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August 7, 2009 Tim McMahon, Editor --
Here at Financial Trend Forecaster as our name
implies we are very interested in identifying and
preparing for long term trends. Obviously, the
earlier you can identify a trend and get aboard the
more likely you are to profit. So it was with
great interest we read the following article by
David Galland of Casey Research. A 20 year
bear market sounds a bit presumptuous after all, we
all "know" that in the long run markets always go
up, (or do they?). Even more interesting to me
is that the 20 year bear market could culminate in
another massive war, due to the 80 year cycle
that leads from the "Revolutionary War" to "The
Civil War" to "Pearl Harbor".
Let's look at what the
research says...
A 20-Year Bear
Market?
By David Galland,
Casey Research
In November of 1997, my partner and co-editor of
The Casey Report, Doug Casey, wrote an
article titled “Foundations of Crisis,” which leaned
heavily on the research of Neil Howe and the late
William Strauss.
Howe and Strauss
have written many books on how generations determine
the course of history and how they will shape
America’s future. Their forecasts on a wide variety
of indicators have turned out to be amazingly
accurate. They were among the first to predict (back
in the late 1980s) the rise of Boomer-driven culture
wars and the simultaneous rise of Gen-X-driven free
agency and distrust of government. And they were
completely alone back then in predicting, for the
post-X “Millennial Generation” (a label they
coined), a decline in youth crime and risk taking
and an increase in youth civic engagement that would
first become apparent around the year 2000. Guess
what? For the last ten years, everyone has been
noticing exactly these trends among teens and
20somethings.
Howe and Strauss
also made extensive predictions, based on
generational aging, on how America’s entire social
mood would likely change, in dramatic fashion,
during our current 2000-2010 decade. To quote Doug’s
prescient 1997 article, which was reprinted in
Outside the Box late last year…
“… an
excellent case can be made the U.S. is approaching
another time of secular crisis, a Fourth Turning,
with an expected due date of 2005 – seven years from
now – plus or minus a few years in either direction.
The Stamp Acts catalyzed the American Revolution,
the election of Lincoln catalyzed the Civil War, the
Crash of ‘29 catalyzed the Depression/WW II era.
What might precipitate the elements now floating in
solution? The answer is practically any random event
that's sufficiently traumatic. Any of the theses of
current disaster/action novels and movies will do
nicely. Perhaps the accidental or intentional
release of a super plague vector. The crashing of an
airliner into the Capitol during a joint session. An
all-out assault on the IRS computers by an armed
group – or perhaps the computers just melting down
due to the Year 2000 Problem. Perhaps a financial
disaster that cascades into the Greater Depression.
In any of these, or a hundred other scenarios, the
federal government would almost certainly act
precipitously and with a heavy hand, which would
bring on a whole other set of consequences.
There's no
way of telling where the Crisis will lead, or how it
will end. That's going to depend not only on exactly
who's in control, but what they do, who they're up
against, and a hundred other variables we can't even
anticipate.
One thing
that seems certain is that real crisis brings out
strong leadership. Because of its age and size, it
will come from the Boomer generation, and it will be
in the mold of Roosevelt or Lincoln – both very
dangerous precedents. The boomers in elderhood will
be dogmatic, harsh, puritanical, and quite willing
to burn down the barn in order to destroy whatever
rats they see. Admix that attitude to a time
resembling the Revolution, the Civil War, or WW II,
overlain with today's ethnic strife, urbanization,
financial overextension, and powerful, compact new
weaponry in the hands of foreign fanatics out to
teach the Great Satan a lesson and it's a real
witch's brew.
(Click
to read the full article)
As eye-opening as
Doug’s predictions were, they brought us only to the
onset of the current crisis. Consequently, we
thought it both timely and important to check back
with the source of much of the research he relied
on. And so it was that I spent several hours talking
with Neil Howe, co-author of the seminal work on
generational cycles,
The Fourth Turning ,
and, just recently, the subject of the DVD “The
Winter of History.” Howe is not just an
historian, but also a Washington DC-based economist
and demographer. While our conversation covered a
great many topics, the overriding focus was on how
things are likely to unfold from here.
Many bullish readers won’t be thrilled
to hear Howe’s latest findings about the future, but
given his predictive track record, dismissing them
out of hand could be a costly mistake.
The summary outlook, according to Howe,
is that we are in the very early stages of a 20-year
period of economic and institutional upheaval – an
era denominated by a crisis during which we’ll
likely witness the tearing down and reconstruction
of many aspects of society as we know it.
As individuals, understanding Howe’s
views and taking some reasonable precautions makes a
lot of sense. As investors, those views also have
the potential to make us a lot of money.
Following is my high-level recap of my
long conversation with Neil Howe, along with some
general thoughts on the investment implications of a
20-year bear market.
Remember the Sixties?
If you’re old enough -- or possess even a
rudimentary sense of history -- think back to the
1950s, with roller-skating waitresses, crew cuts,
and nuclear families of the sort represented by the
iconic Leave it to Beaver. Fathers worked,
while many mothers stayed home. Life had a certain
predictable quality and, as far as anyone knew,
would continue along the same lines for time
immemorial.
But then something happened… the 1960s. Literally no
one saw it coming. It was as if someone had flipped
a switch that electrified America and, quickly, the
world. Most everything changed, and a society
accustomed to conformity was blown away with a
fierce individualism expressed with long hair, sex,
drugs, and rock and roll, topped off with civil
disobedience and bloody riots in the streets.
What happened?
According to Neil Howe, in the mid-1960s,
generational change pushed society around a dramatic
corner as idealistic, individualistic young Baby
Boomers (born 1943 to 1960) rebelled against the
midlife leadership of their G.I. Generation parents
(born 1901 to 1924).
These periods of transitions are part of a larger
cyclical pattern made up of four distinct eras, or
“Turnings,” each lasting approximately 20 years. It
can be helpful to think of the four turnings as you
might think of the four seasons, repeating
predictably in their own natural rhythm. A full
cycle of turnings takes place over a period of about
80 to 90 years -- roughly the span of a long human
life. A new turning begins as a new youth generation
comes of age, bringing a new social ethic that
compensates for the excesses of the midlife
generation then in power.
While we don't have the space here to go into the
full details of Howe’s research, it’s important to
the topic at hand that we quickly recap the Four
Turnings.
The First Turning is referred to by Howe as a
High. As this follows a period of crisis, one of
the hallmarks of a First Turning is a heightened
sense of community and collective optimism, driven
in part by the fact that the society has just come
through a difficult and challenging time.
Consequently, during First Turnings, societal
institutions tend to be strong while individualism
is weak. The post-World War II “High” of the
mid-1940s through early ‘60s is the most recent
example of a First Turning.
The Second Turning, called an Awakening,
typically starts out feeling like the high tide of a
High, with signs of progress and prosperity
everywhere. But just as everything seems to be going
along swimmingly, large swaths of society begin to
chaff under the social conformity of the High,
beginning to gravitate to more individualistic
pursuits and demanding that their personal interests
come first. You may recognize the “Consciousness
Revolution” of the mid-1960s through early 1980s,
correctly, as the Second Turning.
Next up, the Third Turning, which Howe calls an
Unraveling, is much the opposite of a High. To
wit, individualism dominates, while institutions are
increasingly weak and discredited. Quoting Howe on
the Unraveling…
"This is a time when social authority feels
inconsequential, the culture feels exhausted, and
people feel bewildered by the number of options
available to them. It is a time of celebrity
circuses and a tremendous amount of freedom and
creativity in our personal lives, but very little
sense of public purpose.
The most recent Third Turning began in the mid-‘80s
with Morning in America, and continued through the
‘90s. Previous periods of Unraveling in American
history were also decades of cynicism and bad
manners. Think of the 1920s, the 1850s, the 1760s.
And history teaches us that the Third Turnings
inevitably end in Fourth Turnings.
Finally, there is the Fourth Turning, called a
Crisis. The recent Third Turning appears to be
winding down, and we are currently on the cusp of a
Fourth Turning. This is a time of great turmoil,
when society’s basic institutions are torn down and
rebuilt, and seemingly insurmountable problems are
addressed. During Fourth Turnings, America engages
in a struggle for its very survival and redefines
its identity as a nation. Large wars are often a
part of this process. The American Revolution, Civil
War, Great Depression, and World War II were all
features of past Fourth Turnings.
In sum, Howe’s research has shown that, with
remarkable predictability, history is not a straight
line extending toward a better and brighter (or
increasingly awful) future, but rather a repeating
cycle of the four distinct social eras. These four
turnings have recurred with remarkable consistency
throughout Anglo-American history, as Neil Howe
outlines at length in
Generations: The History of America's Future, 1584 to 2069 and
The Fourth Turning.
It
is therefore no accident that America has
experienced great cataclysms or “Crises” about every
80 years. Travel back eighty years from Pearl Harbor
Day, and you land in the middle of the Civil War.
Eighty years before that takes you to the
Revolutionary War. If the rhythms of history hold,
America is now poised to enter another Fourth
Turning.
Bad News, Potentially Good News
You don't need me to tell you that the United States
and in fact the world are now facing a plethora of
intractable problems. The world's former powerhouse
economy, the U.S., is now the world's largest debtor
nation – and by a wide margin. The nation has
trillions in unpayable liabilities coming due on
Social Security and Medicare, to name just two of
many broken government programs weighing on the
country. And our much vaunted democracy is
increasingly dysfunctional – rotten to the core,
truth be known – thanks largely to entrenched
special interests and a voting public clamoring for
their own piece of the pie, while trying to hand the
bill off to somebody else.
Meanwhile, the economy – despite rigorous jawboning
by the government and its many friends in the large
banking institutions -- is in serious trouble, with
the housing market buffeted by tsunami-like waves of
defaults, foreclosures, overvaluations, historic
levels of personal debt, and tight credit that has
left the U.S. government as the sole lender in many
markets.
Bernanke and his ilk may see green shoots, but what
they're really seeing is the deep, green sea rising
up once again to bury the economy.
That's the bad news.
The potentially good news, if you credit Howe’s
research, is that the Crisis we’re now entering will
change pretty much everything. While this change
will entail a great deal of pain and a reduced
standard of living for a large number of people, by
the time the Crisis subsides, society will have
pretty much remade itself in ways that no one can
predict at this point.
Put another way, today's intractable problems will
be solved... one way or another.
What's Next
When discussing what's likely to follow next, Neil
Howe turns to his generational profiles and points
out that the rising societal power today belongs to
the generation he calls the Millennials,
individuals born between 1982 and 2004. They are a
“Hero” generation, just like the G.I. Generation
that coped so well with the turmoil of the Great
Depression and World War II -- the last Fourth
Turning. Coddled as children, the G.I.s were
ultimately called upon to help society through a
dark and dangerous period and rose to the occasion.
Again, quoting Howe on the Millennials…
“These are today's young people, who are just
beginning to be well known to most Americans. They
fill K-12 schools, colleges, graduate schools, and
have recently begun entering the workplace. We
associate them with dramatic improvements in youth
behaviors, which are often underreported by the
media. Since Millennials have come along, we’ve seen
huge declines in violent crime, teen pregnancy, and
the most damaging forms of drug abuse, as well as
higher rates of community service and volunteering.
This is a generation that reminds us in many
respects of the young G.I.s nearly a century ago,
back when they were the first boy scouts and girl
scouts between 1910 and 1920.
Unlike the Baby Boomers, who are largely
individualistic and anti-establishment, the
Millennials are good team players. We hear a lot
these days about working together for a common
cause, volunteerism, and the need for stronger
government institutions, largely because these are
the new priorities of the Millennial Generation.
As you may recall, out of the devastation of World
War II, a spate of transnational political and
economic institutions were born, including the
United Nations, the World Bank, the World Health
Organization, and the International Monetary Fund.
By the time the current Fourth Turning is over,
expect more of the same -- but probably even bigger
and more ambitious.
What Does This Mean to You?
Most importantly, if Howe is right, this crisis is
far from over. In fact, when I asked him where we
are today on a scale from 1 to 10 -- with 10
representing as bad as the crisis will get -- he
replied that we are at either 2 or 3. In other
words, the worst is very much yet to come. And, per
above, he expects this period of turmoil to take 20
years to play out. Thus, if nothing else, you may
want to continue approaching matters of personal
finance cautiously.
Secondly, if you're
the type of individual that tends to get steamed up
by larger and more intrusive government programs,
you may want to take a few deep breaths and resolve
yourself to the fact that this phenomenon is likely
to get far worse before we see a return to
celebration of individual rights. (And the cycle
shows that we will see such a return -- about
40 to 50 years from now, when the next Second
Turning comes around.)
If it is any consolation, the Millennial Generation
places a great deal of weight on teamwork and the
notion of doing things "smart." That doesn't mean,
of course, that the various programs that are kicked
off in an attempt to fix the many problems now
confronting society will in fact turn out to be
technically smart. But they will almost certainly be
better thought out than some of the numbskull
initiatives we've seen over the last 20 years.
You can also take some comfort in the fact that
Millennials are builders, not destroyers. By
contrast, the individualistic Boomers that dominate
today’s aging political class are world-class
dissenters, radio talk show aficionados always ready
to scrap it out for their beliefs. Millennials want
to skip the philosophical debate and get straight to
fixing things.
Other insights about Fourth Turning periods gained
from my conversation with Neil Howe…
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Government grows powerful, and sweeping new
legislation is enacted. The old 1990s rule was:
just compete and stay off the state’s radar
screen. The new 2010s rule will be: better have
a presence in Washington so you’re not dealt out
of the “new” new deal. One political party
tends to dominate. The Democrats under FDR
during the last Fourth Turning offer a good
example. While Neil Howe doesn't think it will
necessarily be the Democrats this time around,
they are certainly in the pole position at this
point.
-
While public history speeds up, personal life
slows down. Families will spend more time
together, like in the old Frank Capra movies.
Ever more households will be multi-generational,
a trend now spurred by Boomers with large, empty
McMansions and Millennials without jobs. There
will be a blanding of the pop culture, with the
entertainment of the young (put Miley Cyrus or
“High School Musical” on fast forward)
increasingly regarded as tamer than the
entertainment of the old.
-
Innovation tends to stagnate, while a few new
technologies will be chosen to be adopted on a
large scale. We will see the equivalent of
canals or railroads or interstates being built
across America. To borrow from Carlotta Perez’
four-stage description of technological
revolutions, we are moving from the “innovation”
to the “implementation” stage.
-
New laws and regulations will do less to referee
a free market and more to pursue one or another
national priority. They will increasingly favor
the large producer over the retail buyer,
investment over consumption, planning over risk,
debt over equity. Businesses will hustle to
reposition themselves. Anti-trust will weaken.
-
The authority and obligations of community will
strengthen at all levels, from local to national
and possibly beyond (if our alliances prove
durable). Personal reputation and membership
will matter more. A “new localism” will reshape
town and urban planning. A global slide toward
national or regional protectionism will loom as
a real danger.
-
It is too early to tell whether the crisis will
ultimately be inflationary or deflationary,
though we at Casey Research come down on the
side of inflation for the simple reason that the
government possesses the means to inflate. Due
to the gold standard, that was not the case
early in the Great Depression.
-
In the past, Fourth Turning periods have always
resulted in the nation redefining who we are in
some essential way. That was certainly the case
during the American Revolution, when we
transitioned from a British colony into a
collection of independent states -- and the
Civil War, when those states were hammered into
a single nation. And, again, after World War II,
when the U.S. went from being a relatively
isolated nation to a global empire. A wild card,
for instance a terrorist nuke going off in a
city anywhere on the planet, could similarly
take the country, and the world, into
unforeseeable new directions.
-
Baby Boomers will continue to be respected for
their cultural achievements (it’s not a fluke of
history that Boomer music and other
entertainments are still wildly popular among
the young), but will be increasingly ignored in
the political debate. The term “senior citizen,”
already in decline, will disappear entirely. And
if push comes to shove, Boomer’s financial
interests – including Social Security – will be
subjugated “for the greater good.”
-
There will be a growing push to rebuild the
middle class. The wealthy and the impoverished
alike will both come under pressure thanks to
new pro-middle class initiatives. If you are a
high-income earner, it’s a certainty your taxes
are going up, and likely by a lot. If you want
to make a fortune, don’t pursue the niche or the
“long tail.” Invent the next big brand that
will appeal to Everyman.
Don’t Worry, Be Happy
That is, at best, a sketch of my long conversation
with Neil Howe and doesn't do justice to his
research. If nothing else, however, I hope I’ve
succeeded in giving you at least some sense of the
man and his unique research and encouraged you to
think outside the box about the nature of today’s
crisis.
A
couple of final observations.
First, Neil Howe is not a negative person, nor a
professional doomsayer. Rather, he is a social
scientist and historian with decades of experience
in the social sciences. As you speak to him, you get
the sense that he doesn’t view the world through any
particular philosophical bias, but rather is simply
reporting what his research is telling him about the
current players on the global stage, and which act
we are currently in.
Secondly, speaking as a Baby Boomer and someone with
a lifelong distrust of government and its meddling
institutions, talking to Neil left me feeling oddly
relaxed -- letting go, if you will, of some of the
frustration that has been building within me as I
watch the nanny state grow more and more bloated.
That is not to say we won't continue to speak out
against government waste and prolificacy. We will.
But it seems increasingly clear that we’re now
caught up in a powerful trend toward bigger, not
smaller, societal institutions -- and that these
institutions will, over the period ahead, change the
world as we know it.
Of course, being active investors, at the same time
we raise our voices in protest, we’ll deal with the
reality of the situation by strategically
positioning our portfolios to profit from the coming
changes.
And so, like the Rockefellers and J.P. Morgan during
the Great Depression, we’ll make the trend -- to
matter how negative -- our friend. You may want to
consider doing so yourself.
If your assets are to make it through the
Fourth Turning intact you must make the Big Trend
your friend. The Casey Report
discovers and analyzes budding economic trends and
turns them into hands-on, actionable recommendations
for its subscribers.
Click here to
read the latest report from Casey
Chief Economist Bud Conrad … a play on an all but inevitable
economic trend in the making.
read more.
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