly. However the detractors have been put off by those using the cycle to predict an immediate market Crash. The use of the knowledge of the cycle to identify the next crisis gives it a bad name but that is not it’s only use. 

So we must understand the following.

1. It is not a time cycle but a cycle of events that take place over the life cycle of a generation and therefore it is a generational cycle whose length is directly related to the life expectancy.

2. It lays out economic measures for the cycle and tells you where you are. The end results are known but not how we will get there. Government policy needs to be followed for this as well to understand the near term trends.

3. It relates to inflation and deflation – but those are the results of monetary action. So it actually relates to studying all monetary indicators like interest rates currencies debt/gdp etc at a Macro level to get the full picture

The cycle can be summed up very simply understanding its Four Seasons

1. Spring – the birth of an economy, start of economic activity [20-30 years]

2. Summer – the end of the first growth phase followed by subsequent inflation [10 years], recession from the contraction associated with controlling inflation and monetary excess

3. Autumn – High Growth amidst low interest rates and inflation, leading up to a bubble in asset prices, and build up of excessive debt [10-20 years]

4. Winter – the process of closing out the debt so that the economy can grow again at a rate higher than the cost of capital. [10-20 years]

The last part [winter] gets the most interesting because it is the only one that involves excessive pain and someone is going to be blamed for it. Though the debt is built up over several decades human memory is short. So those in power do not want to take blame for pressing the reset button. This leads to decisions in the short term that postpone the eventuality, or to solve it without too much distress. While the end result is that the Debt must come down as a % of GDP so that the cost of capital is lower than growth, there are many paths to this end.

The government is forced to get involved [because it affects everyone] and therefore the path cannot be predicted. You may get outright deflation, or maybe hyperinflation first, or maybe a middle path with negative real interest rates for years, with mild inflation. You may see a lot of defaults or a lot of bailouts. You may see massive transfer of assets from the private sector to the public sector, or vice versa. How the debts will be cleaned and who will be made to pay for it? In one way or the other the public at large pays. Through inflation or taxes, by government bailouts [tax payer money], or bank runs on public funds. It can be done in 2 years or take over a decade. 

For this reason the detractors will tell you not to follow the Kondratieff cycle.

However that misses the point. When we know that we are in a period where debt is the problem and we know that we are going to pay the price for it, there are things we can do. For example we can avoid investing in Debt laden companies. In that sense my Forecast for a Indian Winter in Feb 2010 was the most timely as it came 6 months before stocks with high debt would lose 50-90% of their value over the next 5 years. And so they did.

In 2009 I said that to a Mutual fund head, do not buy debt laden companies but low debt companies with cash flow. He told me that it is not the way to manage a portfolio. So you get it. Most people will ignore the knowledge of financial cycles and put you to risk. But you should be aware of it.

I wrote the first Article on India’s Economic Winter in Feb 2010 and it is only after 2013 that we have started to recognize that India has a problem in debt. Only after 2014 are we seeing a clear trend in rising NPAs at PSU banks, which were not being reported earlier. Now it is common knowledge that over 200,000 crore of funding is needed to replenish the balance sheets of banks. This year 20,000 crore was announced by the Finance Ministry. We have a Long way to go.

The good news is that we have now recognized the problem and therefore started to do something about it. Having done so, we are now on the path towards ending the winter cycle and Kicking off into the Kondratieff Spring. My timeline for the Start of Spring is Jan 2017. So the Winter should be done before that. I can however be wrong on time depending on what the government decides to do.

My biggest fear at the time of the Modi election was that we were going to be pushed into hyperinflation. The markets optimism with his solving our economic problems was disturbing because with debts this high inflation is the only result that the markets can celebrate. Without more inflation there was nothing in it for the stock market.

However Inflation is the legacy of the previous government. If you study the 1998-2004 period that BJP was in power, the path they took was one of consolidation. Reforms were implemented but the government balance sheet was also repaired. State debts were restructured and the stage was set for what they called ‘India Shining’. So why did they lose the election?

My socionomic answer to this is simple. The lack of speed. We often believe that the people at large want economic growth. But they do not. People at large have basic needs and are not concerned with Macroeconomics. So the primary reason for the loss in the 2004 elections may have been that the slow process of bringing about the change needed to kick off the next cycle of growth took so long that by the time growth had taken off the effects had still to be felt at the bottom of the economy by the public at large. Before the election the Sensex had doubled in value but we were just first year into a bull market. Social mood had not changed to Positive from Negative.

Therefore the recipe often cited by in the media by Uday Kotak that should go for the Marathon, well it won’t win the next election. It is going to be about speed. The people In India are getting impatient. 2008-2015 has been a long period of slow growth. Especially inflation adjusted growth. The inflation [CPI] adjusted Sensex is still below the 2008 highs as shown below. If the effects of the policies of the new government are not widely felt by the next election then I wonder if it would again result in a change of guard at the centre.


Till Oct I was not sure how speed will show up except if the world markets crashed. Our own process of adding up NPAs was going very slow. But now that the RBI has its guns out speed is here. Someone in power heard my voice, or had a voice of their own, saying the same thing. 

 Social Mood needs to be positive for the existing government to be voted back in power. Since we are in the midst of an economic winter, the quick thing to do is take the bitter pills needed on the Debt’s that the Indian Private sector has taken, and help clean up the act quickly so that we can kick start the economy fast. The debt problems are not going to go away. And since the government does not have the public mandate for Inflation, Inflating the debt away by money printing will also be a recipe to lose elections. What I am not sure about though while making this prophecy is whether the public in general understands economics. They will only react to the pain in between. The current path while good and the only quick way to get back to growth, will inject pain on everyone in India in the short term and the social impact of that is not known. What will be needed a year from today is quick action to revive the economy from its depths as well to get full marks for the work done. All this so that before the next Parliament elections we are well on our way into our Economic Spring.

Whatever must be done therefore should be quick. The US did just that between 1929-1932. Most will tell you that the US stock market crashed 90%. But the good news is that they allowed it to happen in 2 years after which the market went up all they way from 1932 to 1972 [see chart below]. That was the US Spring. Note the first wave from 1932-1937 was 5 waves up and saw the Dow go from 40 to 195 almost 5 times up, this even as it was not yet at the all time high. This was a huge and quick recovery because the US after writing off bad loans could stimulate its economy in the midst of favourable demographics, and strong technological innovation. But the economy slowed by the late 60’s so 1970-1982 maybe considered the Summer. This period saw 20% interest rates to curb inflation that was also in double digits.

The subsequent Autumn bull market went on for 25 years. Though the usual length of Autumn is 10-15 years. This is the longest Economic Autumn bull market in history. 2007 onwards the US is in a winter dealing with its debts.


So how does India look? Lots of similarities! The Indian Economic Spring started in 1935, that is when the RBI was created, in case you do not know. So it was the start of monetary economics in India. The bull market up to 1994 was the Spring. After that India faced both double digit inflation and interest rates in excess of 20% for many corporations with a lower than ‘’A’’ credit rating. I call this the Summer up to 2001. Many coalition governments and a Tech bubble in between were followed by the completion of a 7 year contraction in the economy. Managing finances of the government and keeping inflation under control were primary goals of the period.


The Autumn started in 2001. 2002 was the point where it appears that you finally had the inflation beast under control and interest rates were aggressively dropped. As inflation was now subdued and by 2002 interest rates [floating rates] reached a low of 7%, it kicked off our most recent growth phase. The Autumn always ends in excessive debt and asset bubbles. Now while most have started to recognize the debt part few will acknowledge the ‘’Asset Bubbles’’ in our economy. India’s Autumn ended for debt laden stocks in 2010 itself but for the stock market we maybe at the same point the US was in 2007 TODAY. In the Chart above which I published in my first article, and this chart is courtesy Vivek Patil who has backdated and published the Indian index data based on the RBI Index. Vivek needs no introduction for his Neo wave analysis that is widely read. At that time I wrote that the winter would end by 2013 but when the market bottomed and took off after Sep 2013 I was not convinced that the winter was over because the Indian financial sector was still sick and nothing had been done about it. So the timeline is now for it to end by the end of 2016. 



Did I say 2007! All over again…? This time it is India. You might find that startling or even stupid. But what happened after 2007 in the US was that the debts had to be paid. The way out was bailout the banks. Citibank survived but it’s balance sheet was diluted by the funds that had to be infused into it to survive. In the recent months Indian debts are coming due in larger numbers. The game is coming to an end as banks find it increasingly difficult to hide the restructured loans and risky debt that has still not been marked as NPA. The RBI is making louder noises with banks, to come out in the open and solve their problems.

20151209 174924

New rules of the game are being put in place. The final touch to this tune will be the new bankruptcy code. However there is something that should be understood about the code. This is my opinion. The code attempts to identify problems in debt early and resolve it by attaching assets quickly enough so that the right value can be encashed out of it. The idea is to not allow the corporate from cash cowing its assets to the point that the firm is eventually worthless. It is my feeling that this new law is perfect and will aid the next Economic cycle in extending itself smoothly, however it might do little at this stage to solve the problems of the banking sector. We are not in the early stages of the debt supercycle. Banks have been hiding their NPAs under the carpet for long enough without proper resolution that this new law is meaningless to start with for the current situation. The way ahead here is going to be none other than what we witnessed in the US in 2007-08. Once the size of the problem comes to the surface the banking sector will have to be saved by outright bailouts from Taxpayer money, that is the government or a Consortium of private parties or Foreign investors who will lap up the stakes to help Recapitalise the Indian banking sector. Some corporations might be allowed to fail as well. All of this may happen in a short period of time when it does and will be the painful medicine that our economy will have to take to get back on track.


There is no Alternative in my vision. You may offer me government spending to boost the economy enough to make these business loans viable again. Spending of that stature would be inflationary all over again or even hyperinflationary. It is hard for me to judge that the RBI or current government is willing to push the Inflation button. For it to do so they will need the public at large to be in consent. It could mean risking the next election win, if you expect the public at large to understand. For this reason I have always doubted that the new regime would attempt inflation again. The first attempt after 2008 by the former government has already fallen on its face. So a repeat appears mostly unlikely. Around the world we have seen governments create Fear in the minds of people to accept their decisions. Greece is the most recent example where people lost access to their cash and then accepted Austerity without a protest. But that might not work here at this moment because India is still not facing a crisis in headline numbers. In the words of those in Power, India is growing at the highest rates in the Emerging world or even developed world. Try telling the Indian public that 200% inflation is good for you. But then again let me not conclude here, the right thing to do is keep an eye on government policy and you will get a clue. So far nothing indicates that we are going to Print our way out of this and so it is going to be Bailouts and recapitalsation of debts and that is in short the definition of ‘’Deflation’’, as seen in an economic winter.

 2015-11-08 09.23.56

So get the picture RBI has pushed the banks over to complete the debt write off's and restructuring by 2017. It also claims there will be no major pain and the situation is manageable. The problem is not that simple. See we have just re-jigged how we calculate GDP by including indirect taxes as part of the calculation. This at a time when Service tax rates are being jacked up every year. The calculation just does not match the underlying numbers of manufacturing and IIP growth. My sense is that the new method essentially inflates the numbers by using value addition as an excuse. Just because something is a global practice does not make it a good practice. Do we want to go the China way by making all our numbers suspect. Remember what we did with CPI when UNME numbers were too high to handle. A new series was introduced. I am not against a more logical measure but attacking numbers and not the problem is a problem in itself. So we are in an economy that is slowing down, and world GDP forecasts for next year are also being cut. I fact increasingly the IMF and others are calling on the Government to play a greater role in world growth over and above leaving it to central banks. The Central banks have done all they can and the Government needs to implement structural reforms and maybe resort to Fiscal stimulus is the message being sent out to the developed world. Most have taken the QE path as existing debts are already so high that weakening the Fiscal position is considered risky, due to the unknown impact it can have on the bond market. For countries like India the problem is even more peculiar.

But the point is that the world is headed for slower growth. In this environment when we start restructuring our Banking sector there is going to be a cascading effect on the economy. For every failed business that is going to be pushed into declaring bankruptcy there is going to be some unemployment and an overall effect of slowing down the economy further. That slowing down also has an effect on existing business that are not in financial trouble, but are forced to cut back on costs and business plans to adjust to the slowing down of the economy. This has a multiplier effect. There are also social effects that means that society wide the mood turns negative. So you will also have to deal with the potential side effects of negative social mood. 

20160220 124618

See the article in today's papers today and let me put it in perspective. The good news in this article is that banks will not fail because the government has their back. Yes and that means a bailout for them all eventually. But the losses are real and have to be made up for from the Union Budget. So there will be little left over for public spending driven growth. Defaulters to be put behind bars now? Do we have that many jails I wonder. Because this overlooks the cascading effect on loans outside just the corporate sector. The impact of this slowing of the economy on household debts and defaults in housing and other loans etc. I know that the Indian household sector is considered the least levered. But real estate and infrastructure are not. Most of the Banking sector collateral is in the form of Land and Building. Is all this possible? Let me now say any more without some charts.  

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The Kondratieff Indicators 

With that let me get into the actual Measures and charts. Debt is the primary indicator that tells us we are now deep in Winter. Many economists will not acknowledge that India has a problem of debt but I am going to show you that it is now way out of control. The reason we do not acknowledge is that there are other nations with higher levels of debt today, but that is no reason to celebrate. 


My total Debt to GDP, green line adds up not just the government debt and bank credit but also external debt and assumes other debt from NBFCs FDs etc at a meagre 8-10% of GDP. So our number is clearly higher than 143% but closer to 152% [Green line]. Yes this number is small but so was the case of the United States in 1929. If you study history there was no reason for a US collapse in 1929, The Debt/GDP was a meagre 135%, so what happened. It was a globalised world where Europe was the epicentre and Britain had colonised the world. But like today debts had piled up and the deleraging process started. The high impact on the US had partly to do with their own decision to write off bad loans, by allowing corporates that had made bad investments to ''FAIL''. Understand this, read it again, and then you will see the parallel to India today. They decided to allow bankruptcies to take place and expedite the process of getting rid of bad loans. The action in the midst of a deleveraging world was banking failures and closure. The economy and stock market collapsed. A 90% fall in the Dow followed from the high to low. The good news? It was over with in 2 years in terms of the stock market. The FED stepped in late but eventually put in money for the banks. The government stepped in and spent money to get growth back. The fall in GDP initially pushed up their Debt ratio to 260% but it fell from there for decades to come eventually. So here we are in India at 150% with a slowing and deleveraging world economy pushing our banks to acknowledge failure....Should I expect a different outcome? I do not think so. By that I do not mean that the market falls 90% but it will fall hard taking down even the best performers with it for a while. But be aware that the recent move by the RBI has put us on a fast track equivalent to the one faced by the US during the Great depression.

The next thing about the chart above is the divergence in the ratios for the government and others. The Government debt ratio [Pink line] hit a high of 82% [90% on old data], in 2003 and has been falling ever since. It is at 63% plus 3% for external debt of government. In fact external debt was also at 16.28% in 1992, so at 3% there is nothing much to worry. However external debt of the nation is at 25% of GDP, so the bulk is now owed by the private sector [ECB+FCCB+Other] The non government domestic debt which is mostly bank credit however has also been rising ever since. What has happened therefore is that once the 2003 bull market took off the government started to deleverage its balance sheet. Exactly as you should. Stimulate during a crisis and balance during a boom. In the interim however the private sector has taken on the debt load not just in the growth years but also in the years afterwards. This is the primary reason that they are screaming for lower rates for all these years. They have continued to borrow to pay back old loans and stay afloat and hopes have been high that interest rates will decline and save them. So far that has not happened except marginally. Even after the 2008 crisis once the government stimulus eased off private debt continued to expand. Also they have increasingly used external debt to lower the cost of borrowing which is now fraught with foreign currency risk. 

But this expansion in corporate debt it seems is not a domestic phenomena. Post 2008 corporate debt has expanded almost everywhere, but particularly in the EMs. Charts courtesy this article




 The number doing the ciccles is around 9 Trillion dollars of new debt added after the Great Financial crisis by EMs alone. Which is why falling EM currencies last year have pushed countries like Brazil and Russia to the Brink. China has most of its debt domestic and so that is a different story. But what about India? We faced the headwind in 2013, and have been safe since because RBI stepped in with foreign money. Borrowed from NRIs, and allowing fresh flows into Indian debt markets by raising limits time and again. But has this made us safe? In a crisis when Foreign investors are forced to sell Indian stocks [irrespective of the perceived strength or our economy], the resulting damage to the currency will have a contagious effect on our debt markets that have been expanded further with the help of foreign money. We saw the curtain raiser in January, if we believe the news that Sovereign wealth funds were forced to sell their India assets to meet their financial needs. This has nothing to do with our fundamentals but has punished our markets and the currency both.


In the interim as these debts turn due the NPA cycle has turned across the EM [Chart from BCA Research] space with rising numbers and so has been the case in India. [Chart below from the Economic times]


This years number is going to be much bigger as a lot of the loans are being marked as NPA, Now the biggest threat to a debt problem for any nation is that of interest rates and if you noticed the most recent rate cut did not have an effect of lowering the rate in the bond market for long. So the pressure has started to build up.


The Power Finance companies some time back had to also write off losses as the efforts to clean up started. The government is already on  the path to deflating the excess from the past so there should be no doubt that India is already in the Midst of its own economic winter and missing piece to the puzzle remains asset price bubbles that are still to deflate along with it. Overvalued stocks and real estate need to correct. Till that happens the big question on everyone’s mind in that respect should be ‘Will they inflate’. That has been the only question I ask when the new government speaks about the economy. The run up to the 8000 mark last year was a great bet on inflation coming back. But in hindsight you will see that it was the effect of past inflation. The previous government inflated at will, and RBI held back rates punishing savers. Negative real rates pushed people into gold and real estate. The impact of previous expansionary measures, OMOs along with the stimulus were the real drivers of the market pushing up consumption driven defensive stocks and exporters that benefitted from the weaker rupee. 

However all these measures that show an inflated GDP are not resulting in growth and higher earnings. The great divergence between reported growth and actual earnings is now loud and clear that the current strategy is not working and thus the markets are far too overvalued. Chart courtesy Capital Mind. 

So after 3 quarters of negative growth historical market valuations remain elevated with the growth the valuation gap at the most in years. Hope was that growth will rebound in the second half of the year [based on media interviews], I never understood how. And so far there is not a whiff of smell of growth anywhere. So inevitably valuations need to correct. Recently even 2017 forecasts are being downgraded.

As a believer in cycles I am not a believer that the actions of the government are detrimental or not in the right direction. In fact the institution of Bankruptcy law and announce infusion of funds into state run banks are the end game. They see the problems and are working to the right ends. However it is for us to understand that this does not come without hiccups. Fund infusion into PSU banks is estimated at 2-3 lakh crore rupees total and that cannot come without diluting the size of the balance sheet of these banks one way or the other. And that means that their stock prices cannot be where they are today even after the recent crash. Unless we know the prices at which the equity will be expanded. So uncertainty plays till a clear timeline for the investment is announced. The sooner they do that the sooner the market can stabilise for this sector. 

So an economic slowdown is imminent. The big question is will they inflate or consider fiscal spending, against a mandate to fight inflation. If you have not noticed the money growth reported by RBI had dropped to single digits. So the RBI had moved to a tightening cycle as well, market interest rates are losing their meaning. That reverse policies have the reverse effect should be noted by all following the economy. That has resulted in slower credit growth, low IIP, dropping GDP growth rates, and now a complete collapse in exports. In a competitive world the positive rub off of currency devaluations can quickly be exhausted as other countries take equivalent measures. So everything ends up being only short term. A zero sum game. So it should come as no surprise that our trade is contracting, the exact opposite of what is mandated. 

The real revival of the economy is now dependant on convincing the people that more inflation is good for them, or coming up with technological advancements that will boost productivity based growth. While we speak about our demographic dividend, at the end their behaviour from one generation to the next also encompasses a cycle. It is not only about demographics but how one generation behaves with respect to his or her finances. 

The 90’s generation retired and as the excess from the previous cycle consolidated, a new generation that joined the workforce into the 2000’s became the cause effect for buying new houses and cars and going on holidays. As this population ages its spending pattern also changes, to saving for retirement and better standards of living. The overcapacity that builds around one generation takes time to rebalance itself while the next one is joining the workforce and getting ready to spend again. This is what causes a slowdown and recession in the economy. 

Growth is therefore a behavioural outcome. It has to do with the mood and behaviour of the population at large and the demographic profile. On the outside this is either assisted by or held back by the financial cycles. When financial excess is low and expansionary cycle is helped by finance, and when there is excess [high leverage and debt], then it can harm or slowdown the behavioural cycle. The interaction of these forces results in higher or lower stock prices. 

Where we stand today is at the end of a cycle of financial excess. This is showing up in growing NPAs and defaults. The generation that drove the consumption boom from 2001 onwards is now in the middle ages and a new generation is entering the workforce. This rebalancing will result in a new wave of demand going forward and in the meantime the financial system needs to reset its excess from the previous cycle so that it is prepared to take on the new one. This can cause pain in the interim. Taking the bitter pill is the best option for the long term.

Blowing bubbles without correcting the past will only lead to the blowing of new and bigger bubbles. In that respect there are lessons to be learnt from the mistakes of the western world. However like I said at the start I am amazed that we follow the same financial model as the rest of the world and are going to face the same problems but are unwilling to accept that we have a problem to start with. We are if you ask me where the US was in 2006-07, or more so in 1929, with respect to the financial cycle. What we do as this unfolds over the next 12 months will determine how it ends, and how soon we can get on with the next Kondratieff Spring bull market.

I have set my watch to October 2016 for the worst to be behind us. Those expecting the government to go out of the way and take rash inflationary measures without addressing the problems first are only hoping for more bubbles and not genuine growth. For once let us do this correctly. The current regime so far shows the resolve to do so. That is probably the RBI has also moved ahead with a quick act to clean up the system. It took guts to do it. In the interim let us take the bitter pill. 

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The Game Changers

The two biggest factors that hurt debt the most are inflation and interest rates, and indirectly currencies. So let me review the situation here.


This chart from Capital Mind give you an insight into what we are likely to face. Over the next few years the government faces the task of rolling over a lot of its debt which can be a pressure point for the bond markets. So far since 2013 our bond markets have been managed by attracting global investors into it on a bond spread. As rates are cut locally, spreads narrow and the currency pressure combined, put upward pressure on market based bond yields. This leaves the RBI to do a lot of Open Market Management if it intends to keep rates low.


Your view of interest rates depends on which chart you are looking at. The long term chart above gives you a picture of lower and lower rates. They peaked in 1992. The SBI advance rate or prime lending rate is no more relevant today but the bank rate reflects the general long term direction. But the real question is whether interest rates are going lower today or this year or not and that needs a closer look. So this chart of the 10 year GSec gives you the picture.


My long standing view on this has been that the 10 year G sec rate has not topped out. From the low in 2008 we are in wave C. Wave C typically has 5 waves. So far 3 waves are up and wave (e) of C is pending. If the yield fell below the point marked as (b) then we would have to think that the rate cycle might have changed. But holding above it the trend is of higher tops and bottoms and leaves open one last and final spike in yields in interest rates. The upper channel trendline is at 10.27% so as long as we do not see a decline below 7.089% on the 10 year GSec the view is that we will see 10.27% or higher first. That should be the last push up before interest rates top out and start a major decline phase. I believe it will also mark the start of India's Economic Spring, the next major long term bull market that could go on for 20-30 years.


But how do we know that this bear market ended? While technically we can project to the previous bottom made by an index, and come up with some really bearish numbers. That does not account for the potential for inflation in between. If at some stage in between this process of deflation the RBI/Govt. step in to inflate the economy? You may measure the bear market with a ratio for a better call on it like the Sensex/CPI ratio above or the Sensex/Gold ratio. The Sensex/CPI ratio is still below the high of 2008, and can go back to test the 2009 low in a bear market. Note the ratio going back there does not mean the Sensex has to go there, because there is inflation in between. Similarly the Sensex/Gold ratio chart is above. This chart uses Gold prices in $ and multiplies it with USDINR, in other words the Gold rate is in ounces. I did this because of more price history is available for the comex price. In this case too the Sensex peaked in 2008 and has not made a new high. In fact the ratio has started to fall recently given that Gold prices have broken out on the upside. It is my sense that Gold is going to keep outperforming equities till the end of this deflationary cycle. The ratio above could fall to 0.103 if C=A, or lower based on the Head and Shoulders pattern on the chart above. Note how many times the neckline at 0.1736 held as support again and again since 1993, 4 times, including at the 2013 market bottom. However I think that level will break before the Economic Winter is over. 

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So what will be the impact of all this on Real Estate?

Up front let me add that I am not an expert on this. In fact I am told that if Gold goes up so does Real Estate. On the other hand higher interest rates make Real Estate risky in the near term. So maybe the two will deviate for a while and then there will be a bit catch up. I am not sure. But a deflation without any impact on Real estate is hard to imagine. This chart again from Capital Mind Puts Realty into focus. While most of the little credit growth should have moved to manufacturing a lot is still going into Housing. Housing is not a domestic bubble it is a global bubble. Housing is out of control in most places that attracted investment dollars like Canada and Australia. So the next housing bust will be a global phenomena as well.


Interest rates and inflation are also directly impacted by the currency. USDINR was in the limelight in 2013 but ever since it has moved slowly causing the concerns to die down. However as we get closer to the 69 mark fears are coming back. Was the strategy to attract Bond funds into India and keep the rupee strong any good at a time when all the world was watching their currencies fall? There are no good answers. No we did not want a currency crisis in 2013. But can we avert one now? So we postponed a problem that is coming back to haunt us again.


However my long term view remains that USDINR is in a bull market. This is the easiest statement to make in a Keynesian economy. Why? Because that is how they all operate. Keep weakening your currency and trying to grow the economy till debts do us part. So this is the yearly chart of the USDINR dating back a century. What do you see. A 100 year bull market. So during an Economic Spring, weakening your currency actually pays off. Each devaluation acts like a stimulus package. However there comes a point when this does not work any more. This is especially true if you have funded your Economic growth with foreign money. We opened our Capital account slowly since 1992. Most of the foreign money came in after 2002. So wave II of 5 on this chart when the rupee strengthened to 38 occurred between 2002-2008, a bull market. This money came mostly into equities. After that corporate borrowing and after 2013 some amount of government bond sales have expanded our external debt to over 25% of GDP. So unlike our Economic spring which was mostly funded by domestic money, our Autumn bull market had a quantifiable amount of foreign funding. So the 1992 currency devaluation caused the Harshad Mehta bubble. A devaluation today would be a crisis. The chart below shows that we are in wave III of 5 the most powerful segment of this move. There are multiple target levels based on all the channel lines. We will have to see how many are achieved. But close to 90 by the time wave III ends is not hard to imagine now.


 So we are watching a weaker currency and higher interest rates risking an outflow of money from the country. The only source of liquidity then that held up the market till Jan 2016 was domestic flows. This chart tweeted by , makes the picture quite clear on how big the flows this year actually were. There were not only big they were consistent month after month. These flows were the impact of the positive social mood in the public at large after the Modi election. A failure of markets to revive from here would do permanent damage to the broadly positive sentiment that was persistent till now. The damage might not be easily repaired.



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Catch 22

The Indian Macro picture is in the Midst of a Catch 22 situation. No matter which side you push you trigger another crisis. This is usually what you should expect in an economic winter that has not fully resolved itself from the complete cycle. In a year that every currency was beaten up ours held out. We take a pat on the back for it. However we have done so at the cost of allowing our exports to fall in value terms. The rising dollar brought down both sides of the equation imports from lower commodity prices and exports from a lack of re-pricing. And the tool used to achieve this was nothing more than bringing in a lot of money into Indian debt. When that limit exhausted itself then another lot was opened up at the same time that interest rates were cut 50 basis points.

I wonder if this is s smokescreen of sorts. Bond yields could not stay down for more than a few weeks and are headed higher again. So the window for debt that was filled up so fast was only meant to keep off the pressure from our bond market imploding along with the currency? The measures taken by RBI in hindsight will appear like only quick fixes to a problem that is half a century deep.

Can the RBI really fix this? The real problem then is not fixing what you can’t but what you can. How to write off unreported and restructured debt that really cannot be paid back. How to deal with the idea that global liquidity that has mostly financed the Indian growth story will suddenly dry up one day. 

And since we have not passed on the positive effects of falling oil prices to the economy will we be able to deal with the reverse situation, rising commodity prices or simply food inflation around the world. Even a jump in inflation just on the back of a weaker currency would be damaging. Instead of importing deflation we would start importing inflation. For these reasons and more the RBI was unable to act on rates at its recent meeting.

20150826 141825

The only tool in the hands of the RBI is to expand monetary policy and shower inflation onto the people at large. If not we will have to go over the painful deflation, that any economy that follows the current monetary system, adopted by the rest of the world, has to. The next question is how fast will we bite the bullet and move on. It would be advantageous to India to not kick the can down the road. Allowing things to melt and rebuild quickly has major advantages. It disallows anti-social forces to take root, in the midst of the economic contraction that lies in between. Because market calamities cause financial pain and depression they also support anti-social thinking. The longer a depression is allowed to persist the longer time it gives these forces to work their way into the minds of the people at large. Quick action and moving fast usually brings back animal spirits in favor of the general good. So that is what I can hope for from the RBI and the government.

The Cycle will complete its course –

Apart from setting the above expectation the Indian economy is now headed into the final winter phase for its generation long economic cycle. We have played catch up with the rest of the world by walking down the globalization path starting 1991. After that there was no looking back and we are now part of the global economy and affected by the same economic forces that impact everyone around the globe. Our only strength is our demographic profile and our ability to bounce back. But that does not mean we do not face a winter of our own.

The Sensex Gold ratio chart continues to show that we have been unable to go above the 2008 highs to date. The index is still below the 50% retracement mark here. The coming asset price deflation in India accompanied by our own currency adjustment [mild word for a USDINR target that can end up in triple digits or at least close to 90], and the potential for a major Gold price rally in the coming year are headwinds that should push down this ratio to a level from where the new Kondratieff Spring economic cycle can start. That is called the birth of an economy because we start from scratch and aim to achieve the aspirations of a new generation.

Gold has formed a year long ending diagonal or wedge pattern on the way down with sentiment reaching below 5% bulls. This will be a long lasting bottom, and should be accompanied by a trend reversal in the dollar itself.

However the decline of the dollar index this time will not be the same as the one witnessed since 2002. At that point it indicated inflation of global assets but this time it is more likely to reflect US deflationary trends and an unwinding of the carry trades in Euro and Yen. On the other hand the contraction will make the dollar strong against EM currencies or those with large dollar denominated debts. This will therefore be in general bearish for world equities and bonds. Temporarily it might support commodities but in particular it would be good for Gold and Agro commodities.

There is no change in my view that Indian interest rates at some time will shoot up in the bond markets irrespective of whether the RBI makes an official announcement of rate hikes. The reasons could be a guess between currency management to Agro based food inflation or just because of an outflow of funds. Hard to say. But that will mark the end of the winter phase and interest rates in India will permanently drop from there for a long time to come.

If you understand the Economic cycle that repeats over and over again and prepare for it there are lots of opportunities in the above. Else it a painful period for you that lies ahead. If you only like a period of growth and rising stocks the good news is that it might not be far away as we enter the final year of the Winter cycle and are already pushing hard for quick deleveraging.

In 2016-2017 we may face the same crisis related questions that the United States faced in 2008 or 1932. How we deal with it will pave the way ahead into the new Economic Spring bull market that lies next. A 20-30 bull market may develop from there

The oddest case would be that this unwinding process that I have outlined to complete by the end of 2016 stretches out into a slow and extended period of market gyrations in both directions with a lot of sector rotation. It would be awkward but we would have to deal with it. But the moves by RBI have already moved us from a Marathon to a Sprint so expect speed.

I expect a quick fix and similar to 2000-2001 we should complete this business cycle before the rest of the world. Unfortunately the National party that has taken power to steer us through this period of crisis is the same as the one that was around in the previous period. And despite all their good efforts the market punished them in 2004 with an election loss. The reason is that public at large does not understand economics. They are driven by mood. Coming out of a bearish business cycle that was turning around in 2004, the negative mood associated with that bear market led to a negative vote against those in power. They failed to recognize the measures in the power and road sectors that were major reforms of that time. I wonder if the same will repeat. The good efforts that have been put in and will continue over the next year have nothing to do with the natural course of long term economic cycles that need to complete. The coming winter is capable of making people remorseful of those in power irrespective of their gainful efforts. This is behavioral and something we will watch for closely in the next election.

For now be prepared for the coming winter, it is already here !! 

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Kondratieff Wave Cycle

Indian Economic Winter


And its impact on the Indian Stock markets and Asset markets. The 70 year financial cycle surrounding business cycles.

Original Publication 25 FEB 2010/12 : Update in March 2013    Cycle Update 

Winter Update and follow up Articles 2014-2015: Winter Updates

The Kondratieff [Kf] cycle or waves are the brainchild of Nikolai Dmyitriyevich Kondratyev. Ian Gordon is the most active follower of the Kf cycle on the US markets and his writings are found at and also read simply read the basics about the theory visit 

Ever since I started studying the wave theory I have been exposed to the Kf cycle. It has taken me long to understand the context in which the cycle is to work because originally it appeared more like a study of inflation and deflation, and most of us think inflation is defined as a rise in prices. EWI and Robert Pretcher have made the point amply clear enough that changes in prices of goods and services is a by-product of inflation and deflation. Inflation refers to the expansion of monetary supply through printing of currency or through the expansion of credit or debt in the economy. Deflation therefore is the reduction of credit and debt or money supply. Before I shows you some charts here is some background.

N.D.Kondratyev noted that once economic activity stats expanding the financial system starts to expand. Business ideas needing to grow look out for funding or money for their activities and this forms the beginning of the Kf cycle. Credit is used to fund expand and grow business existing and new. But as the need to grow and compete grows man starts using debt to profit from the expansionary trends rather than new ideas. This greed causes bubbles. At some time debt becomes so big that it cannot be financed or serviced any more and defaults start to happen and a deflationary cycle starts. Deflation continues to most credit is destroyed and it takes years to restore confidence for the whole cycle to start again. The expected time span of the cycle is between 60-70 years. However its not a time cycle.  

This cycle has become the object of concentration of many of the prophets of doom since the 90s as they have been predicting the end of a 70 year cycle that started for the US in 1935-49 after its last known deflationary depression. That its such a long term cycle many were too early to predict it and this bubble ended up being bigger than many in the past. The reason for this is that a bubble in credit/debt can continue as long as there is cheap finance available to keep funding or refinancing the existing debt. Also inflation needs to stay under control as long as monetary expansion continues. Once a lot of debt has already been built up to avoid the unwinding process you would always try to hang onto it by finding new financing options. The bursting of a bubble would occur due to natural consequences once options run out as they did in 2007 for the US, but they can also be burst by social or ecological factors like war, famine, earthquakes, volcanoes or something that is big enough to overwhelm the current level of economic activity making debt default the only option. So the US went into deflation in 1929 when its debt to GDP ratio was 140-160%, in 2007 it went up to 400%. Different countries around the world have deflated at different levels of debt, and a lot depends on the domestic and external environment. Today India's debt to GDP is above 150%[public+private] and not many want to accept the possibility of deflation in India because we believe that debt can be refinanced from the high savings like Japan has done for years, to keep the deflation from causing an economic depression. However the global economic environment is not favorable anymore and its effects in a globalised economy cannot be ignored. If savings are diverted to finance credit of the government than industry might get started and vice versa. If interest rates are lowered a lot then inflation becomes a risk, unless cheaper imports are available [read strong currency]. So lots of room for imbalance. 

The Kf cycle also has been often misunderstood as a time cycle so the exactness with time i.e. 50-70 years is not exacting however history has seen these cycles hover around this time frame. The essence of the cycle lies in the flow of events from one to the other with the same results. Being a generational event that is its size is similar to mans life expectancy the next generation does not relate with its presence that easily and it continues to repeat with the same manifestations as long as we follow the existing economic models. The US is in its 4th Kf cycle since the 18th century.

The Kf wave also needs to be read in the context of the Elliott Wave Principle, the 5-3 pattern at that degree of trend. Recent research by EWI on socionomics shows how the wave patterns of the stock market are associated with social trends. And it is the social mood that determines whether economic activity will expand or contract as people feel better or worse about themselves. So the Elliott wave pattern reflects economic activity that is the lifeblood of an expanding or contracting Kf cycle over 70 years. Therefore a deflation becomes more severe once it starts as social mood turns negative and social behavior forces us deeper into a corrective mode. It forces new change to correct the mistakes of the past before another positive cycle can emerge and it shows up in a bear market in the form of a 3 wave decline.

Now that's a lot of theory so here are some charts. And what is happening to India!


The first chart I am showing is that of the Sensex picked up from Vivek Patil's reports as it back dates the Sensex based on the RBI index and the FE index. This chart gives us more than 70 years of data to fit the Indian Kf cycle. Since India started its first cycle post independence it may be fair to assume that we are in wave 1 of a supercycle degree bull market and the coming bear market will be wave 2 of supercycle degree. Note my wave counts are based on R. N. Elliott's methodology and not Glenn Neely's Neowave so it will differ from those followers. The Kf cycle discussed by Ian Gordon is often discussed in the form of 4 seasons to explain how it is unfolding, and they are like this.

The Kondrateiff seasons and India

 Kf Spring - Spring represents the birth of an economy which for India would have started a little before  or around Independence. Spring is the bull market during which the economy grows on new found growth prospects to exploit all its resources. Interest rates start on a low base and trend higher as demand for money grows to fund growth. Prices of assets commodities and labor expand. For India the time up to 1990 would represent such a period. GDP compounded at 6% during this period.

Kf Summer - Summer is when the economy reaches full bloom. All resources are being exploited and the expansionary phase of the past results in visible price inflation catching up with wages. To control it, interest rates move up substantially often slowing down the economy. By the end of Spring price inflation will eventually appear to have been controlled and interest rates can go lower again. 1994-2001 represents such a period in India. 1966-1981 represents the same for the US. For those who have been following the market for the last decade you will remember how analysts were often comparing the 70's Dow chart with the 90's India chart to predict how the Dow then took off later and went up 10 fold over the next 20 years [during the Kf Autumn]. Well India went up 8 times since 2001 in 7 years. What I want to highlight is that in terms of the Kf cycle they were comparing the same state of markets [Kf summer]. The outcomes therefore were also similar, but time wise one lasted much longer. There is a belief therefore that India's bull market that started in 2001 is going to last for decades and we are seeing a temporary halt right now, however the size of the bull market is often ignored. Time was smaller in India because we quickly went from a closed to open economy and are doing a very fast catch up job with lost time. In terms of wave structure too if you see the chart above wave 3 was the longest however wave 1 was a small bull market relatively, and therefore wave 5 equals wave 1 in size and that is good enough. India's debt to GDP was just over 50% by the end of the Summer].

Kf Autumn - The myth that inflation is under control is what kicks off the Autumn. This feeling of control allows for monetary action to start again. Note that this is the only time when lower interest rates are associated with rising asset prices. During spring interest rates start on a small base and expand slowly as the economy expands, demand for finance leads interest rates. During Autumn rates are lowered to kick start economic activity and the belief that prices can be kept under control allows for credit based bubbles to reach full scope. Falling rates push all asset prices up from equities bonds and real estate to possibly commodities and wages. As credit levels expand exponential nurturing debt with cheap finance is the essence of keeping the Autumn bubbles alive. But as discussed above they will eventually burst. 2001-2010 is the Autumn for India. In terms of credit 2010 appears like the right time of the cycle to end, though from a stock market perspective it can be debated whether the 5th wave based on Elliott waves ended in 2008 or 2010. It differs between Sensex and Nifty. India's debt to GDP had crossed 135% and is now close to 140% This excludes items like NBFCs, non banking FDs, non banking corporate debt, derivatives markets and other lenders and borrowers. Bank credit and Govt debt along add up to close to 140%. If we put everything together it could shoot past 150%

Kf Winter - As always winter will come. The most painful period as bubbles burst causing economic upheavals and hardship. Fear and distrust force reduced lending activity despite lower interest rates. Quality debt is back in vogue. The process of unwinding of debt before another cycle starts can take from a few years to decades depending on the degree. The U.S. deflation from 1929-1949 took 15 years for debt, but stock markets bottomed in 1934, i.e. in 4 years. However a grand super cycle occurs when a 5 wave rally of one larger degree occurs. This means after 3 consecutive Kf waves in a country it completes a larger degree 5 wave rise lasting 210 years and will correct/consolidate for a longer period. In the U.S. 1720-1784 is shown as the Grand-Supercycle degree wave 2 by Robert Prechter in his book "Prechter's Perspective". That was 50-60 years of depression/consolidation. Since then US has been in a Grand supercycle degree wave 3 till year 2000. Wave 4 could potentially be as large in time. But for countries like India that are in their first Kf cycle since independence and things are not so bad. Yes I think India will see its own Kf winter, i.e. deflation or depression, however after 2-3 years once it completes a supercycle degree wave 2 correction, a larger degree supercycle wave 3 bull market lasting 70 years can emerge. This is when decoupling will happen for India and maybe China. The recent 2010 Indian budget has started talking about reducing the fiscal deficit and that is a deflationary trend signal. How debt gets reduced may vary from cycle to cycle. Bubbles can be pricked internally through tightening or externally through events not in our control.


 Now that I have given enough perspective to the Kf cycle and where India is placed within it lets discuss the impact on India and the stock market. it is my belief that India will find it hard to escape the Kf winter that is likely to follow. As India was late to enter the Global Kf-Autumn, it will has taken time to enter the Kf winter. One of the reasons that India's cycles are years apart from the west is that we were a closed economy but since the 80's we started the process of opening up. In 1991 we jumpstarted the process with reforms and have been catching up very fast with the world cycle. So while the Indian Summer occurred 10 years after the US summer ended, our winter is now starting 3 years later. 2010 shall mark the beginning of India's Kf winter of deflation and depression as the external environment starts to worsen. Attempts to finance its own fiscal deficit internally might stress the economy and attempts at price inflation will lead to dumping of goods by other nations or social revolt. Raising interest rates will lead to reduced lending and if we try diverting savings to finance the government the corporate sector will starve. So we are walking a tight rope which will break more due to external factors than domestic ones. Non financial problems like the one with our neighbors can also be a hidden trigger. Basically our high fiscal deficit and 140% debt/GDP is now exposed to various external risks that can stall further monetary expansion and thus force a period of deflation before we can start growth all over again.

India's biggest strength that will eventually bring us out of this mess is our demographics. A young population is willing to take hard steps and suffer the pain needed to quickly move ahead. Ageing populations in the west and Japan prefer not to suffer pain and postpone it as far as possible which will make them take much longer [20 years for Japan already]. Now here is a look at the current picture of the Elliott Wave structure for the Sensex for the last decade

Elliott Waves and the Markets - counts updated to 05/2012



If you have watched the economy since the 90's you will appreciate why 94-01 was a Kf summer. The business cycle turned down when India's debt to GDP was only 50%. So overcapacity in some sectors was enough to plague us for years. Interest rates for lower rated corporates were over 20%, and the FD market exploded due to the cash crunch. It took years before interest rates fell again and inflation was controlled and a new business cycle emerged. Also note how social mood turned down, from the music industry losing its charm to coalition governments becoming the norm were changes in social trends. During this phase you had sector bull runs from time to time but no broad based bull market. While the Sensex remained above 2800 stocks lost upto 50-80% due to the contraction. Defensives [fmcg and pharma] and technology stocks were the best performers.

I have already explained that 2001-2010 was the Kf Autumn, within this the 5th wave of the stock market advance from 2001 ended in 2008 after which it is technically in a bear market. However some sectors like Autos and IT are completing their 5th waves in 2010 as the B wave in the Sensex is forming. If you have been an Indiacharts follower then you would know that I was originally counting the fall in 2008 as a 5 wave decline. At some point I choose to follow the W-X-Y-X-Z structure as it allowed me to truncate the bear market at 8000 on low sentiment readings. My expectation then was of an X wave upto not more than 12500. However we have a B wave that is much larger. That alternate played its role then and allowed me time to judge whether my original counts that have longer term bearish implications are valid and whether economic behavior is fitting. Now its more clear that decoupling is a fad. Its possible only after a deflation. It takes a new model of growth to emerge may be new technologies that solve the worlds problems or make it more productive. All said and done the original wave structure of counting the 2008 bear market as a wave A decline has not been violated and the falling volumes and bubble in small caps is a clear signal that the recent Nov'2010 high is a wave B top of a supercycle degree bear market. Wave C of the bear market therefore will be a 5 wave decline and has already started. Wave C has already begun and is splitting. Wave C would be at least equal to wave A giving the Sensex a target of 7627. Alternatively its possible for a mutiyear bear market to unfold in a complex W-X-Y-X-Z format with each bear market being a W/Y/Z and each bear market rally an X lasting for years. The choice of pattern will depend on how we choose to unwind our past excesses slowly and painfully or fast and quickly. Demographics can offer a hint here. A young population like that of India would like to take the hit and get on with it and that is what our government or RBI should let happen. Trying to slow down the pain will only prolong it. I am not sure how demographics play a role here because out leaders are always in the higher age bracket, the only reason could be that governments mostly implement that which the public at large demands no matter how absurd, its not their role to do what they think but what the people agree to. For this reason blaming the government for everything that does not work is a false approach in market analysis though very tempting. But my point here was that chances of a deep correction quickly and unwinding of excess debt in the system is a higher possibility for us than a long extended multiyear pattern of range bound moves with big bull runs as X waves in between. Its also what I would like to see so that we can quickly get on with it to the next supercycle bull market. A prolonged consolidation would not only hurt business but also be frustrating for a young population and could lead to social unrest.

These predictions may sound impossible today as known fundamental theory practiced cannot predict it as it does not encompass socionomics [or socio-economics], mass psychology and social mood, or financial cycles based on macroeconomics like the Kf wave. However wave theory states that bear markets often travel up to the wave 4 low of the previous bull market at one lower degree under consideration. 2001-2008 involved an extended 5th so wave IV of the 5th wave hit a low of 8800 a point we have already visited once, however wave 4 of the 2001-2008 bull market was at 4227, and wave 4 of the 70 year bull market shown in the first chart above is at 2596. These targets appear absurd today but coincide with C=A [7627], 1.618 times A [at 5545] and 2.618 times A [at 3842] as potential targets if C was extended.

I don't know whether to say we should expect such low levels but the Elliott Wave Principle suggests it and till the market proves it wrong it might be better to be prepared for the above scenario till a better one is clearly emerging. Right now investors should be holding cash and protecting their cash in safe banks FDs or Central government securities. Buy dollars to hedge against a depreciation of the rupee if you have access to currency futures. And wait for a great investment opportunity that lies at the end. If you are a trader capable of building shorts they would be profitable. At some point of time once gold prices are much lower you might want to also own gold. At some point in future the governments around the world will again attempt to spend their way out of deflation and those attempts at inflation can cause commodity prices to rise or hyperinflation in some economies. Then one should own some gold. But right now its too early to buy.

03-05-2012 update - The original wave count was for Y down to be the largest leg, when posted in 2010. Since Jan 2012 I have been changing this and Y maybe the shorter leg. Z as shown above would now be the longest leg. Also Y is shown above to possibly rise to max the 6000 level but it truncated at the 61.8% retracement and is over. It is also lastly possible that we are still in Y down due to this truncation and Z has not started as yet. Y is then developing itself as a complex corrective or triple zig-zag that will get marked as W-X-Y-X-Z.


Alternative and More thoughts : based on feedback

Now like I said the forecast even at A=C is bad enough and frankly for most readers hard to believe. So lets discuss what alternates have been thrown at me. The most common one is that India because of its high savings rate and public sector will be able to keep fueling its expansion for several years and we may get a few more bubbles to possibly new highs before we can enter a corrective Kf winter like period. Before I discuss this lets look at this chart taken from Citigroup Global markets Asia Pacific report.


Now let me be very clear that I am not being an economic analyst. Technical analysis and the Elliott Wave theory form the basis of any forecast. So what is the role of the Kondratieff wave? While studying supercycle degree Elliott wave counts, the knowledge of the Kf wave allows for economic forecasting based on a non linear model. So what I am most convinced about is the wave Count discussed above and that the Kf cycle of 70 years coincides with the 5-3 supercycle trend of markets. Based on this typically the Kf summer coincides with a wave 4 formation at supercycle degree. And wave 5 up with the Autumn bull market. In this context what I would expect is that attempts to reflate the economy with spending could slow down Wave C into a larger time wise 5 wave decline where wave 2 of C would be another strong rally that will try to retest the recent highs. But since wave B is over its going to be difficult to do more than that. The chart below shows this pattern and how the economic cycle and wave supercycle wave counts coincide with each other.


Extending the Kf Autumn into more bubbles is theoretically possible but needs a positive external environment and no external shocks, and a solution to inflation and interest rates as they come back to haunt you at the end of an Autumn bull market. If by some means we are able to solve the inflation/interest rate puzzle then an Autumn bull market can bubble away for longer than normal to all time highs. This has been seen to happen only for countries with huge economic power like US in the current period. So for all our strengths and better demographics we are weak in many areas such as technology, food security, dependence on rain gods, threatening neighbors and a non-global currency. One look at the chart above tells you that in a world that is already in trouble over debt we rank only next to Greece. OUCH! but economists will tell you its not that bad because we have domestic savings to finance it. All the same we need to service our debts and that's a cost that will slow us down. Our Debt to GDP ratio was over 100% two years back based on rough estimates. It is now close to 140%, excluding items where data is not available. Government debt including states and external debt is close to 70% and banking sector credit to commercial sector is at over 65% so that adds up to 135%+. In Greece the problem is not just savings but that its part of the Eurozone and cant do the kind of creative financing we still can. So just the idea that we can take the risk of growing on debt is not good enough anymore the question is whether its worth the risk and will it bear fruit before some external threat pricks it. Right now the wave structure tells me that it shall not be possible to extend this debt cycle any further. I have also been questioned about the 70 year period. Its not an exact period but its between 50-70 years that in the past has taken for the full Kf cycle to play out. You have to study the stages of the credit cycle in more detail to figure that out. Also stock market peaks and troughs will not occur exactly at the end of a Kf Autumn/Winter based on economic data, there are lead lags. Again is it still possible that we are only in wave 2 bear market of a multi year bull market that wont go below 11500? Its possible but till there is evidence of that, the risk of a Kf winter is worth keeping note of and waiting for it to be ruled out.

Kondratieff and the Financial cycle - 3/05/2012

While the Kf cycle is affected by demographics and technology the impact of the financial cycle is the highest and so we will not look at financial data and India is placed in the financial cycle. Not that spring and autumn periods can extend due to technological advances and play a role in the structure and size of the move. Demographics are essential for the spending cycle of the generation that starts working and then enters the spending cycle which is an approximate 20 year cycle. However for the demographic cycle to kick in the financial cycle has to also be favorable. Technological cycles can cause wave extensions within a boom due to the related productivity gains that are associated with them.


The first chart that I have to start is courtesy the Ian Gordon, of The Longwave Group. This chart shows the interplay between 4 major components, interest rates, inflation and commodity prices and stock prices. Now you visually see what I explained earlier that interest rates peak in the spring of the supercycle degree wave count and then spike up at the end of the Autumn or after the Winter has started. That spike up usually pushes the economy over the cliff from its debt overhang and then it takes a long time to recover. However soon after the debt problems are out in the open interest rates decline and that allows for stock markets to find a bottom way ahead of the economic cycle. The timing of these events with the structure of the market is important as they dont always follow an exact pattern but coincide close to each other. Still its important to know whether you are past that point in debt and interest rates.

In Jan 2012 I made a presentation at ATMA that showed many of these data points for India and so lets look at these charts again.


The most important one and that which has everyone in the market paying attention is the interest rate cycle. When the market rallied in Jan most believed that the interest rate cycle has turned down. The chart above is that of the Ten year GSEC yield. Based on this interest rates have not topped yet. Note interest rates peaked in India's Kf summer during the 1990's near 15% for Bank FDs. The Gsec yield shown above shows it falling since and then its bouncing back since 2004 in what I have marked as a corrective A-B-C structure. This is the spike in yields that is putting pressure on our debt levels. That chart itself shows that the interest rate up cycle might not be complete as wave C should complete 5 waves up which is not clear. An expanding triangle might be forming till 9.4% or if C=A in a throw-over till 9.9%. After that rates will peak and start falling. The chart above is after the recent interest rate cuts. And just yesterday RBI raised rates on NRI deposits. So the recent cuts appear premature and don't reflect the real situation. We are at the inflection point where rates will spike up and peak and stock markets enter their final leg of a bear market. 

We are therefore at the inflection point where everything changes. The perception that all is well. The real trend in GDP growth and the real pressure points in the economy are revealed. The following crisis that will now emerge from this will put enough pressure on the system to push a new age of financial and economic reform unlike any in the past but that is after the crisis deepens. We are at the edge of the cliff where the crisis becomes reality. Note that stock market as always will move ahead of the trend. They will crash before the crisis and they will bottom when the crisis is widespread and fully understood. By the time real reforms happen stock markets will have already seen their low point. This should happen over the next 1-3 years. It could be faster but time is not the science here and like I said the stock market and economic data points are not likely to be correlated in the near term. It takes time to get people into a consensus on the right path forward after a crisis. It takes time for public mood to change from one period in time to the other after they suffer economic pain.


As also explained above as interest rates peak so does inflation bottom during the spring. Seen above the chart of the CPI [UNME] urban inflation was depressed in the late 90s up to 2005, rising a little in 2007, and taking off after 2008. Thus during 2001-2003 low rates and inflation create the feeling that we are in control of these two factors and that creates confidence among policy makers to expand credit and capital for growth without fear of the two. This creates the Autumn boom which historically always ends in a bubble and crisis followed by deflation or depression or both depending on the economy in question.


This next chart above shows India's debt to GDP on reported numbers of the two components i.e. government debt and banking credit. You will find it interesting to note that the government number is actually falling after 2005. However ratios can fool you. In the weeks prior to this years budget there were articles discussing it and giving credit to the government overlooking that the rate of growth of debt was actually higher. This is because of the use of nominal GDP which includes inflation in the calculation above. It also shows that the government has been de-leveraging and allowing private debt to grow. Sounds like a good thing. So why all this talk this year about crowding out of the corporate sector by the government in borrowing? Because high levels of private debt and interest rates are putting pressure on the corporate sector and because banks have slowed down credit growth at the instruction of the RBI to reign in inflation. But all this does not change the macro picture that we have a high debt to GDP ratio in the economy short of 140% not including other forms of debt than these two. At this point the only way the monetary cycle can keep expanding and aiding growth is therefore to lower interest rates and for that control inflation. Most economic winters started at ratios above 150% but how high the numbers can rise before a crisis depends on being able to control these two key numbers inflation and interest rates. As discussed elsewhere the US did it by pushing globalization and Europe by creating the Euro zone. What can India do today? And should it follow the same path?

Seeing how our financial system has been imitating the global financial model since 1992, I can only tell you that it would do us good to stop and change course however painful that is if we want to move ahead quickly to the next stage of growth. Look at it another way do we want to blow our bubble still bigger to their size knowing how its all ended there today? We are in the fortunate position to know the financial problems that the current model of working are causing and could take a lead in changing things. But its not easy for the reasons discussed mood or public consensus on the way forward. For that reason we will have to visit a crisis of our own in any case before things change or improve or the cycle can turn up again. The good news is that the government has capacity to stimulate the economy in future when needed as its own debt to GDP ratio is low. That without financial restructuring could give us a good powerful bear market rally again like it did in 2009 at some point in the future and we need to keep an eye on that possibility. Such interventions can change the time that a Kf cycle takes to complete and what it goes through in the interim in relation to the stock market.

The Dow/Gold ratio is often used to measure the KF cycle as shown below for the Dow. Again courtesy Ian Gordon, of The Longwave Group. 


This measure should work for all markets then and so I quickly backdated gold price data using the usdinr and did a Sensen/Gold ratio and its quite an amazing chart. First the Gold chart in rupee terms from 1970


Now look at the Sensex/Gold ratio from 1978 that the Sensex exists. What you see below is that the bull for the ratio peaked in 2008 and the 2010 rally is stocks is significantly lagged by this ratio. As seen above the ratio often completes the entire cycle up to down at supercycle degree. Then if we are in a supercycle degree down cycle then the ratio must fall below the 0.17 neckline of the H&S like pattern for the ratio and head towards the lower end of the range closer to 0.03 before we are done here. I will continue to monitor this as time goes. It means that either stocks need to come down, or gold [in rupees] needs to go up, or both, for this to happen.


The The above analysis shows that the Kondratieff Autumn bull market ended in 2008 in economic terms even though it might have continued into wave 5 upto 2010 on the Nifty. It shows that the Kondratieff winter for India has started but the economy has still not passed the tipping point where sentiment turns extremely negative and eventually hope is lost. We maybe at the cliff where that downfall starts as interest rates spike up to their peak levels. Once the winter dawns value investing will be back in vogue.

NEW additions - 14/07/2011

Kf cycle extentions and Global Headwinds

In my lifetime I am experiencing the first Kf inflection point from an Autumn to a Winter, so for all the theory and the gut feel from the data above that we are where we are, my experience is limited to this one time event and phenomena, and its going to make a lifetime of a difference to my investment payoff for an entire generation. Maybe that is the one reason this cycle works it occurs only once in your lifetime and its expectation can never become a mass phenomena. And since no one has any living experience of it its hard to believe and digest for most as it forecasts changes of large financial magnitude that will affect lives for years ahead.

This is why I have to be careful and admit that Kf Autumns can extend under certain circumstances. But are there many examples in history? No! Some people say Debt in India is not a problem but still the US with only 135% debt to GDP in 1929 underwent the great depression. That raises the question did the US face a Kf winter in the 1930's of its own doing? It was not because of their economy sinking but because global forces were at work back then too. The Economic power house of the period before the 30's was Europe and that got into trouble. The cycle then too was global. Economists who have studied high levels of debt do not define any particular level of debt from where an economy gets into trouble, it happens once the level is high enough that servicing it is difficult from GDP growth. The Kf cycle that measure the expansion of debt along with interest rates and inflation allows us to see the point where the secondary bubble in debt develops after a Kf summer [Summer is when interest rates drop along with inflation and all seems to be under control]. The Elliott wave theory allows us to identify the Summer as a wave IV at supercycle degree and the start of the Autumn speculative bull market. Once the Autumn is over as bubbles are already in place its a collapse that inevitably follows.

Because of the great depression the efforts of governments to not repeat the follies of the past have now tried to postpone the eventuality of a debt collapse through the use of financial institutions designed to prevent or postpone a collapse of the system till a solution is found. As discussed an Autumn bull market builds on the back bone of two things low interest rates and low inflation. As long as this is true debt levels keep going up till a bubble develops in some part of the system. Active management can ensure that bubbles don't develop but then at some point servicing debt that is high requires an expanding GDP that can service it, Productivity gains and technological advancement have played that role in the past and for the US the debt is now close to 380% of GDP. The US with its knowledge of the past was able to keep inflation low through what I may call a global arbitrage, In other words Globalisation was used to arbitrage cost of production in industrial goods and then in services [manpower]. This globalisation of the Kf cycle allowed it to extend for another 15 years beyond the normal time period of the average cycle. This allowed the US in a unique position as the owner of the reserve currency system to keep interest rates low and service its expanding debt. In the 1920's one can draw the same analogy with the high debts in Britain during the peak of its empire as it colonised the world. While world trade did exist back then globalisation and single currencies had still not been explored. So when debts hit the cealing even the US that was best positioned as an economy at higher levels of debt was pulled down in a depression with the rest of the world. Its supremacy as the largest creditor nation did not become an advantage till its own Kf cycle started once again from the Spring, a new 70 year period of prosperity. I am explaining this in detail because many predictions for the US Kf Winter have gone wrong as they were made ahead of time and no one anticipated the above possibilities to an extension of the Autumn bull market that was also aided by huge technological advancements. I have seen reports that show that productivity gains from tech were actually nominal since the 90s, so more of the gains were from globalisation/arbitrage.

This discussion is important as India nears a debt level of 140% to GDP. At the end of a Kf Autumn the question is can the Autumn extend. Many fundamentally think that India and maybe even China can keep going. But Kf analysts would have to see it differently. That we as an economy have triggers for a bright future we are at levels where an extension in the Kf Autumn requires low interest rates and low inflation both to persist. Along with that as we have opened up our economy to globalisation we also need a sound global economic environment. Our situation and even more that of China therefore today is like that of the US in 1929, growth economies rearing to go, the biggest creditor nation [China] but a global Kf Winter headwind from the US and Europe and Japan. Like US had to pay the price of a depression before it could grow exponentially from 1940-2000 [stock market 1932-2008], we might also have to first pay the price of a Winter so that we can Spring into a period of undeterred growth. But to allow the intellectuals an opportunity on a extended bull market in India I want them to ponder on how under this environment can we keep both inflation and interest rates low for an extended period of time. If financial markets detect unabated demand for commodities from emerging markets they will drive up those prices for economic profit. Since we are the cheapest producers of the world we have no where else to go to do our own industrial or economic arbitrage. We dont own the worlds reserve currency or have an unlimited market for our debt to finance our long term needs. Thus our dependence on global money in the form of FDI/FII remains. The argument that a weak global economy would bring down commodity prices and lower our inflation is a flawed argument in a global market place. The impact of a global slowdown or recession on India would be significant as many of our companies are now global, and our finances are global.

The only middle path I can see is that of a muddle through global economy, that does not fuel demand too much neither slows down dramatically but allows us to keep expanding. That then leaves us with the basic domestic question about our own ability to absorb the huge amounts of money in our economy without price controls or currency controls. Blaming all inflation on global commodity prices appears like the easy way out. When the CRB index was at its lowest levels in 2009 CPI-UW was in double digits as shown in the chart below. There is no correlation between the two. Domestic inflation has been a function of nothing other than our own monetary phenomena. So expansionary policy at the current levels of economic activity going forward will continue to attract the wrath of price inflation. Without a solution to that interest rates cant be held far behind as we saw in the last financial year. It almost appeared that RBI would keep rates low for the sake of growth but was eventually forced to act. At 140% debt to GDP high interest rates will not allow the economy to sustain and attempts to keep growth high will result in high nominal GDP growth [read Real GDP+inflation], boosting tax revenues on the incremental gains but not offering any real growth. That leaves one argument from the bulls, "Indian are mature enough to accept higher inflation for the sake of higher growth". Really? I actually heard some of that a year back.


In other words in the past we have only seen Autumns extended by the dominant economy of the world, by means that few others can adopt. Japan managed a muddle through economy because it could choose a soft landing in the case of extended growth in other parts of the world. Today with most global triggers used up we would need a miracle to keep an Indian Autumn bull market going on for ever without an economic Winter of our own. Yes the day you can clearly see our ability to keep interest rates low, inflation low, and be unaffected by a global recession that day it will be possible. It might also be possible if we choose to inflate the economy anyway and let people pay the price of inflation through a rising cost of living. I hope I Have made my point.

Here is a statistic I recently came across - All but one economy defaulted on its debts when the debt to GDP crossed 150% and that exception was Great Britain at the peak of its empire that managed to hang on, as it was financed then by the USA. This goes back to the 1930s. Today USA is the one in the position of claiming a global empire but not any other. With our own Indian debt to GDP at close to 150% we are at risk whether you want to believe it or not. Yes research may show otherwise that among listed companies those in the Senses/Nifty don't suffer such high debt however we are discussing Macro-economics here and at that level we have a problem that will affect everyone directly or indirectly.

The subject of people not liking inflation or its hedge [equities] can be best measured by looking at what people are doing with their savings. RBIs annual report publishes the % of household savings going into equities including debentures and mutual funds UTI etc. The % data is shown on the chart below. It does not show much hope. The ratio if my memory serves me right peaked in 1992 close to the 20% mark, could not find it on RBIs site. If fell throughout the 90s. A famous Indian investor called the 2003 bull market on the theory that retail investors will come back. The bull market he got but not the retail investors. The chart below is clear with their disinterest. 2006-2008 for three years interest did come back but did not match the highs seen in 1992. It was quick to disappear and 2011 we ended negative. The recovery to Sensex 18,000 in 2010 saw the no touch only 4.6%. This compared with developed markets like USA where the ratio is 60%+.


India's supercycle Bull market?

India will actually witness a supercycle bull market only after it does a supercycle bear market along with the rest of the world. Only after that would it enter a 70 year bull market period when targets like a Sensex 50000+ would become an economic reality but till then we have to suffer the pain first is my best bet. By when would we see this bear market end and the next leg up begin. I will need to go into an updated wave count for India and time projections for that so here it is.

Updated long term wave count

I first thought of updating the chart above but then let me use a new one altogether so that you can see how patterns change in the use of Elliott waves in real life. In my original wave count I was considering the entire post 2009 rally as a wave B but now I am changing it to X. The characteristics remain the same but it opens up more possibilities. Here is why I considered it. The chart below shows what I expect to be a triangle formation since the high of Jan 2011. Now if the 2010 top was wave B wave C down after that would be a 5 wave decline. In that case we would now be in wave 2 sideways. But wave 2 is rarely a triangle, triangles are most often found in wave B. What does it mean?


It means that the 2008 low is W and the 2010 top is X and next leg down would be Y. Now a bear market can end in Y but larger degree bear markets I have always seen completing in Z so it could be a long drawn affair going all the way into 2016, with Y ending somewhere in 2012-13. Now the size of each leg may also wary and need not look exactly like below. Y could be smaller and Z bigger and X a triangle of some kind etc. But that the current decline is wave Y is now clearly forming as an A-B-C. This allows for more complex bear market formations than simple 5 down expected earlier.  Would wave Y itself become a more complex pattern with more subdivisions?, it obviously could. Now lets see why the year 2016 is important.


I have done very little work on time cycles so I will refer to experts. I have read a few pieces that point to 2016 and here is the best of them from Robert Prechters May 2011 Elliott Wave theorist, from Elliott Wave International. In that report he shows that not only does the 7 year cycle but the 33 and 16.9 year cycles also point to the year 2016. This is where a meaningful bottom would occur for that market. Now that since the US will get there in 3 more waves down [waves 3-4-5 of a 5 wave decline] it is possible that an inter market divergence occurs. It is possible that when wave 3 down bottoms India completes its bear market and when wave 5 down in panic is forming India is in wave 2 of a new supercycle bull market already. I have seen such divergences of US v/s India before. An example at cycle degree is when India bottomed after 9/11 at its lowest level in Sep 2001, the US completed wave Y of its post Y2K bear market and continued to fall in wave Z into Oct 2002 to new lows when India was making wave 2 of a its Kondratieff Autumn bull market. This phenomena can again repeat at a larger degree between 2013-2016. Otherwise we all bottom together in 2016 anyway. I think 2016 should be the outer time frame for any Indian supercycle degree bear market at this juncture, with possibility of it completing as early as 2013.


With this analysis I have given a price and time dimension to the India's Kondratieff winter bear market that we have already entered. The updated wave counts take into account the changes in the fractals of the market as they have unfolded up to now. My disbelief about how our inflation interest rate scenario can be managed at the current global debt to GDP ratios. And the need to trade the market accordingly.

Market Type and Seasonality for Traders

A little more on the last sentence. That I have established we are in a trading market and not a trending one. Even the bear market itself is unfolding in pieces as small as they get. This may be the reason why IVs are low and maybe they stay there for a prolonged period of time. In other words a slow and gradual unfolding of a downward trend can occur with lots of intermittent rallies and a larger X wave bull market period similar to that from Mar09- Nov10 at some point. We have already seen that a large part of this period involved markets moving not more than 5-8% in any direction so once you identify the market type and trade with tools needed for such a market and avoid being a buy and hold or sell and hold kind of trader you might do better, A few bigger moves may come once a year but if you take it in pieces you will put together the big one too. The technical tools for trending markets v/s trading ones are different, the same indicators work differently and sometimes you have to act on simple readings of extreme sentiment or over bought over sold to keep the profits. The markets move swiftly in your favor and then quickly against you again giving you no second chance to take an exit with a confirmed reversal. Once you get used to this market type it will come easily, the difficulty will be when the market type changes again. But I believe that wont be any time soon but that day we will miss the first big move before knowing what has happened. No trading system has been able to capture a change in market type and that will keep us from being gods and only playing with the odds.

Finally a word on seasonality. During the 90s, the Kf summer I noticed that markets followed a budget top, and October bottom cycle for years, but in 2002 something changed for the first time markets topped in Jan. Since then as the Kf Autumn began seasonality shifted to a Jan top to a May bottom with a temporary halt in Oct. This seasonality remained till 2009. Since 2009 as we enter the Kf winter I have now witnessed a new change, an Oct/Nov top and April/June bottoms, and a 2 month up down cycle at play. This new cycle should remain in play till the Kf Spring the next bull market emerges. Once should know that seasonality does invert between the bullish and bearish periods at times when a trend extends however the time periods remain. So from June 2011 we were in a bullish cycle till July then down in August and September. Positive for October. Note this is not normal but both last year and this year October saw a rally and a top near Diwali. Last 2 years top was on Diwali day a surprise but this year a day after Diwali just to fool the ordinary observation. The cycle is now down for November and December before a counter cyclical move in late Dec to Jan. Wave 3 down either ends by Dec or continues all the way into Feb similar to last years cycle.

03-05-2012 update - The seasonal pattern played out as above with the market making its low point a month earlier than the previous two years. The top in Feb too therefore was a month early. Since Feb however we are in the 3rd month counting for the next seasonal down leg to complete. The reason for this delay may therefore be attributed to a seasonal adjustment. What that means is that the time taken is the markets way of adjusting back to the original 2 month seasonal cycle that was prevalent since 2009. That usually meant a top in April and a two month decline into early June for a bottom. We are therefore into the final month where the current down leg should complete bye end of May or early June.


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