The Crisis Decades

Building Wealth with Natural Capitalism

by Robert Warren | July 1, 2008

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When Abraham Lincoln spoke the words “Four score and seven years ago...,” he knew that it would strike a chord in his audience and become memorable. Lincoln, was of course, referring to the previous crisis in American history, the Revolutionary War, eighty seven years previous. At least seven historians have observed that major crisis within a society occur at regular intervals of approximately 80 to 100 years. In ancient Greece, this period of time was known as the saecula and measured the length of a long human life time.

William Strauss and Neil Howe in their book the Fourth Turning, describe the last 7 saecula from the middle ages to the present that have defined American history and predict a looming crisis in the coming decades. They argue that the reason 2005 resembles in many ways 1925 is that the generational make up of society is similar and that similar generations act in remarkably similar ways. In each saecula, society experiences approximately two decades of a “high,” an “awakening,” an “unraveling,” and finally a “crisis.” The crisis either marks the end of the society or prepares the society for a new beginning.

In 1945 Victory Day marked the beginning of the most recent American “high” decades.  The heroes of WWII, the GI generation, had returned. America had become a super power and the country embarked on a massive expansion of material and institutional infrastructure. Like natures springtime, American society was growing. The “high,” resulted in the birth of the Baby Boomers while conformity and a can do spirit reigned.

The Kennedy assassination in 1963 brought on the “awakening” decades. The Boomers questioned their parents' role as heroes, conformity, materialism, and the morality of war. Marginalized groups, like women, and minorities who were left out of the prosperity of the “high” began questioning the moral basis of society. The turbulence and victories of the anti-war movement, women's movement, and civil rights movement all provided society a dramatic counter point to the previous “high.” Like nature's summertime, the fruits of American society were maturing. The “awakening” resulted in the birth of the Gen X-ers. Individualism, spiritualism, concern for the marginalized of society, and stewardship for the environment reigned.
 
The Reagan Presidency in the early 1980's marked the beginning of the “unraveling” decades. The  Gen X-ers came of age with a pragmatic approach to life while the Boomers sold out to materialism. Regan and the following presidents spoke of reducing government's role, yet, they increased institutional complexity, military spending, and ran larger and larger deficits. The institutions and infrastructure created in the “high” and “awakening” began to show signs of wear and neglect. Society became more cynical. The gap between the rich and poor widened and Americas role in the world became marginalized. Like nature's fall, the fruits of American society were ripe for the picking. The “unraveling” resulted in the birth of the Millennial generation. Cynicism, mistrust in institutions, and personal achievement reigned.

As we stand  on the doorstep of the “crisis” decades we have a similar generational makeup that we had on the threshold of 1929, eighty years ago. The GI generation, the heroes of the last crisis, are passing away. The Boomers are entering old age and will provide the sage advice for the coming ordeal. The Gen X-ers are entering middle age and promise to provide pragmatic leadership. The Millenial generation entering our high schools and colleges are protected, scout like, and conformist. They will be placed on the front lines to become the future heroes of the next decades. Like nature's winter, we face a difficult period.

All societies go through periodic crisis. These periods require maximal effort from the society and its citizens. The excess from the previous three generations become cleansed from the system – old tired out institutions crumble and outdated infrastructure falls into disrepair. The society faces severe threats to its very existence and the outcome is uncertain. The crisis period can result in society's complete collapse or a renewal of spirit making way for the next “high” decades.

Strauss and Howe come to the conclusion that society is on the verge of the crisis decades through the lens of long term cycles of history that have a period of 80 to 100 years. Other authors observe shorter cyclic periods which can be shown in charts of stock and commodity markets.

Three valuation waves can be traced through the last century using the P/E ratios of the Dow Jones Industrial Average shown in the following graph from “Long Valuation Waves” by Adam Hamilton. In 1929, 1966, and 2000 the P/E ratios of the Dow Jones reached a peak. On average these peaks reached prices of 34X earnings over twice the historical average of 14X earnings.  Of course, in between these peaks the P/E ratio fell in massive stock market bears that lasted approximately 17 years each and ended with the P/E ratio of less than 7X earnings. If this trend continues, we can expect another 10 years of falling P/E ratios in the general markets.

 

The last P/E peak in 2000 was by far the largest of the last century with a P/E ratio of 44X earnings. Today we stand at approximately 23X earnings with another decade to go. From a higher than average peak we can expect a mean reversion to a lower than average trough. This is a loss of over 70% from today's P/E ratios.

Commodity markets inversely follow these long valuation waves. When stock market P/E ratios peak commodity prices are at their lowest. From the troughs, commodity prices rise for an average of 17 years to peak when the stock market is at its lowest valuation. Oil clearly shows this trend. In the fourth quarter of 2001 oil was under $20 per barrel. Since then the price has increased over 550% to over $130 per barrel today. If historical cycles are a reliable guide, we can expect this trend to continue up for another decade.

Overlaid on these two cyclical investigations is a plethora of analyses that show that the current economy is in shambles.  John Williams of shadowstats.com writes in his “Hyperinflation Special Report Issue 41” that that the US will be in a great depression (20% decline of GDP) as early as 2010.

Williams argues that the debit obligations of the US government are so large that the US economy is structurally bankrupt. He writes that if the government taxed 100% of personal income and corporate profits the US would still show an annual deficit. With this reality, the government and the Federal Reserve have only two choices, to default on all unfunded obligations or to inflate the money supply until the debt disappears. The latter has historically been the choice of functional governments.

The hyper-inflationary depression scenario painted by Williams places the US economy in an ever deepening crisis for the next decade. One landmark along the way is the total collapse of the dollar in which both physical and digital currency are in such short supply that barter will take over. A collapse of the world's reserve currency will have global implications such as food shortages, a cessation of commerce, and social unrest.

Similar to Strauss, Howe, and Hamilton, Williams attributes the coming events to long term economic, social, and political causes.  These authors view the situation as inevitable, predicable, and part of a larger cyclical historic pattern.

Using history as a guide I have divided the next two decades into quarters to paint a picture of the upcoming events. Certainly, I do not have a crystal ball and events could spiral out of control leading toward a complete societal collapse. Conversely, cooperation with a visionary leader could make the coming crisis mild and short.

• Chaos - Beginning in circa 2010 the US is poised to descend into a hyper-inflationary depression.  The entire society will be in a state of shock.  Blame for the myriad problems will be liberally thrown about.  Politicians and business leaders will attempt several solutions most of which will make matters worse. It's likely that the Boomers who still hold the reins of power will retreat to the values that marked them during the “Awakening” decades such as environmentalism, human rights, anti-war, and democratic expansion.  The Gen X-ers just moving into management positions will openly fight with the Boomers offering pragmatic alternatives. Boomers will favor a status quo of business over environment, restricted rights, military expansion, and expansion of executive powers.  The infighting and lack of a whole system approach will propel the society further into the depression.  Long standing institutions and infrastructure such as the dollar, social security, and the electric grid will come under intense stress and could fail.
• Acceptance – the society will begin to accept the situation moving from infighting toward cooperation partly due to the increased influence of the Millennial Generation. The Gen X-ers will see the practical utility of cooperation and the Boomers will embrace it as a core value. All the serious problems facing society will become widely recognized and whole systems solutions, which will address multiple problems, will bubble to the surface.  Societies mood and business values will be at their lowest point. Commodity prices and monetary inflation will be at their peak.
• Decision – a major event will catalyze the society and each generation will wholeheartedly launch into a cooperative endeavor. Each citizen will gladly offer her services to society and  there will be few who doubt the moral and practical necessity of the effort.  Times will still be tough but the mood will be improving. Commodity prices will begin to fall and inflation will subside.
• Resolution – a can do spirit will prevail. All available resources, institutions, and labor within the country will be geared up to resolve the crisis.  The Millennial Generation will be on the front lines fighting and dying for the cause. The Gen X-ers will be in full control of directing the country. The Boomers will support the cause through sacrifice and sage advice.

 

 

 

 

 

 

 

The USA has experienced and come through crisis decades in the past as these WWII posters show.  These decades have brought the society together in a common purpose and has transformed the country.

It is likely that the coming decades will be more severe than what has been experienced in the past. The country has far fewer resources and economic resilience.  The crisis comes just as global problems ranging from Peak Oil to Global Climate Change all come to a head. These decades will provide the crucible for a dramatic paradigm shift.

Natural capitalism is poised to provide the intellectual framework for this paradigm shift. It is a whole system engineering approach that promises to provide the needed solutions through a business lead transformation. Businesses, which are early adopters of the natural capitalism principles, will weather the crisis decades and emerge leaders in a transformed world. Investors who successfully identify these businesses and ride these revolutionary trends will build resilient, secure, wealth.

Next week, I will explore the first principle of natural capitalism.

 

Copyright © 2008 Robert Warren
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