Declining income from property, sales and other taxes coupled with growing pension obligation debts and the residual effects of the financial meltdown are inflating a dangerous bubble in the $3 trillion to $4 trillion public bond financing market.
If the bubble bursts, agencies will be unable to borrow, and would cancel or postpone public projects such as school construction or building roads and highways. At worst, governments could default and upend the historically safe municipal bond market.
"This is the most serious municipal debt crisis in U.S. history, including the Depression," said Denver-based attorney Jeff Cohen, who represents bond issuers and buyers. "Arizona has huge problems. So do Nevada, Illinois, New York and New Jersey. And California has the same credit rating as Kazakhstan."
Small to mid-size public agencies, in particular, have been hit hard, said Cathy Spain, director of the Center for Enterprise Programs at the National League of Cities.
Not only has public agencies' income dwindled, but they can't even buy the bond insurance that would lower their borrowing costs. Most of the bond insurance companies, who participated in the mortgage-backed securities shenanigans, spiraled out of business during the bank meltdown.
Get your popcorn ready - this should be a doozy!
Also check out Robert Prechter's thoughts on why you should run, not walk, from these "safe" muni bonds.
Ever wonder what the hell takes the rating agencies so long?
Today, leading credit agency Fitch downgraded Portugal's debt amid "growing concerns about the government's ability to service it's borrowings."
Well - duh - increased borrowings coupled with decreasing tax revenues should raise concerns. What amazes me is that the Euro traded down today on the news - this shouldn't have been news at all, everybody saw this coming from Portugal as soon as Greece got the hiccups.
If the tax revenues were coming back, there might be hope - but revenues are not coming back anytime soon, so hope is bleak, if not non-existent. Europe is an economic basketcase with declining demographics - it's completely toast.
Bond king Bill Gross of Pimco weighed in today - in his eyes, there are three factors which could, at least theoretically, allow a country to escape the sovereign debt trap:
It must be able to print its own widely accepted currency
Have manageable budget deficits, and
Find investors willing to buy their bonds (Source: Forbes)
The US, for now at least, passes all 3 tests...Greece, Portugal, and the rest of the PIGS obviously do not. Much of the rest of the world does not either.
Is sovereign debt the next domino to tumble in the global financial crisis? It sure looks like things are teetering.
To put it in perspective how bad things are when the US looks good in comparison, check out Bud Conrad's excellent analysis about America's federal deficit (Hint: it's even worse than you think!)
You've gotta admire former hedge fund manager Jonathan Rojewski, who ditched his Wall Street job in favor of creating his own brand of tequila.
So Rojewski left the financial industry after a decade of climbing the ladder from analyst to hedge fund manager -- working at the likes of Goldman Sachs, Oppenheimer, and Pequot Capital.
And for what? To start a Tequila company named Tanteo, which not only means "test" in Spanish, but also "score" -- or as the Tanteo team likes to interpret the word, "succeeding."
Hank Paulson and Ben Bernanke are sweating right now. The Bank of America scandal could have some legs, especially with a Democratic Congress looking for folks to tar and feather. In fact, one of them could be toast - whoever doesn't rat first. Read on for more details in this guest piece by Olivier Garret, CEO of Casey Research.
Bigger Than Watergate? By Olivier Garret, CEO, Casey Research
Reportedly, Bill O’Reilly referred to a recent story out of our nation’s capital as “bigger than Watergate.”
Whether the story is bigger than Watergate or not, it is definitely a scandal of huge proportions.
To sum it up, on April 23, 2009, New York Attorney General Andrew Cuomo sent a letter to Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs Chris Dodd; Chairman of the House Financial Services Committee Barney Frank; SEC Chairwoman Mary Schapiro; and Chairwoman of the Congressional Oversight Panel Elizabeth Warren.
The letter outlined how former Treasury Secretary Paulson and Fed Chairman Ben Bernanke forced Bank of America’s acquisition of Merrill Lynch – even though Bank of America CEO Ken Lewis and the board of directors tried to pull the plug on the deal after it turned out that Merrill Lynch was far deeper in debt than it had admitted.
In the words of Attorney General Cuomo himself:
Immediately after learning on December 14, 2008 of what Lewis described as the “staggering amount of deterioration” at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (“MAC”) occurred. After a series of internal consultations and consultations with counsel, on December 17, 2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.
Bank of America’s attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced.
Meanwhile Ken Lewis has been sacked as chairman of the board at Bank of America… even though he might well have been the only conscientious and honest player in this scheme. And now the sharks have started to turn on each other: according to Cuomo, Paulson “largely corroborated Lewis’s account” and informed the attorney general’s office that he “made the threat at the request of Chairman Bernanke.” The latter has so far chosen to keep his mouth shut.
The key factor here is not that the Devious Duo forced Bank of America into a merger it didn’t want to commit to. Granted, that’s an unheard-of interference of government in the free market, but we’re quite sure that the Powers-That-Be could sweep it under the rug by invoking the “greater good.”
No, the part of the story that could really break Al Paulson and Don Bernanke’s necks is the failure to inform the Securities and Exchange Commission, as well as Bank of America’s shareholders, of the extent of toxic waste Bank of America was forced to accept. That’s fraud, pure and simple.
And that’s a pretty good sign that this is not going to go away. Some of the Casey Research editors – yes, we do have bets out – think it’s going to be huge, especially since the scandal happened on President Bush’s watch and the Democrats are in control of Congress. Chances are that either Paulson or Bernanke is going down, depending who cuts a deal with prosecutors first. Their “friends in high places” may be able to keep the Justice Department out of it, but they won’t be able to control ambitious state officials like Cuomo. There’s blood in the water, and this is a career maker for a prosecutor.
So what happens when the highest financial officials in the U.S. government are unmasked as crooks? Will there be riots in the streets? Will the average American pick up his torch and pitchfork and march on Washington D.C.? Probably not. But it may happen at some point as we are moving deeper into the Greater Depression, a term coined by Doug Casey, our resident contrarian investment guru. Read Doug’s FREE, 13-page special report about what will happen when social unrest breaks out in the United States, and what you should do to prepare your assets for that time. Click here to read it now.
The Wall St Journal reports that over 20% of US homeowners owe more on their mortgage than their homes are worth.
Some metropolitan areas are faring worse – much worse – than others. Las Vegas takes the prize, with an astounding 67.2% of homes that are “upside down” in terms of equity. Maybe the Obama administration can order the remaining 32.8% can take what’s left of their home equity over to the roulette wheel at MGM – appealing to their patriotic duty to help less fortunate home and casino owners with each spin of the wheel.
If you’re scoring at home, perennial foreclosure powerhouse Stockton, CA placed a distance 2nd, with 51% of their homes underwater.
This bit was also picked up by our friends at The Daily Crux.
How bad can this financial crisis get? Check out Bud Conrad's analysis of our current situation, in comparison with similar types of financial collapses.
It's an interesting perspective - Van Eeden believes that the cash that banks to have is parked with the Fed with strings attached. So it's not really theirs to lend. And there is a great crisis of confidence in lending - folks who are looking for loans aren't desirable borrowers for banks, and folks who would be creditworthy are not out there looking for loans.
The interview is also worth watching because Van Eeden gives an excellent, clear explanation of how the government is mucking up any potential recovery with it's policies. His recommendation - let the market sort it out. How novel!
How bad can the current financial crisis get, and how long will it last? Casey Research's Chief Economist, Bud Conrad, tackles this question, crunching the numbers produced by two leading economists who took a broad sampling of banking crises. The information is presented in an insightful and informative way as only Bud can. I hope this helps round out your thought process about the depth of the current crisis.
Bad, Worse, or Worst?
An assessment how serious the current crisis is likely to get
It’s time to call the global crisis what it is: the worst financial collapse since 1929. That’s no surprise to subscribers of The Casey Report, who have been amply warned over the last five years. But now even government officials, after trying to ignore the facts on the ground for the last couple of years, are admitting the truth of the matter.
Now that it’s here, we turn our attention to trying to discern, “How bad can it get?” and “How long can it last?”
While such questions can never be answered with anything approaching absolute certainty, there are methods that can be used to assess what may lurk over the horizon. With that goal in mind, this article focuses on – and then expands upon – the recent work of two economists who painstakingly analyzed a substantial number of previous banking and currency crises in an attempt to derive potentially useful lessons. I have then taken their data and applied them to the current circumstances to see where we are, relative to those other experiences.
The Data
The data are from a study called “The Aftermath of Financial Crises” by Carmen M. Reinhart of University of Maryland and Kenneth S. Rogoff of Harvard University. In their study, the authors summarize the results of a broad sampling of banking crises, with between 13 to 22 crises analyzed for each of the variables.
The Reinhart/Rogoff study is based, in turn, on data extracted from an even more comprehensive study of events in 66 countries, titled “This Time Is Different: A Panoramic View of Eight Centuries of Financial Crises,” by the same authors.
I’ve summarized the findings from the latest study in the table below:
The economic measures in the left column show how far the U.S. situation has deteriorated so far. The next columns show the average historical deterioration and the worst case of the crisis analyzed.
I then applied these data to calculate the levels that the U.S. could reach if it followed the path of the historical examples. The projected level is based on the measure analyzed, either from the peak prior to the downturn (e.g., the S&P 500) or from the bottom prior to the downturn (e.g., the lows in unemployment). Thus, as you can see in the table here, the S&P 500 has already dropped from its October 2007 peak of 1565 down to 766. If this crisis were to end up being only “average,” then it would drop to 690.
If, however, the worst case of a 90% drop were to occur, as it did in Iceland last year, then the S&P 500 would trade down to the shocking level of 157. For further reference, if the current crisis were to cause the stock market to fall as sharply as in the Great Depression, the S&P would touch 469.
Duration of Crisis
As you can see in the summary table below, it took 3.4 years, on average, for the stock market to fall from the peak to the bottom. In the worst case, it took five years. With the recent peak in the S&P 500 occurring in October 2007 – just one and a half years ago – the crisis is likely to have some time to go before reaching even an average duration. More specifically, if this crisis turns out to be just “average,” we would not expect to see the low before the first quarter of 2011.
Crisis Horizon: Some Conclusions
The global economic situation continues to deteriorate on all fronts (see charts below).
Housing prices are down 28% from their bubble peak in 2006 but still have a ways down to go to get back to their pre-bubble levels. Even an average downturn will mean that housing remains a problem for several more years. Unless, of course, the government steps in to stave off those resets… a “solution” that carries with it a separate set of problems, making things worse. We continue to expect very serious problems in the commercial real estate sector.
The stock market is approaching a 50% decline, the average of what has been observed in past crises. Further slowing in U.S. corporate activities and profits means additional increases in unemployment, establishing a negative feedback loop that pushes corporate profits – and stock prices – even lower.
The only growth trend at this point is in government bailouts, which are in high gear, indicating we’ll experience the serious growth of outstanding debt seen in other crises. The elevated levels of government borrowing required to fund that spending are absorbing all available credit from foreigners, directly competing with business in need of the new financing that will be required to expand the economy. The combination of declining business activity, coupled with declining levels of household income, will result in declining tax revenues, increasing the budget deficit beyond the size of the new bailout programs. State and municipal governments across the nation are already being confronted with large shortfalls in their budgets, shortfalls that will only widen as the crisis worsens.
The combined business slowing and jobs contraction assure that the GDP will decline. Components of GDP having to do with necessities like food and shelter will continue to bump along regardless of the economic conditions, but the lack of growth in GDP could extend for years as it did in Japan and as it did after the 1929 stock crash.
Inflation/Deflation
Given that we are currently in a deflationary phase, it is easy to dismiss the case for inflation – and many do. We think that is a mistake. Even a summary tabulation of the unprecedented increases in government debt at this relatively early stage in the crisis make a compelling case for higher inflation, if for no other reason than that it shows clear intent on the part of the government to spend “whatever it takes” to offset the deflationary forces now stalking the land.
The research paints a dismal story of years of economic stagnation. In our view, the trend is now firmly established for dollar debasement, a debasement that will eventually overwhelm the deflationary pressures from collapsing asset values. Therefore, don’t listen to the happy faces on CNBC spouting off, for the umpteenth time since this crisis began, that now is the time to jump back in and buy stocks. It isn’t.
Be extremely skeptical when you hear some pundit pronouncing that this piece of short-term good news or another is an “all clear” signal. Until we start seeing a systematic improvement in the economic fundamentals – for example, an upward movement in consumer confidence – the only signal the economy will be hearing is that of a runaway train coming straight at it.
The numbers paint a dark picture… but it is in crises like today’s where unusually good opportunities arise for investors. Take our investors, for example, who made money shorting financials over the last year. The Casey Report focuses on recognizing and analyzing market trends way ahead of the investing crowd – a strategy that has already provided its subscribers with up to four-digit returns. The latest edition includes an update on the analysis you’ve read above. Try it risk-free for 3 full months, with our 100% money-back guarantee: click here to learn more.
This 1999 NY Times Article: about Congress easing the banking laws that were constructed after The Great Depression is hysterical. If hindsight is always 20/20, I wonder what this is exactly.
Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.
...
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.
''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''
Shout out to my boy Dave D (become his 2nd Twitter follower) for sending this gem along.
Looking for a contrarian indicator you can take to the bank? Look no further than our faithful Fed Chairman Ben Bernanke. In this guest piece, the folks at Casey Research revisit Big Ben's Greatest Hits, while casting an eye towards investment opportunities that arise from taking the opposite of Ben's words at face value.
When Bernanke Says All Is Well, It’s Time to Duck and Cover By the editors of Casey Research
“We’ve averted” the risk of a depression, Federal Reserve Chairman Ben Bernanke said this week. “Now the problem is to get the thing working properly again.”
Appearing on CBS network’s 60 Minutes, Bernanke told correspondent Scott Pelley that concerted efforts by the government likely averted a depression similar to the 1930s. He also stated the nation’s largest banks are solvent and that he doesn’t expect any of them to fail; and that the U.S. recession will come to an end “probably this year.”
Is this finally the light at the end of the tunnel for the U.S. economy?
We don’t want to appear as perpetual gloom-and-doomers, but fact is, when Bernanke tries to predict the future, he’s usually wrong.
Prediction: The subprime mess is grave but largely contained, Bernanke reassured the Federal Reserve Bank of Chicago in a speech on March 15, 2007.
While rising delinquencies and foreclosures will continue to weigh heavily on the housing market, it will not cripple the U.S. economy, he said. “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”
Reality: The median price of a home sold in the U.S. fell to $170,300 in January 2009, down 26% from a year and a half earlier, according to the National Association of Realtors. This housing crash has spread pain more widely than any before it. Home prices fell about 30% during the Great Depression, according to calculations by Yale University economist Robert Shiller. But back then, the nation was less concentrated in urban centers, and much fewer Americans owned homes.
Other housing downturns in recent decades have been regional; this one is national. Prices in the fourth quarter of 2008 fell in nearly 90% of the top 150 metro areas, according to the Realtors group. And 5.4 million homeowners, about 12%, were in foreclosure or behind on mortgage payments at the end of last year. The Federal Reserve now estimates home prices could fall 18%-29% more by the end of 2010.
Prediction: “I expect there will be some failures” of smaller banks, said Bernanke in February 2008. “Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system
Reality: IndyMac Bank failed in July 2008, with $32 billion in assets. Washington Mutual failed in September 2008, the largest bank failure in history with $307 billion in assets. Wachovia was sold to Wells Fargo in October 2008, amid concerns about its financial health, and Citigroup still scrambles to raise cash from both the government and private sources.
Fortunately for Bernanke, and unlike us at Casey Research, he doesn’t make a living by being right about the future. If he did, we strongly suspect that by this time, he would find himself without subscribers.
Thus, it is a mystery to us why the mainstream media still seem to eagerly soak up his every word, much like a devout Catholic would absorb a papal ex cathedra proclamation. But until the last American has woken up to Bernanke’s fallibility, that likely won’t change.
In the meantime, we recommend using the Fed chair’s economic outlooks as a contrarian indicator – if he says the market looks good, run for cover as fast as you can.
***
Bernanke may be wrong more often than not and still keep his job – we at Casey Research cannot afford that luxury. Our subscribers depend on us researching, correctly analyzing, and predicting market currents and emerging trends… which also includes the movements and changing policy decisions of Big Politics.
Our fresh-off-the-presses, FREE special reportObama’s Newer Deal, Part 2 tells you all about the president’s Stimulus Plan, its impact on and implications for your personal life and finances. Don’t miss it – click here now!
Jeremy Grantham, one of my favorite investors, often puts out fantastic (and free) articles and editorials about the markets. Grantham has been extremely bearish since 2000, and has been particularly bearish in 2000 and 2007, which were not bad times to be cautious at all.
I enjoy his analysis because it is extremely pragmatic - he keeps a cool head about him, and is bearish on assets when they are expensive and in a bubble type of mode, and bullish on things that are cheap.
Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure.
And this analogy is my favorite:
Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ sets in. Those who were over invested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete. Typically, those with a lot of cash will miss a very large chunk of the market recovery.
What do you think - is it time to start deploying some cash into stocks now, under the belief that it's always darkest before dawn?
Or - would you wait until you see a clear sign that a new bull market has begun - such as a major publication throwing in the towel on stocks (a la this famous BusinessWeek headline)?
Stratfor reports that more European nations are likely to face credit downgrades, and that, ultimately, a restarting of the global economy and flow of credit will be needed to drive down the cost of debt financing.
The article mentions how the massive amount of debt being issued by the US Treasury, in the form of Treasury bills, is really squeezing other countries, as they vie for very small remaining slivers of the sovereign debt pie.
We, like the rest of professional investors it seems, are quite bearish on US Treasuries (that's the only thing we don't like about this trade).
National governments will really feel the squeeze if and when rates on their sovereign debt begin to rise. Couple that with falling tax receipts...and rising expenditures...look out!
Everybody wants predictions. The following article does a little better than that, in that I wrote it back in November of 1997, outlining several theories of history, and pointing to a logical way of anticipating what will likely happen to the world at large over the next generation.
As you will read, the methodology I relied upon for anticipating the events that are now unfolding – 11 years later – were actually quite accurate, confirming, in my mind at least, that now is a time to be very cautious in your personal and financial affairs.
The article is unaltered in its text from the original, though I have added some current commentary in bold italics
Doug Casey
December 26, 2008
"Don't know much about the Middle Ages, look at the pictures an' I turn the pages. Don' know much about no rise and fall, don' know much ‘bout nothin' at all" "Wonderful World," Sam Cooke.
The lyrics quoted above probably describe the average American's knowledge of history about as well as any academic study. Not only don't they know anything about it, and think it's irrelevant, but what they do know is inaccurate and slanted. And they must not think very much about the future either if the amount of consumer debt out there, mostly accumulating at 18% interest, is any indication.
One point of studying history is that it gives you an indication of what's likely to happen now, if you can find an appropriate analog in the past. This is a tricky business because as you look at factors contributing to a trend, it's not easy to determine which ones are really important. Making that determination is a judgment call, and everyone's judgment is colored by his worldview, or Weltanschauung as the Germans would have it.
Let me briefly spell out my Weltanschauung so you can more accurately determine how it compares with your own, and how it may be influencing my interpretation of the future.
I'm intensely optimistic about the long-term future. It seems to me a lock cinch that the advance of technology alone – and nanotechnology in particular – will result in a future of incredible abundance and prosperity, and that alone will solve most of the problems that plague us. Space migration, intelligence increase, and life extension will be commonplace realities. These things, plus the growth of both knowledge and its accessibility and the concomitant rise of the individual from the group, will constantly diminish politics as an element of life. The future will be much better than anything visualized on Star Trek, and will arrive much sooner. That's the good news.
The bad news is that within the longest trend in history, the ascent of man, there is plenty of room for setbacks, and much of history is a case of two steps forward and one back. My gloomy short-term outlook, and my reasons for maintaining it, is recounted here monthly. Whether it's right or wrong, from an investor's point of view, the short term is more relevant than the long term. Notwithstanding Warren Buffett's great success in going for the long term, Keynes was right when he said that in the long run we're all dead. History shows that goes for civilizations as well as people. The problem is that our civilization is probably just now on the cusp of the long term.
Hari Seldon: Where Are You When We Need You?
Isaac Asimov's classic Foundation trilogy centers around a scientist, Hari Seldon, who invents a science called psychohistory, which allows the fairly accurate prediction of broad trends in society going for centuries into the future. Seldon lives on Trantor, the planetary capital of a galactic empire; the entire planet is covered with a high-tech version of Washington, D.C., devoted to nothing but taxing and regulating the rest of the galaxy. Seldon forecasts that the empire will collapse and Trantor turn into a gigantic ghost town. And of course that's what happens, because it's a novel, and that makes for a good story. It's a good story because it's credible, and it's credible because people know nothing lasts forever, and there is a cyclicality to everything; birth, youth, maturity, senescence, and death. These stages are shared by everything in the material world, whether it's a person, a city, a civilization, or a galaxy. It's just a question of time and scale.
From that point of view everyone knows the future, i.e., we all know that everything eventually dies. But we'd like a bit more precision on the timing of their lifecycles. Some gurus believe, or appear to believe, they can actually predict the details of the future; I consider them knaves. People who actually do believe them should be considered fools. That said – Nostradamus, astrology, channeling, tea leaf reading, and the like aside – I do think the best indicator of what will likely happen in the future is what has happened in the past. That may seem like an obvious statement, but it's not. There have traditionally been three ways of looking at the problem; call them theories of history.
Oldest is what might be termed a chaotic view, which presumes mankind doesn't have any ultimate destination but is wafted on the wings of Fortune or hangs by the thread of Fate. Subject to the arbitrary will of the gods, whether it's the Old Testament's Yahweh, or Homer's Zeus, the future is unpredictable, and prophecy or an oracle gives you as good a read as anything else. I discount this theory heavily.
A second ancient view is that everything is cyclical, and therefore somewhat predictable. History may be viewed like a giant sine wave that's possibly headed somewhere, but the direction is unknown. Or history is really a circle, constantly repeating itself, much like the four seasons of the year. There's a lot of wisdom to the cyclical view.
The third view sees history as a linear sequence, one that's actually headed somewhere. That view holds a special appeal for followers of evangelically oriented religions, particularly Christians (many of whose beliefs have an apocalyptic tinge) and Marxists (who were, until lately, given heart by the "scientific" inevitability their views would prevail). The linear view ties in with the idea of Progress, that (more or less) every day and in every way, things are getting better and better – although there's also a subculture populated mostly by deep ecology, animal rights, and anti-technology types who believe things are headed to hell in a hand-basket. But they all believe we're headed somewhere in a more-or-less straight line. There can be a lot of truth to the linear view, certainly if you look at the technological progress of mankind over the past 10,000 years, and this view prevails today.
My own view is a synthesis of the cyclical and linear theories. I see history evolving towards an incredibly bright future, but cyclically suffering setbacks, cyclically repeating the same patterns along the way. To me history looks like a spiral, heading off in a specific direction, but always covering the same ground in a different way with each revolution.
That's one reason The Fourth Turning, (Broadway Books, NY, 1997) by William Strauss and Neil Howe got my attention; we're all drawn to those who see at least part of reality the way we do. The book is an extrapolation of their last work, Generations, and notwithstanding its literary faults, is simply brilliant. I've never met Howe, but did have lunch with Strauss once about five years ago. The way I see it, although they're both conservatives, neither of them has any particular economic, political, or social philosophy, and they're not trying to grind an ax. Their books are a value-free look at U.S. history, and their conclusions are more credible as a result.
Their basic hypothesis is one I suspect Hari Seldon would recognize, and my thoughts are built on the research Strauss and Howe have done over the years. I suggest you get a copy of The Fourth Turning while it's still in the stores. That's also true for my own Crisis Investing for the Rest of the ‘90s, which has several chapters on related subject matter, and Arthur Herman's just-released The Idea of Decline in the West, which also bears on the subject. With 50,000 new books published every year, very few stay available for more than a few months. If something has appeal, you should buy it now, because it may be hard to come by when you have the chance to get into it. (Of course, I was wrong on that point -- websites such as Amazon and Alibris.com now make it easy to pick up many older books.)
Generations Generational conflict has been recognized since ancient times. The twist here is the discovery of several things that have previously eluded observers. One is that the well- known conflict between fathers and sons is only half the story; there aren't just two generational types that alternate (e.g., liberal and conservative), but four. The reason for looking at it this way is that a human life can be conveniently divided into four stages: Childhood, Young Adulthood, Midlife, and Elderhood. Throughout all of history, a long life might be considered to be 80 to 100 years, with each of the four stages equaling a quarter of it.
Just as each person's life holds four stages of about 20 years each, each generation comprehends a group of people born over about 20 years. Members of a particular generation tend to share values and ways of looking at the world not only because their parents also shared a set of views (which the kids are reacting to), but because every new generation experiences a new set of events in a way unique to them. They hear the same music, see the same events, are exposed to the same books. Members of a generation share a collective persona. There appear to be four distinct archetypal personae that recur throughout American history. And throughout world history as well, although that's a bit beyond what I hope to explore here.
It also seems, throughout history, that there are periodic crises. About once every century, or about when each of the four generational types has run its course, a cataclysmic event occurs. It generally takes the form of a major war, and it generally catalyzes a whole new epoch for society.
The four mature generations alive today each represent an archetype. Let's review them from the oldest now living, to the youngest.
Hero Archetype The "GI" generation, born between 1901 and 1924, includes basically all living people in their mid-70s and older. They grew up and came of age in the midst of the most traumatic years in human history: the 1930s and ‘40s. This was a time of catastrophic financial and economic collapse, world war, political dictatorship, genocide, and virulent ideology, among other unpleasant things; a period of intense turmoil. The times required them to be civic minded, optimistic, regular guys who could be counted on to do the right thing, fit in, and see that everybody got a square deal. As a consequence of what they've been through, they tend to be indulgent parents. As kids they're "good"; as adults they're selfless, constructive, and communitarian. Hero archetypes encounter a Crisis environment in Young Adulthood; assuming they survive it, the odds are the rest of their lives will be lived in growing economic prosperity, leading to a leisurely retirement.
Artist Archetype
Meanwhile, another generation was being born at the height of the Crisis – something that seems to occur roughly every 80-100 years – from 1925-42. This generation, the "Silent," watched these titanic events happen but were too young to take part in them. They were relegated to being protected, while trying to be helpful in the limited ways available to them. They're overprotected as children, when they might be characterized as "placid"; they tend to underprotect their own children as a reaction. As adults they're sensitive, well-liked, sentimental, and caring.
Prophet Archetype
Next came the group we call the "Boomers," born from 1943 to 1960. This was the first generation born after the Crisis was over, and they grew up in an environment where their parents (mostly GIs and early cohort Silents) felt obligated to protect them from all the trauma of the preceding years and were desirous of giving them all the things they never had. As kids they're seen as "spirited.'' Later in life, they tend to be narcissistic, presumptuous, self-righteous, and ruthless. Born after a Crisis, their Childhood years coincide with a rebirth of society, and their Elderhood coincides with another Crisis. More on them below.
Nomad Archetype The fourth generational type is represented by today's "Generation X," born 1961-81, during what might be called an Awakening period when the Boomers were in the limelight. As a consequence, they were overlooked and a bit abandoned. Their reputation as kids can be summed up as "bad." They're oriented toward survival, which is partially a result of their being underprotected as children. When they become parents, they react and become overprotective. They tend to be savvy, practical, tough, and amoral.
The kids born between 1982 and perhaps 2002 should be another Hero archetype. My own experience with them is that they're shaping up that way. Represented by clean-cut, straight-arrow Power Rangers. Quite a reaction to the sewer-dwelling Mutant Ninja Turtles that were analogs for the previous generation. They're "'can do" kids, programmed to do the right thing in a smoke-free, drug-free, eco-sensitive, politically correct world. Like all Hero types, they respect their elders, do what they're told without much questioning authority. That's just the type of person you want to have fighting a war for you, and that's probably just what they'll wind up doing. Just like the last Hero types, the GIs. (Iraq was first. Iran next? Or will it be Saudi Arabia?)
It's risky to characterize everyone born in a certain time frame as sharing a persona; after all, people are individuals, not ants or atoms, each like the other. But it's really no different than characterizing people by the country they're from. There's no question in my mind that people share characteristics by virtue of the milieu in which they live, and that's true of time as well as geography. Take a look at the people you know by age groups, and see if they don't roughly fit the brief descriptions.
The interesting thing is that through about 400 years of American history, it's possible to see these generational types repeating themselves. It's not an accident. The characteristics of each type shape the next generation, as well as current events. And events leave a further imprint on all of them.
Making an Example of the Boomers
Just as every generation has its own persona, the character of each generation evolves as it moves through life. The Boomers are perhaps the most relevant example of this. First they were Mouseketeers and Beaver Cleaver clones. Who could have guessed they would mutate into Hippies and even Yippies as they reached Young Adulthood, reacting against everything they'd grown up with, everything their parents worked so hard to give them.
They came of age during a period that might be called an Awakening, and it's recurred on schedule five times so far in American history. Awakenings are times of religious and moral ferment, when the youth tend to challenge prevailing cultural values pretty much across the board. Young adults were into New Age things this time around, in the 1960s and ‘70s. At the time it seemed utterly shocking and completely new, but that was only because nobody then alive had seen the previous Utopian Awakening in the 1830s and ‘40s, the Pietist Awakening of the 1740s and ‘50s, the Puritan Awakening of the 1630s and ‘40s, or the Protestant Reformation of the 1530s and ‘40s.
Like all the generations before them that grew up in similar times, they eventually put away the things of their youth. But who guessed that their next mutation would be into Yuppies, whose motto was not "Peace and Love" or "Revolution for the Hell of It," but "Shop Till You Drop" and "He Who Dies with the Most Toys Wins" as they moved into midlife.
But even now the acquisitive mania that characterized the ‘80s is ebbing, now that the first cohorts of Boomers are crossing over 50. You can already see the signs of their next stage of evolution, in the judgmental behavior of people like William Bennett (George Bush) and Dan Quayle (Ann Coulter) on the "right," and Al Gore and Hillary Clinton on the "left." They did sex, drugs, and rock ‘n' roll in the ‘60s. They believe they've fought the war of good against evil in both Vietnam and the segregated lunch counters of the South. They know they were the first generation to have traveled widely thanks to the jet, to have been brought up by television, and had the telephone as a given. They've been there, done that, and now that they're getting older, they're going to make sure that everyone else benefits from their wisdom – like it or not.
The Boomers are an archetypal Prophet generation, a type born after a secular crisis, just in time to create another one. Get the image of a grim elder, with a well-defined vision of what's right and wrong, calling down wrath, and laying down the law for a troubled nation in chaotic times. That's the type of person who tends to lead countries into wars, as well as through them. Interestingly, the Boomers in America have their counterparts abroad today, especially in China, where they grew up during the Cultural Revolution. Two ideologically driven, righteous groups running two such powerful and alien cultures is almost a guaranteed formula for a millennial-sized crisis. Which should appear, coincidentally, sometime shortly after the millennium. (We're right on schedule.)
So What's Next?
The real watersheds in history, crises that make or break a civilization, occur roughly every 100 years. The most recent ones in American history that will resonate without looking up the facts in a reference book are the Revolution, circa 1782; the Civil War, circa 1863; and WW II, circa 1943. We've had other wars, and they were traumatic enough; that's the nature of war. But the War of 1812, Mexican, Spanish, World War I, Korean, and Vietnam wars had nothing to do with the country's survival as an entity, as a civilization. They were optional wars, sport fighting, if you will, by comparison. Wars that occur at a secular Crisis, a "Fourth Turning" to Strauss and Howe, when a Prophet generation is acting as elder statesmen, with Nomads as operational commanders, and Heroes as front line soldiers tend to be total wars that have an ideological underpinning. They're life-and-death struggles not just for the individual participants, but for the civilization as a whole.
That major wars occur at such long remove from each other probably isn't an accident. Really catastrophic wars, from at least the days of Troy on down, have usually been the Great Events that resound through living memory. The Great Event of a century forms the thought and character of everyone alive when it happens, influencing them relative to the stage of life they're in at the time. Perhaps that's why a people will collectively do its best to avoid a repeat, at least while there's anyone still alive who saw the last crisis.
(It's been said that war is a force that gives life meaning. And I think that's true, although it's perverse that the most destructive and idiotic activity that it's possible to engage in would just have to be the most important. Maybe, after the orgy of self-indulgence and conspicuous consumption that has characterized the past couple decades, Americans collectively feel they need to prove something. There has to be some rationale for the current war hysteria other than pure stupidity...)
In any event, the way the current generations line up relative to historical analogs, 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. (Close, but not quite.) 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.
(In the historical context, 9/11 will be viewed as the opening kick-off for the coming Crisis... and the messianic overreaction of Bush and his cronies as the catalyst for turning things from bad to worse. It may be that Hurricane Katrina, for instance, a completely accidental event, may be blamed for providing a pin to burst the financial bubble – which would be a pity, since the neocons could then blame it, not themselves.)
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, whom 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 (although not necessarily wise) 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.
If things evolve over the next decade as they did in past analogs, it will be a very un-mellow time indeed. That's assuming things end well, and there's no guarantee they will, as many foreign countries have discovered throughout history. We've been uniquely blessed.
What to Do
Strauss and Howe aren't financial types, and their advice is nebulous along those lines. To sum it up, their suggestion is to learn to swim with the tide by not hoping the current good times last forever; the chances of the good times are coming to an end now. They'd also advise not sticking your head up above the crowd, something that is always very risky when times are in turmoil; remember what happened to Japanese-Americans during the last crisis. They suggest that there will likely be a resurgence of nationalism, much as was the case during past crises. It won't be a good time to be a maverick in the U.S., a thought that makes places like Argentina and New Zealand look even more appealing.
(I bought property in both places shortly after this was written, and have been rewarded with a quadruple in both instances – considerably better than would have been the case in the U.S.).
Strauss and Howe suggest you look to diversify in all things, so everything won't go bad at once. Brace for the collapse of public support mechanisms. Set your roots with your family, because people you can rely on will be at a premium. Heed emerging community norms, bond with like-minded people, and return to basic, classic virtues. This is sound advice any time, but critical if you're rigging for heavy weather.
Assuming you wanted to stay in the U.S., you'd rather be on some land near a small town, and far away from a major city. You'd want to be self-sufficient in as many ways as possible – freeze-dried food. etc. Perhaps Howard Ruff will make a comeback with advice like that, which seems quaint today. But then I'm nothing if not a contrarian.
(In hindsight, the original article could have been a bit more specific – other than the suggestions about Argentina and New Zealand. Personally, I believe that unassailable wealth is the best protection against global crisis. For it to be unassailable, your wealth must be at once substantial, free from threat of confiscation, divorced from the whims of the masses, and located in a country or currency that has a good risk/reward profile. Unfortunately, the U.S. doesn't make the cut.
In the first instance, the single best way to build wealth now, while there is still time to do so, is in carefully selected gold and other resource stocks. In order for it to be free from the threat of confiscation, at least some part of your wealth needs to reside in a country where you don't. To state the obvious, I would be very cautious about traditional stocks and bonds until we see how things shake out. Rather, get positioned in gold and silver stocks now, ahead of the curve, then sell out for a big profit to the panicking masses and move an increasing percentage of your wealth into tangibles such as gold, silver, and maybe, as part of a diversified portfolio, real estate in especially attractive areas – but only after the bubble has decisively burst.)
A Parting Parable
In case you have any doubts, I buy the theory outlined above and its many ramifications that there isn't room to explore here. It really is scary to think that we could again experience a real Crisis with a capital C; I'm not talking about just a bear market in stocks. If it happens, I promise you stocks and mutual funds will be about the farthest things from most people's minds.
At the same time, there's no point in feeling terrorized. This stuff has been going on since the dawn of history. So let me leave you with a parable. I could appropriately quote Ecclesiastes (To every thing there is a season, and a time to every purpose under heaven: a time to be born, and a time to die, a time to plant, and a time to pluck up that which is planted, etc., etc.). But everyone knows that reference. Let me rather give you John O'Hara. At the beginning of O'Hara's novel Appointment in Samara, he tells a brief parable, which I'll summarize:
There was a merchant in Baghdad who went to the market with his servant. There they saw Death, who stared at the servant in what seemed a threatening way. Later the servant said "Master, lend me a horse. I shall ride to Samara, and there Death will not find me." The merchant did so, then returned to the market, where he again saw Death, whom he approached and asked why he had stared at his servant in such a threatening way. Death responded, "I wasn't threatening him. I was just very surprised to see him here in Baghdad, since I have an appointment with him in Samara later this afternoon."
(Strange, the location for the proverb, in that this was well before the current war).
***
There is no doubt that we are now in the Crisis stage… which, according to Strauss and Howe’s “Turnings” theory, may last another decade or more. Is there any way to escape this economic tsunami unscathed?
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