The Next 1st Turning
Last Update: 3/10/2024
The world is in the end-stage of a 20+ year 4th turning within a larger 80 year long cycle, depicted below juxtaposed with the Dow Jones Industrial Average index (as a proxy for the entire equity market):
The latter half of this 80 year long cycle was “governed” by a financial regime specifically designed to exploit the prevailing demographic, geopolitical, and economic conditions. Two features characterized this regime:
- Globalization (from the 1980s to COVID in 2020) was a huge disinflationary force because material and labor were obtained at the cheapest possible sources, notably China.
- Financialization was also a huge disinflationary force because it built up a huge, sophisticated financial sector to minimize friction of money velocity (the turnover of capital accumulated by a large generation of Boomers in their prime years) in the economy.
Qualitatively, economic growth is a function of demographic growth, money supply (debt) growth, and productivity growth. By the 3rd Turning (the 1980s to 2000), global demographic growth was already on the decline. Productivity growth was insufficient to make up the difference. Money supply (debt), on the other hand, grew sharply with Financialization. The “buy now pay later” credit industry exploded in the Reagan 80s and brought future demand forward. Coupled with cheap products made possible by Globalization, consumption-led “economic growth” continued into the 90s, accompanied by breadth-taking asset bubbles (not all money supply went into consumption; a lot went into asset investment/speculation, — evidenced by a whopping 1400% gain in the Dow Jones Industrial Average).
Malfeasance is never far away when there is too much money sloshing around the financial system. The 4th Turning (2000) started with massive financial fraud in the cases of Enron, HealthSouth, WorldCom, Madoff, etc. Instead of letting a cleansing wash-out run its course, the Federal Reserve increased the amount of debt (money) and reduced the cost of debt (interest rates) to cut the recession short. “Recovery” resumed in 2002 with still too much money sloshing around the financial system. Sure enough, even more massive financial fraud surfaced in the form of the Global Financial Crisis in 2008. The Federal Reserve doubled down to again avoid a prolonged recession. Asset bubbles further grew alongside the mirage of uninterrupted “economic growth”.
Then came COVID in 2020, when the entire world shut down. Biden’s Treasury department went wild in handing out $6T to households and businesses (by issuing government debt ultimately funded by the Fed’s money printing) to restart the U.S. economy. In all, the money printing in the 4th Turning is nothing short of eye-popping:
Biden’s jaw-dropping fiscal stimulus unnaturally truncated the 2020 recession. But as I pointed out in my Macro View for 2024–2025, “unfinished business” will resume, and 2024–2025 will prove to be the “echo” of the 2020 recession:
So here we are, in the end-stage of the 4th Turning. The U.S. has come to the end of the road trying to further fabricate growth through even more and cheaper debt for the simple reason that the Nation cannot even afford to pay interest on the gargantuan debt already accumulated since the 80s:
Clearly, the U.S. has been living way beyond its means during the glory decades of Globalization and Financialization. The disinflationary tailwind, while enriching the already asset rich by fueling asset inflation, merely resulted in debt accumulation for the “buy now pay later” poor. By 2024, consumers are clearly tapped out (customers are telling McDonald’s it can’t keep passing inflation onto them anymore so corporate earnings contraction is neigh). Meanwhile, to keep up with social obligations, the federal government has gone exponentially into debt (see 700% increase in chart). The optics of “economic growth” is now revealed to be a mirage. The government is broke as wealth disparity keeps widening. The latter half of the current 80-year cycle has been, in retrospect, Gilded Age 2.0 (history rhymes, — no wonder the palpable social tension from declining sense of well-being and rising political stress):
If it offers any solace, the rest of the world is in exactly the same shape. They have all used debt to fuel their economic growth and now face the same piper to pay. All countries now have to inflate away their enormous debt overhang through significant currency debasement (stealth taxation in the form of financial repression). Competitive currency debasement thus creates a stealth currency war whereby each country has to maintain a relatively high interest rate (cost of capital) to keep the relative strength of its currency, — which stymies growth. With money velocity sharply dropping (Boomers’ capital sitting passively in T-bills), what lies ahead are decades of below-trend growth and sub-par profit around the world (aka depression, — albeit not of the 1930s flavor). Meanwhile, de-globalization and reshoring will introduce friction and increase costs in supply chains, — which is inflationary. As well, already existing sanctions, trade wars, and kinetic wars will continue to escalate in an amorphous multipolar world. These too are inflationary. Call this globally synchronized inflationary depression (“stagflation”) wave Tsunami #1. When the world is synchronized in a negative manner countless things can go wrong.
Tsunami #1 is formed by legacy. Its origin, nature, even magnitude is both understood and quantifiable, not the least here. The dynamics of Tsunami #1, already at work, look like this:
To gauge the timing of the end of the 4th Tuning, I turn to the linchpin for global financial markets and thus economic cycles, — the US Dollar. The latter 3 Turnings of the 80-year long cycle, juxtaposed with the US Dollar index this time, provides hints:
This long term USD chart shows two complete “USD smile” cycles. The first peak to trough (7-years half cycle) — from 1985 to 1992 — was driven by the Plaza Accord. The second peak to trough (8-years half cycle) — from 2002 to 2008 — was due to the Euro (launched in 1999) significantly outpacing the USD (a de-industrialized America) during “China rising”.
Idealized, the USD (reserve currency that dominates financial markets global and economic growth) oscillates in the following manner (via global capital flow and foreign exchange “fixing”):
We are now in purple state but haven’t peaked yet. USD will further strengthen as the Yen craters (from interest rate differential between the U.S. and Japan since 2023). Assets denominated in USD (e.g. stocks, bonds, commodities) will weaken with the strengthening USD but “harder” currencies (gold/BTC) will rise with the USD. Rising Eurodollar will cause EM recession from illiquidity. Meanwhile, long bond yields will rise in response to sticky inflation and irresponsible fiscal spending, expediting U.S. recession. This will plunge the world into the red state (synchronized global recession. Only after traversing the red state will the world get to the green state (the next 1st Turning). Rate cuts will be a feature of the red state, causing the US dollar to go down.
A declining USD is consistent with a secular bond bear market. As demonstrated in the UK gilt crisis, — when the bond market expressed disapproval of the government’s fiscal policies by sending yields higher and currency lower. That is to say, fiscal dominance eventually breaks the positive correlation between yields and currency (ala the USD/UST “doom loop” described in my Macro View for 2024–2025 ) created by monetary dominance. A “Lower USD = growth in emerging economies” set of dynamics will then prevail, sending the USD into a new trough as emerging economies outgrow the U.S. This is typically accompanied by a commodity super cycle (obviously inflationary).
Thus, the current global 4th Turning will end with the start (not trough) of the red state (USD peak), — because emerging economies will have already started “green shoots” (reshoring alone will create tremendous demand in India, Vietnam, Mexico, etc.) as the U.S. goes into a 7 year recession (Simon Hunt’s 6–7 depression years) with USD decline. Visually, I make the USD peak to be around 2028. But gut tells me it will happen sooner. Watch out for these potential triggers: A rising Yen from belated BOJ rate hikes and EU advances in Euro-based cryptos that will enhance global prevalence of the Euro.
While Tsunami #1 is already in motion, potentially exponential productivity growth is poised to materialize from breakthroughs in technologies like generative AI, machine language, cryptocurrencies, Web 3, 5G, quantum computing, material science etc. Integrated into every industry (especially biotech) and every aspect of daily life, these revolutionary technological advances will work in unison to wholesale disintermediate, completely replace existing business models, and transform life itself as described here, here, and here. Even before this productivity wave fully takes hold, vast supporting infrastructure — from upgraded semiconductor plants to massive distributed (and redundant) data centers, — will have to be built. This will start an industrial and manufacturing renaissance, thus a commodity super-cycle (including a huge jump in energy demand). Call this globally synchronized inflationary growth wave Tsunami #2. When the world is synchronized by way of the same positive driver, it is a zero-sum game of intense competition and not one of high tide lifts all boats.
Unlike Tsunami #1, Tsunami #2 is nascent, amorphous, and uncertain. Its formation will depend on legislations, adoption, availability of resources, and other factors. In my view, two factors are more determinant than all others: Energy and capital.
Let's first examine capital. Normally, low interest rate (cost of capital) is only possible in nations with savings. We are a nation of (debt financed) deficit spending both at the government and household levels. At our current high level of debt overhang, it’s only natural that our cost of capital stays elevated. The drop in interest rates described in the second paragraph will prove ephemeral once we exit the 2024–2025 recession, because structurally, we are now wired for high cost of capital and subdued bank lending. This is a headwind for incubating innovative technology companies that shape Tsunami #2.
Fortunately, there is a “dark pool” of global liquidity outside the purview of traditional banking:
The credit events that will punctuate the 2024 recession—think SVB 2.0, REITs, Blackstone, zombie corporations et al — with their genesis described here, will necessitate liquidity injection by the Fed to kickstart a new up-cycle of this global liquidity:
Don’t let the official QT narrative (“tapering” in the Money Printed by the Fed in the 3rd and 4th Turning chart) fool you. Most recently, Yellen’s QRA (Quarterly Refunding Announcement) of issuing an extraordinarily large amount of bills instead of coupons to fund federal deficit spending was a stealthy way of sucking up money market funds (the wealthy’s “cash”) and channeling that into the “dark pool” of liquidity to fund deficit spending on special government programs:
One such government program is, of course, the deceptively named “Inflation Reduction Act” which subsidized the physical construction of reshoring facilities such as semiconductor manufacturing plants:
So despite elevated cost of capital in the banking sector (transmission mechanism for the Fed’s monetary policies), there seems to be ample liquidity to fund the exponential age, — either through private channels like private equity and venture capital or through fiscal policies tapping private channels via instruments like RRP.
Now let’s examine energy. All human activities, after all, are forms of energy transformation. Crypto mining requires an enormous amount of energy. Building ever larger data centers to host ever more Big Data to drive AI requires a lot of energy. Quantum computing requires a lot of energy. In short, the exponential age will kick off a quantum leap in energy needs, just as we face global energy shortage from under-investment in the sector due to misguided green energy policies. So will energy shortage (or cost) be a show-stopper for the exponential age?
Fortunately, a shale renaissance — resurgence in the production of oil and natural gas from U.S. shale formations — is already underway. This renaissance is driven by technological advancements, combining hydraulic fracturing and horizontal drilling which will significantly increase the yield. And that is not all. On the heel of Germany's energy shortage due to dependence on Russia's oil and gas, global interest in nuclear energy is now renewed with urgency. Not only will this newfound abundance of energy fuel the exponential age of technological advances but the second order and 3rd order effects of the shale renaissance will optimize de-globalization and re-industrialization in the U.S.
So Tsunami #2 is not just about the exponential age of technological advances, but the shale (and nuclear) renaissance as well.
Earlier in this article, I estimated the current global 4th Turning will end around 2028, at the latest. USD peaking will be the confirmation. Tsunami #1 and Tsunami #2, both inflationary, will simultaneously be in force for about 7 years (half cycle to the USD trough) in the first half of the next 1st Turning. As previously mentioned, the emerging economies will already be on the rise while the U.S. finishes its recession (illiquidity and insolvency events from maturing “debt walls”, implosions of the ginormous derivative market, etc). It won't be until the USD troughs before the “green shoots” of dis-inflationary exponential productivity growth takes hold in the U.S. By around 2035 (beginning of the next 2nd Turning), we should see the U.S. out-innovate the rest of the world in the exponential age.
Even then, business spurred by the exponential age will prove too abrupt for conventional organizations to adapt so some, just like Polaroid Xerox, and Blockbuster of bygone technological paradigm shifts, will perish. On top of that, the previously mentioned “debt walls” faced by zombie corporations (as of this writing only the top 100 of the largest 500 companies are profitable and only the top 10 hold all the cash, the rest are debt laden) will force more into bankruptcy. This means the already bifurcated economy will get more so in the next half of the next 80-year cycle, even though spirit is “high”.
