Sometimes, we get a warning from history. Not screaming CNBC headlines or market crashes, but cold realizations of repeating patterns. That is what's happening now, and that is why I cannot get my mind off of Neil Howe's template for the "Fourth Turning."
If you do not know Howe's work, here's the basic idea: About every 80 years, societies experience enormous, huge upheavals, which he called fourth turnings, that swallow the country and the world in chaos and then resolve, often brutally, in new social norms. Think American Revolution, Civil War, Great Depression, and World War II. And I'm not even talking about market corrections here; I'm talking about a basic reshaping of how power, wealth, and opportunity are delivered across the society.
If Howe is correct, we are in the midst of one of these changes at the moment.
That may sound depressing, and it is, but here's why I believe it matters to us as long term investors: when structural forces this powerful are in motion, you can't just invest around them. You have to invest in them. And that changes everything about how we need to be thinking about our portfolios.
The Core Idea: Everything Is Changing All at Once
Let's break this down. This is more than your garden variety economic cycle. We're witnessing the coming together of debt, politics, global power, and technology, all at the same time. It's not so much the next quarter but the next quarter century.
Here are five important forces I'm following and how we might navigate them as investors:
The Fiscal Cliff Is Long and Hard
The U.S. national debt is just shy of $37 trillion, and here's the twister: we're going to have to replace all those low interest bonds we issued during the 2010s with a whole new set of much higher yielding ones. The government's interest payments are soaring at the same time that political resolve to confront the problem is falling apart.
I've seen this pattern before. Governments borrow first to maintain living standards. Then they borrow to service the borrowing. Eventually, the math breaks.
This isn't necessarily a signal for investors to head for the hills. However, it means asking, what happens when the world's "safest" asset, which would be U.S. Treasuries, is not so safe after all?
I'm looking at real assets. Gold, which central banks are now buying again after several decades of selling. Good companies have pricing power. Global spread away from the dollar.
And most important of all, not giving in to the temptation of reaching for yield in risky credit markets when the ground beneath it is shaking.
Trends in the Market Are Unraveling
Here's something that's been keeping me awake at night: Traditional relationships among stocks, bonds, and currencies are breaking down. Typically, when stocks drop, money goes to Treasuries and the dollar rises. Instead, we're getting the reverse: stocks and the dollar both falling, even as long term interest rates rise.
That's not normal. And when normal falls apart, it often means some larger shift is happening beneath.
Markets don't go for uncertainty, and we're seeing that in the shape of the yield curve steepening, clearly predicting trouble ahead.
As long term investors, this says to me that we have to be thinking differently than we have in the past in terms of traditional asset allocation models. The 60/40 portfolio may not save you when stocks and bonds are declining for the same structural reasons.
Capital Begins Leaving America Because of Perception of Declining Property Rights
Money poured into America like water downhill for twenty years. Our net investment position expanded to well over $25 trillion as the world found in America the safest, most dynamic place to park capital.
That's changing. Devaluation is stimulating capital flight, and dollar based investors are slowly waking up to currency risk.
This isn't doom and gloom; it's change. And change is opportunity. I am looking at what other countries are doing in their positions. Who is building the infrastructure of the future? Who's got the demographics? Who's innovating?
From the perspective of investing, I believe it's time to begin looking seriously elsewhere outside of U.S. markets. India is very similar to China 30 years ago, with its young population and tech skills. But there is good news for investors who are willing to travel globally.
Private Credit Is Starting to Look a Lot Like 2007
But those collateralized debt obligations are a distant memory. Those "sophisticated" financial instruments that damn near broke the system? Well, that's what private credit markets feel like today: complex, unclear, and far, far too popular for their own good.
Big institutions that invested early in private credits are now fighting around liquidity in these markets. Now, the allure of higher returns is being overshadowed by volatility and liquidity issues that make these investments seem less appealing by the day.
Public credit markets, the boring, transparent stuff, in other words, have been quietly outperforming. That's a lesson about the virtues of simplicity and liquidity when things go sideways.
Wall Street's smart money is not in hot pursuit of the latest financial innovation. It's sticking to what it can control and exiting if necessary.
The Ground Rules Are Being Rewritten
The sobering part: we're no longer dealing in economic cycles alone. We're confronting social and political upheaval that extends far beyond the markets.
The level of wealth inequality has reached the threshold that could lead to institutional breakdown. Technology moves faster than society can accommodate. The revolution is bringing big changes quickly, like new ideas, new goals for society, and a push for fairness or equality. But the systems behind how things are made (like factories, technology, and labor) and who owns what (like land, businesses, or resources) are still mostly the same as before. They're changing, but very slowly.
Because of this difference in speed; fast political or social change vs. slow economic or property change; there's a growing tension. It's like trying to run a race with one leg moving fast and the other dragging behind. Eventually, that imbalance creates frustration, inefficiency, and even conflict. People start to feel that the revolution isn't delivering on its promises because the old systems are holding things back.
So, the pressure builds. And at some point, these issues become so big that no one can ignore them anymore; they demand action.
Supporting Thought: Why Gold Is Having a Moment
So if you're scratching your head that gold has been sneakily soaring while everyone is transfixed by the tech stocks frenzy, well, it's because the smart money sees what's going down in the world of traditional safe havens.
Central banks all over the world have turned from selling gold for decades to buying. Gold is looking attractive for its stability and its record of 5,000 years as a store of value.
This is not a discussion on my love for gold or end of the world predictions. It's all about portfolio insurance when the insurer itself may well be in difficulties.
My Final Thoughts: Generational, Not Quarterly
So what's the takeaway?
The Fourth Turning isn't advising us to panic. It's telling us that history unfolds in large cycles and that we are living in such a moment. The institutions, currencies, and power structures that have characterized our investing careers are all up for grabs.
But if you can instead take the long view and think in terms of decades, if you can invest in your future grandchildren's college funds, not your future quarterly statements, you're going to be ahead of 90% of all the other investors out there either chasing the latest thing or trembling under their desks.
Stay diversified. Think globally. Own real assets. Avoid excessive leverage. And most of all, remain curious about what's actually shifting underneath.
It's the investors who know these patterns, not just the headlines, who will not only preserve wealth in this massive transition but who also will emerge stronger on the other side.
As always, I'd love to know what you think. How are you positioning for these changes? Do you already take the long view, and are you beginning to imagine portfolios that go beyond the typical U.S.-centric ones? Drop me a note.
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