Finding OPPORTUNITY In CRISIS

If you do not understand what is written about in this blog, then you may remain clueless about the coming events of the next dozen years; it all revolves around The Fourth Turning.  The Wall Street Journal said of the book, The Fourth Turning:  “One of the best efforts to give us an integrated vision of where we are going.”  

[NOTE:  long blog… print it out.]

President Donald Trump and (his primary strategist) Steve Bannon are integral to this story, perhaps somehow destined to be in their current positions of power… at least they believe this to be true.  Half of the people in the United States hate everything about the election of Donald Trump and half of the people love everything about it.  As a nation we are divided 50/50 and very few people walk the middle line between the two.

I want to begin by re-stating that I am not taking a political position on the recent U.S. election.  I’m one of those dreaded moderates and therefore willing to take a hard look at the viewpoints of all political parties or candidates.  Taking the middle road certainly eliminates a lot of fear and handwringing.  So, despite me sounding like a Democrat, one of my favorite Presidents was Republican George H. W. Bush (Bush-41) and this is because he was a moderate (and he didn’t attempt to destroy the environment).

Below is a snippet taken from the February 26, 2017 Wall Street Journal on “economic confidence.”  The euphoric Republican win in late 2016, with the economy near its peak high, is the total mirror image of late 2008 when the Democrats took office as the financial crisis was at its peak of turmoil:

I need to start this blog by saying that some recent events have me a bit concerned, such as President Trump’s February 7th 3:00 AM call to his (then) National Security Advisor, Mike Flynn, as to whether or not it is a strong Dollar or a weak Dollar that is good for the U.S. economy.  I was also concerned when I recently heard Trump say that Gross Domestic Product (GDP) was “below zero-percent” (which is literally impossible… it’s like saying that you got on the scale and that you weigh less than zero pounds) and again two weeks ago when he said that the un-employment rate is “currently at 42%” (>2x worse than the Great Depression).  It wasn’t too long ago that Trump seriously suggested that the U.S. could borrow lots of money from foreigners and then default on its debt, keeping the cash and then declaring a national bankruptcy.  And on the evening of February 22nd, he suggested that he really didn’t have tax or healthcare plans at all and would just leave it up to the Republican Congress to send him something to sign.

And then there is this:  A snippet taken from an article headline on Yahoo Finance on February 21, 2017.  Following President Bill Clinton’s earlier example, President Donald Trump plans to change the way that growth in the economy is calculated in order to make the U.S. economy look rosier during his term:

We seem to have entered a brave new world where literally anything that is repeated often enough becomes truth, regardless of its merits.  And a celebrity (or leader) is anyone that has been viewed repeatedly on our little screens and they are worshipped at a level never before seen.  They become our “friends” and we love them and want to be a part of their gang… and “when you’re a celebrity, they will let you do anything, you can grab…”  and they could even “go out and shoot someone and not lose any voters.”  I was not surprised to see Kid Rock recently announce that he will be running for the Michigan Senate seat in 2018… he’s certainly qualified.

?  With all that is now happening at hyper-speed, we must remember that, when viewing over a longer term, stocks represent partial ownership in corporations and their price moves on fundamentals & corporate earnings and not on politics or news or beliefs or emotions or fear or even Tweets or war.  Stocks have been recently moving up because of improved fundamentals and earnings.  Period.  Even when President Kennedy was assasinated, and I can tell you that this was terrible, the stock market went higher and higher because of strong fundamentals and strong earnings.  ?

In a recent blog, I wrote that one could not understand Donald Trump’s thinking without first understanding Steve Bannon.  It is equally impossible to understand Steve Bannon without understanding the book:  The Fourth Turning.

Donald Trump’s thinking was formed by three prolonged experiences:

1. Donald Trump was sent, by his father, to a very expensive and competitive military academy prep-school because of “bad behavior” (but he was never actually in the military since he obtained repeated draft deferments during the Vietnam War).
2. He grew into adulthood and beyond while attending a “prosperity church” where the continual message was that “Jesus wants you to be rich.”
3. He moved into older age by completely and totally embracing the teachings in the book:  The Fourth Turning, as interpreted by his own personal version of Oliver Cromwell:  Steve Bannon

The Fourth Turning is the attempt by two scholars, William Strauss and Neil Howe, to put a timeframe on cyclical world events, a sort of Generational Theory.  It stems from their observation that history tends to repeat (because humans never learn) and then using pattern recognition to organize these repeating historical events.  The theory is that world events constantly revolve around 80 year cycles (roughly the 80 year length of a typical human life) that can be broken into the 4 different 20 year periods (the 20 year length of time that it takes for a new generation to arrive on the scene) and then the 80 year cycle starts over again, as always.  The length of the cycles actually vary, but are generally close to 80 and 20 years and they fit the pattern fairly well.  The 20 year periods can be either mild or extreme, based on how we act and react.  Wars are sprinkled throughout the four periods (since humans naturally form into tribes that are war prone against “other” tribes) but wars are more likely during the CRISIS period.

The four 20 year long periods are:

1. HIGH… society functions as a group to create strong institutions and to restore order out of the chaos that was created by the destructive CRISIS (as in the Great Depression and WWII) that occurrred at the end of the prior 80 year cycle (IE, Greatest Generation).  This is the period of Spring.
2. AWAKENING… tired of the restraints, a new generation strives toward art and free thinking and the spirituality of the individual (IE, Hippie Generation.  Yes, it was great!).  This is the period of Summer.
3. UNRAVELING… society just wants to have fun while being sick of the extremes of the two prior periods; people generally become cynics and even have a weak civic ethic and poor manners (IE, Culture Wars of the 1980s and 1990s, the Non-voting Generation).  This is the period of Fall.
4. CRISIS… destruction of the cycle, usually involving a strong financial crisis and the destruction of public institutions, followed by war (IE, “War on Terror,” against radical Islamist factions).  This is the period of Winter, with Spring not too far behind.  CRISIS can be summarized as:  populism, nationalism, state-run authoritarianism and anger & fighting (and so enters Trump!).  According to the authors, we are currently in the first half of the CRISIS period, which began with the first of two financial crashes (in 2008 with another near the end) and it ends sometime around 2029 (and this fits in perfectly with my own market cycle timeline!).

It isn’t just Steve Bannon that believes this theory.  In the late 1990s, Democrat Vice-President Al Gore bought and sent a copy of the book, The Fourth Turning, to each member of the U.S. Congress.  The problem with Steve Bannon is that he seems to believe that he (Bannon) has the divine mission of driving us into a World War III CRISIS by breaking down political and economic alliances and by confronting the perceived enemy (Islam) head on and then bringing us back into a new HIGH period, rebuilding America into a new ‘Greatest Generation’ crafted out of the group effort of the current youth of America.  After all, Bannon is a self-pronounced Nationalist (which is why so many Neo-Nazis are attracted to him).  In a mid-2016 Vanity Fair article, Steve Bannon actually stated that Donald Trump was:  “a blunt instrument for us and I don’t even know whether he really gets it or not.”   Strauss and Howe themselves were looking for a “Gray Warrior Leader” and I wonder if Bannon, who is now the only Presidential-advisor in U.S. history to ever be placed on the all important National Security Council, somehow believes that he might be this catalyst of change since he is apparently already determining policy and strongly influencing Executive Orders.

Steve Bannon’s agenda seems to have five central themes and I’ll leave it up to the reader to determine the value of each point.  I don’t believe that I am wrong about any of this because it is based on his writings.

1. Each country in the world should move away from the Clinton globalization “New World Order” agenda and regain their national identities and take charge of their own economies and currencies.  He wants the European Union to break up and he wants “state’s rights” in the United States.  He wants France to be French and England to be English and Iran to be Persian and for the United States to be, well, what the U.S. was during the 1940s & 1950s.  He views corporations as “people” but the government itself is not “of the people,” it’s just a problem to be eliminated.
2. The United States should, once again, become the one great world power.  This involves securing borders and vetting who enters the United States as well as privatizing the prison system and increasing (and using) the strength of the military while building up nuclear weapons and arming our allies with nuclear weapons.  [I remember a couple of months back when Trump asked one of his foreign policy advisors to explain just exactly why the United States could not use nuclear weapons against its rivals(?!?).]
3. The Federal Government should be reduced (crushed) in order to increase the power of the individual… (but according to his own writings, he wants power for the individual as long as that individual becomes part of a new group that believes in the ideals of the Republican Party and with his view of the Christian religion.  Again, he wants the HIGH period of the 1940s and 1950s to return).  You crush the government by decreasing tax-receipts while running huge deficits and eliminating regulations.  Bannon wants to de-regulate everything including the activities of the banking and financial system (remember 2008?) and to eliminate minimum wages and to destroy any environmental regulation that might get in the way.
4. The biggest threat to the American system is “Radical-Islam” and it must be utterly destroyed.  He also views China and North Korea as future threats.  He feels that the “War on Terror” is the new WWIII and that it will eventually be as great as was WWII.  [In 1998, the authors of The Fourth Turning wrote that this war may climax during the mid-2020s… and again, strictly for investors reading this blog, war and a booming stock market often go together… go figure.]  The people in Bannon’s posse are likely to feel that “the brown bear from the north” (Russia) and Israel (with its capital being established in Jerusalem) will both be our long time allies in this battle, and that this cleansing will eventually move us from CRISIS to HIGH period.
5. He wants to eliminate the Federal Reserve and then return to the “Gold Standard” where the U.S. currency is backed by gold.  This sounds good in theory, but it would likely be impossible at this point since it would effectively halt the ability to stop both collapsing deflationary-depressions and over-heated hyper-inflations, which is why the Federal Reserve and other Central Banks were started in the first place.  I mean, despite the reader’s opinion, it was the Federal Reserve’s rapid liquidity infusion that prevented the Great Recession of 2008 from becoming the Second Great Depression of 2008 to today.  Also, we simply do not hold enough gold to back our currency, although the U.S. has larger stockpiles than does any other country.

Steve Bannon, quote originally taken from his Breitbart website:

Reuters headline on February 27, 2017, Donald Trump announced his budget priorities, centered around the military and borders and sending more troops to the Middle East:

Steve Bannon from a TV screenshot of his recent interview with The Hollywood Reporter:

?  Steve Bannon in a recent Daily Beast interview:  “I’m a Leninist.  Lenin wanted to destroy the state, and that’s my goal too.  I want to bring everything crashing down and destroy all of today’s establishment.”  ?

So, this is what I’m saying:  President Trump & Steve Bannon are apparently basing their political actions on the teaching that they read in a book.  What are some of the 1998 CRISIS prophesies (about today) that the Trump & Bannon duo might feel is their destiny to fulfill?  (Making them self-fulfilling prophesies that then become true!!!)  

These are the major predicted events that I gathered together from reading the book and I didn’t leave any out just because they did not fit; how many items below (again, from 1998) are already being fulfilled within the first two months of 2017?

1. A new alternative conservative political party will be brought into the White House.
2. Rather than “alleviate societal pressures” the new President will “aggravate in order to command the nation’s attention.”
3. There will be a breaking away from globalization in favor of nationalism and isolationism.
4. The new government will turn aggressively militaristic, including increasing nuclear weapons stockpiles.
5. The enemy will become “Radical Islam” and war will escalate.
6. There will be a cross-border trade war.
7. Infrastructure spending will be one of the main talking points.
8. There will be less emphasis on social programs and elder care and debt service.
9. Personal freedoms will be curtailed.
10. There will be an aggressive attempt to shut down the free-press and to label it as “fake.”
11. Criminal justice will become rough and “vagrants” will be rounded up and deported.
12. There will be social and cultural and civil rights distress.
13. There will be an attempt to squash protests.
14. Extremist groups will become emboldened.  [There have been an unprecedented 166 bomb threats against U.S. Jewish Community Centers in just the first 7 weeks of 2017.]
15. The environment will become a non-priority.
16. The new political party will become authoritarian.
17. Things could eventually progress to the point where there is an attempt to alter the U.S. Constitution and the Bill of Rights.

We need to remember that our investment portfolios are separate from our opinions and emotions.  The stock market does not take anything personally and it does not react to the same things that humans react to, or in the same way.  We have to be able to find OPPORTUNITY in CRISIS.  We also have to remember that, if the theory is correct, then a great new HIGH period will be built out of the resulting ashes of the CRISIS period.

Okay, time out for some needed humor:

A MARKET CYCLE viewpoint on the future of investments (it should be easy to understand if you take it one sentence at a time):

1. Throughout history, stocks generally do quite well for a (very roughly) 20 year Secular Bull period which is followed by a difficult (again, roughly) 10 year Secular Bear period.  (Note:  “Secular” simply means “long lasting” or “decades long.”)  We are currently nearer the beginning of a new 20-ish year stock Secular Bull market that likely began in 2011 which means that stocks may generally outperform for another dozen years.  A “Secular Stock Bull Market,” like now, simply means that bullish periods will generally be stronger than usual and that weak periods will be less weak… for a prolonged decade(s) long period.
2.  Commodities generally do poorly during the Secular periods when stocks are doing well.  Commodities began a new Secular Bear in 2011 which means that commodities may underperform stocks for another dozen years (except during occassional late-stage periods during stock cyclical-bull markets… like now).
3. Bonds have their own cycles that revolve around inflation and deflation, sort of the breathing in and then out of Mr. Market.  Fixed-rate bonds generally (unprofitably) inflate for roughly 20 years and then slowly (profitably) deflate for 30 years.  We are closer to the beginning of the unprofitable inflation stage, which likely started in early 2016, so fixed-rate bonds (like Treasuries) are likely to generally underperform for the next 20 years.  CAUTION:  As President Trump gains control of the Federal Reserve appointees, he could stack the deck in favor of members that would keep interest rates artificially low (as any real estate mogul would love) and this would keep the interest on government debt down and allow for cheaper infrastructure spending, but it could also cause eventual massive and dangerous hyper-inflation.
4. And of course, none of these cycles move in a straight line, they always zig-zag.  For example, 20 year long stock Secular Bull markets (like now) may contain many smaller cyclical bullish and bearish periods.  Between today and the year 2029, for instance, those who follow market cycles would expect several recessionary cyclical bear market periods within the confines of a generally rising stock market.  With each passing day, the next recession is one day closer rather than further away.  But no matter what gyrations happen between now and the end of this current Secular Bull market, stocks are likely to be much higher a dozen years from now.  I feel so strongly about this that I just purchased the domain name of:  “Dow80000”  

If investors can sidestep (and profit during) the difficult periods, then investment portfolios will be many times higher than with buy & hold.  This is MarketCycle Wealth Management’s focus:  maintaining profits during bear markets and economic-recessions and even depressions.  For long-term trend-followers, bad times can become good for investment portfolios… and extremely bad periods can become extremely good periods.  I expect the United States to generally lead all other countries in relative strength over the next dozen years.  Although home-based in the United States, MarketCycle has a number of overseas clients and holds its accounts under our advisory but with (international brokerage) Interactive Brokers as our clearing-house.  Although we can and do hold global assets in our client’s portfolios there is a real tangible benefit to foreign clients diversifying into U.S. Dollars in these accounts.

What is the major RISK that investors must watch out for under the current conditions?  If President Trump (wrongly) increases fiscal stimulus during this already overheating late-stage of the market cycle, it could cause the stock market to shoot UP parabolic.  One would definitely not want to leave those giant gains on the table, but if it overshoots all reasonable valuations, then it would likely correct the overbought conditions by falling downward rather than sliding sideways.  Parabolic stock markets do not correct themselves by moving sideways, they fall.  Investors must watch carefully and prepare accordingly if this begins to happen.

As investors, we have to constantly remember this famous quote: 

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CNBC on February 16, 2017:

Article by Stephen Aust, MarketCycle Wealth Management