Wednesday, July 8, 2009

20-Year Turning (Bear Market) & Remember Dr. David Kelly's Suicide?

I just wanted to mention that we now know the truth about David Kelly's suspicious and convenient suicide (and why to ensure that your computers are hidden) before diving into what it will mean to experience a 20-year bear market. (Emphasis marks added - Ed.)

British weapons inspector Dr. David Kelly was writing an exposé about his work with anthrax and his warnings that Iraq possessed no weapons of mass destruction at the time of his death in July 2003, according to a report published in a British newspaper.

Kelly’s death — said to have been a suicide — has stirred controversy, as it came on the heels of testimony to the House of Commons about a memo which purported that Britain had “sexed up” a dossier on Iraq’s alleged weapons of mass destruction. A Parliamentary inquiry ruled that the death had been suicide, though it also included testimony from a former British ambassador who quotes Kelly as having said, “I will probably be found dead in the woods” if Iraq were invaded.

The new report says Kelly had spoken with an Oxford publisher several times about a book.

“He had several discussions with a publisher in Oxford and was seeking advice on how far he could go without breaking the law on secrets,” the UK Daily Express alleged.

Kelly’s computers were seized in the wake of his death. He was a signatory to Britain’s Official Secrets Act, which allows for the prosecution of those who talk to the press about state secrets and prescribes a more stringent framework for secrecy than in the United States.

According to the paper, “he was intending to reveal that he warned Prime Minister Tony Blair there were no weapons of mass destruction anywhere in Iraq weeks before the ­British and American invasion… and was also intending to lift the lid on a potentially bigger scandal, his own secret dealings in germ warfare with the apartheid regime in South Africa.”

The extraordinary diviner John Mauldin introduces us to David Galland of Casey Research who ventures the thesis that we are in a 20-year bear market which we had better be aware of even if we don't fully understand why.

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 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 . . .

"... 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.

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 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?

Click here to read more.

Hope you made it this far. Let's hope we're still here after these intractable problems are solved.
Suzan ______________________

2 comments:

Beach Bum said...

This was an excellent post! While on vacation I heard a report that right now social scientists are seeing a generation gap in moral, political, and economic beliefs dividing those 20 and younger from those in their 40's and older far greater than the generation gap from the 1960's.

The 20 something crowd is far more liberal and open to new things than the 40 somethings guarding the current status quo.

Change is coming and everyone needs to buckle up cause like Betty Davis said its going to ne a bumpy ride.

Suzan said...

Thank you so much, BB.

I don't understand why everyone doesn't want to read these excellent posts and really appreciate what they are up against (instead of turning once more to the exploits of American Idiots, et al.).

And my students echo your words. Those Millenialists will be mind-blowers!

Your Bette Davis h/t is one of my favorite lines that I use waaaay toooo muuuuch in class.

Love ya,

S