By David Robertson, CFA
July 2014
Blessed, and often cursed, by what David Brooks calls "an intense desire to figure stuff out," we have been struggling to reconcile two prominent views of the future. On one hand, we agree that there are lots of smart, creative people around and that we all keep getting more and better tools to collaborate and to solve problems. We share the view that, all else equal, the ingenuity and quality of the human spirit points to a better existence.
Things are rarely equal, however, and in this case, it doesn’t take much sleuthing to see a world awash in debt and littered with underperforming economies which are becoming progressively less able to service that debt. Add in cyclically high profit margins that are likely to revert down, a bevy of geopolitical risks, and the distinct potential for higher interest rates, and it's not hard at all to imagine the potential for a damaging reset of the markets.
The bigger question for us is not that the market has continued to rise despite weak analytical foundations, because the market typically bounces around and overshoots in both directions. The bigger question is why has the disconnect between markets and reality persisted for so long this time? Is something else going on?
The answer may very well lie in the time-honored quote: "We see the world not as it is, but as we are." Since "how we are" is largely determined by the environment into which we are born and the experiences we have in our formative years, it is useful to explore this as an avenue of inquiry. In fact, William Strauss and Neil Howe did exactly this in their book, The Fourth Turning. As they describe, kids within a particular generation tend to have similar experiences and therefore share many common views. Kids from other generations, however, typically have different childhood experiences and therefore adopt different world views. As a result, distinct "generational archetypes" emerge from these disparate experiences. One of the great insights of their research is that history can be better understood through the lens of the interplay among various generational perspectives.
Strauss and Howe go on to describe in great detail the backgrounds of each generation as well as the world views and mental models that resulted from growing up in such conditions. We'll focus on just two, the Boomers (born 1943-1960) and the 13th Generation (born 1961-1981). In doing so, it is important to note that the authors’ primary consideration is in identifying the "center of gravity" of generational belief systems. As a result it is necessarily very general and does not capture numerous individual counter-examples.
According to the authors, “Thanks to greater affluence, declines in adult mortality, and so many stay-at-home mothers, Boomer children enjoyed the most secure family life in American history ... At no other time in the twentieth century did the mainstream culture impart such a benign worldview to children, seldom requiring them to prepare for painful challenges or tragic outcomes.”
Given this background, the authors then explore the consequences: “Surrounded by such open-handed generosity, child Boomers developed what Daniel Yankelovich termed the ‘psychology of entitlement.’ Landon Jones recalls how ‘what other generations have though privileges, Boomers thought were rights.”
Continuing, they observe, “Planning for tomorrow was no big deal. Boomers expected to “find better jobs, make more money, and live in better houses than their parents." The authors also quoted financial expert, David Barker who predicted: “The generation … inevitably spoiled by the wealth created by their parents’ generation is sure to drive the system over the edge, without the experience of the past decline [i.e., the Great Depression] to provide financial and economic sobriety."
Not surprisingly, the 13th generation, born about twenty years later, grew up in a radically different environment. According to the authors, “The 13th Generation survived a hurried childhood of divorce, latchkeys, open classrooms, devil-child movies, and a shift from G to R ratings. They came of age curtailing the earlier rise in youth crime and fall in test scores — yet heard themselves denounced so wild and stupid as to put The Nation at Risk. As young adults, maneuvering through a sexual battlescape of AIDS and blighted courtship rituals, they date and marry cautiously.”
The contrast of these two generational experiences is stark: “Unraveling-era 13ers, males especially, have been hit with a one-generation depression. From 1973 to 1992, the real median income from young adult males fell by 28 percent, more than it did for the entire nation from peak to trough of the Great Depression.” Further, “Where Boomers were the most alibied and excused criminal generation in U.S. history, 13ers have become the most incarcerated. Roughly one-third of all 13er black males are either in prison, on probation, or under court supervision.”
It is not surprising that given very different formative experiences, 13ers have very different perspectives than Boomers. “13ers will feel little stake in the old order, little sense that their names and signatures are on the social contract. They will have reached full adult maturity without ever having believed in either the American Dream or American exceptionalism. They will never have known a time when America felt good about itself, when its civic and cultural life didn’t seem to be decaying. From childhood into midlife, they will have always sense that the nation’s core institutions mainly served the interests of people other than themselves."
Wow, quite a difference, huh? What can we take from this? First and foremost, it provides a viable explanation for the duration of the disconnect between asset prices and underlying fundamentals. It turns out the explanation is not so much an economic one as a political one. As things currently stand, the Boomers are the generation with the greatest social influence. It is also the generation which does not have "the experience of the past decline to provide financial and economic sobriety.” Given this context, it shouldn’t be too surprising that as a group, it might refrain from difficult decisions and persist in spending beyond means. This insight goes a long way in explaining why the disconnect has endured as long as it has.
It also supports the position that there is a big disconnect that it will eventually be resolved and quite possibly in a painful way. As progressively more Boomers retire, 13ers will ultimately replace them as the socially prominent generation and they will have a very different take on things. The same set of economic and market conditions will now be seen through the eyes of 13ers who believe "the nation's core institutions mainly serve the interests of people other than themselves” and who view the status quo as unsustainable. When that tide turns, we can also expect very different policy responses.
Another lesson from the Fourth Turning is that because the "constellation of generational archetypes" is constantly changing, there is a distinctly cyclical pattern to much of history. While we continue to see significant risks to asset values and the distinct potential for some meaningful dislocations, we also don't view it as a linear path to the end of the world. We remain optimistic about human nature and our ability to adapt and already see plenty of seeds being planted for re-growth. Much as each season has its unique qualities and purpose, so too does each turning. As Strauss and Howe rightly point out, “Cyclical time teaches you not just to accept the rhythms of history, but to look for ways to make use of them, to fulfill your role in those rhythms as best you can. It is an antidote to fatalism.”
Finally, we do think the Fourth Turning provides an extremely useful paradigm from which to view many of the economic, political, and societal changes going on right now. Insofar as this is correct, it will be extremely important to prepare for tougher times over the next several years. Coming out on the other end may very well be an economic landscape vastly different from what any of us have experienced directly. Fortunately, it is just as likely that valuable lessons for the future landscape will be informed by history. We look forward to helping investors navigate this difficult journey by being attentive, by being curious, and by being thoughtful. Static processes and old maps aren't going to help.
July 2014
Blessed, and often cursed, by what David Brooks calls "an intense desire to figure stuff out," we have been struggling to reconcile two prominent views of the future. On one hand, we agree that there are lots of smart, creative people around and that we all keep getting more and better tools to collaborate and to solve problems. We share the view that, all else equal, the ingenuity and quality of the human spirit points to a better existence.
Things are rarely equal, however, and in this case, it doesn’t take much sleuthing to see a world awash in debt and littered with underperforming economies which are becoming progressively less able to service that debt. Add in cyclically high profit margins that are likely to revert down, a bevy of geopolitical risks, and the distinct potential for higher interest rates, and it's not hard at all to imagine the potential for a damaging reset of the markets.
The bigger question for us is not that the market has continued to rise despite weak analytical foundations, because the market typically bounces around and overshoots in both directions. The bigger question is why has the disconnect between markets and reality persisted for so long this time? Is something else going on?
The answer may very well lie in the time-honored quote: "We see the world not as it is, but as we are." Since "how we are" is largely determined by the environment into which we are born and the experiences we have in our formative years, it is useful to explore this as an avenue of inquiry. In fact, William Strauss and Neil Howe did exactly this in their book, The Fourth Turning. As they describe, kids within a particular generation tend to have similar experiences and therefore share many common views. Kids from other generations, however, typically have different childhood experiences and therefore adopt different world views. As a result, distinct "generational archetypes" emerge from these disparate experiences. One of the great insights of their research is that history can be better understood through the lens of the interplay among various generational perspectives.
Strauss and Howe go on to describe in great detail the backgrounds of each generation as well as the world views and mental models that resulted from growing up in such conditions. We'll focus on just two, the Boomers (born 1943-1960) and the 13th Generation (born 1961-1981). In doing so, it is important to note that the authors’ primary consideration is in identifying the "center of gravity" of generational belief systems. As a result it is necessarily very general and does not capture numerous individual counter-examples.
According to the authors, “Thanks to greater affluence, declines in adult mortality, and so many stay-at-home mothers, Boomer children enjoyed the most secure family life in American history ... At no other time in the twentieth century did the mainstream culture impart such a benign worldview to children, seldom requiring them to prepare for painful challenges or tragic outcomes.”
Given this background, the authors then explore the consequences: “Surrounded by such open-handed generosity, child Boomers developed what Daniel Yankelovich termed the ‘psychology of entitlement.’ Landon Jones recalls how ‘what other generations have though privileges, Boomers thought were rights.”
Continuing, they observe, “Planning for tomorrow was no big deal. Boomers expected to “find better jobs, make more money, and live in better houses than their parents." The authors also quoted financial expert, David Barker who predicted: “The generation … inevitably spoiled by the wealth created by their parents’ generation is sure to drive the system over the edge, without the experience of the past decline [i.e., the Great Depression] to provide financial and economic sobriety."
Not surprisingly, the 13th generation, born about twenty years later, grew up in a radically different environment. According to the authors, “The 13th Generation survived a hurried childhood of divorce, latchkeys, open classrooms, devil-child movies, and a shift from G to R ratings. They came of age curtailing the earlier rise in youth crime and fall in test scores — yet heard themselves denounced so wild and stupid as to put The Nation at Risk. As young adults, maneuvering through a sexual battlescape of AIDS and blighted courtship rituals, they date and marry cautiously.”
The contrast of these two generational experiences is stark: “Unraveling-era 13ers, males especially, have been hit with a one-generation depression. From 1973 to 1992, the real median income from young adult males fell by 28 percent, more than it did for the entire nation from peak to trough of the Great Depression.” Further, “Where Boomers were the most alibied and excused criminal generation in U.S. history, 13ers have become the most incarcerated. Roughly one-third of all 13er black males are either in prison, on probation, or under court supervision.”
It is not surprising that given very different formative experiences, 13ers have very different perspectives than Boomers. “13ers will feel little stake in the old order, little sense that their names and signatures are on the social contract. They will have reached full adult maturity without ever having believed in either the American Dream or American exceptionalism. They will never have known a time when America felt good about itself, when its civic and cultural life didn’t seem to be decaying. From childhood into midlife, they will have always sense that the nation’s core institutions mainly served the interests of people other than themselves."
Wow, quite a difference, huh? What can we take from this? First and foremost, it provides a viable explanation for the duration of the disconnect between asset prices and underlying fundamentals. It turns out the explanation is not so much an economic one as a political one. As things currently stand, the Boomers are the generation with the greatest social influence. It is also the generation which does not have "the experience of the past decline to provide financial and economic sobriety.” Given this context, it shouldn’t be too surprising that as a group, it might refrain from difficult decisions and persist in spending beyond means. This insight goes a long way in explaining why the disconnect has endured as long as it has.
It also supports the position that there is a big disconnect that it will eventually be resolved and quite possibly in a painful way. As progressively more Boomers retire, 13ers will ultimately replace them as the socially prominent generation and they will have a very different take on things. The same set of economic and market conditions will now be seen through the eyes of 13ers who believe "the nation's core institutions mainly serve the interests of people other than themselves” and who view the status quo as unsustainable. When that tide turns, we can also expect very different policy responses.
Another lesson from the Fourth Turning is that because the "constellation of generational archetypes" is constantly changing, there is a distinctly cyclical pattern to much of history. While we continue to see significant risks to asset values and the distinct potential for some meaningful dislocations, we also don't view it as a linear path to the end of the world. We remain optimistic about human nature and our ability to adapt and already see plenty of seeds being planted for re-growth. Much as each season has its unique qualities and purpose, so too does each turning. As Strauss and Howe rightly point out, “Cyclical time teaches you not just to accept the rhythms of history, but to look for ways to make use of them, to fulfill your role in those rhythms as best you can. It is an antidote to fatalism.”
Finally, we do think the Fourth Turning provides an extremely useful paradigm from which to view many of the economic, political, and societal changes going on right now. Insofar as this is correct, it will be extremely important to prepare for tougher times over the next several years. Coming out on the other end may very well be an economic landscape vastly different from what any of us have experienced directly. Fortunately, it is just as likely that valuable lessons for the future landscape will be informed by history. We look forward to helping investors navigate this difficult journey by being attentive, by being curious, and by being thoughtful. Static processes and old maps aren't going to help.
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