The Sixth Wave – What will drive markets for next 50 years?

Coined by economist Joseph Schumpeter in 1942, the theory of “creative destruction” suggests that business cycles operate under long waves of innovation. Specifically, as markets are disrupted, key clusters of industries have outsized effects on the economy.

Take the railway industry, for example. At the turn of the 19th century, railways completely reshaped urban demographics and trade. Similarly, the internet disrupted entire industries—from media to retail.

Long Waves and the sixth wave of innovation

The above infographic shows how innovation cycles have impacted economies since 1785, and what’s next for the future.

Technological innovation and economic growth are closely related and can be articulated within the concept of cycles or waves. Each wave represents a diffusion phase of a series of technological innovations creating entirely new economic sectors and opportunities for investment and growth.

These waves are related to the phases of development of the world economy. As time progressed, the lapse between each wave got shorter. For instance, the first wave lasted 60 years, while the fourth wave lasted 40 years. This reflects a growing potential for innovation and the capacity of economic systems to derive commercial opportunities from an innovation once it has been adopted. Innovations are much less the result of individual efforts but are organized and concerted actions whose results are rapidly diffused. Also, at the end of a cycle, the rate of innovation usually declines as most of the main innovations in the driving sector have already occurred, and the industry has been captured by commercial and regulatory interests that focus more on rent-seeking than innovation.

Since the beginning of the industrial revolution in the late 18th century, six waves have been identified:

First wave (1785-1845).

During the first wave of the Industrial Revolution, water power was instrumental in manufacturing paper, textiles, and iron goods. Unlike the mills of the past, full-sized dams fed turbines through complex belt systems. Advances in textiles brought the first factory, and cities expanded around them. The beginning of the Industrial Revolution mainly focused on simple commodities such as clothes and tools that could benefit many people. The conventional maritime technology relying on sail-ships was perfected, supporting large colonial and commercial empires, mainly Great Britain, France, the Netherlands, and Spain. Significant inland waterway systems were also constructed. The costs of production and transportation were significantly reduced.

Second wave (1845-1900).

With the second wave, between about 1845 and 1900, came significant rail and steel advancements. The rail industry alone affected countless industries, from iron and oil to steel and copper. In turn, great railway monopolies were formed. This induced opening new markets, and giving access to a wider array of resources internationally and inland. The steamship had a similar impact on maritime transportation and permitted expanded commercial opportunities in global trade.

Third wave (1900-1950).

Electrification was a major economic boost in the third wave as it permitted the usage of a variety of machines and appliances. It also permitted the development of urban transit systems such as subways and tramways. Another significant improvement was the internal combustion engine, around which the whole automotive industry was created and expanded the mobility of passengers and freight.

The emergence of electricity powering light and telephone communication through the third wave dominated the first half of the 1900s. Henry Ford introduced the Model T, and the assembly line transformed the auto industry. Automobiles became closely linked with the expansion of the American metropolis.

Fourth wave (1950-1990).

The post-World War II period represented significant industrial changes with new materials such as plastics (petrochemicals) and new sectors such as electronics (television). The jet engine expanded the aviation industry toward the mass market, and mobility could be realized globally.

Fifth wave (1990-2020?).

The development of information systems and then the internet substantially improved the transactional environment with new communication methods and more efficient forms of management of production and distribution systems (logistics). This spawned new industries related to personal computing devices, mainly computer manufacturing and software programming, but more recently, e-commerce platforms.

After the internet emerged by the early 1990s, barriers to information were upended. The internet ushered in a new frontier of globalization, a borderless landscape of digital information flows.

Sixth wave (2020?-).

The key technologies that are likely to be the drivers of the 6th wave are already in place and mainly include robotics, automation, artificial intelligence, drones, and sustainability. AI so far has been in the forefront leading the market rally, but it will not be the biggest driver.

There is a developing technology that will dwarf all others! It will revolutionize the global industries; one can compare that to the impact of Industrial Revolution of 18th century. This technology has potential to be a gamechanger for the mankind.

Crucial Knowledge for Investors

To the economist Schumpeter, technological innovations boosted economic growth and improved living standards.

Knowing the main driving sectors is of utmost importance to long-term investors. Because disruptor companies in driving sectors have potential to grow phenomenally. They also tend to lead to monopolies. Especially during a cycle’s upswing, the strongest players realize wide margins, establish moats, and fend off rivals. Typically, these cycles begin when the innovations become of general use.

Of course, this can be seen today—never has the world been so closely connected. Information is more centralized than it has ever been, with Big Tech dominating global search traffic, social networks, and advertising.

Like the Big Tech behemoths of today, the rail industry had the power to control prices and push out competitors during the 19th century. At the peak, listed shares of rail companies on the New York Stock Exchange made up 60% of total stock market capitalization.

Mega Wealth Creators

Gain in share prices (x times) –

Fourth Wave

Boeing 13x (1968 to 1990)

Fifth Wave

Amazon 640x (1998 to 2020)

Microsoft 222x (1990 to 2020)

Adobe 277x (1990 to 2020)

Sixth Wave

NVIDIA 3x (2020 to June 2023)

ASML 1.5x (2020 to June 2023)

The sixth wave has just begun, knowing the biggest drivers is the key to wealth for next few decades. Early investors get the highest returns.

Trikaal Macros – Weekly Newsletter

Trikaal Macros is a weekly newsletter on economy and markets, focusing on long-term market drivers and its future outlook. In the short run, a whole lot of factors can drive markets up or down, but in the long run, it is either the government policies, structural factors, or technological innovations, that will drive the economy and markets. Government policies may impact for few years but tech innovations drive markets for decades.

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