This week on the MacroVoices podcast, host Erik Townsend interviewed Neil Howe, co-author of The Fourth Turning, an investing tract that’s found renewed relevance thanks to White House Chief Strategist Steve Bannon, who’s cited it as an inspiration for his (and by extension, President Donald Trump’s) worldview.
According to the New York Times, which published a story earlier this year explaining the theories encapsulated in the book, the Fourth Turning was “written by two amateur historians, making the case that world events unfold in predictable cycles of roughly 80 years each, and that they can be divided into four chapters, or turnings: growth, maturation, entropy and destruction. Western societies have experienced the same patterns for centuries, the book argues, and they are as natural and necessary as spring, summer, fall and winter."
Few books have been as central to the worldview of Mr. Bannon, a voracious reader who tends to see politics and policy in terms of their place in the broader arc of history.”
Townsend shares Bannon’s enthusiasm, saying in his preamble that he believes the Fourth Turning is “the most important investing book of our time…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.”
During the interview, Townsend and Howe discussed Howe’s conclusion that America is presently in the middle of a 20-year-long period of social, economic and political upheaval.
Howe begins by explaining how the first book written by himself and William Strauss, with whom he also collaborated on the Fourth Turning, introduced him to the idea that America’s economy and culture follow distinct patterns. While studying cultural differences between generations of the American population, Howe says he began to notice a pattern, with one generation tearing down and reinventing some of the institutions, both physical and cultural, of the generation that preceded it.
“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.”
In Howe’s more recent writing, he has cited the 2008 financial crisis as the catalyst that signaled the beginning of the most recent turning. But Townsend questions why Howe didn’t pick 9/11. For one, Townsend believes it had a more dramatic impact on how Americans view and feel about the US’s relationship with the modern world.
Howe says he didn’t choose 9/11 because it didn’t have the same transformational influence on markets that the financial crisis had. It also arrived too early: In 2001, most members of the millennial generation hadn’t graduated from high school yet, and most baby boomers hadn’t reached retirement age.
“A couple of reasons. One is that, although 9/11 changed America’s attitude towards the rest of the world, I think that the stock market boom and celebrity circus that’s here in the United States really hadn’t changed very much. And I don’t think you really had a shift, a fundamental shift, in America’s perception of themselves as a people, as their own country, to a fundamental degree until 2008. Also, 2001, as we explained to many people at the time, was simply too early. Every turning starts when each generation is beginning to move into a new phase of life. Back in 2001 boomers were not yet retiring, millennials were still—maybe the first one of them was barely graduating from high school.
So, this was not what we expected. 2008 really did coincide with the generational maturity of the turning, so to speak. And I think that, in terms of the basic shift in our efficacy of the social system, I think 2008 was a bigger change.” The crisis also ushered in an era where central banks exhibit total control of markets, which has created an “artificial quality,” Howe said.
“The economic emergency that occurred in 2008-2009 really catapulted us into by far the biggest economic emergency we’ve been in since the early 1930s. And, arguably, we are still living out the consequences of that with complete change in central bank policy, monetary policy, with sustaining these record low interest rates and arguable very high valuations in financial markets—almost anything pushed by that—and people still wondering how we’re going to get out from under that.
The constant discussion is when are central banks going to pull back on their balance sheets and actually go back to the old normal? So, I think there is the sense, even in this the booming markets that we see today, that there is this artificial quality: people think that there’s something wrong about this. We have not re-righted where we were. We are not letting price discovery and actual markets function the way they did before then.
So, I do believe that 2008 was the beginning of a whole new regime. And I also believe that the political dysfunction, the sense of political dysfunction—created during the two turns of the Obama presidency and, obviously, also into the Trump presidency—of government completely grinding to a halt is going to have some very powerful repercussions in the years shortly to come.”
Of course, there’s a certain futility in trying to determine the exact beginning and ending of a turning cycle while it’s still in progress. Townsend asks, since we can’t predict the future, how do we know that there isn’t an even worse crisis just around the corner? It’s a great question, Howe responds.
“It’s certainly a danger out there. Now we all just saw this morning how markets reacted to this war of words between President Trump and North Korea. I think that there is a rising tide of nationalism around the world. I think it’s driven by younger generations. And I should say not just nationalism but authoritarianism. And I would say these are strong parallels that we see between the decade we’ve been living through and the 1930s. Because it isn’t just what happens to/in the economy. I mean, you consider so many ways in which this last decade has recapitulated the 1930s, starting off with a financial crisis, worries about deflation, worries about declining fertility rates, and currency wars, and beggar thy neighbor policies, and radical attempts by monetary and ultimately fiscal policy to remedy the situation.
But also consider the geopolitical atmosphere of the 1930s. Which was a new world in which there was no concert of great powers, no great power who was taking responsibility for guiding or leading the world. Britain had largely retreated from its global influence after World War I.
The League of Nations had fallen apart. And the 1930s was the time when authoritarian leaders, and with growing popularity—growing numbers of people thought that that was actually a pretty good answer to the world’s problems. These regimes were doing whatever they wanted in their corner of the world with no one really to stop them.”
Evidence of the millennial generation’s contribution to the current turning can be found in the shift in political attitudes from those of their parents. Howe claims millennials are less interested in democracy, and that there’s a “growing appeal of authoritarian leaders that get things done.”
“And I think today we live in a similar era. Just look around the world today. You see a vacuum of any great power or concert of great powers who are orchestrating what goes on in the world. And basically people doing what they want and creating an increasingly dangerous world. I even think in the culture you find strong parallels. The decline in home ownership, for example. The decline in the birth rate and the fertility rate. The blanding of the popular culture that occurred during the 1930s is very similar to what’s going on with the millennials today. And the growing appeal among younger people, activists among younger people—younger people have a more collectivist or authoritarian notion of what kind of government works.
We actually wrote a piece recently called Are Millennials Souring on Democracy? And look at some of these recent opinion polls around the world showing that millennials are less interested. Not just in America but in Europe and East Asia. Not necessarily favoring liberal democratic solutions. It’s a growing appeal of authoritarian leaders that get things done. Well, you can see here in the United States we have a government that no longer thinks about the future at all and can’t get anything done. So you can imagine how turned off you would be if you’re a young person trying to think of the rest of your life.”
If Howe is correct, the US has another decade or so before the present cycle ends, and the next first turning, supposedly a period of economic and cultural renewal, begins. So, Townsend asks, with 10 years of turmoil left on the clock, what can Americans expect? Howe said Americans should be watching for "all these little problems to coalesce in one huge problem.""
“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.”
Americans – and investors, in particular – shouldn’t find comfort in the notion that the worst of the crisis has passed. Central bankers managed to engineer a quick recovery (in asset valuations, at least) with an unprecedented injection of freshly printed capital, but the magnitude of this intervention is preventing markets from working properly - what Howe calls “the valuation issue.”
Central banks’ willingness to keep us “not too far from the zero bound” has had myriad benefits for investors. But with US equity valuations still so close to all-time highs, Howe wonders: “Have we created a monster here.”
Listen to the rest of the interview below:
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