The Fourth Turning Is Here: How to Trade the Regime Shift | U Got Options | Ep.10
Summary
Market Regime Shift: The guest frames a Fourth Turning environment with structurally higher inflation and rising rates, reversing decades of globalization, easy money, and falling discount rates.
Commodities Allocation: He favors pairing equities with commodities and commodity futures instead of bonds, citing superior diversification in an inflationary regime.
Precious Metals Focus: Gold and broader precious metals are highlighted as core strategic assets, with rising AUM, historical outperformance in inflationary eras, and a role as non-correlated diversifiers despite higher volatility.
Options/Tail Hedging: Emphasis on tail hedging, convexity, and volatility strategies (calibrated with the Kelly criterion) to mitigate drawdowns and create optionality for opportunistic risk-taking.
Defense Spending: Anticipation of increased defense spending amid greater geopolitical conflict risk, supported by historical precedents of large-scale rearmament and its investment implications.
60/40 Vulnerability: The traditional 60/40 portfolio is deemed ill-suited for this regime; asset pricing is driven more by discount rates than growth, with bonds and equities both vulnerable as refinancing rolls into higher rates.
Risk Management: Elevated valuations, potential market discontinuities, and political instability (including civil conflict risks) underscore the need for diversification, real assets, and robust hedging.
No Specific Tickers: The discussion did not pitch individual companies or tickers; focus remained on sectors, sub-industries, and macro themes.
Transcript
You got you got [music] your trade. You bet. You bet. You bet. Your money just got made. [music] >> Welcome to You Got Options, an exciting series right here on Top Traders Unplugged, hosted by none other than Jim Carson, one of the sharpest minds when it comes to understanding what's really driving market moves beneath the surface. [music] In this series, Jim brings his deep expertise and unique perspective honed from years of experience on the trading floor to candid conversations with some of the [music] brightest minds in the industry. Together, they unpack the shifting tides and underlying forces that move markets [music] and the opportunities they create. A quick reminder before we dive in. You got options is forformational and educational purposes only. None of the discussions you're about to hear [music] should be considered investment advice. As always, please do your own research and consult with a professional adviser before making any investment [music] decisions. Now, what makes this series truly special is that it's recorded right from the heart of the action on the trading floor of the SIBO. That means you might catch a little background buzz, phones ringing, traders shouting as Jim and his guests unpack realorld insights in [music] real time. We wouldn't have it any other way because this is as authentic as it gets. And with that, it's time to hear from those who live and breathe this complex corner of the markets. Here is your host, Jim Carson. [music] Hello and welcome back to You Got Options from the SIBO floor brought to you by Kai Media and Top Traders Unplugged. Today we get to talk to no other than Neil How the seminal offer of the fourth turning. uh I've talked about a lot of times obviously Neil uh is well known for it but we are in a regime change and in regime change we talk about how distributions change dramatically the value of options in that type of an environment as well as how to invest and allocate assets in a dramatically different environment. You're going to love this one. Enjoy. Yo, live it up. Don't settle for less. You got options. [music] Put your skills to the test. It's your call. Time to strike. Make your move. Grab the mic. Mic. >> You got You got You got options. [music] Execute your trade. You got You got the game. You got [music] You got You got options. You got options. Execute your trade. >> Hey, welcome back to You Got Options. I'm here with no other than the man himself, Neil Hal, uh author of The Fourth Turning. Uh Neil and I have an incredible uh you know, personal connection, which is pretty cool. A really good friend of mine, recent friend of mine, and investor. I won't name his name here for for confidentiality. Is a really good friend of Neil's. Uh they've known each other for I think 40 years or some amazing amount of time. I I believe Neil wrote some of the fourth turning, you know, on his couch at times, I've heard. Um but uh yeah, we've gotten to have dinner together a bunch of time. So wonderful to um finally kind of get you here uh in person uh so that the rest of the world can hear some of the awesome conversations we've had uh in person. So um Neil, I want to have you uh start off if you don't mind. uh a lot of people are familiar with your work uh you know some foundational work on on generations and uh kind of how they affect outcomes in markets but if you don't mind giving us an update about uh I know you put a a a newer book out uh in the last several years uh update on kind of how you see the timeline of uh kind of forth turning where do you think we are in it and speak a little bit about more generally what the fourth turning is for those that aren't as familiar with with the issues >> yeah Sam and and uh great to be here and uh very nice to be able to follow up uh you know after meeting you and talking to you at length in person. Um and I enjoy your show by the way. I learned from it uh you know being gradually becoming a little bit more market practitioner than I used to be. Um but I you know this whole idea of the fourth turning I mean it started out many many years ago actually with a with a co-author Bill Strauss and myself. We we started writing books on generational differences really not really about you know we we didn't start writing about historical cycles at all. Uh we were just interested in why it was that different generations uh when they come to power um are behave so totally differently than other generations. In other words, we were just interested in history and we're particularly interested in how some generations leave behind such different endowments. Right. So uh some generations are uh you know are are are very much m much civic builders uh and and doers you know teen players um like like the parents of the baby boomers right who took the nation through the great depression as as as coming of age and as young adults World War II uh build built up the Pax Americana the whole infrastructure of postwar America and um uh and than their kids, boomers, who were famously a generation of vision and values and I'm sure uh uh tore down more dams than they built. You know what I mean? We were always have a very different uh sense of themselves. And and what interested us is how these differences and and and clashes and these patterns go back all the way back to the 17th century. I mean, they go back to the very first colonists in America. And in fact, they go back in Anglo-American history. I mean, they go back way back in Europe. And we think a lot of the world now is uh manifesting some of these basic generational archetypes and contrasts. Now, that led to the idea that certain generations always follow other generations and that and that these kinds of things are related to some of the broader patterns we see in American history set. So for example uh this country has seen certainly since our colonial experience huge um uh almost cataclysmic upheavalss in the public sphere uh when we rebuild our political constitution, our economy, our infrastructure, our whole outward community life uh what about once every long human lifetime. I mean we did it in the uh the last quarter century of of the uh of the 1600s uh with the glorious revolution and all the various rebellions and you know Bacon's rebellion, King Phillips. It was a very violent and very um civically constructive period in colonial history. We did it again with the American Revolution. We did it again with the Civil War. We did it again with the Great Depression, the New Deal and World War II. What what uh this is part of a grand cycle and and and and considering this a long human lifetime is seasonal. You know about one generation per 20 years or so that leads to a almost seasonal idea that we go through this the spring, the summer, the fall and the winter. The winter is the fourth turning and the fourth turning is the season we are now in. Right. And it's no accident Sam that we have so many comparisons today to our experience today to the 1930s. In fact, there is no other decade. I mean, you can just check it out on engram to which uh parallels are more often drawn today from the 1930s. This is no accident. That was the last fourth turning. We're in the new for and and so so it is a it is a vision of cyclical motion of social moods in which one mood always drives the next with the coming of age of a new generation right with a new socialization experience and uh and and ultimately it it uh it gives us different kinds of of uh of trials to live through. Uh one of the most momentous in terms of public history, certainly political history uh and the history of great conflicts is the fourth turning and that was released actually in a in a book we wrote in 1991 called generations and uh I think we in that book we rebrought generations back into parliament. It had been gone for a while since the 1960s. In late60s, everyone talked about generations. That was a generation gap and the boomers and uh and you know the the Dean Rusk and LBJ and all those people who took us into the Vietnam War and all that stuff. But I think we brought it back and it was in that book by the way that we um that we identified and first talked about the the millennial generation. So that's uh our term uh and and and then later on we we wrote other books you know about generations and particularly in 1997 we wrote the fourth turning which really turned this idea of sequence of generations into more of what we think of a cycle of history right or a cycle of historical tendencies in modern societies which tend to think of themselves as progressive and very recently Sam Um, I wrote a book, uh, my my co-author, Bill Strauss, passed away about 10 years ago, but I I did write a book back in 2023 called The Fourth Turning is Here. Um, that book did very well. That was a New York Times bestseller for, you know, more than the summer uh, summer and fall. And and this idea, which originally was considered, uh, really out there has has really much wed the mainstream. Um and and and and I will say that that leads me to the final thing. We can talk more about it if you want and that Simon Schuster is now asked me to write another book in response to the single biggest question that I get right from the fourth turning is here and that is Neil I believe you. I think history is going in that way. What the hell can I do about it? How do I prepare my family? Where do I live? What do I do in markets? Right? In other words, uh that's kind of my my day job being a financial adviser, right? But what do I do in my market behavior? How do I manage my wealth? In other words, there are all kinds of questions, right? Practical questions. Uh which which people want to know. >> Yeah. I I think I mentioned this to you at some point, but I actually was came late to your work. Uh I I actually didn't read uh the fourth turning till 2022 and in 23 I read you know your new book but I had come to a lot of these same conclusions from a different perspective. >> Yeah. >> Uh which were really from a markets history perspective not a generational spe uh uh perspective but also taking politics and mixing politics in. And it was so amazing when I read your book. It's like uh I I found myself at points almost being like, "Yes, 100%. Yes, he gets it." Like it is this um it's such an elegant uh solution reality when you see things that fit so cleanly into the real world and the why. Um you know, at that moment how real and and true that is um and I think that's why you've had such great success and and people it's hard to deny >> what we're seeing at this point. I think another person who's looked at a little bit from market perspective is Ray Dallio, you know, I mean, he's talked a lot about the long debt cycle and God knows how many books he's come out with, but but he he talks about the same 80 to 90ear cyclicality. And I think though when you look at the roots of it, right? I mean, debt itself has no periodicity. You know what I mean? Debt itself is just an abstraction. It's just a dollar amount, right? But what gives history an actual periodicity, a tangible periodicity? >> Yeah. >> And that has to be related to the human life cycle. You know what I mean? That that it has to be. Yeah. Okay. >> I couldn't agree more. I couldn't agree more. And and that's what connects everything. Um >> at the end of the day, generations, as you as you state, um have their own learned history, right? And that learned history uh their relativism is based on their experience. Totally. >> So their generational uh experience is is uh is very different than than the other generations around them. And because the human life cycle I couldn't agree with you more uh we we keep repeating the same uh you know political realities. Now now the reality is as you know uh uh why do we constantly shift from one to the other? And uh I have a theory and we've talked about it, but that that at the end of the day there is a uh kind of this almost animal survival of the fittest uh you know uh driving force in humanity that's like an animal reality. It's just it's the nature if you will. And then there's the um the human truly unique human thing that is not natural which is the pursuit of fairness and justice and the human contract with one another. And I think those two things are the two forces that are kind of pushing us and pulling us. And there's a constant debate about which one's more important, how far one should be, you know, treated. And this is the left and the right. This is Socrates talked about this, right? Do you give the best violin players the best violins or do you give the the worst violin players the violins? And I think that is the the driving kind of animus that drives this. And I think you speak about this so eloquently, you know, >> Sam, it's interesting that uh that that very duality that you mentioned, right, between survival of the fittest and you know, you know, kind of reality show, survivor, all of that versus high ideals, making life kinder and nicer, right? >> Is itself a generational archetype. And and today we find coming of age and say not coming of age but coming into midlife is generation X who was always from the time they were throwing kids back in the late 60s and 70s when no one had any time to pay attention to them right because you know family life was going to hell basically back then. Um they were these notions of reality and survivor became building blocks of their pop culture and and later on I mean the the whole idea of you know just do it you know and and uh uh the the you know it works for me. I think that's my favorite that's my favorite Gen X motto. It works for me. Meaning I really don't care if it works for the rest of you but it works fine for me. Right. It is atomizing in some ways. Uh it is very pragmatic obviously. Uh and these are the people who are now uh the members of cabinets. I mean they are the people who are senators and congressmen now. They are beginning to set the tone for this highly pragmatic age right in which there are no rules. What are you talking about? Collective security, international law all this stuff. But many of these exers had parents who were the children of World War II and they were all believers in those high ideals. They believed in the UN. They believed in the peace marches. You know, many of them went down to Selma. You know, this they believed in the system. Um and uh you know even when we saw the recent validictory to uh to Dick Cheney uh we forget that that generation of which he was a member and he was you know most of his career people forget he was the ultimate systems guy. You know what I mean? He was just the ultimate nerd. He always kind of went along with you know the the the the the you know the CIA the state department decided this of course we have to do it. We got all these things. But my point is is that this these are generational contrasts and and it's shocking because we don't think about the fact that we all live on a generational diagonal. We should have known that that generation was going to replace boomers, right? Uh and they would be the dominant generation. their way of speaking, their way of thinking would inevitably, right, take its place in the sun. So, so I actually think of um and what I love about this conversation is the way I came to the same conclusions was really looking at interest rate cycles and these things are connected, right? Um basically anybody who was born, let's say heading into the into 1982, right? has only now for 40 years experienced one thing which is decreasing interest rates, supply side economics, increasing inequality, right? Globalization, you know, expansion, technological development as a function of lower interest rates. And this 40-year experience is very unique at least to this 80-year period, right? Um, and not surprisingly, those people are having a reaction to it, which is this isn't fair. This is unjust. They've been labor. They're when you're born and as you know, you know, you go to the workforce after high school, college, you've been labor. And the older generation has been capital, right? And so, you're more likely to feel, well, this isn't fair. I've been on the front end of this. The system is broken. It's all gone one way. And so this idea of fairness and reinforcing populism if you will is is really come to fruition as a function of that gener those generations coming in my opinion to uh political dominance and or or coming towards political dominance. Um does that jive with your thinking at this point? Like the core driver right now like I guess the thing that will ultimately drive and kick off what we're beginning to see which is a more market uh change. Um, I'd love to hear kind of like if that's tangential or no exactly with you, how you think about it. >> Look, I mean, I think, you know, this is when the the investors I deal with, you know, the investors, they they go to a financial adviser and the financial adviser says, "Oh, invest your money with me. I've looked at the last 40 years. I figured out all the correlations. I figured out we have mastered everything. We know how it works." And their fear is, "Wait a second. I don't think the next 10 years are going to be like the last 40 years. Right? And I think their suspicion is absolutely correct. All of these trends we've seen over the last 40 years toward greater inequality, toward uh uh democratization around the world, toward freer trade, uh toward free flow of capital, toward disarmament. I mean, you could also say uh collective security, all these things are all now moving in another direction, right? Toward autocracy, toward tariffs, toward industrial policy, toward and and and toward toward higher interest rates. And I will say this and I I this and we can get into this cuz this has monumental implications for investing and that is I think toward a trend instead of from lower interest rates and lower inflation. Higher interest rates higher inflation. And a point I make is that the climax of fourth turnings always results in higher inflation. And why? Because inflation is a great maze. And leaders may not think that at first, but when they're in power, it comes upon them like an epiphany. Inflation is a is not a problem in a crisis. It's a solution. It's a wonderful way to rearrange the card decks. You know what I mean? To absolutely reallocate wealth and income. The tax always comes in these scenarios, >> but but it always happens. And and in a crisis, every country raises resources. It needs to reallocate resources suddenly. It tries to do it through debt. It tries to do it through taxes. But inevitably, it has to do a lot. And I think this time we'll have to do more because of the amount of indebtedness, not just public sector indebtedness, but indebtedness to the world that America has. So I I think here we have it part of the solution. And and also to follow up on your other point, these younger generations today, uh if you look at just attitudes toward democracy, they don't care as much about democracy as older people because when they when people say democracy, older people think, oh my god, you know, great system, it's beautiful. It worked well for me. Uh but what younger people see is leaders who talk about everything and never do anything. And it's a basically a vetocracy. You get to keep your high prices on your homes. You get to keep markets super high, overvalued, so that when I invest, I'm not going to earn anything in the long run. But he reiterated his belief once again that he says, "Yeah, yeah, it's terrible that young people can't, you know, get mortgages for their houses. Housing is so expensive." He says, "On the other hand, I'm not going to do anything to undermine all these Americans who have high highriced homes, you know, >> but here's the thing. At some point, that becomes a zero sum game, right?" >> Right. >> So, I don't know your your reaction. >> Yeah. Yeah. I completely agree with you. Look, the connection between markets and inflation is I think it's important that everybody understands it this because it's the most important thing in finance. If money gets spent in a demand push economy, if we're spending money, if government is transferring money from the rich to the poor, or we're sending now the flow of money instead of capital now to people, the velocity of that money as economists would call it or the the the entry into the economy is is 100%. Whereas the velocity of money that goes to capital is approaches zero. The reason we haven't had inflation despite all of the spending that we've done is because it has been driven by Federal Reserve monetary policy which by definition is just sending money to capital. It is sending money to investments to pe that are owned by the rich and as those that money flows to them what do they do? Do they spend their money? No. They already have the minimum they need. Yeah. They'll spend it on luxury goods and yes we've seen the best performing asset for 40 years. >> That's keeping the economy going right now by the way. Yeah, >> 100%. But the reality is once populism takes hold and is a political structure assuming and this is a big assumption that I think we'll get to a little bit later that the political will is ultimately you know seen through which in a democracy historically it has been right we could go in theory to an authoritarian situation where we could suppress the will of the people for much much longer and that will build. Okay, that's my my thought thoughts on that. We'll get to that later, but the important part in a book bookmark that one we >> Yeah, we'll definitely come back to that. It's important. It's important in this regime. Um, but importantly, the will of the people broadly, if it is going to be politically fulfilled, that means those people are going to get more money, which means there's going to spend more money, which is a demandside economy. It can create a lot of real growth like uh not real in inflation terms but like actual demand growth uh like we saw in other periods but at the end of the day it drives dramatic inflation and the discount rate the price of the long-term bond which is driven by inflation is not even close the most important thing to to finance. Most people think it's economic growth. It's not. 1968 to82 great example inflation happens right? What happens to equities? We actually have greater GDP growth in real terms adjusted for inflation. 3.8% per year for 14 years. What happened to the uh to the market in real terms for the 14 years? Down 4% per year on average per year for 14 years. The GDP growth in real term in the last 40 years has been 2.3%. 1 a.5% lower yet we've seen 9% real per year uh you know uh growth of market. So assets are much more sensitive to the discount rate. What people are willing to pay for the earnings. Uh the liquidity that's driven by lower interest rates is what drives outcome for investments. Most people don't understand this. They people have have moved away from the bond market because they understand the connection between interest rates, the long bond and bonds. Obviously they just experienced that initial pain in 22. But very few people understand that the dominant force in the value of equities and assets is not growth. It's not GDP growth. It's actually interest rates. And um we can get into the whole whole piece, but important to note that is intrinsically tied to inequality and generational political demands for are we prioritizing one thing median outcomes or mean outcomes. And it sounds like a small thing. It's everything. Are we prioritizing to to the greatest GDP growth of the whole thing or at technological dev advancement and outcomes? Uh, are we giving the best violin players the best violins or are we thinking about um, you know, the med the the viol the weak violin players and them all having a little bit more fairness in the system and and and that really is how these markets are interconnect. It's through that interest rate mechanism and through that inflation that is so critical. >> Well, inflation really is you know there's been a lot of increased discussion recently about erodicity. You know what I mean? I I'm sure that you know it's the whole idea that the sum of all possible trajectories may be perfectly fair right but most Americans are on one trajectory and a few are on another right the whole idea that how the process takes place it's also a fundamental point about uh about you know investing in bets which are you know the expectational value is positive but the geometric outcome as you know is negative Well, now you now you just bring up my favorite topic, right, which is volatility and options, right? >> That is and you know, perfect perfect segue into >> we are for so fortunate in this fourth turning because in fourth turning we didn't have this great fortune to make bets in nonlinear ways. the public can actually position and and investors can position with much more liquidity in ways that take advantage of this erodicity that that take advantage of this nonlinearity. Um, and this is why 6040 may have worked okay last 40 years. There's been a controlled system, right? We're very kind of a natural free market system where we're optimizing to one thing that's deflationary and we can just respond with more and more monetary policy. Great. We're all cogs in a wheel. But as your generational work talks about the politics uh of each generation matter and when we prioritize fairness or equality or you know some level of fairness um then then those there's less control and there's more nonlinear outcomes and and things can change not just very quickly but for long periods of time in dramatic ways that are that seem impossible to imagine given a 40 years of of one. Well, I you know I geez there is so many different ways the conversation can go from here. Um I kind of hesitate. Uh the my first question is uh and I'm just going to shoot out some questions here because you can go with different ones but one is to whom are these uh uh option strategies available? you know, there there all kinds of, you know, you can go down the list of all the kinds of stuff that's out there being offered, right? All of these these uh these these these buffered outcome fund, you know what I mean? All of these different kinds of funds which um which which basically give you a guarantee on the bot on the downside and kind of, you know, sell the upside, right? And we know what that does. Uh in fact, now that I am in the we'll talk about that later. Now I'm actually in the business of of of investing and trading. Uh the first thing I look at in the morning is to look at where's the gamma in the overall market because you can now with all these different kind of systems out there you can kind of see what's going to happen if the mercury goes up a little bit or goes down a little bit. Are we in a stable zone or are we in an unstable zone? This did not used to be true. But now that we have this machine in place, Sam, right, which is doing what I just suggested, right? I mean, it's selling when you go up, it's buying when you go down. Uh, when you But but it it it lends itself to this discontinuity. You got to add too much and the whole thing falls away. And of course, then what have you got? The Fed, you got the Treasury, you've got, you know, we got all of our other things in place. That's one question I wanted to ask you. The other question um I think had to do with um uh uh I think the political right because I think you were getting at it. Let me let me just add by the way an economist who wrote nearly a century before Adam Smith and I I'm a huge fan of Adam Smith. I mean that was my um you know the the history of economic thought actually was my specialty in graduate school. So I was you know and I I I worked on all of them. I went to the marginalists and I you know I I read all of that stuff but there was one genius who wrote nearly a century before Adam Smith Rishar Kantiel he was a Frenchman and he wrote the definitive work on the impact of inflation as you know Smith and all the classical economists never wanted to talk about inflation this is why canes later blamed them he said you know they never actually understood the importance of price changes right on the market. Kantio talked about it all and he talked about it back in the 1600s and he was the one who said it's like it's like honey pouring out of a jar. He said you first you got to look at where the inflation is coming from. Who gets advantage first? And he he was the one for instance to notice why is there a lot of money in urban places and in rural places there's never any money. I live out in West Virginia and I'm telling you there's no money out here and no one here cares about, you know, the S&P 500, right? Um, but you see these enormous discontinuities. They really haven't changed since Kantino's time, but he actually, and I urge you, Sam, if you have not revisited, it's not a long book. It's much shorter than the Wealth of Nations. >> Yeah, definitely read the Wealth of Nations. Kanton is is is in my parlance. definitely haven't read uh Katon and and and should. Um but I I love the elevation of them and it just speaks to >> how these what we're talking about is is a tale as old as time. >> It is >> even though it's not as well understood by by most and hopefully you and I are helping educate and bring this and stand on the shoulder giants, right? Uh you know, elevate and bring those things to to the broader public. But but but like I said, do things still also change? like we're it's tails all the time but but now we have reflexive instruments like options >> right >> to uh to affect and bet on these outcomes in a much more precise way >> you know and and whether it's here at the SIBO or whether you're doing on commodities elsewhere using those options um allows for incredible impact for relatively low risk um and multi-dimensional space but you do highlight that they also have reflexive effects and so they can make some of these cycles and these things go on for longer play out in very unique kind of paths right if you will uh maybe in different speeds and different uh kind of uh you know in a different like again path in a sense and I don't think it ne necessarily means we're not going to get to a similar place eventually right um but but I do think that they they are playing increasing important roles Um I think we're living a really important moment right now in these four or five years. Most people don't realize this is critical. You and I talked about this but I want to highlight this for the audience. We have seen a tripling to quadrupling in the last three years of aum money invested in a series of things. And most people don't draw them together and see the connection. And I'm going to highlight what those are. But they're all correlated. And well, how are they correlated? They're correlated in the sense that they are noncorrelated assets. >> Yeah. >> Who's getting those assets? >> Precious metals tripling to quadrupling in value in three years. >> Who's getting those? Hedge funds have two and a halfx in AUM. By the way, from almost a steady state 2 trillion, they're now five, right? Uh uh and by the way, gold itself in price was pretty steady state until they took off. Um structured products or things like structured products like ETFs that do and buffers and all these other things that do these same things >> have gone from 500 billion to 2.3 trillion a four to 5x in three years from again a relatively steady state of growth, right? Um and then crypto you could argue were things again seen as non-correlated. Now whether they are non-correlated or not we could talk about that but the big idea here is that there is a perception of a need and these are early adopters. These are people listening to you and I thinking about these things saying, "Oh no, we need to do something." But this is with markets at all-time highs, >> right? >> These are people who saw 22 happen and like, "Oh my god, bonds aren't going to help me anymore. I need something else that maybe is going to help me." >> But these are people who have not yet seen what I believe and I think you believe is is a broader regime shift and that equity is not going to work either. Not the way we've seen in the way we think about it, right? Um so uh I I it's critical to see what's happening that's on the ground three years and that know that this is this is an area and these all these the growth the things that are working are all correlated in that sense and that you also by the way just if you look at markets the ultimate as you know the ultimate driver outcomes is supply and demand we've gone from a call it six trillion all those things I talked about were six maybe seven trillion dollars that's it in 2022 and here in 2026 Six. How much is all of that? Maybe about 20 23 depending on how you look at precious metals and what's above the ground and who owns it. >> Yeah. Well, the the total assets last thing I was going to say 500 trillion, you know, 500 trillion. Yeah. You've seen a tripling from from 7 and a half to 23. But but 23 relative to 500. What happens when the 500 really is a risk? and the 95% of allocation which is stocks, bonds, private equity, private credit, real estate, all the same stuff really assets. What happens when those things are finally at risk? Well, the door that and the amount of available things to invest in that are non-correlated are much smaller and a lot of them are still developing and some of them and sorry if I cut you off like hedge funds and structured products the evolve stuff we're talking about that is so critical in this positioning has reflexive effects and so we're looking at a complete market transformation as part of this forth turning and it's happening at the same time because we've developed a lot of these things they didn't exist amidst this time and now the adoption's happening. We're hitting a bit of a tipping point for what I would consider new technology and new new products and things not just hedge funds which have started by the way in 1970 and options who were started around 1970 and and that are now coming kind of for broad. >> Yeah, the these are look um very often the things you mentioned obviously the market itself has gone up. This has been a great time for markets and this is when we're talking about complaining the markets are you see the multiple expansion I mean by any well let's you know let's not get into Schiller's cape and all that but we all know that is the very expensive markets now overall I mean in terms of not global equities especially but US equities I mean honestly the rest of the world's a lot cheaper um you know relative to earnings or anything like that but it's very expensive so naturally people are going to gravitate toward these other things that are regarded as tail hedges, right? I mean, that's what people are going to want. Um, and the ultimate tail edge is political and uh you have a very optimistic uh outlook. Uh I I see something at that could be a little bit more of a discontinuity than you do. In other words, let me come back to what for turning always climax in conflict. I mean, real conflict. I'm talking about real conflict, right? >> Agreed. >> Um and uh which is all of the ones in our history and most other modern nations forth turning always involved a internal uh war, external war uh and uh a huge devaluation at least temporary of markets. In extremists they resulted in just the closing of markets. just closing, right? People don't remember what happened in World War I. A day or two after armies started marching, the markets just closed everywhere. And you'd be lucky at the end of markets reopen. And because you might be a member of a different country, right? I mean, if you're part of the Austrian Empire, it didn't exist. If you were part of Zarus Prussia, it was no longer there. I mean, what happened to your assets? Interestingly enough, uh after in the early 1990s, uh many Eastern Europeans who come to the United States and lost all of their assets during World War II, the Warsaw Pact fell. These new democratic governments took power and and there were all these people writing back to these new regimes, these new because they set up markets again, right? Free markets. And they say, "My greatgrandfather owned a piece of property near Budapest. Do I have a I mean, think of how pathetic that is. Maybe the people who own stuff today, maybe it will be your grandchildren writing letters to some new regime. I I mean, I don't want to be able to warn this to you, Sam, but you need to realize that it's not always just everything doesn't end and buy the dip. >> Yeah. And by the way, nobody's called me the greatest like optimist. So, so I think we know where we are here. Um, I love that you're highlighting again the big idea here is we are embedded in this recency bias. Nobody looks like a track record longer than 10 20 years. >> Well, also also survivor bias survivorship. We're the most prosperous economy on earth. So, of course, we're talking right 100%. I I I 100% agree. >> 6040 people don't realize didn't exist in 1988. It came about because it worked for 40 years. But why did it work? Does anybody ask that question? It didn't work. If you look at 6040 for 12, just 125 years, never mind the 250, 500, the thousands of years we're talking about, it doesn't work. There's no diversification benefit. Literally, the sharp ratio of the last 125 years of stocks is.35 and a 60/40 portfolio is.37. There's really zero diversification benefit of stocks and bonds >> and and importantly this idea that this is how you invest which is just conventional wisdom at this point >> for what is the most important other than maybe your health the most important thing that everybody does people are just following they're lemmings following something that only worked because of recency bias so I think it's critical to understand that what you're highlighting is not just that this is recency bias but what is possible as opposed to this control little system we've been in is dramatically different than what most people are willing to come to terms with. >> Well, and and and the impact of of policies which nations will enact when they're when the people demand them, you know, it's funny when whenever I talk to people about the long-term success record of equities, you know, and to take them through US history sort of inflation adjusted total total returns, right? total real returns inflation adjusted. You have these crashes and long periods of nothing happening. I mean, >> I'm going to give you a statistic here. >> Hold on, hold on a second. 1929 to 1949 would be one. Uh, first of all, you had to underdo a 77% decline in real terms and then you had to go 20 years before you got your money back. But it's interesting. So, after I go through them and there was another one, World War I, there's another great one that started in the late 60s, lasted through the 80s. And you but here's the thing and then and then all these people get really nervous and I say but but I'm not just dissing equities. Take a look at bonds. >> Correct. >> If you had bought a 10-year you know bond portfolio sort of 10year maturity US treasuries just before Pearl Harbor when the interest rate was down around you know 1 point something um you know we still had deflation right up. We're still in the great depression really up until Pearl Harbor. If you had bought that and then my question is how many years would you have to wait before you just got your money back with with inflation? You would have to wait till 1987. That's 47 years. And and you say talk about that. Imagine a real stagnation for 47 years. And by the way, I think a lot of economists would say that when you look at Jeremy Seagull's wonderful thing about, you know, bond, you know, stocks do so much better than bonds. A lot of that was due to the half century of financial repression that we had in place in America. To reiterate what you're saying, I love that you know those numbers because most people don't. The reason passive investing and 6040 exists. By the way, it's gospel. Nobody It's like blasphemy to say this is not the way to invest. But the reason that it is adopted and fully like and it didn't exist before 1980 and you highlight these but I want to like reiterate is because from 1900 to 1982 actually where interest rate peaked that's why I'm drawing that line there. >> Yeah. from 19008 192 82 years you had three I want to reiterate three 20 year two decade periods were 60 40 what's considered the way to invest now made 0% 0% for 20 years three of them 60 of the 82 years if you invested each one of them you 0% 1900 to 1920, 1929 to 1949, 1962 to 1982. >> Yeah, clearly 70s would have been terrible. >> How in the world, if you're sitting in 1982, talk about recency bias now. If you're sitting in 1982, how in the world is anybody going to say, "Yes, you buy and hold for the long run, or better yet, we're going to buy and hold stocks and we're going to pair it with bonds." Nobody did it. The Dow Jones was created a hundred years ago, 60 years before that. So, we had passive investing as a concept. Why do you think nobody did it? It didn't work. So, Sam, one one new idea uh this is something we're doing with our fund. Um and that is getting rid of that pairing uh to the extent that we're long net equities. We're not pairing it with bonds. If anything, we're short certain kinds of bonds. what we're doing is pairing up it with commodities and commodity futures. So this is the missing great leg that has always been there by the way and people have looked at the behavior of commodity futures since the late 19th century. Uh this is something that I'm trying to revivify, bring back to life. Uh but but anyway, go ahead. >> Yeah, I couldn't agree more. Three years ago, we very publicly actually four almost four years ago now said gold is going to be the best performing asset for the next 1015 years. This is when it was literally and buy it with calls and commodities not just not just precious metals. I'm I'm just saying. Yeah. Okay. >> Agreed. Uh commodities writ large and strategic assets, things of true value, right? Um I couldn't agree more. The thing I would add to that though, or maybe kind of to be pmical, it's a great diversifier. >> But the thing don't do anymore is diversify. >> Uh they don't they don't think about risk because they haven't had to. It's controlled system. But there are ways we talked about a 0.35.3C 7 sharp for 60 40 over 125 years. There are ways that are not that complicated that are basic academic research. Diversification using long vault and convexity to rebalance for to prove geometric returns, value investing versus growth. All of these things are wellknown, well doumented ways to improve riskadjusted returns. You can get to sharps and higher which seem almost crazy to people by following these principles, not by having like just some incredible alpha. Gold or and commodities broadly do need to be part of that stool. they need to be one of the legs. It is a diversifier. I will highlight though precious metals themselves have a ton of volatility. Uh in the 60s and 70s the best performing asset was precious metals, gold particular but it was also the most volatile asset and so agreed it should be part of >> but here's the thing. It doesn't matter how volatile it is. If you have a lot of volatile assets and they're not correlated to each other, it doesn't matter. What you need to do is to is to make sure you have enough of each. You need to do something to reduce the volatility drag on your portfolio. And if you hold enough of them, >> uh you're good. And but you need >> any we you know what I'm talking about. >> Yeah, agree. But diversification, which everybody talks about, but they're like then diversify to 500 stocks and 500 bonds. Um is is a thing that I think uh is is going to become more a part of broad parlance. Risk management. people throw it around but nobody even knows what the sharp ratio is of the assets they own or the portfolios they own. So that is the key and at the core of that and this is what I do and what I think a big part of what you're doing is using also things that are nonlinear like options to really help shape a portfolio that takes advantage of that nonlinearity >> and that non-correlation that's so critical. Uh as we approach the end here Neil >> tell me a little bit more about what you're doing with in your ETF. I'd love to give you a chance to talk about how other than the commodity piece which you already highlighted, what are the other things you're doing? Do you use options and and and how what are the other things that you use and what do you >> we do? So this this part of the you know remember the answer the question that I said is people said what should I do? So one of the things I'm writing a new book right uh but the other thing is um with with hedgei that I work for I started an ETF uh it's called a hedgei fourth turning so hft uh and you know the great thing about what I love about ETFs is anyone can invest in it you know what I mean you don't have to be a qualified this or okay so >> and it's basically three basic premises one is I just talked about instead of pairing our net equity position with uh by By the way, it's a 15050 fund. So, we can't go short as well as the long, but we pair our net long equities with commodities, commodity, futures rather than bonds. So, number one difference, right? >> Yep. >> The second is is that we all of our actual equity investments are forth turning themes. Things that we will do we think will do good. I mean this would be uh obviously national defense, personal security, uh energy, a lot of industry, robotics, uh uh completely retooling a health care system. Uh to some extent when it comes to more things like um uh uh a lot of the weirder highly leveraged consumers and financials were probably short. Uh here's one thing you have to understand, Sam, is that for the last five quarters, America has had a net national savings rate of exactly zero. Outside of a severe recession that's never happened to us before, America is simply half going to move to saving more and consuming less. And and and every time there's pressure on the dollar, this just comes again, this reality back. America has got to have to fundamentally change its orientation. Um I think in a weird way uh Donald Trump may be actually part of that uh in its own strange fashion. But but I do think um you know I say strange fashion because obviously we got the deficit to worry about when it comes to disabling too. But I but I do think this is inevitable. It doesn't matter who our leadership is. We're going to have to move that direction and then and then that influences the kind of sectors we're in. And then finally, and this is the part that I think you'd be interested, and that is we're built for heavy weather, meaning that we believe strongly believe in the optionality of cash along with Warren Buffett. So we are, you know, to some extent cash valuations remain very high. Uh we do do uh tail edging. That's where the options come in. Uh and that is very carefully um uh uh calibrated according to the Kelly criterion. So you'd be familiar with that. So we we wage our bets very carefully, right? And we optimize them. Uh and it's really helped us. I mean it helped us two days ago, right? I mean it was wonderful. So >> So we do that and um and uh and we also keep our beta low. I mean we're we're we're low beta on our on our you know on our launch. >> Yep. And and again, I've talked about this in other venues here with David Dredge on the same podcast, but that V people look at it like as they have in the past and say, "Well, this this thing makes 0% over the long run. Why would I own it?" And they're missing the big point, which is it's like taking the brakes on your car >> and say, "Man, these brakes make me go slow. Got to throw them out of the car." >> No, no, they don't sit on the brakes and gas at the same time either. That That's not how brakes work. It's brakes, gas. It's control around the turns. allows you to be aggressive at the right times, allows you to not only not fly off the tracks, but allows you to take risk when risk and opportunities present themselves in different ways. So, >> yeah, >> have in your portfolio. That's [music] what, you know, using options and hedges are all about. >> Two last things and we're going to we're run out of time here so we're going to hit it quick, but these are big ideas so dive in. One, [music] it's one thing to say, okay, the fourth turning is here and the big ideas which are so valuable over a decade, but do you have signal? How how will we know that it's it's imminent or this year or next year that the tough part here, right, is the timing. So are historically since you since you have such a lens on maybe it's not one year or six months, but how do you gauge where we are? Because again, it's not just a life cycle per se. there's some other effects and things playing in and how would we know or how would we have a good sense when the probabilities start really drifting to our favor and how close are we? You know, it's funny. I I've actually been thinking about that a lot because I'm writing about it now because I'm now getting into practicalities, right? Um I do think that uh an extremely overvalued market is obviously a dangerous signal. It's not no one should time their trades on that. Let me be clear. But you need to be aware that we are looking, you know, when I look at at at our ATF for instance, I'm looking at a 10 to 15 year horizon. So, you know, I'm looking for something that's going to carry you through, but you should be aware of what the historical record is at these valuations and what your likely 10-year return is on just equities long, right? Is probably not going to be terribly good. And I would say if I were to be a little bit more dramatic about it, it may not be very good. And it may include some huge declines. I mean, if you look at these plateaus in the past, they're not plateaus. They're plateaus that include huge declines in recovery. So, um, I would say, but obviously the market is unpredictable at any given time. And you know this better than anyone, Sam. Uh, there are an equal number of people who think the market's going to go higher as go lower, right? So, uh, the market is to that extent unpredictable. I would say that when it comes to the other elements of the fourth turning we talk about such as conflict I would actually say that when uh particularly in terms of geop geopolitics when America seems to be at the point that it's really repairing stuff and getting stuff back in order I think that becomes a forcing moment for adversaries. Uh uh I'm I'm serious about that. When when it looks like things are still going to hell, >> uh it's there's no window closing for China. No window closing for Putin. Just let it keep going. >> Almost like a almost like a caged, you know, cornered animal is when things really conflict in a >> sense. We've seen this in the past and I like to bring up historical examples of when this happened, you know. Yeah. >> Yeah. Go ahead. Finish. Yeah. Finish that thought, please. But but I but I and I do think and I think that the success of coming out of this very often depends upon the investments we make early. >> Y >> um you know the the the classic one I like to uh talk about is when uh right after the fall of France is when um the mood in America began to change hugely. You know we were no longer an isolationist nation. the Republican party instead of running someone like Lindberg that ran Wendell Wilka who was an internationalist who actually agreed with FDR it was important we had to resupply the arsenal of democracy right that's how much the mood had suddenly changed and and FDR went to Congress in July the next month and he proposed more than doubling the size of the of the US Navy and this included you know the the Iowa class battleships and included all the Essex class aircraft carriers that would later dominate in the Pacific in 1940 43 and 1944 that bill which is the largest by far the largest appropriations weapons appropriations in American history as a shear of GDP went through Congress with not one opposing vote that was in July of 19 member that was in July of 1940 that was more than a year before Pearl Harbor but here's the thing Sam if we had not made that investment right we the war in the Pacific would have gone on for at least another couple of years. It we we don't think about and there there are other great examples I like to bring up of this, but these are moments actually in our history we really have to think ahead, not just we're so much into the headlines right now. We're not thinking of where these things are likely to go. >> I I couldn't agree more or two quick thoughts and then I want to ask you one last quick question, but these are the thoughts I have on what you're saying. uh you know how you said uh I'm not being bearish enough or what I think I'm gonna say the same thing back to you now. Um so so one to your thought of uh market valuations and historic forward and you kind of are like yeah K Schiller whatever the reason Schiller matters and why he ultimately will be proven correct that most people don't understand that people like oh but there's such a lag and it's so in indecisive of when the reason there's a lag the reason we haven't seen adjustment as interest rates have gone higher yet is because people obviously when interest rates are zero everyone is going to refinance. Markets operate on supply and demand. Until people need to refinance at higher rates, the higher rates don't matter, >> right? >> And everybody refinance in 2020 2021. Do you know what the average duration is of the debt taken in Jan 2021? >> Five to five to eight years. >> Yeah. So, it's beginning to bit roll over. Yeah. >> So, the interest rate and its effect on the total valuation has a lag for that reason. And guess what? Here we are on the doorstep. So, you want signals? That's a signal for me. >> Yeah, I I I I agree with you. And by by the way, I will say this just in defense of uh of Bob Schiller, and that is uh uh Burton Malik uh you know, I think he's he's I don't know, they're they're both getting on. I think, you know, he's his late 80s. Uh but Burton Mal who was very famous as you know, along with Eugene FM as one of the great titans of efficient market theory, right? which is that there is no such thing, you know, you can never predict anything, right? Um I what was his book? Uh a random walk down wall street 1973. It was a long time ago, but a classic, right? A classic in the markets. >> So he wrote just last fall in the New York Times, and this is his admission. He says, you know, it actually is true that in times when the valuations are elevated, uh investors tend not to do well over the next several years. And I consider that to be my god, why didn't you say that years ago? >> But the reason too that it's going to be worse than you said is not just because the interest rate effect and how I do believe K Schiller like or Schiller the Schiller index is >> uh is correct by the way and most people like oh it can't be whatever. >> I think the other part that people also poo poo price to sales like oh come on profit margins have changed forever. I think that people a lot of people don't thing that people don't realize is profit margins themselves are highly correlated over long periods of time to interest rates. So, not only are we, if you look at it price to earnings ratio, yes, it's records or close to records >> relative to interest rates, even worse, >> but when you really connect it to what price to sales, it is so far off the charts. And the reason is because profit margins are at records at exactly the time, not surprisingly, that interest rates are starting to kind of break out the other way. And that's a critical thing for people to understand. So from a markets perspective, I know I'm out in the fringe and if you're, you know, you're out on the tail, I'm even further out on the tail in that regard. So, so I think important to note that. And then last thing, again, we got to we got to button this up. I could go for two hours with you, Neil. This is wonderful. Um, is uh the big question for me and and I don't know how we could do this service in like a at two or three minutes, but we have to. Is it possible that this could lead to pure authoritarianism, right? That the will of the people, which is what the generational part, this is kind of the the thing I alluded to earlier in the conversation, can be circumvented by power and is is that something in your your view that could in theory, despite it being an unlikely outcome, I >> well that change. In my most recent book, I do talk about the threat of of civil war and that would just include conflict that just simply brings down the politics in America, makes us just dysfunctional, a failed state in some way. Uh as well as something that would really involve two sides, you know, ultimately uh through escalation and threats. You know how these things happen. Um and just to remind people just historically, no one ever thinks civil war is going to happen in their own country. uh Barbara Walter, who's actually the one of the world's experts on civil wars, has actually interviewed survivors of civil wars all over the country, you know, from Myanmar to to to uh uh to Rwanda. And she says she interviews these people and they all say the same thing. We never saw it coming. and and uh uh uh Henry James who who wrote his autobiography late in life. He was a he was 21 22 years old in Washington DC in 19 in 1861. He was right there in the capital. He knew everything, right? I mean his father was a diplomat after all. And he and he later wrote in his his biography said absolutely no one saw it coming. I mean this was this was after the election of Lincoln. He said no one saw it coming. He said, "And and anyone who did is lying." [laughter] >> Well, and and yeah, >> and but my point my point is simply that that this will be a conflict. Now, your question is could authoritarianism, in other words, could you simply move from being a republic to an empire with no conflict in between? And I actually in my new book, I actually address that question because it occurred to me. >> I love I love the little cliffhanger. You'll have to go read the book. >> Well, [laughter] well, I do. And I and I go through all the examples, but let me just give you the the the the quick answer is that every republic, and I'm talking about, you know, Venice and Carthage and Rome and, you know, you just go through all the great names, the Dutch Republic, all of the great republics of history, including those that the founding fathers thought about when they were designing our constitution, they all fell on either two ways, foreign conquest or civil war. None of them simply died with a signature. You know what I mean? It never happens that way. >> Well, Neil, what a wonderful do again. We could do two hours. Maybe we'll do it again with you and and revisit uh in a year or so. But but incredible having you on here. uh no better environment to trade in distributions and look for kind of tail convex instruments and and um hopefully we're we've we've been again like I said on the shoulders of other giants to help kind of spread the word about kind of where we are and where we're going. Um Neil, thank you so much for your time today and look forward to to talking again. All right. All right. Be well. Take care. [music] Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's [music] episode, the best way to stay updated is to go on over to your favorite podcast platform and follow the show so [music] that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review. [music] It only takes a minute and it's the best way to show us you love the podcast. 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The Fourth Turning Is Here: How to Trade the Regime Shift | U Got Options | Ep.10
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You got you got [music] your trade. You bet. You bet. You bet. Your money just got made. [music] >> Welcome to You Got Options, an exciting series right here on Top Traders Unplugged, hosted by none other than Jim Carson, one of the sharpest minds when it comes to understanding what's really driving market moves beneath the surface. [music] In this series, Jim brings his deep expertise and unique perspective honed from years of experience on the trading floor to candid conversations with some of the [music] brightest minds in the industry. Together, they unpack the shifting tides and underlying forces that move markets [music] and the opportunities they create. A quick reminder before we dive in. You got options is forformational and educational purposes only. None of the discussions you're about to hear [music] should be considered investment advice. As always, please do your own research and consult with a professional adviser before making any investment [music] decisions. Now, what makes this series truly special is that it's recorded right from the heart of the action on the trading floor of the SIBO. That means you might catch a little background buzz, phones ringing, traders shouting as Jim and his guests unpack realorld insights in [music] real time. We wouldn't have it any other way because this is as authentic as it gets. And with that, it's time to hear from those who live and breathe this complex corner of the markets. Here is your host, Jim Carson. [music] Hello and welcome back to You Got Options from the SIBO floor brought to you by Kai Media and Top Traders Unplugged. Today we get to talk to no other than Neil How the seminal offer of the fourth turning. uh I've talked about a lot of times obviously Neil uh is well known for it but we are in a regime change and in regime change we talk about how distributions change dramatically the value of options in that type of an environment as well as how to invest and allocate assets in a dramatically different environment. You're going to love this one. Enjoy. Yo, live it up. Don't settle for less. You got options. [music] Put your skills to the test. It's your call. Time to strike. Make your move. Grab the mic. Mic. >> You got You got You got options. [music] Execute your trade. You got You got the game. You got [music] You got You got options. You got options. Execute your trade. >> Hey, welcome back to You Got Options. I'm here with no other than the man himself, Neil Hal, uh author of The Fourth Turning. Uh Neil and I have an incredible uh you know, personal connection, which is pretty cool. A really good friend of mine, recent friend of mine, and investor. I won't name his name here for for confidentiality. Is a really good friend of Neil's. Uh they've known each other for I think 40 years or some amazing amount of time. I I believe Neil wrote some of the fourth turning, you know, on his couch at times, I've heard. Um but uh yeah, we've gotten to have dinner together a bunch of time. So wonderful to um finally kind of get you here uh in person uh so that the rest of the world can hear some of the awesome conversations we've had uh in person. So um Neil, I want to have you uh start off if you don't mind. uh a lot of people are familiar with your work uh you know some foundational work on on generations and uh kind of how they affect outcomes in markets but if you don't mind giving us an update about uh I know you put a a a newer book out uh in the last several years uh update on kind of how you see the timeline of uh kind of forth turning where do you think we are in it and speak a little bit about more generally what the fourth turning is for those that aren't as familiar with with the issues >> yeah Sam and and uh great to be here and uh very nice to be able to follow up uh you know after meeting you and talking to you at length in person. Um and I enjoy your show by the way. I learned from it uh you know being gradually becoming a little bit more market practitioner than I used to be. Um but I you know this whole idea of the fourth turning I mean it started out many many years ago actually with a with a co-author Bill Strauss and myself. We we started writing books on generational differences really not really about you know we we didn't start writing about historical cycles at all. Uh we were just interested in why it was that different generations uh when they come to power um are behave so totally differently than other generations. In other words, we were just interested in history and we're particularly interested in how some generations leave behind such different endowments. Right. So uh some generations are uh you know are are are very much m much civic builders uh and and doers you know teen players um like like the parents of the baby boomers right who took the nation through the great depression as as as coming of age and as young adults World War II uh build built up the Pax Americana the whole infrastructure of postwar America and um uh and than their kids, boomers, who were famously a generation of vision and values and I'm sure uh uh tore down more dams than they built. You know what I mean? We were always have a very different uh sense of themselves. And and what interested us is how these differences and and and clashes and these patterns go back all the way back to the 17th century. I mean, they go back to the very first colonists in America. And in fact, they go back in Anglo-American history. I mean, they go back way back in Europe. And we think a lot of the world now is uh manifesting some of these basic generational archetypes and contrasts. Now, that led to the idea that certain generations always follow other generations and that and that these kinds of things are related to some of the broader patterns we see in American history set. So for example uh this country has seen certainly since our colonial experience huge um uh almost cataclysmic upheavalss in the public sphere uh when we rebuild our political constitution, our economy, our infrastructure, our whole outward community life uh what about once every long human lifetime. I mean we did it in the uh the last quarter century of of the uh of the 1600s uh with the glorious revolution and all the various rebellions and you know Bacon's rebellion, King Phillips. It was a very violent and very um civically constructive period in colonial history. We did it again with the American Revolution. We did it again with the Civil War. We did it again with the Great Depression, the New Deal and World War II. What what uh this is part of a grand cycle and and and and considering this a long human lifetime is seasonal. You know about one generation per 20 years or so that leads to a almost seasonal idea that we go through this the spring, the summer, the fall and the winter. The winter is the fourth turning and the fourth turning is the season we are now in. Right. And it's no accident Sam that we have so many comparisons today to our experience today to the 1930s. In fact, there is no other decade. I mean, you can just check it out on engram to which uh parallels are more often drawn today from the 1930s. This is no accident. That was the last fourth turning. We're in the new for and and so so it is a it is a vision of cyclical motion of social moods in which one mood always drives the next with the coming of age of a new generation right with a new socialization experience and uh and and ultimately it it uh it gives us different kinds of of uh of trials to live through. Uh one of the most momentous in terms of public history, certainly political history uh and the history of great conflicts is the fourth turning and that was released actually in a in a book we wrote in 1991 called generations and uh I think we in that book we rebrought generations back into parliament. It had been gone for a while since the 1960s. In late60s, everyone talked about generations. That was a generation gap and the boomers and uh and you know the the Dean Rusk and LBJ and all those people who took us into the Vietnam War and all that stuff. But I think we brought it back and it was in that book by the way that we um that we identified and first talked about the the millennial generation. So that's uh our term uh and and and then later on we we wrote other books you know about generations and particularly in 1997 we wrote the fourth turning which really turned this idea of sequence of generations into more of what we think of a cycle of history right or a cycle of historical tendencies in modern societies which tend to think of themselves as progressive and very recently Sam Um, I wrote a book, uh, my my co-author, Bill Strauss, passed away about 10 years ago, but I I did write a book back in 2023 called The Fourth Turning is Here. Um, that book did very well. That was a New York Times bestseller for, you know, more than the summer uh, summer and fall. And and this idea, which originally was considered, uh, really out there has has really much wed the mainstream. Um and and and and I will say that that leads me to the final thing. We can talk more about it if you want and that Simon Schuster is now asked me to write another book in response to the single biggest question that I get right from the fourth turning is here and that is Neil I believe you. I think history is going in that way. What the hell can I do about it? How do I prepare my family? Where do I live? What do I do in markets? Right? In other words, uh that's kind of my my day job being a financial adviser, right? But what do I do in my market behavior? How do I manage my wealth? In other words, there are all kinds of questions, right? Practical questions. Uh which which people want to know. >> Yeah. I I think I mentioned this to you at some point, but I actually was came late to your work. Uh I I actually didn't read uh the fourth turning till 2022 and in 23 I read you know your new book but I had come to a lot of these same conclusions from a different perspective. >> Yeah. >> Uh which were really from a markets history perspective not a generational spe uh uh perspective but also taking politics and mixing politics in. And it was so amazing when I read your book. It's like uh I I found myself at points almost being like, "Yes, 100%. Yes, he gets it." Like it is this um it's such an elegant uh solution reality when you see things that fit so cleanly into the real world and the why. Um you know, at that moment how real and and true that is um and I think that's why you've had such great success and and people it's hard to deny >> what we're seeing at this point. I think another person who's looked at a little bit from market perspective is Ray Dallio, you know, I mean, he's talked a lot about the long debt cycle and God knows how many books he's come out with, but but he he talks about the same 80 to 90ear cyclicality. And I think though when you look at the roots of it, right? I mean, debt itself has no periodicity. You know what I mean? Debt itself is just an abstraction. It's just a dollar amount, right? But what gives history an actual periodicity, a tangible periodicity? >> Yeah. >> And that has to be related to the human life cycle. You know what I mean? That that it has to be. Yeah. Okay. >> I couldn't agree more. I couldn't agree more. And and that's what connects everything. Um >> at the end of the day, generations, as you as you state, um have their own learned history, right? And that learned history uh their relativism is based on their experience. Totally. >> So their generational uh experience is is uh is very different than than the other generations around them. And because the human life cycle I couldn't agree with you more uh we we keep repeating the same uh you know political realities. Now now the reality is as you know uh uh why do we constantly shift from one to the other? And uh I have a theory and we've talked about it, but that that at the end of the day there is a uh kind of this almost animal survival of the fittest uh you know uh driving force in humanity that's like an animal reality. It's just it's the nature if you will. And then there's the um the human truly unique human thing that is not natural which is the pursuit of fairness and justice and the human contract with one another. And I think those two things are the two forces that are kind of pushing us and pulling us. And there's a constant debate about which one's more important, how far one should be, you know, treated. And this is the left and the right. This is Socrates talked about this, right? Do you give the best violin players the best violins or do you give the the worst violin players the violins? And I think that is the the driving kind of animus that drives this. And I think you speak about this so eloquently, you know, >> Sam, it's interesting that uh that that very duality that you mentioned, right, between survival of the fittest and you know, you know, kind of reality show, survivor, all of that versus high ideals, making life kinder and nicer, right? >> Is itself a generational archetype. And and today we find coming of age and say not coming of age but coming into midlife is generation X who was always from the time they were throwing kids back in the late 60s and 70s when no one had any time to pay attention to them right because you know family life was going to hell basically back then. Um they were these notions of reality and survivor became building blocks of their pop culture and and later on I mean the the whole idea of you know just do it you know and and uh uh the the you know it works for me. I think that's my favorite that's my favorite Gen X motto. It works for me. Meaning I really don't care if it works for the rest of you but it works fine for me. Right. It is atomizing in some ways. Uh it is very pragmatic obviously. Uh and these are the people who are now uh the members of cabinets. I mean they are the people who are senators and congressmen now. They are beginning to set the tone for this highly pragmatic age right in which there are no rules. What are you talking about? Collective security, international law all this stuff. But many of these exers had parents who were the children of World War II and they were all believers in those high ideals. They believed in the UN. They believed in the peace marches. You know, many of them went down to Selma. You know, this they believed in the system. Um and uh you know even when we saw the recent validictory to uh to Dick Cheney uh we forget that that generation of which he was a member and he was you know most of his career people forget he was the ultimate systems guy. You know what I mean? He was just the ultimate nerd. He always kind of went along with you know the the the the the you know the CIA the state department decided this of course we have to do it. We got all these things. But my point is is that this these are generational contrasts and and it's shocking because we don't think about the fact that we all live on a generational diagonal. We should have known that that generation was going to replace boomers, right? Uh and they would be the dominant generation. their way of speaking, their way of thinking would inevitably, right, take its place in the sun. So, so I actually think of um and what I love about this conversation is the way I came to the same conclusions was really looking at interest rate cycles and these things are connected, right? Um basically anybody who was born, let's say heading into the into 1982, right? has only now for 40 years experienced one thing which is decreasing interest rates, supply side economics, increasing inequality, right? Globalization, you know, expansion, technological development as a function of lower interest rates. And this 40-year experience is very unique at least to this 80-year period, right? Um, and not surprisingly, those people are having a reaction to it, which is this isn't fair. This is unjust. They've been labor. They're when you're born and as you know, you know, you go to the workforce after high school, college, you've been labor. And the older generation has been capital, right? And so, you're more likely to feel, well, this isn't fair. I've been on the front end of this. The system is broken. It's all gone one way. And so this idea of fairness and reinforcing populism if you will is is really come to fruition as a function of that gener those generations coming in my opinion to uh political dominance and or or coming towards political dominance. Um does that jive with your thinking at this point? Like the core driver right now like I guess the thing that will ultimately drive and kick off what we're beginning to see which is a more market uh change. Um, I'd love to hear kind of like if that's tangential or no exactly with you, how you think about it. >> Look, I mean, I think, you know, this is when the the investors I deal with, you know, the investors, they they go to a financial adviser and the financial adviser says, "Oh, invest your money with me. I've looked at the last 40 years. I figured out all the correlations. I figured out we have mastered everything. We know how it works." And their fear is, "Wait a second. I don't think the next 10 years are going to be like the last 40 years. Right? And I think their suspicion is absolutely correct. All of these trends we've seen over the last 40 years toward greater inequality, toward uh uh democratization around the world, toward freer trade, uh toward free flow of capital, toward disarmament. I mean, you could also say uh collective security, all these things are all now moving in another direction, right? Toward autocracy, toward tariffs, toward industrial policy, toward and and and toward toward higher interest rates. And I will say this and I I this and we can get into this cuz this has monumental implications for investing and that is I think toward a trend instead of from lower interest rates and lower inflation. Higher interest rates higher inflation. And a point I make is that the climax of fourth turnings always results in higher inflation. And why? Because inflation is a great maze. And leaders may not think that at first, but when they're in power, it comes upon them like an epiphany. Inflation is a is not a problem in a crisis. It's a solution. It's a wonderful way to rearrange the card decks. You know what I mean? To absolutely reallocate wealth and income. The tax always comes in these scenarios, >> but but it always happens. And and in a crisis, every country raises resources. It needs to reallocate resources suddenly. It tries to do it through debt. It tries to do it through taxes. But inevitably, it has to do a lot. And I think this time we'll have to do more because of the amount of indebtedness, not just public sector indebtedness, but indebtedness to the world that America has. So I I think here we have it part of the solution. And and also to follow up on your other point, these younger generations today, uh if you look at just attitudes toward democracy, they don't care as much about democracy as older people because when they when people say democracy, older people think, oh my god, you know, great system, it's beautiful. It worked well for me. Uh but what younger people see is leaders who talk about everything and never do anything. And it's a basically a vetocracy. You get to keep your high prices on your homes. You get to keep markets super high, overvalued, so that when I invest, I'm not going to earn anything in the long run. But he reiterated his belief once again that he says, "Yeah, yeah, it's terrible that young people can't, you know, get mortgages for their houses. Housing is so expensive." He says, "On the other hand, I'm not going to do anything to undermine all these Americans who have high highriced homes, you know, >> but here's the thing. At some point, that becomes a zero sum game, right?" >> Right. >> So, I don't know your your reaction. >> Yeah. Yeah. I completely agree with you. Look, the connection between markets and inflation is I think it's important that everybody understands it this because it's the most important thing in finance. If money gets spent in a demand push economy, if we're spending money, if government is transferring money from the rich to the poor, or we're sending now the flow of money instead of capital now to people, the velocity of that money as economists would call it or the the the entry into the economy is is 100%. Whereas the velocity of money that goes to capital is approaches zero. The reason we haven't had inflation despite all of the spending that we've done is because it has been driven by Federal Reserve monetary policy which by definition is just sending money to capital. It is sending money to investments to pe that are owned by the rich and as those that money flows to them what do they do? Do they spend their money? No. They already have the minimum they need. Yeah. They'll spend it on luxury goods and yes we've seen the best performing asset for 40 years. >> That's keeping the economy going right now by the way. Yeah, >> 100%. But the reality is once populism takes hold and is a political structure assuming and this is a big assumption that I think we'll get to a little bit later that the political will is ultimately you know seen through which in a democracy historically it has been right we could go in theory to an authoritarian situation where we could suppress the will of the people for much much longer and that will build. Okay, that's my my thought thoughts on that. We'll get to that later, but the important part in a book bookmark that one we >> Yeah, we'll definitely come back to that. It's important. It's important in this regime. Um, but importantly, the will of the people broadly, if it is going to be politically fulfilled, that means those people are going to get more money, which means there's going to spend more money, which is a demandside economy. It can create a lot of real growth like uh not real in inflation terms but like actual demand growth uh like we saw in other periods but at the end of the day it drives dramatic inflation and the discount rate the price of the long-term bond which is driven by inflation is not even close the most important thing to to finance. Most people think it's economic growth. It's not. 1968 to82 great example inflation happens right? What happens to equities? We actually have greater GDP growth in real terms adjusted for inflation. 3.8% per year for 14 years. What happened to the uh to the market in real terms for the 14 years? Down 4% per year on average per year for 14 years. The GDP growth in real term in the last 40 years has been 2.3%. 1 a.5% lower yet we've seen 9% real per year uh you know uh growth of market. So assets are much more sensitive to the discount rate. What people are willing to pay for the earnings. Uh the liquidity that's driven by lower interest rates is what drives outcome for investments. Most people don't understand this. They people have have moved away from the bond market because they understand the connection between interest rates, the long bond and bonds. Obviously they just experienced that initial pain in 22. But very few people understand that the dominant force in the value of equities and assets is not growth. It's not GDP growth. It's actually interest rates. And um we can get into the whole whole piece, but important to note that is intrinsically tied to inequality and generational political demands for are we prioritizing one thing median outcomes or mean outcomes. And it sounds like a small thing. It's everything. Are we prioritizing to to the greatest GDP growth of the whole thing or at technological dev advancement and outcomes? Uh, are we giving the best violin players the best violins or are we thinking about um, you know, the med the the viol the weak violin players and them all having a little bit more fairness in the system and and and that really is how these markets are interconnect. It's through that interest rate mechanism and through that inflation that is so critical. >> Well, inflation really is you know there's been a lot of increased discussion recently about erodicity. You know what I mean? I I'm sure that you know it's the whole idea that the sum of all possible trajectories may be perfectly fair right but most Americans are on one trajectory and a few are on another right the whole idea that how the process takes place it's also a fundamental point about uh about you know investing in bets which are you know the expectational value is positive but the geometric outcome as you know is negative Well, now you now you just bring up my favorite topic, right, which is volatility and options, right? >> That is and you know, perfect perfect segue into >> we are for so fortunate in this fourth turning because in fourth turning we didn't have this great fortune to make bets in nonlinear ways. the public can actually position and and investors can position with much more liquidity in ways that take advantage of this erodicity that that take advantage of this nonlinearity. Um, and this is why 6040 may have worked okay last 40 years. There's been a controlled system, right? We're very kind of a natural free market system where we're optimizing to one thing that's deflationary and we can just respond with more and more monetary policy. Great. We're all cogs in a wheel. But as your generational work talks about the politics uh of each generation matter and when we prioritize fairness or equality or you know some level of fairness um then then those there's less control and there's more nonlinear outcomes and and things can change not just very quickly but for long periods of time in dramatic ways that are that seem impossible to imagine given a 40 years of of one. Well, I you know I geez there is so many different ways the conversation can go from here. Um I kind of hesitate. Uh the my first question is uh and I'm just going to shoot out some questions here because you can go with different ones but one is to whom are these uh uh option strategies available? you know, there there all kinds of, you know, you can go down the list of all the kinds of stuff that's out there being offered, right? All of these these uh these these these buffered outcome fund, you know what I mean? All of these different kinds of funds which um which which basically give you a guarantee on the bot on the downside and kind of, you know, sell the upside, right? And we know what that does. Uh in fact, now that I am in the we'll talk about that later. Now I'm actually in the business of of of investing and trading. Uh the first thing I look at in the morning is to look at where's the gamma in the overall market because you can now with all these different kind of systems out there you can kind of see what's going to happen if the mercury goes up a little bit or goes down a little bit. Are we in a stable zone or are we in an unstable zone? This did not used to be true. But now that we have this machine in place, Sam, right, which is doing what I just suggested, right? I mean, it's selling when you go up, it's buying when you go down. Uh, when you But but it it it lends itself to this discontinuity. You got to add too much and the whole thing falls away. And of course, then what have you got? The Fed, you got the Treasury, you've got, you know, we got all of our other things in place. That's one question I wanted to ask you. The other question um I think had to do with um uh uh I think the political right because I think you were getting at it. Let me let me just add by the way an economist who wrote nearly a century before Adam Smith and I I'm a huge fan of Adam Smith. I mean that was my um you know the the history of economic thought actually was my specialty in graduate school. So I was you know and I I I worked on all of them. I went to the marginalists and I you know I I read all of that stuff but there was one genius who wrote nearly a century before Adam Smith Rishar Kantiel he was a Frenchman and he wrote the definitive work on the impact of inflation as you know Smith and all the classical economists never wanted to talk about inflation this is why canes later blamed them he said you know they never actually understood the importance of price changes right on the market. Kantio talked about it all and he talked about it back in the 1600s and he was the one who said it's like it's like honey pouring out of a jar. He said you first you got to look at where the inflation is coming from. Who gets advantage first? And he he was the one for instance to notice why is there a lot of money in urban places and in rural places there's never any money. I live out in West Virginia and I'm telling you there's no money out here and no one here cares about, you know, the S&P 500, right? Um, but you see these enormous discontinuities. They really haven't changed since Kantino's time, but he actually, and I urge you, Sam, if you have not revisited, it's not a long book. It's much shorter than the Wealth of Nations. >> Yeah, definitely read the Wealth of Nations. Kanton is is is in my parlance. definitely haven't read uh Katon and and and should. Um but I I love the elevation of them and it just speaks to >> how these what we're talking about is is a tale as old as time. >> It is >> even though it's not as well understood by by most and hopefully you and I are helping educate and bring this and stand on the shoulder giants, right? Uh you know, elevate and bring those things to to the broader public. But but but like I said, do things still also change? like we're it's tails all the time but but now we have reflexive instruments like options >> right >> to uh to affect and bet on these outcomes in a much more precise way >> you know and and whether it's here at the SIBO or whether you're doing on commodities elsewhere using those options um allows for incredible impact for relatively low risk um and multi-dimensional space but you do highlight that they also have reflexive effects and so they can make some of these cycles and these things go on for longer play out in very unique kind of paths right if you will uh maybe in different speeds and different uh kind of uh you know in a different like again path in a sense and I don't think it ne necessarily means we're not going to get to a similar place eventually right um but but I do think that they they are playing increasing important roles Um I think we're living a really important moment right now in these four or five years. Most people don't realize this is critical. You and I talked about this but I want to highlight this for the audience. We have seen a tripling to quadrupling in the last three years of aum money invested in a series of things. And most people don't draw them together and see the connection. And I'm going to highlight what those are. But they're all correlated. And well, how are they correlated? They're correlated in the sense that they are noncorrelated assets. >> Yeah. >> Who's getting those assets? >> Precious metals tripling to quadrupling in value in three years. >> Who's getting those? Hedge funds have two and a halfx in AUM. By the way, from almost a steady state 2 trillion, they're now five, right? Uh uh and by the way, gold itself in price was pretty steady state until they took off. Um structured products or things like structured products like ETFs that do and buffers and all these other things that do these same things >> have gone from 500 billion to 2.3 trillion a four to 5x in three years from again a relatively steady state of growth, right? Um and then crypto you could argue were things again seen as non-correlated. Now whether they are non-correlated or not we could talk about that but the big idea here is that there is a perception of a need and these are early adopters. These are people listening to you and I thinking about these things saying, "Oh no, we need to do something." But this is with markets at all-time highs, >> right? >> These are people who saw 22 happen and like, "Oh my god, bonds aren't going to help me anymore. I need something else that maybe is going to help me." >> But these are people who have not yet seen what I believe and I think you believe is is a broader regime shift and that equity is not going to work either. Not the way we've seen in the way we think about it, right? Um so uh I I it's critical to see what's happening that's on the ground three years and that know that this is this is an area and these all these the growth the things that are working are all correlated in that sense and that you also by the way just if you look at markets the ultimate as you know the ultimate driver outcomes is supply and demand we've gone from a call it six trillion all those things I talked about were six maybe seven trillion dollars that's it in 2022 and here in 2026 Six. How much is all of that? Maybe about 20 23 depending on how you look at precious metals and what's above the ground and who owns it. >> Yeah. Well, the the total assets last thing I was going to say 500 trillion, you know, 500 trillion. Yeah. You've seen a tripling from from 7 and a half to 23. But but 23 relative to 500. What happens when the 500 really is a risk? and the 95% of allocation which is stocks, bonds, private equity, private credit, real estate, all the same stuff really assets. What happens when those things are finally at risk? Well, the door that and the amount of available things to invest in that are non-correlated are much smaller and a lot of them are still developing and some of them and sorry if I cut you off like hedge funds and structured products the evolve stuff we're talking about that is so critical in this positioning has reflexive effects and so we're looking at a complete market transformation as part of this forth turning and it's happening at the same time because we've developed a lot of these things they didn't exist amidst this time and now the adoption's happening. We're hitting a bit of a tipping point for what I would consider new technology and new new products and things not just hedge funds which have started by the way in 1970 and options who were started around 1970 and and that are now coming kind of for broad. >> Yeah, the these are look um very often the things you mentioned obviously the market itself has gone up. This has been a great time for markets and this is when we're talking about complaining the markets are you see the multiple expansion I mean by any well let's you know let's not get into Schiller's cape and all that but we all know that is the very expensive markets now overall I mean in terms of not global equities especially but US equities I mean honestly the rest of the world's a lot cheaper um you know relative to earnings or anything like that but it's very expensive so naturally people are going to gravitate toward these other things that are regarded as tail hedges, right? I mean, that's what people are going to want. Um, and the ultimate tail edge is political and uh you have a very optimistic uh outlook. Uh I I see something at that could be a little bit more of a discontinuity than you do. In other words, let me come back to what for turning always climax in conflict. I mean, real conflict. I'm talking about real conflict, right? >> Agreed. >> Um and uh which is all of the ones in our history and most other modern nations forth turning always involved a internal uh war, external war uh and uh a huge devaluation at least temporary of markets. In extremists they resulted in just the closing of markets. just closing, right? People don't remember what happened in World War I. A day or two after armies started marching, the markets just closed everywhere. And you'd be lucky at the end of markets reopen. And because you might be a member of a different country, right? I mean, if you're part of the Austrian Empire, it didn't exist. If you were part of Zarus Prussia, it was no longer there. I mean, what happened to your assets? Interestingly enough, uh after in the early 1990s, uh many Eastern Europeans who come to the United States and lost all of their assets during World War II, the Warsaw Pact fell. These new democratic governments took power and and there were all these people writing back to these new regimes, these new because they set up markets again, right? Free markets. And they say, "My greatgrandfather owned a piece of property near Budapest. Do I have a I mean, think of how pathetic that is. Maybe the people who own stuff today, maybe it will be your grandchildren writing letters to some new regime. I I mean, I don't want to be able to warn this to you, Sam, but you need to realize that it's not always just everything doesn't end and buy the dip. >> Yeah. And by the way, nobody's called me the greatest like optimist. So, so I think we know where we are here. Um, I love that you're highlighting again the big idea here is we are embedded in this recency bias. Nobody looks like a track record longer than 10 20 years. >> Well, also also survivor bias survivorship. We're the most prosperous economy on earth. So, of course, we're talking right 100%. I I I 100% agree. >> 6040 people don't realize didn't exist in 1988. It came about because it worked for 40 years. But why did it work? Does anybody ask that question? It didn't work. If you look at 6040 for 12, just 125 years, never mind the 250, 500, the thousands of years we're talking about, it doesn't work. There's no diversification benefit. Literally, the sharp ratio of the last 125 years of stocks is.35 and a 60/40 portfolio is.37. There's really zero diversification benefit of stocks and bonds >> and and importantly this idea that this is how you invest which is just conventional wisdom at this point >> for what is the most important other than maybe your health the most important thing that everybody does people are just following they're lemmings following something that only worked because of recency bias so I think it's critical to understand that what you're highlighting is not just that this is recency bias but what is possible as opposed to this control little system we've been in is dramatically different than what most people are willing to come to terms with. >> Well, and and and the impact of of policies which nations will enact when they're when the people demand them, you know, it's funny when whenever I talk to people about the long-term success record of equities, you know, and to take them through US history sort of inflation adjusted total total returns, right? total real returns inflation adjusted. You have these crashes and long periods of nothing happening. I mean, >> I'm going to give you a statistic here. >> Hold on, hold on a second. 1929 to 1949 would be one. Uh, first of all, you had to underdo a 77% decline in real terms and then you had to go 20 years before you got your money back. But it's interesting. So, after I go through them and there was another one, World War I, there's another great one that started in the late 60s, lasted through the 80s. And you but here's the thing and then and then all these people get really nervous and I say but but I'm not just dissing equities. Take a look at bonds. >> Correct. >> If you had bought a 10-year you know bond portfolio sort of 10year maturity US treasuries just before Pearl Harbor when the interest rate was down around you know 1 point something um you know we still had deflation right up. We're still in the great depression really up until Pearl Harbor. If you had bought that and then my question is how many years would you have to wait before you just got your money back with with inflation? You would have to wait till 1987. That's 47 years. And and you say talk about that. Imagine a real stagnation for 47 years. And by the way, I think a lot of economists would say that when you look at Jeremy Seagull's wonderful thing about, you know, bond, you know, stocks do so much better than bonds. A lot of that was due to the half century of financial repression that we had in place in America. To reiterate what you're saying, I love that you know those numbers because most people don't. The reason passive investing and 6040 exists. By the way, it's gospel. Nobody It's like blasphemy to say this is not the way to invest. But the reason that it is adopted and fully like and it didn't exist before 1980 and you highlight these but I want to like reiterate is because from 1900 to 1982 actually where interest rate peaked that's why I'm drawing that line there. >> Yeah. from 19008 192 82 years you had three I want to reiterate three 20 year two decade periods were 60 40 what's considered the way to invest now made 0% 0% for 20 years three of them 60 of the 82 years if you invested each one of them you 0% 1900 to 1920, 1929 to 1949, 1962 to 1982. >> Yeah, clearly 70s would have been terrible. >> How in the world, if you're sitting in 1982, talk about recency bias now. If you're sitting in 1982, how in the world is anybody going to say, "Yes, you buy and hold for the long run, or better yet, we're going to buy and hold stocks and we're going to pair it with bonds." Nobody did it. The Dow Jones was created a hundred years ago, 60 years before that. So, we had passive investing as a concept. Why do you think nobody did it? It didn't work. So, Sam, one one new idea uh this is something we're doing with our fund. Um and that is getting rid of that pairing uh to the extent that we're long net equities. We're not pairing it with bonds. If anything, we're short certain kinds of bonds. what we're doing is pairing up it with commodities and commodity futures. So this is the missing great leg that has always been there by the way and people have looked at the behavior of commodity futures since the late 19th century. Uh this is something that I'm trying to revivify, bring back to life. Uh but but anyway, go ahead. >> Yeah, I couldn't agree more. Three years ago, we very publicly actually four almost four years ago now said gold is going to be the best performing asset for the next 1015 years. This is when it was literally and buy it with calls and commodities not just not just precious metals. I'm I'm just saying. Yeah. Okay. >> Agreed. Uh commodities writ large and strategic assets, things of true value, right? Um I couldn't agree more. The thing I would add to that though, or maybe kind of to be pmical, it's a great diversifier. >> But the thing don't do anymore is diversify. >> Uh they don't they don't think about risk because they haven't had to. It's controlled system. But there are ways we talked about a 0.35.3C 7 sharp for 60 40 over 125 years. There are ways that are not that complicated that are basic academic research. Diversification using long vault and convexity to rebalance for to prove geometric returns, value investing versus growth. All of these things are wellknown, well doumented ways to improve riskadjusted returns. You can get to sharps and higher which seem almost crazy to people by following these principles, not by having like just some incredible alpha. Gold or and commodities broadly do need to be part of that stool. they need to be one of the legs. It is a diversifier. I will highlight though precious metals themselves have a ton of volatility. Uh in the 60s and 70s the best performing asset was precious metals, gold particular but it was also the most volatile asset and so agreed it should be part of >> but here's the thing. It doesn't matter how volatile it is. If you have a lot of volatile assets and they're not correlated to each other, it doesn't matter. What you need to do is to is to make sure you have enough of each. You need to do something to reduce the volatility drag on your portfolio. And if you hold enough of them, >> uh you're good. And but you need >> any we you know what I'm talking about. >> Yeah, agree. But diversification, which everybody talks about, but they're like then diversify to 500 stocks and 500 bonds. Um is is a thing that I think uh is is going to become more a part of broad parlance. Risk management. people throw it around but nobody even knows what the sharp ratio is of the assets they own or the portfolios they own. So that is the key and at the core of that and this is what I do and what I think a big part of what you're doing is using also things that are nonlinear like options to really help shape a portfolio that takes advantage of that nonlinearity >> and that non-correlation that's so critical. Uh as we approach the end here Neil >> tell me a little bit more about what you're doing with in your ETF. I'd love to give you a chance to talk about how other than the commodity piece which you already highlighted, what are the other things you're doing? Do you use options and and and how what are the other things that you use and what do you >> we do? So this this part of the you know remember the answer the question that I said is people said what should I do? So one of the things I'm writing a new book right uh but the other thing is um with with hedgei that I work for I started an ETF uh it's called a hedgei fourth turning so hft uh and you know the great thing about what I love about ETFs is anyone can invest in it you know what I mean you don't have to be a qualified this or okay so >> and it's basically three basic premises one is I just talked about instead of pairing our net equity position with uh by By the way, it's a 15050 fund. So, we can't go short as well as the long, but we pair our net long equities with commodities, commodity, futures rather than bonds. So, number one difference, right? >> Yep. >> The second is is that we all of our actual equity investments are forth turning themes. Things that we will do we think will do good. I mean this would be uh obviously national defense, personal security, uh energy, a lot of industry, robotics, uh uh completely retooling a health care system. Uh to some extent when it comes to more things like um uh uh a lot of the weirder highly leveraged consumers and financials were probably short. Uh here's one thing you have to understand, Sam, is that for the last five quarters, America has had a net national savings rate of exactly zero. Outside of a severe recession that's never happened to us before, America is simply half going to move to saving more and consuming less. And and and every time there's pressure on the dollar, this just comes again, this reality back. America has got to have to fundamentally change its orientation. Um I think in a weird way uh Donald Trump may be actually part of that uh in its own strange fashion. But but I do think um you know I say strange fashion because obviously we got the deficit to worry about when it comes to disabling too. But I but I do think this is inevitable. It doesn't matter who our leadership is. We're going to have to move that direction and then and then that influences the kind of sectors we're in. And then finally, and this is the part that I think you'd be interested, and that is we're built for heavy weather, meaning that we believe strongly believe in the optionality of cash along with Warren Buffett. So we are, you know, to some extent cash valuations remain very high. Uh we do do uh tail edging. That's where the options come in. Uh and that is very carefully um uh uh calibrated according to the Kelly criterion. So you'd be familiar with that. So we we wage our bets very carefully, right? And we optimize them. Uh and it's really helped us. I mean it helped us two days ago, right? I mean it was wonderful. So >> So we do that and um and uh and we also keep our beta low. I mean we're we're we're low beta on our on our you know on our launch. >> Yep. And and again, I've talked about this in other venues here with David Dredge on the same podcast, but that V people look at it like as they have in the past and say, "Well, this this thing makes 0% over the long run. Why would I own it?" And they're missing the big point, which is it's like taking the brakes on your car >> and say, "Man, these brakes make me go slow. Got to throw them out of the car." >> No, no, they don't sit on the brakes and gas at the same time either. That That's not how brakes work. It's brakes, gas. It's control around the turns. allows you to be aggressive at the right times, allows you to not only not fly off the tracks, but allows you to take risk when risk and opportunities present themselves in different ways. So, >> yeah, >> have in your portfolio. That's [music] what, you know, using options and hedges are all about. >> Two last things and we're going to we're run out of time here so we're going to hit it quick, but these are big ideas so dive in. One, [music] it's one thing to say, okay, the fourth turning is here and the big ideas which are so valuable over a decade, but do you have signal? How how will we know that it's it's imminent or this year or next year that the tough part here, right, is the timing. So are historically since you since you have such a lens on maybe it's not one year or six months, but how do you gauge where we are? Because again, it's not just a life cycle per se. there's some other effects and things playing in and how would we know or how would we have a good sense when the probabilities start really drifting to our favor and how close are we? You know, it's funny. I I've actually been thinking about that a lot because I'm writing about it now because I'm now getting into practicalities, right? Um I do think that uh an extremely overvalued market is obviously a dangerous signal. It's not no one should time their trades on that. Let me be clear. But you need to be aware that we are looking, you know, when I look at at at our ATF for instance, I'm looking at a 10 to 15 year horizon. So, you know, I'm looking for something that's going to carry you through, but you should be aware of what the historical record is at these valuations and what your likely 10-year return is on just equities long, right? Is probably not going to be terribly good. And I would say if I were to be a little bit more dramatic about it, it may not be very good. And it may include some huge declines. I mean, if you look at these plateaus in the past, they're not plateaus. They're plateaus that include huge declines in recovery. So, um, I would say, but obviously the market is unpredictable at any given time. And you know this better than anyone, Sam. Uh, there are an equal number of people who think the market's going to go higher as go lower, right? So, uh, the market is to that extent unpredictable. I would say that when it comes to the other elements of the fourth turning we talk about such as conflict I would actually say that when uh particularly in terms of geop geopolitics when America seems to be at the point that it's really repairing stuff and getting stuff back in order I think that becomes a forcing moment for adversaries. Uh uh I'm I'm serious about that. When when it looks like things are still going to hell, >> uh it's there's no window closing for China. No window closing for Putin. Just let it keep going. >> Almost like a almost like a caged, you know, cornered animal is when things really conflict in a >> sense. We've seen this in the past and I like to bring up historical examples of when this happened, you know. Yeah. >> Yeah. Go ahead. Finish. Yeah. Finish that thought, please. But but I but I and I do think and I think that the success of coming out of this very often depends upon the investments we make early. >> Y >> um you know the the the classic one I like to uh talk about is when uh right after the fall of France is when um the mood in America began to change hugely. You know we were no longer an isolationist nation. the Republican party instead of running someone like Lindberg that ran Wendell Wilka who was an internationalist who actually agreed with FDR it was important we had to resupply the arsenal of democracy right that's how much the mood had suddenly changed and and FDR went to Congress in July the next month and he proposed more than doubling the size of the of the US Navy and this included you know the the Iowa class battleships and included all the Essex class aircraft carriers that would later dominate in the Pacific in 1940 43 and 1944 that bill which is the largest by far the largest appropriations weapons appropriations in American history as a shear of GDP went through Congress with not one opposing vote that was in July of 19 member that was in July of 1940 that was more than a year before Pearl Harbor but here's the thing Sam if we had not made that investment right we the war in the Pacific would have gone on for at least another couple of years. It we we don't think about and there there are other great examples I like to bring up of this, but these are moments actually in our history we really have to think ahead, not just we're so much into the headlines right now. We're not thinking of where these things are likely to go. >> I I couldn't agree more or two quick thoughts and then I want to ask you one last quick question, but these are the thoughts I have on what you're saying. uh you know how you said uh I'm not being bearish enough or what I think I'm gonna say the same thing back to you now. Um so so one to your thought of uh market valuations and historic forward and you kind of are like yeah K Schiller whatever the reason Schiller matters and why he ultimately will be proven correct that most people don't understand that people like oh but there's such a lag and it's so in indecisive of when the reason there's a lag the reason we haven't seen adjustment as interest rates have gone higher yet is because people obviously when interest rates are zero everyone is going to refinance. Markets operate on supply and demand. Until people need to refinance at higher rates, the higher rates don't matter, >> right? >> And everybody refinance in 2020 2021. Do you know what the average duration is of the debt taken in Jan 2021? >> Five to five to eight years. >> Yeah. So, it's beginning to bit roll over. Yeah. >> So, the interest rate and its effect on the total valuation has a lag for that reason. And guess what? Here we are on the doorstep. So, you want signals? That's a signal for me. >> Yeah, I I I I agree with you. And by by the way, I will say this just in defense of uh of Bob Schiller, and that is uh uh Burton Malik uh you know, I think he's he's I don't know, they're they're both getting on. I think, you know, he's his late 80s. Uh but Burton Mal who was very famous as you know, along with Eugene FM as one of the great titans of efficient market theory, right? which is that there is no such thing, you know, you can never predict anything, right? Um I what was his book? Uh a random walk down wall street 1973. It was a long time ago, but a classic, right? A classic in the markets. >> So he wrote just last fall in the New York Times, and this is his admission. He says, you know, it actually is true that in times when the valuations are elevated, uh investors tend not to do well over the next several years. And I consider that to be my god, why didn't you say that years ago? >> But the reason too that it's going to be worse than you said is not just because the interest rate effect and how I do believe K Schiller like or Schiller the Schiller index is >> uh is correct by the way and most people like oh it can't be whatever. >> I think the other part that people also poo poo price to sales like oh come on profit margins have changed forever. I think that people a lot of people don't thing that people don't realize is profit margins themselves are highly correlated over long periods of time to interest rates. So, not only are we, if you look at it price to earnings ratio, yes, it's records or close to records >> relative to interest rates, even worse, >> but when you really connect it to what price to sales, it is so far off the charts. And the reason is because profit margins are at records at exactly the time, not surprisingly, that interest rates are starting to kind of break out the other way. And that's a critical thing for people to understand. So from a markets perspective, I know I'm out in the fringe and if you're, you know, you're out on the tail, I'm even further out on the tail in that regard. So, so I think important to note that. And then last thing, again, we got to we got to button this up. I could go for two hours with you, Neil. This is wonderful. Um, is uh the big question for me and and I don't know how we could do this service in like a at two or three minutes, but we have to. Is it possible that this could lead to pure authoritarianism, right? That the will of the people, which is what the generational part, this is kind of the the thing I alluded to earlier in the conversation, can be circumvented by power and is is that something in your your view that could in theory, despite it being an unlikely outcome, I >> well that change. In my most recent book, I do talk about the threat of of civil war and that would just include conflict that just simply brings down the politics in America, makes us just dysfunctional, a failed state in some way. Uh as well as something that would really involve two sides, you know, ultimately uh through escalation and threats. You know how these things happen. Um and just to remind people just historically, no one ever thinks civil war is going to happen in their own country. uh Barbara Walter, who's actually the one of the world's experts on civil wars, has actually interviewed survivors of civil wars all over the country, you know, from Myanmar to to to uh uh to Rwanda. And she says she interviews these people and they all say the same thing. We never saw it coming. and and uh uh uh Henry James who who wrote his autobiography late in life. He was a he was 21 22 years old in Washington DC in 19 in 1861. He was right there in the capital. He knew everything, right? I mean his father was a diplomat after all. And he and he later wrote in his his biography said absolutely no one saw it coming. I mean this was this was after the election of Lincoln. He said no one saw it coming. He said, "And and anyone who did is lying." [laughter] >> Well, and and yeah, >> and but my point my point is simply that that this will be a conflict. Now, your question is could authoritarianism, in other words, could you simply move from being a republic to an empire with no conflict in between? And I actually in my new book, I actually address that question because it occurred to me. >> I love I love the little cliffhanger. You'll have to go read the book. >> Well, [laughter] well, I do. And I and I go through all the examples, but let me just give you the the the the quick answer is that every republic, and I'm talking about, you know, Venice and Carthage and Rome and, you know, you just go through all the great names, the Dutch Republic, all of the great republics of history, including those that the founding fathers thought about when they were designing our constitution, they all fell on either two ways, foreign conquest or civil war. None of them simply died with a signature. You know what I mean? It never happens that way. >> Well, Neil, what a wonderful do again. We could do two hours. Maybe we'll do it again with you and and revisit uh in a year or so. But but incredible having you on here. uh no better environment to trade in distributions and look for kind of tail convex instruments and and um hopefully we're we've we've been again like I said on the shoulders of other giants to help kind of spread the word about kind of where we are and where we're going. Um Neil, thank you so much for your time today and look forward to to talking again. All right. All right. Be well. Take care. [music] Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's [music] episode, the best way to stay updated is to go on over to your favorite podcast platform and follow the show so [music] that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you. And to ensure our show continues to grow, please leave us an honest rating and review. [music] It only takes a minute and it's the best way to show us you love the podcast. 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