| K-Waves or Long Waves or Kondertiev's describe the state of development and diffusion in core technologies which power the economy. K-waves are a techno-economic statement which describes how the core technologies are being consumed and used in the economy and how that consumption affects economic expansion.
So what does a K-wave look like? The following graph is Carlota Perez's 2002 Long Wave model. I have modified Carlota's S curve to reflect the market impact from an investment perspective. It follows below. To be clear I am not referencing the original legacy Kondratieff model. Though Kondratieff had the right idea relative to the tremendous impact of technology diffusion, his original overly simplistic model did not withstand the accumulated data. The data has shown his model, but not his concept, to be flawed. Instead we rely on the latest Perez updates for Long Wave theory.
We will talk about the successive phases in a k-wave, taking each phase separately, therefore don't worry if the following chart means very little to you when you first see it. It is merely reference for you to look at while we walk through the phase descriptions.
What Carlota Perez did so brilliantly with her seminal book Technological Revolutions and Financial Capital was to define how Long Waves function and impact the world we live in. Her model fits the data. I have back tested her model using market date to the early 1900s. Perez broke Long Waves into two halves. The first half being the Installation Period where new core technologies emerge to reshape our world as the markets are primarily driven by investor capital.
The second half of each wave is termed the Deployment Period where the core technologies are consumed by production capital, business investment in other words, and become embedded within every industry and facet of life. In between the two periods is the Inflection Point where markets pop and drop as a chaotic deleveraging process ensues. The overvaluations from the extreme exuberance result in excessive leveraging as the Installation Period crashes to a close. The Inflection Point is where we are today in the current Information and Telecommunications Long Wave.
Though the graph gives the impression that the major growth occurs only in the second half of the wave this is not really true. It is true that many more computers (tablets, Smartphones etc) will be built in the 2nd half of the wave, just as there were many more cars built in the 2nd half of the prior long wave. However the growth in the markets is in reality roughly the same, approximately 3.5 times growth in economic value. The scale for the growth is 3.5 times larger in both halfs of the model.
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