By John Mauldin | 30 June 2009
Long time readers know that I am a huge fan of the work of Neil Howe. His book, The Fourth Turning, written with William Strauss, was one of the seminal pieces of my reading over the last 30 years. [[Earlier, they also wrote Generations: The History of America's Future, 1584 to 2069 : normxxx]] And it has turned out to be stunningly prophetic. Uncomfortably so. A roughly 80 year cycle (±2 to 4 years) has been repeating itself for centuries in the Anglophile world, broken up into four 'generations' or 'turnings'. We have begun what Howe called many, many years ago The Fourth Turning.
Neil Howe is the co-author, with the late William Strauss, of a number of seminal works on the impact of 'generations' on cycles of history. Howe is a founding partner of LifeCourse Associates (lifecourse.com) which provides research to institutions looking to capitalize on generational research.
The June 2009 edition of The Casey Report, the flagship publication of Casey Research, featured a comprehensive 23 page interview with Neil Howe as well as suggestions on how to position your portfolio to profit during a Fourth Turning crisis. I persuaded my friend David Galland to at least summarize it for my Outside the Box this week, and he graciously did so. David is the managing editor of The Casey Report and has had a long career in the financial services industry; as a founding partner of the successful Blanchard Group of Mutual Funds and, before joining Casey Research, as a founding partner of EverBank, one of the big success stories in independent online banking.
Casey Research is offering readers of Outside the Box the opportunity to read the full edition of The Casey Report featuring the Howe Interview, and receive the publication for the next three months with a 100% satisfaction guarantee. For details click here
I trust you will find this week's Outside the Box to be helpful. The more things change…….
John Mauldin, Editor
Outside the Box
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A 20-Year Bear Market?
By David Galland, Casey Research | 30 June 2009
In November of 1997, my partner and co-editor of The Casey Report, Doug Casey, wrote an article (annotated in 2005) 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 20-somethings.
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 (2008):
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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 most mothers stayed home. Life had a certain predictable quality and, as far as anyone knew, would continue along the same lines until the end of time.
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. [[Not to mention the start of the Viet Nam war…: normxxx]]
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 70 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 [[see the references above: normxxx]], 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…
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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, and the Great Depression/World War II were all features of past Fourth Turnings. [[Think of 1920 as 'similar to' 2000 (including the severe recession of 1920-21)…: normxxx]]
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 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. [[And think of 2009 as approximately 1929±1 or 2 years!: normxxx]]
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 huge 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 [[bread and circuses!?!: normxxx]], 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 [[which is desperately getting worse: normxxx]], 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 if not most major markets. Bernanke and his ilk may see 'green shoots', but what they're most likely seeing is Kudzu springing 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. [[but, given past experience, likely to be a whole lot better.: normxxx]] 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…
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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 a 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 "smartly". 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 necessarily 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…
- 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, as 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 legislation 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. Second, speaking for myself (David) 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 that we at Doug Casey won't continue to speak out against government waste and profligacy. 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'— no matter how negative— 'our friend'. You may want to consider doing so yourself.
See also:
Generation Gab (7/8/2008)
The Next New Deal
13th Gen: Abort, Retry, Ignore, Fail? Remember, Obama is a Gen-Xer!
CSIS— Global Aging Initiative:
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The 2003 Aging Vulnerability Index; The Graying of the Middle Kingdom (2004); The Aging of Korea: Demographics and Retirement Policy in the Land of the Morning Calm.
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