Click the play button below to listen to the entire interview. And click here for a special deal we offered all MacroVoices listeners for Hedgeye's "Holy Grail of Risk Management."
Erik: Joining me next is Neil Howe, co-author of what may be the most important investing book of our time, The Fourth Turning. I am such a big fan of this book personally that I literally named my own investment management company Fourth Turning Capital Management after Neil’s work. And my own investment process centers on understanding that we’re in the middle of a fourth turning. Now, while the book was actually written twenty years ago, I would argue that it’s even more relevant today than the day it was first published.
Neil, many of our listeners have already read the book, so I’m looking forward to getting an update on how things are progressing. But, for the sake of listeners who may not have read the book yet, let’s start with a review of the basics. What is a fourth turning? What is the theory of how generational cycles influence society and financial markets? And when did the present fourth turning begin?
Neil: Great questions. I would just maybe preface this by saying—because people often ask me—did Bill and I start out by trying to write a book about rhythms of history. And the answer is no. The two of us were very interested. I started out as a historian, actually, before I became an economist, and I was very interested in how generations are different throughout history and what implications that’s had.
A lot of people remember how much boomers were so different than the World War II generation that raised them. And since then, we’ve often puzzled over this. Two generations, such completely different sense of where their lives were going. And we looked back in history and found—and this was actually our first book, that came out in 1991, which was called Generations: The History of America’s Future. And what we found is—we rewrote all American history from the 17th century onwards—and we found, not only have generations always been there, they’ve always been noticed, people have—no one’s noticed different generations as being different.
And there have been generational clashes throughout American history, but these generations tended to recur in a certain sequence. In other words, different generations don’t arise at random. Certain kinds of generations always tend to arise after other kinds of generations. And, lo and behold, at the end of the book we intuited that this had a synchrony with a long-term cycle of American history that many people have noticed.
And that is—it’s about the length of a long human lifetime between the great political and civic turning points of American history, going forward from the Glorious Revolution and the War of Spanish Succession up to the American Revolution to the Civil War to World War II and the New Deal. And then on into the era we find ourselves in today. And that, roughly halfway in between, we find the great spiritual awakenings of American history. We used to literally call these “awakenings.” But these were always pushed by the young and always very focused on the new revolution in values.
So, on the one hand, you have these turning points which are civic and institutional and involve politics and empire and the economy. These are the fourth turnings. And then you have these value-focused episodes which involve culture and religion and the interior of life, not the exterior of life. And of course our most recent awakening was in the late ‘60s and ‘70s, something a lot of us boomers today remember because they came of age during that period. So this was an interesting pattern to us, and it was in The Fourth Turning where we sort of formalized that into looking at history moving through a series of social moods in a certain order. And we think there’s some very fundamental reasons for why we move through history. And not just American, I should mention, but I think most of the modern world moves through history and cycles like this.
They can be interrupted, they can be cut short, but there is a tendency for this. It’s manifested itself very strongly in American history. And we call these—each of these eras is about a generation long, they’re about 20, 21, 22, 23 years long, and we call them first, second, third, and fourth turnings.
The fourth turning is the final season of history, if you will, the final generation. And that is the period of crisis. That is the period when we tear down institutions that we’ve built, everything that’s dysfunctional. And we sort of rebuild things from scratch again. And it usually follows a period where—it’s bound up in a period where there’s complete disgust, complete distrust with what we have. And, usually under pressure by the younger generation, we kind of rebuild. These are the civic rebirth moments we’ve talked about earlier. That’s by way of introduction. That book was in 1997. You’re right, it’s about 20 years ago.
Erik: By your analysis, the present Fourth Turning began in 2008 and should end sometime around 2030. So we have roughly 12 years left in this fourth turning. Now the very last part, you describe in the book, is the resolution. That’s the time—at least in the case of after World War II you’d had Bretton Woods and the IMF and the UN and all these other institutions being created—but that happens in the last couple of years. So it sounds like we’ve got about a decade before that resolution begins. So what should we expect in that next decade, for the second half of this fourth turning?
Neil: I think this is going to be the real rollercoaster ride. And I do think, not only—as you mentioned there are four stages to a fourth turning. One is the catalyst. The next is the regeneracy when we see some center of public trust beginning to grow around the new public agenda. We really haven’t seen that yet. Although you can look at various parts and begin to see certain—I would say particularly look at what young people are doing. Every fourth turning you kind of see where are young people going, who are they beginning to trust both on the right and the left. I think that’s an interesting marker.
But then ultimately you move to the crisis. And that’s when this new sense of public trust, which I think won’t really begin to appear once we begin to hit public problems that we have to solve. And I mentioned about two or three that we’re probably going to have to hit by the end of this year. And then, of course, comes the mid-term election next year. But that’s when that begins to grow. And then the crisis, when all of these problems begin to coalesce into one huge problem.
It’s when the Great Recession met all of these—the rise of fascism both in Asia and in Europe, and everything came together, currency wars, everything became part of a huge problem. Which, by the resolution, you see—and this is what happens at every fourth turning. All the little problems come together into a giant problem. And the giant problem gets completely solved.
And this is why fourth turnings are not necessarily dangerous or bad things. They’re good things. They’re necessary things. It’s when history solves big problems that otherwise in another era would have seemed insoluble. So you notice that with Bretton Woods, the UN, the IMF, the World Bank, all of these institutions we created, we solved all kinds of problems. We saw the recovery of Europe, we were going to have a global financial and trade system that put an end to trade wars. With the founding of the UN we thought we had created a framework for solving international conflict. And we had a great deal of investment in the future and a great deal of peace and prosperity for the next several decades. So we did, we created a new world. We created a new civic world. Not just the United States but together with much of the rest of the world, which would have seemed unthinkable ten years earlier.
So I like to say—because people sometimes say, well, you know, this fourth turning sounds horrible. A high likelihood of war, particularly of total war. You have these great crises.
But on the other hand, it’s how you create a new golden age. And I would just add one other feature of a fourth turning is that, because you’re completely upending institutions, political and economic institutions, it tips the playing field away from the old and the established to the young and the have nots. And you saw that hugely, coming out of the last New Deal, coming into the late 40s and early 50s. With this GI generation for the first time the middle class could go to college, they could go into vocational programs, for the first time they could own homes.
We truly transformed our entry of all citizens into democracy coming out of World War II. And of course, hopefully, the dream would be to create a new opportunity for the millennial generation, who by that time will be—the oldest of them will be almost approaching midlife by that point. But that’s what happened last time with the Greatest Generation, the GI Generation. And a successful outcome: we’d create that same scenario for millennials.
Erik: So it sounds like—at least if we follow the template of how past fourth turnings have played out, where all these little problems come together into the really big problem—the crisis hasn’t really happened yet, at least in the cycle that research shows should happen.
Neil: No. I mean, it’s the same way. You look at 1929. Now, 1929 caused an obviously vertiginous—it was a financial crisis that caused a vertiginous fall in GDP much deeper than 2008-2009. But, on the other hand, it was truly a v-shaped recession. We had enormous growth. Actually, from 1933 on we had between 6-7-8% real growth per year until the next recession in ’37, and so on. Then we kind of went down again. But much of the ‘30s was actually a period of rapid growth, people forget that. But nonetheless everyone felt shaken by what had happened in 1929, despite the fact that a lot of the mid-30s were actually pretty good growth years.
And I think the same thing is true today. We feel very differently about America because of what happened in that last great recession, and I think that actually our ability to keep us from going deeper into that recession is actually contributing to some problems that are still with us. Particularly this problem of central banks keeping interest rates so low, keeping us still kind of not too far from the zero bound and raising real questions among people of are financial markets working properly? This is sort of the whole valuation issue of have we created a monster here?