In Transcripts


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“On today’s show our guest, Neil Howe, author of the best-selling book, The Fourth Turning, says that this static Fed-manipulated complacency will not survive, and that a paradigm shift of historic proportions is just around the corner.”

– Kevin Orrick

“To understand this, and to understand that generations are fundamentally different, and that there is a pattern on how these generations succeed each other, is the beginning of wisdom. And the wisdom of one generation is understanding that it doesn’t want to raise kids to replicate themselves, but the real object is to raise kids who complement yourselves, who have strengths that you do not have.”

– Neil Howe

Kevin: I’m really excited about our guest today, Dave. This is somebody that we have had on two other times, purposely, about two years spaced apart. Neil Howe wrote the book The Fourth Turning, and has truly changed the way people think about generational change.

David: Looking at history from a cyclical perspective gives him a certain view into events, not only present and future, but looking back in time, to see some similarities and some patterns. Part of what he is doing is not just looking for a numeric match-up, where you might have a market crash at this particular point, like a Kondratieff might have, but rather, he is looking at social mood and he is looking at the sociological changes that happen, that occur within generations, and really saying, “Look, every generation is going to be different. And every generation is going to gain some things and lose some other things. Every generation has strengths and has weaknesses and you see patterns play out, politically, economically, socially, on that basis.”

Kevin: One of his great warnings that he has been coming up with over the last few years is a cry of, “Be careful of complacency.” The complacency in the market, the lack of volatility in the market is definitely not going to change the history of change. One of the things that he has looked at over the last 600 years is when society becomes complacent, and oftentimes that complacency precedes a great change, oftentimes war, changes that just shock the society as a whole.

David: He has taken his work and what he and William Strauss had done with The Fourth Turning, and now works with a group called Hedgeye Risk Management. He is the managing director of demography. They do consulting with asset management companies. Though they don’t manage resources themselves. They do consulting through their Stanford and D.C. offices.

Kevin: Sometimes it is good to look back and say, “Okay, what were we talking about before the election?”

David: Last September we discussed a number of the challenges the next president would face, and we also returned to a topic that we reflect on quite often in our office, which is, what does each generation learn from the one that precedes it, and how does each generation process the context they grew up in, and in what ways do they take a unique approach to engaging their world, either informed by their predecessors, or as a reaction to them?

A part of that conversation in September included a view of the cyclical nature of history espoused by Neil Howe in a book he co-authored with William Strauss two decades ago called The Fourth Turning. These pre-election musings were more about the current generation, the millennials, how they would react to the next administration’s successes and failures, some of my concerns in that regard. And of course, the extraordinary backdrop the next president would be operating within.

Neil has joined us on our commentary as a guest years ago to explore the secular – the long-term – cycles he sees spanning Anglo and American history, with the suggestion that there are both challenges and opportunities that lie ahead of us. I assume if the listeners have not read that book that they are likely to order it at the end of the discussion today and read it. It is an incredibly useful overlay for appreciating how social, political, economic, and ultimately historical events can act and influence each other.

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Writing a book 20 years ago, a national best-seller I might add, with a part of the title being An American Prophecy, invites this first question. The events of the last 20 years give you some reflection on where you have been, what we have seen, what was right thus far, and where you have been wrong. What is your self-assessment? What would you recalibrate, if anything?

Neil: That’s a good question. Obviously, I think we did a few things which were pretty on target. We suggested that in our 1997 book that sometime in the middle of the next decade, the middle of the 00s, that there would be a real mood change in America and it would be generationally driven into this new era which would be a new mood of urgency and crisis, this idea that things would be changing very fast, both in the economy and public policy. We did suggest that it would very likely be kicked off by a great devaluation in the financial market.

And all of this would coincide with the emergence of millennials as the new coming of age generation, Xers for the first time beginning to move into leadership positions in mid-life as they were growing older, and boomers for the first time beginning to look at elder leadership positions and retirement as that generation is moving on. These generational transitions are critical, for anyone who has read our book, thinking about how eras change in mood as we move forward, each of these turnings being about a generation longer, about 20 years or so in length.

And I think all of that was pretty good, obviously, and we did have the GFC, the global financial crash in 2007 and 2008, and we had the election of Barack Obama who was, by our reckoning, a very first cohort Xer, born in 1961, raised a little bit more on maybe hip-hop than on classic boomer oldies, and a president, I must say, who, in his own autobiography and speeches often referred to himself as part of the generation coming after boomers. And very much those two events kind of kicked off, I think, what we call the beginning of the fourth turning, this new era we have entered.

And obviously, ever since, I think we have been in a different time. People sometimes ask me, the decade we have lived through, it is 2017 now, and you look over the last ten years, what decade this resembles in history? And I think there is no question what it resembles. It resembles the 1930s. You look at the economy – very disappointing growth, the underemployment of labor and capital, the inability of monetary policy to re-stimulate the economy, fears of deflation for the first time since the 1930s, fears of trade wars and beggar thy neighbor policies, of devaluation, one nation against the other.

Even terms that were popular in the 1930s have been revived in popularity. Larry Summers brought back this whole idea of secular stagnation. This was a term originally coined by Alvin Hansen in 1937 to popularize pains in America, back when FDR was still president. Debt deflation, which was coined by Irving Fisher in the early 1930s, about how deflation actually compounds the burden of debt, and this has also been brought back. I think, globally, the idea that we are living in an era of declining authority of any great power coordination or agreement of the U.N. as an effective global body, or the G6, or the G7 as an effective governing body.

Ian Bremmer, I think, is one of the leading geopolitical strategists in America. He came out with a book recently, called [Every Nation for Itself: Winners and Losers in] A G-Zero World, meaning every nation for itself. And we see a world in which authoritarian states are free to do whatever they want in their corner of the world. Well, doesn’t that remind you of the 1930s with the collapse of the League of Nations, the decline of Britain, and basically, new authoritarian regimes doing whatever they wanted to in their corner of the world.

And I might add, and this is significant, when you look at this generationally. These authoritarian nations are attracting greater public interest and enthusiasm. Think of which leaders in the world today have the highest public approval rating. You’re looking at Xi Jinping, Narendra Modi, Vladimir Putin. These are authoritarian leaders, and they are much more admired than most of the leaders today in the democracies. This, again, was a feature of the 1930s.

I think, lastly, I would say, just in terms of what we have experienced recently with declining fertility rates, increasing multi-generational living, different generations living in the same household, declining home ownership, kind of the blanding of the youth culture, many of these things were also associated with the 1930s. So I think that many of the archetypal mood shifts, we are seeing played out. Obviously, most of all, both of these decades occurred in the shadow of a giant global financial crisis, 1929 and 2008. So here are the parallels.

And in some ways, our recent financial crisis in some areas of the world like Europe is actually much worse than the 1930s was. Europe has barely recovered its GDP prior to the crash. This was actually much more severe in terms of the duration of the crash than the 1930s was for Europe. So here are the parallels. And I think there are generational parallels, as well, but to sort of give you that as an overall backdrop.

David: One question on the 2007-2008 crisis. I tend to agree with you in terms of there being parallels to the 1930s, but we have had multiple financial crises since 1997, both around the world and at home, and I think you are right, there is a particular significance here, perhaps, that is kicking off a fourth turning. But what, in your opinion, made the global financial crisis stand out as pivotal? Why is it not a continuation of the third turning sort of unraveling which has been in place since the early 1980s?

Neil: Because I think it’s driving a transformation in public attitudes to political life, and that is where we are going to see the change. I did predict this back in 2012 and 2013 when people were talking about the possibility of a sovereign debt crisis in Europe, and I thought, “No, that’s not going to be the crisis,” because as I think we found out, the ECB could, and as Mario Draghi did, do whatever it takes. They could always back that up.

So the real crisis, which is a more slow motion crisis, is going to be complete political disaffection with the political leadership of the European Union, indeed, the very function and existence of the EU, you’re going to find rebellions, meaning that, here you have this enormous youth unemployment, a complete collapse of productivity growth, and the kind of immiseration of a new generation of Europeans who can’t get ahead, who found that the only way to save Europe was to hugely inflate the assets of everyone who has already saved, namely the old, and to deprive them of any opportunity of saving themselves, or to buy into an extremely over-inflated market. And particularly in Southern Europe, in addition to that, you give them an over-valued currency.

This, again, has a flavor of the 1930s, and I would argue that the euro to Southern Europe is exactly what the gold standard was in the 1930s. Mainly, it was an albatross that they couldn’t get rid of given the political ideas of the time. Everyone from Winston Churchill on down said we had to remain on the gold standard, we couldn’t ever part from the gold standard, while their countries went down the tubes. And then finally, they had to let go, and the U.S. was the last to let go, which actually hurt us in 1930-1931 because everyone else was letting go of the gold standard and we weren’t.

But this is now the situation for Portugal, Spain, Italy, Greece. God knows why Greece has continued to stay on the euro. It has completely destroyed their economy over an entire decade. They would have been so much better going back to the drachma years ago. But for whatever reason, I think partly because the leaders in Greece have a lot invested in euros, they decided not to do that.

But the point is, there is a revolution growing in Europe. It is a populist revolution. It is, to some extent an anti-democratic and authoritarian revolution, and it is both on the left and the right, and it is directed against the centrist liberal democratic middle. And we see in Northern Europe, it is mostly on the right. In Southern Europe, with parties in Spain like Podemos, in Italy the Five Star movement, it is mostly on the left. They are anti-EU, and in some cases, anti-euro.

We saw it, obviously, with Brexit. We saw it, most fascinatingly, in Theresa May’s brash decision to get a much larger majority and doing a kind of flash election, and getting pulverized, or at least humiliated. She obviously ended up with the most members of the House of Commons, but being pulverized by Jeremy Corbyn, who got this huge vote from young people in Britain on the left for a socialist regime, completely changing land use patterns in England, and these enormous new government payments to reimburse young Britains who are going to college and going to university, basically saying, “Why don’t we invest more in our future here? We actually have a program to get our whole nation going somewhere.

So here you have something, this idea of populism, authoritarianism, and I would say, particularly, when you go to East Asia, nationalism, which is going around the world, also shades of the 1930s. And we have yet to see the biggest manifestations of this. This is still brewing.

David: This is similar to my earlier question. Is this the 1930s? We have government stats which would suggest we are on the road to recovery, the worst is behind us. Today we have EBT cards which give the impression that everyone has the resources they need – there are no bread lines. Again, this is kind of a repeat of the earlier question, but what makes you think this is the 1930s, or an early stage of the fourth turning versus an extension of the third? From an investment standpoint, that is particularly relevant. Timing is everything.

Neil: Yes. There were no bread lines by 1937 and 1938 either. And in fact, most of the 1930s, after the bottom was hit in 1932, was 5-6% real GDP growth per year. That was a V-shaped depression. We went way down and most of the 1930s, except obviously in 1937, we were picking up a lot faster than we are today. Europe is so close to zero that to talk of recovery you kind of have to put it in quotes. And I think any talk of Europe being out of the woods, particularly given the state of its banking system, and the enormous reliance they are still having on quantitative easing in Europe, I think would be premature.

I also think that Europe is politically in danger. I would say, right now, the specter, the immediate cloud over Europe right now is Italy. Italy has to have another election within the next ten months and right now the Five Star movement is way ahead, and the Five Star movement has been pretty adamant about getting out of the euro, as indeed, Italy probably should. If Greece were to leave the euro, the EU could manage that. The EU could not manage an economy the size of Italy leaving.

David: Not without Italy.

Neil: Yes, and I would also just raise this interesting thing going on with millennials, and that is, this is a generation that is just tired of the gridlock and histrionics and complete incompetence of the older leadership, particularly the boomers, who are now senior leaders in most countries, including the United States, who absolutely cannot focus on the long term. They cannot even formulate a long term agenda, much less even have any means of getting it through, or legislated, or even, frankly, articulated, or focus on it.

One of the reasons why these authoritarian regimes like China are much more popular in the eyes of millennials around the world than among older generations, is that the younger people feel at least China focuses on the future, invests a huge part of their economic product into the future, and have a plan. Look at the United States. Look at these countries today. They’re unable to focus on anything beyond next month. They can’t even formulate a budget. They can’t get anything through Congress. And all they’re doing is embarrassing themselves.

There is some great research now, if anyone is interested in pursuing this, and it was highlighted recently in the New York Times and the Post. There is a scholar by the name of Yascha Mounk of Harvard, who with a partner has done some interesting work on world value surveys showing that young generations today are much less enthusiastic about democracy. If you ask the question, “Can you imagine an authoritarian government taking over if democracy simply doesn’t work?” Millennials today around the world are much more likely to say yes. Older generations, many of whom recall, or were raised in the aftermath of World War II and the Cold War and the war against fascism, adamantly say, “No, democracy is always the best solution.”

What millennials today want is something that works, something that focuses on the future, something that builds, something that is functional. They are simply not finding it in democracy today. The biggest decline in trust in institutions today, and you see this clearly in America, is in all those institutions we associate with democracy – media, Congress, White House, courts, law, anything involved with what we think of when we think of the term liberal democracy.

Which institutions have not fallen, and have actually risen over the past 20 years? The military, the police, small businesses, interestingly enough. But that is kind of ominous, and I think, when you look ahead, everyone looks in terms of right wing versus left wing, and I think that is a mistake. You really have to look at authoritarian versus liberal democratic. And right now, I think, when you look generationally, you see an increasing attraction toward the former among young people, who are justifiably impatient.

David: You mentioned Ian Bremmer earlier. His book The End of the Free Market suggests a greater role for the state, implying almost a Roosevelt era-type expansion of the state.

Neil: Fourth turnings, historically, as indeed, political crisis, inevitably, is associated with an increase in state power. That has always been true. Every total war, every great crisis, every great collapse, the state comes in the fill the difference. I think what is happening now is that older generations don’t really feel that urgency because, “Well, everything will stay around long enough for my own benefits to come through.” You know what I mean? “I don’t know whether I’m getting an Illinois State pension, or whatever I’m receiving, it’s going to last long enough for me.” But I think a lot of millennials are looking further forward and they’re saying, “This system is not going to last. It’s not going to last for me. It’s not going to be there for me.”

David: Fourth turnings are a season where problems are resolved. That is the good news. The bad news is that they are rarely solved without conflict. So, first is the human propensity to kick the can further down the road that thing that leads us to this point in history where we have an accumulation of problems all clustered in a fourth turning crisis? And if that is the case, we may be in a season of change, but, man, I see a lot of structural problems, issues of unsustainability that are still being ignored, as if the proverbial can is still kind of rolling its way down the road.

Neil: Well, that’s true, and that was also a lot of the feeling in the 1930s. Despite the fact that you had the economic crisis, no one really thought, frankly, until World War II, that we were out of it. We went back into it again in 1937. We were still a nation in depression on the eve of Pearl Harbor. In 1941 we still were away from full employment, we still had very little animal spirits with regard to investment. And when it came to our international problems, there was a feeling of, “Things are worse than ever,” and we just hoped, particularly in America, that we could just avoid it all somehow and keep our heads down. So there was a sense of kicking the can down the road then, as well.

I do agree with you, and I think that this odd sense today is not just a contradiction, it is almost something bordering on cognitive dissonance, that politics is regarded as so completely unstable and fluid. You think of these futures markets showing what a large share of betters are willing to put their money on Donald Trump not even surviving his first term in the White House, these odds maker bets you see in the British betting markets, for example, and this sense of Washington chaos or gridlock, absolutely nothing happening, and the sense of incompetence around the world in terms of political leadership.

And then on the other hand, this incredible, not only overall loftiness of valuations in financial markets, but the lack of much volatility, partly through financial engineering, but we see in most of these measures of what we call market complacency, which are valuations divided by the VIX, showing complacency off the charts. This is odd. This is clearly unsustainable, where you have such a complete sense of vertigo with regard to our civic and political future, and the sense of utter complacency in financial markets.

And actually, I think it’s a real problem for Donald Trump. I argued after he was elected, before he was inaugurated, that the one thing Donald Trump needs to succeed is a big bear market. He needs stocks to crash, because that way power will gravitate toward the executive, people will demand that he take action, whether it is an aggressive fiscal policy and tax reform. Right now, no one is acting, because everyone is too complacent. Everything is so great. Why would anyone stick their neck out right now? Trump can’t even get a Republican majority Congress to pass its own Republican legislation, let alone anything that Trump wants.

David: This is interesting, because in September, my concern coming into the election was that whoever won might get caught holding the bag, the bear market bag. We are coming into our ninth year of growth in the equities markets, and I’m just wondering if the person who is elected doesn’t end up being a Hoover, where the party and the person become very unpopular for a very long time because they are blamed for a certain degree of pain and anguish experienced by the man in the street.

So my thought was the Millennials might look and say, for a generation – let’s say, for instance, Trump were to win. These were my musings in September. He is associated with the free markets. He is associated as a businessman. Do we move away from the free markets on that basis, as people point the finger of blame at the person who is responsible? You’re kind of arguing the opposite side of that, saying “No, in fact, he becomes more powerful as he has carte blanche to do what he needs to do from a policy perspective in the context of panic.”

Neil: I’m not disagreeing with you. I’m actually just simply saying, a necessary, but not sufficient condition for Trump to be an effective president is he needs a mood around him that requires action, sometime early in his term. Remember, Reagan had a horrible recession early in his first term, as well as a tremendous stock market decline which by August of 1982 was down at an all-time low in real terms. That was the bottom. But in real terms, I think it was something like a 35% decline in the Dow. That was in the first half of his first term.

He did get a lot of his legislation through, partly due to the sense of crisis. Volcker was keeping interest rates sky-high, and inflation was screeching to a halt. Things were very painful for a while. And in the last two years of his first term, everything was jumping back up again and in the economy it was morning again in America, and he got one of the great victories in popular vote margins in history in 1984 when he was re-elected.

But my point is that you need urgency to create big change. No one on a bright, sunny day when everyone is feeling great, comes in and offers to give up a lot to move forward. That is only done on a very dark and stormy day. That is certainly one lesson of history. Social Security, itself, an invention of the welfare state in America, which was legislated in 1935, was similarly done at a very dark moment in American history when we thought we had to do something. And there were radical populists out there – there was Huey Long, there was Father Coughlin – my God, if you thought FDR was bad, there were a lot of worse options that people were afraid of at that time.

And we needed something big, and we came up with it. We did it. We got it done. I just think it is similar. I’m not saying that a crash would ensure Trump to be a success, and in some ways, to be very honest with you, Trump is starting out in a much worse position than Hoover. Hoover actually did get the youth vote of his time. In 1928, most of the GI generation, the first batch of the greatest generation we talked about, did vote for Hoover. The Republican party, at that time, was considered the party of science, of technocrats, of smart people, of educated people. The Democrats were sort of the dumb party at that time.

And Hoover was a miracle-worker. He was a man of business, but he was an engineer. He read and wrote Latin. Believe it or not, he had a tremendous reputation going into that election, an election where he got a tremendous majority vote. And you’re right, he was toast by 1932, and it worked out very badly for him. Well, I think it is fair to say that Donald Trump did not have all that great a reputation among Millennials even going into his presidency.

So I am by no means sanguine about Trump’s outlook, even if bad things do happen and I do agree with you, I think a big bellwether is going to be whether the Democrats retake the House in 2018. Depending on what happens with the debt limit ceiling this fall and whether the Republicans can get anything at all legislatively done in Congress, I think by the end of this year everyone is going to be looking forward to 2018, and at that time all of the initiative will be grabbed from Trump’s hands and everyone is going to be looking at whether the Democrats can retake the House.

I assume, because of the arithmetic of the Senate, they really have no chance there. But that is where all of the attention is going to focused. And if they can do it, and they have a few new national leaders on the Democratic side who can appeal to Millennials, you’re right. We might lurch back to the left with Bernie Sanders. But what I would say is, the middle right now is completely unstable, and in fact, and attracts very little enthusiasm. That is to say, it is either going to be a populism of the right or the left.

David: Right. Let me speculate about, perhaps, your role in big change in D.C. I know I have referenced your book dozens of times over the years. And in fact, in the book that I published this last year, you made the bibliography. In February you wrote an article for the Washington Post asking, “Where did Steve Bannon get his world view?” And the answer that you proposed was – your book. I have that article linked on our Commentary site for our listeners because I think it gives a great Reader’s Digest version of your approach to history. So, I’m wondering, what are your thoughts on the Bannon connection, and in the context of crisis, do you begin to see, again, some of your ideas about the cyclical view of history seep into big change that is occurring in Washington?

Neil: Yes, Steve Bannon and I collaborated on some film projects. I think what a lot of people don’t really understand about Steve Bannon is that he is very different from most – when you think of a Washington ideologue you usually think of someone who is either motivated by religion or by political principle, someone like a Rand Paul, or even Paul Ryan, some who has very dogmatic political views or perhaps an evangelical, or something like that.

Steve Bannon is a culture guy. He spent years in Hollywood and he really doesn’t care too much about political theory or religion. He is just fascinated by culture, and he is fascinated by how culture changes. He has a very different perspective on political change, which gave him kind of a unique view of the great potential of populism to work in 2016, particularly populism that moved to the left economically, but a little bit more to the right socially. I think that was something that no one else saw. I think it is something that Democrats may learn from, and may run with, if it doesn’t work on the GOP side. It doesn’t seem to be working very well now.

I will say, too, obviously, that although Bannon, I think, was instrumental in Trump getting elected, it is not clear to me, and it is not clear to a lot of people, that his views, necessarily, are really very influential in the policies that are now being pursued, if indeed one thinks right now that the White House is really directing policy at all. My view is that the White House is basically sort of handing the baton off to Republicans in Congress and basically telling them, “Hey, give us some policy. (laughs) Try to do something that you want and we will call it our own.” So I think there is a real vacuum there on the White House side. So, in that sense, I guess you could say, I don’t think Steve Bannon’s voice is having much influence at the moment.

David: Going back to this idea of transitioning from season to season, first turnings are full of powerful reforms, they reflect a new social order. Let’s explore a number of possible outcomes. One – he had sort of successful period of problem-solving. In a fourth turning you get some of the structural things done. Again, maybe that takes a very different political face. Maybe, as you say, less liberal democracy, more authoritarianism – who knows?

But secondly, what if there is not a successful attempt at solving the old problems? Can you have a fourth turning and sort of a failure within the context of a fourth turning, which sort of opens the door to social and political devolution? I have always taken the first turning as some sort of encouragement, fourth turnings being sort of the greatest darkness before the dawn. But what if you have social and political devolution instead of a positive evolution?

Neil: You almost have two different scenarios. One is, you have a crisis and a victory, which thankfully, has been the typical pattern in America. I would say the only singular crisis in American history where one could have imagined a much better outcome, or a much more uplifting outcome, is probably the Civil War, which was only resolved through the complete defeat and subjugation of one part of the country, and it was catastrophic in terms of casualties per capita, by far the most destructive war in American history. And it did have, as we discussed in an earlier book we wrote called Generations, a sort of retelling of American history generationally – it left an enduring weakness, or vacuum, in American civic life that lasted for several decades after the Civil War. But I would say the general pattern is, yes, a big crisis, a successful outcome, and a renewed civic life, kind of a new golden age of civic life following the crisis.

I think there are two other options. One would be a crisis and defeat. That is something we have not experienced in America. What that would look like we can only speculate by looking at other examples of defeated nations, what has happened to them, and how they have adjusted to their post-defeat role. You might look at the defeated Axis powers after World War II as an interesting test case, and we have written a little bit about that. One thing that might even be most disturbing of all, is that no real crisis ever ultimately expresses itself, which actually, oddly enough, may be the worst outcome of all. That is to say, everything we see about our world today, the rich getting richer, the poor getting poorer, democracy sort of ebbing away, people feeling powerless over their political lives, people feeling less and less a sense of civic participation or belonging, and we have kind of turned that up. There is an interesting book by Tyler Cohen. He is a very popular writer now, he wrote Average is Over and The Great Stagnation. He wrote a recent book called The Complacent Class. If you want to read a book about America’s future in the absence of a fourth turning, read that book. The real rate of return gets lower and lower, we kind of approach the stationary state, productivity growth kind of ebbs to nothing, we become a kind of nominal market society, but one in which all the markets are dominated by a few very large companies with enormous market power and concentration. In that kind of society, highly stratified, not feeling at all like what we think of as being America, is, I think, the scariest one, one in which global problems, problems of global order are not rectified. And it is one that disturbs me the most.

One thing I have often said about fourth turnings is that although they risk crisis, and they risk anything you want to talk about – convulsions, devastation, violence, all the rest of it – they do bring about great reforms, and they bring about national mobilization, which re-instills a sense of national purpose, and re-tilts the whole playing field away from the rich and the old to the poor and the young, and allows them to remake their country again. Anyone who has read the book that many have heard of but haven’t read is the big tome by Thomas Piketty, Capital, and the course of inequality over recent centuries will probably recall his chart where he shows that inequality keeps rising decade after decade after decade.

But it goes way down in the 1930s and 1940s. It is the great reversal, sometimes called the great compression, when we became, throughout most of the high-income world, a more egalitarian society, right at the end of World War II, and in the 1950s, and indeed, in America, in the late 1960s, is when the Gini coefficient, the measure of inequality, reached its all-time low before beginning to rise again, and that was in the mid-life of the greatest generation, heavily unionized, had no problem trusting government to take care of big problems. That was the generation that came out of the last fourth turning. They did create a more equal, more egalitarian, more democratic country, at least a feeling that their country is more democratic. The question is, without a fourth turning, or something that is recognizable in that sense, is that the worst outcome of all?

David: Yes. I’m in the middle of The Complacent Class. It’s a great book. I wonder to what degree might a technology change the impact of human action and the cyclicality that you see in history. I’m wondering about the management of a process and interaction in real time using new tools to essentially engineer certain desired outcomes. If you bring in big data, predictive technology, agent-based modeling, complexity theory, and basically say, we can get a nanosecond in front of the market’s reaction to anything, and therefore, mute or control, to some degree, the market’s reaction, is that how we emerge into that most disturbing scenario where we don’t have a real crisis, and we remain stratified. As you say, we don’t have a catalyst to ultimately look at the global problems that we have, and then have them rectified, because now we have technology which, again, is taking away action and reaction, in terms of human action. Is it possible that technology actually changes the cyclicality in human history?

Neil: Well, you know, I kind of believe, along with Hyman Minsky, that complacency begets risk-taking, and the more that you try to engineer the future, the more you take risks, until you almost guarantee that you’re going to bring down the system. This is a generational process of basically forgetting that by the time you get to the point where everyone believes that nothing can go wrong, all of us as individuals begin to take extraordinary risks, and we always figure out a way to bring the system down. And it’s a good thing we do that because it forces us all to participate in the process of rebuilding.

When it comes to technology, having given birth to the whole idea of a Millennial generation, and so on, and I get calls all the time from the media about how technology is shaping Millennials. How does Snapchat shape them? How does the iPhone shape Millennials? What about Facebook, all the stuff by Zuckerberg. Whatever it is, how is it shaping Millennials? And after a while I just want to tell all these people, you really need to reverse your causality. Instead of talking about how technology is shaping generations, start thinking a little bit more about how generations have shaped technology.

The fact is that without Millennials, there would be no demand for the social media we talk about today. The whole idea of using the Internet as a place where we can come together and form communities under our own real identity was a completely unknown idea to Boomers and Xers back in the late 1990s. For us, technology was all about individuating and getting away from community. So Millennials really had this very distinct and new idea of what technology could do. I recall back in the 1990s, again, that Clinton always used to say, that no authoritarian regime would ever survive the Internet. This was very common in the 1990s.

I don’t know if you remember, but it was back when Francis Fukuyama was talking about the end of history, that we would all be kind of liberal democratic market-oriented societies, nation states would wither away, there would just a big global market. And one of the reasons why authoritarianism would decline is that people are saying that the Internet would undermine the ability of any authoritarian leader to rule. You look at that from today’s perspective and I say, the only response is, “Are you kidding?” Authoritarian leaders today know totally how to manipulate the Internet.

The Internet is the way that Big Brother keeps track of you. You have cameras everywhere, you have people monitoring social networks. Social networks are the only way people communicate. That is how you’re monitored. In fact, it has become an ideal took for authoritarian leaders today. Look at how Vladimir Putin makes it work. Look at how Xi Jinping makes it work in China. You have hundreds of thousands of young Chinese who are monitoring the social networks on behalf of the state.

So, my point is, don’t look at technology as an independent force that changes social trends. Instead, look at social trends as forces which make use of whatever technology out there to further its own ends. And I think you can look at moods that way, and you can look at generations that way, but don’t expect that technology is going to come along kind of from the outside to save us. Technology is going to serve whatever direction all of us feel like we want to go.

David: We talked about civil war just a few minutes ago, and several weeks ago on our commentary we discussed the collapsing of certain state budgets. Culturally, we are not the same country we were in the 1930s. We are not in this together, which raises the question of a fourth turning and the question of internal conflict. What kind of a rebirth would you anticipate in a first turning if it follows a period of internal conflict, more like the Civil War versus the last fourth turning which we saw which was defined by international or external conflict.

Neil: That’s a great question. We sometimes exaggerate, looking back, how united we all were in the 1930s. We had enormous immigrant communities who still felt that they did not have much – here in our local regions in America, has anyone gone back and looked at local color short story writing in the 1930s? We were a nation of significantly different bits and pieces back in the 1930s. Spoken speech could hardly be understood, if you went from New England down to Texas for example. We were not, in many ways, as united as we are today, in some respects.

I will agree that in terms of ideological division, the whole red zone, blue zone thing, and how politically different we are by region, that is disturbing today, and that probably has no precedent. If that were the issue in a regional struggle, I think you would have to expect that the outcome of the crisis would involve some degree of just subjugation. It would be like after the Glorious Revolution, sort of the Whigs just basically suppressed the Tories, and Tory regions in Britain were simply suppressed. Anyone who wanted to bring back the Stuarts, there were uprisings which were periodically suppressed.

You would think of something that is regional, and you would have regional winners and losers, and that would condition our memory of that crisis, and that would go on for generations later. And I think, probably, if that were the case, in the subsequent awakening, you would find the revenge of the suppressed would come to the surface. Which part of America was vanquished and what truths or insights did it have which were suppressed? Those will emerge again. So yes, that would play out for a long time in American history, if we had that kind of a fourth turning.

David: One of our guests, Bill King, and this is kind of specific to market dynamics, explored how the 1987 market crash was exacerbated by the bottleneck of brokers and phone lines as investors were attempting to sell while the automated selling was already in motion triggered by what was called portfolio insurance, what today we would call derivatives. Today we have the Fed. We have ample liquidity from the Fed. We have high frequency trading firms which are willing to serve the interests of the Fed, effectively delivering liquidity via normal market mechanisms, but very effectively, very quickly, to wherever the liquidity needs to go. So theoretically, we are past the age of market crashes, if you assume that a crash is merely an isolated liquidity issue.

Neil: Yes, but you see, I don’t believe that crashes are an isolated liquidity issue. I don’t think it is true for a crash that one recovers from in three weeks or four weeks, in a relatively short period of time as was true in 1987.

David: So Minsky and the social mood are still more important to you? I just want to find out, your primary concern, what you find it most disturbing is where there is no real crisis. That, to me, is also real disturbing, because I look at what the Fed is attempting to do in sort of smoothing the business cycle, and I come back around to that idea of super-computing and technology and to the cycles of the future.

Neil: The good news is, I don’t think they are going to succeed. Many valuations measures today are off the charts, and despite the fact that the Fed is beginning to raise rates again, and is talking about shedding its balance sheets later in this year. And I think that part of what is going on, if you want to talk about a bubble today, and we may, post-crash, talk about it as the passive index fund bubble. That is what is going on. Everyone is pushing into passive indexing.

If I find one thing that scares me about the market today, it is that, particularly among Millennials who are so social – Millennials, above all, are a generation that would rather go down with their buddies than be left alone behind. What that means is, they love passive indexing because it means they’re all in it together, whatever happens. So, even if they are lemmings all going off the cliff together, they’ll never be left behind, which is why the only way to get Millennials to invest in stocks is to camouflage it as a target date fund, or some sort of thing that puts it into a big basket. Real estate and individual stocks, Millennials think, are toxic, hugely dangerous. But put them all in together with everyone else and they’re happy.

The older generation, too, is going to Vanguard and State Street and Black Rock, and the result is that even these so-called active funds don’t want to get in front of the locomotive. So the active fund, the hedge fund, which lately have not been doing very well, except for the quant funds, but the quant funds, basically, don’t take directional positions. They’re just doing arbitrage. So a lot of you active funds are behaving like passive funds, and right now I regard this as a big danger because of the potential for hurting. Everything today is momentum. Anyone who talks about value is disparaged today.

One other aspect, as long as we are talking about index funds, one of the things that I have been concerned with recently is their economic impact, totally aside from their financial impact. This is what I call the paradox of risk diversification. If everyone is completely diversified across the market, it means that everyone is owning a little bit of every firm and every industry, in which case, who is the investor competing against anymore? If you have an active investor, they’re investing in, say, American Airlines against United. They’re investing in American and hoping it really competes and beats the pants off United. But today, everyone is investing in every airline, everyone is investing in every social media company.

So I would ask the question, and Congress is beginning to ask the question, if the biggest single shareholder of something like 85% of the S&P 500 by market value, is Vanguard, Black Rock and State Street combined in their passive funds, that is, in aggregate, if you combined all those, they are the single largest equity holder in 85% of the S&P 500, and they are the ones who participate in all the proxy votes. No management has to listen to them. Who are they competing against?

I would suggest that since they own a cross-section of every industry across all fronts. I would say they are only competing against two players: new entrants, which dovetails with declining business dynamism today and fewer start-ups, and they’re competing against the consumer, which argues in favor of increased market power, raising prices in a way that less competition in prices may be good for the shareholder, but not good for the consumer. All of this is detrimental to productivity improvement, business dynamism, and competitiveness in general. And I think the financial hurting impact and the economic impact of the current dominance of passive index funds worries me.

David: So we’re essentially seeing a deadening of the free markets, if that is a fair description of what happens in that context, we could remain in that sort of state for a long period of time, and it has just become a relative game in terms of our global GDP market share, if you will, or how we compete against Germany and the EU, or how we stack up against the Chinese and Japanese. Ultimately, don’t you have investors with capital flowing to where there is actually an opportunity to make more than 2%? The standard expectation of a 6-7% return in equities, if we have moved into a period of secular stagnation, then the brave new world of investing is Vanguard, Black Rock and State Street and significantly lowered investment returns, don’t we ultimately see capital flight, and the undoing of that?

Neil: To where? To Europe? Emerging prospects there, or to emerging markets? You’re right, actually, in the short-term I would advise people right now – I think the S&P is usually over-valued. Right now I think emerging markets, on any reasonable valuation basis, are a much better buy at this moment, unless you consider a very traumatic near-term event, something that would hugely raise the dollar in some global crisis. But as a near-term proposition you’re right, but it is not immediately obvious.

But I will say this. I don’t believe this is a long-term phenomenon because I believe that politics and the social mood will not tolerate this. They are already not tolerating it around the world, and we have yet again to look forward to 2018, look forward to 2020, look forward to the horrible possibility that past 2018 we may have some sort of caretaker government in charge of the White House. We may be a ship completely dead in the water, politically, completely unable to move in this country. And imagine if events overtake us now. I thought it was scary back in the fall of 2008 when the stock market was plunging and you remember George W. was kind of a lame duck, Obama was kind of waiting in the wings. You remember how traumatic that felt for about three or four months.

Another analogy would be when Herbert Hoover was the lame duck and was just sitting there waiting for FDR to take over and the country’s economy had come to a complete standstill. The first thing FDR did when he came in, of course, he added 100 days to enact his program, but imagine two years of something like that. I don’t know. I just think, thinking that this situation could go on indefinitely is ahistorical to me, because most of America will not tolerate it.

David: Yes, and I just come back to that issue that you find most disturbing – no real crisis emerges, and that is where there is a presumption of control by the Fed, by the ECB, by the Bank of Japan, where they are willing to take their balance sheets and continue to buy assets, whether it is index funds, which you see the Japanese doing in corporate bonds, or just the run-of-the-mill mortgage-backed securities and treasuries here in the United States, or the ECB across the spectrum of fixed income bringing yields down and boosting prices. We think that it can’t go on forever. Frankly, it has gone on a lot longer than I thought that it could. And the confidence that is building in this top-down management style where we will bring peace and prosperity to all people by keeping panic out of the headlines.

Neil: I think you’re right, if there were no such thing as voters and the ballot box. So, among the investor class, you’re great. It could last forever. And these investors would bequest all of that to Muffy and Dusty, and it would be passed along, and the families would become progressively more unequal that way, as we already are. And that could last indefinitely. But sovereignty remains in the hands of the people, and they will not tolerate it. If you saw anything in this last election in 2016, I can’t imagine a more damaged challenger than Donald Trump, and my God, he won. The amazing thing about the Trump election is what he represents. How could that candidate win an election? If that doesn’t tell you something about the mood of the non-investor class in America, I don’t think anything will.

David: Right. So, one more question for you, and this is kind of moving away from the macro, moving to the micro. This year I published a book on legacy, where I explore the challenges that each generation has of stewarding, not only the tangible assets, but also the intangible resources. These are the values and the things that really matter in terms of family identity, passing them on to the next generation. You see, just as one example, the greatest generation, as they are called. They weren’t really able to replicate themselves. What, in your opinion, kind of bringing in the sociological elements – I realize you are not a psychologist, but kind of looking from a multi-disciplinary standpoint – what obstacles do you believe make the creation and the continuance of a strong legacy a challenge through decades, or even centuries.

Neil: You may have mentioned one obstacle right there. That is, generations can never replicate themselves, but they never give up trying, which is too bad, because that is an effort at which they can never succeed. If there is one central lesson we have pointed out, really, various ways in all of our books, it is that generations are archetypally different. They have to be different. Generations have different strengths and weaknesses. And the real wisdom, for an older generation that is passing on, is to recognize it has different strengths and weaknesses than the next generation coming along.

I think that knowledge is the beginning of everything that is fruitful in generational transmissions of values and behavior. The greatest generation, which took us through the war against Tojo, the war against Hitler, rebuilt America after World War II, and have built all of the infrastructure – my God, that generation poured more concrete than any other generation in American history – and did so much to give America a solid union movement, a solid middle class. It was the first generation whose middle class went to college. It gave us nearly universal home ownership, a level of home ownership that we have fallen beneath today, actually – 66%, we’re back down to 62%.

But anyway, they gave us everything, and a certain ideal of America that we look back upon with a certain nostalgia. But one thing they couldn’t do, this great generation of builders throughout so much of their lives, young adulthood and midlife, is that as senior leaders they could generate no enthusiasm whatsoever among the young. You remember that period of the late 1960s overlapping with Vietnam and the long, hot summers, and everything that went crazy in America at the time was associated with a sort of complete youth rebellion against everything that generation stood for.

And that was kind of a tragedy. You think of that generation having such close relationships with its own parents in the 1930s, and yet, they were so estranged from their kids, their Boomer kids, and that estrangement, often, was never healed in later decades. I think, interestingly, in that generation, the GI generation, later when it started retiring, invented this new mode of retirement – the harvest years, cashing in on all their savings and all these new programs like Social Security and Medicare by building retirement communities in the middle of the desert with names like Leisure World and Sun City, which actually had laws prohibiting young people from moving anywhere near, these were age-segregated communities, literally, because they didn’t want young people to live anywhere near them. That was how bitter that values struggle was in that era, when Boomers were coming of age. And how sad that was for all generations involved at the time.

What is interesting to me is, I see Boomers reaching now that same age. Boomers are almost surprised by the opposite. I find so many Boomers I meet today are just astonished by how close they are to their own kids. They never expected that because they had never been that close to their World War II winning parents. But my gosh, these Millennials will never leave, they just keep hanging on, they keep calling them every day. They seem to be so close to them on issues in the culture and values, they talk to them all the time, and are supportive, their lives are intertwined in so many ways.

But I think, to understand this, and to understand that generations are fundamentally different, and that there is a pattern on how these generations succeed each other, is the beginning of wisdom. It is kind of an understanding that seasons are different, generations are different. And the wisdom of one generation is understanding that it doesn’t want to raise kids to replicate themselves, but the real object is to raise kids who complement yourselves, who have strengths that you do not have.

When I think it is obvious what strengths Boomers are looking for in the Millennials that they know, many of them their own kids, and that is, for a generation that so valued independence, tearing down institutions, and risk-taking, that what they are inculcating in their kids, and what they can take pride in, in their Millennial kids, is a generation that has a greater capacity to form communities, to work in teams, to avoid risk, and actually take our country together to a future in which institutions can be built up again rather than torn down. And that is an old pattern that comes back again and again. We are seeing it work its way through our history right now.

David: Well, Neil, we need to get back on the line 2020, and maybe in the year 2020, we will have even greater wisdom in hindsight, looking back at our conversations, 2015, here in 2017, and maybe with a little bit of insight, too, as to what goes from there – the fourth turning, and how it continues to sort of unfold. Thanks for joining us today. We appreciate your insights. As I mentioned earlier, dozens may be a severe understatement, the number of times that I have referenced The Fourth Turning, and its sort of historical overlay, 600 years of Anglo and American history and the patterns that you have seen, that you have pulled out from the history books, to explore what is changing socially, what is changing demographically, what is changing economically and financially and politically. We appreciate your contribution. Thanks for doing the research in putting that book together. It has been a very helpful tool.

Neil: Thank you. Nice to be there.

*     *     *

Kevin: Dave, it seems strange to hear from anybody that they are hoping that the Federal Reserve and the central bankers will not succeed, but he understands the danger of this complacency. He talked about the passive index fund bubble. You have been talking about that now for the last the last year or two, where people are no longer really just making value decisions, they just all are herding into single investments, thinking that is the way to go.

David: And the most disturbing aspect for him is where there is no crisis – no crisis because then you remain with the maladies that you have in the system. There is something of a purgative nature to any particular financial crisis, whether it is bad businesses with bad business models, or mismanaged businesses which simply need to go the way of the dodo bird.

Kevin: You need creative destruction.

David: That’s right. So, the cyclical nature which he sees in history, and certainly in the markets, although it can come with risk, with pain, there is certainly a healthy element to it.

Kevin: Dave, before we end, one of the things I really appreciated that Neil said is that each generation has its strengths, each generation has its weaknesses. We talked about that two weeks ago, because sometimes the Millennials can take a beating, and we can really raise up certain generations that come before. But I loved what he had to say. You have to recognize that each generation is different than the last, yet historically, the generation before always tries to recreate the same values in the next generation.

David: A very common conversation in our household is recognizing our own individual strengths and weaknesses and the confessional nature of recognizing your weaknesses is one where you can say, “Look, I’m not perfect, and maybe you can do better,” and from an intergenerational standpoint, looking and saying that the next generation needs to learn what they can from the previous generation, but then take their own strengths and do better. That is certainly what I like about his recognition there that wisdom begins with seeing the differences between generations and helping the next generation do what they do best.

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