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The Enduring Impact of the Financial Crisis
Have you ever taken the time to talk to someone who was old enough to remember the Great Depression? My guess is that you would inevitably find that his or her views on the economy, the role of government and the financial markets were meaningfully different from those of a person who came of age during 1960s or 1990s, for example. Specifically, since many of these perspectives were indelibly shaped by the traumatic circumstances of that period, people who lived through the Depression often tend to be more conservative in nature. The lessons of the roaring 1920s were clear: extreme leverage and excess unavoidably lead to financial calamity. However, the takeaway from the 1930s was even more profound: a person can never be certain that current prosperity will continue in the future. The violent swings in the stock market caused by widespread emotional shifts between euphoria and revulsion combined with the extreme unemployment rates left a lasting stain of uncertainty on those who lived through the tumult.
Accordingly, an interesting question to ponder is what the permanent impact of the current financial crisis will have on today’s young adults. While I personally am just outside what is known as the Millennial generation that was born between 1982 and 2004, I have certainly cut my teeth in some of the most volatile and chaotic financial markets in the last 80 years. Being a value investor, I am already very conservative by nature. But, will this experience make me more risk averse? Will I abhor the use of leverage like my grandfather? What will my views be on big government? As I continue to refine my own investment philosophy and framework from which to evaluate the global economy, I have no doubt that the events of the last few years will continually affect my outlook.
While I am unaware of any research regarding the impact of the Great Depression on the formative views of the generation that was forced to navigate that extraordinary period, there is some interesting data on the effect of more recent recessions on young people. For example, my economics professor at UCLA, Paola Giuliano, has recently co-authored a paper on the topic. Now, if you open that link you will a million coefficients and a plethora of statistical analyses. Luckily for those of us who are not econometric specialists, the authors also created a summary of their analytical process and subsequent conclusions:
Our research studies the impact of severe recessions on individual’s broad beliefs and attitudes (Giuliano and Spilimbergo, 2009). Our study relies on answers to the General Social Survey, which has been conducted in the US almost every year since 1972, to analyze how economic shocks have affected the attitudes of different generations in the US. The basic idea is to match macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey…
In order to disentangle the effects of economic distress from other nationwide events, we use the fact that there is considerable heterogeneity in the economic growth across US regions... It turns out that a severe regional recession strikingly alters the attitudes and beliefs of individuals growing up there. It turns out that a severe regional recession strikingly alters the attitudes and beliefs of individuals growing up there. Recessions do alter perceptions, especially of people between the ages of 18 and 25. Recession-influenced respondents expressed a stronger preference for government redistribution and tended to believe that success in life was more a matter of luck than hard work.
For investors who are trying to anticipate the types of businesses that will prosper as the people most influenced by recent history become consumers, homeowners and parents, I think the following two conclusions are most relevant:
First, the effects of a severe recession experienced are large when the individual is between the ages of 18 and 24 – the so-called formative age – during which social psychologists think most of social beliefs are formed; the effects are not so strong when the recession is experienced later in life.
Second, these effects are permanent because attitudes of recession-stricken individuals remain significantly altered many years after the severe recession ends.
While these findings may be somewhat intuitive based on the experience of the Depression generation, it is important to remember that these people will eventually become our CEOs and Congressmen. Thus, as we approach the second decade of the 21st century, it behooves investors to understand who these Millennials are, how they view the government and the economy, and what contribution they will make to society as a whole. For some insight into this generation, we turn to Neil Howe, author of a book called The Fourth Turning. The following excerpts are from an interview with David Galland from Casey research. Mr. Howe’s expertise is generational research. He argues that we are the beginning of a Fourth Turning in which today’s youth will play a very important role. Specifically, Howe identifies four different generational archetypes that he believes assume and then lose power in a rather predictable and cyclical way over time. In reference to the current youth, he predicts that the Millennials will fall into the Hero archetype:
Hero generations are usually protectively raised as kids. They come of age at a time of emergency or Crisis and become known as young adults for helping society resolve the Crisis, hopefully successfully. Once the Crisis is resolved, they become institutionally powerful in midlife and remain focused on outer-world challenges and solutions.
I have to say that sounds about right. But of course this is just a general framework from which each sequential generation blazes its own path. So, what is it that makes the Millennials unique? According to Howe what separates Millenialls from Baby Boomers and Generation Xers is oddly enough how conventional they are:
Since Millennials have come along, we’ve seen huge declines in violent crime, teen pregnancy, and the most damaging forms of drug abuse, as well as higher rates of community service and volunteering. This is a generation that reminds us in many respects of the young G.I.s nearly a century ago, back when they were the first boy scouts and girl scouts between 1910 and 1920.
So this is a generation that is surprisingly conventional. When surveyed about what they want to do with their lives, Millennials say they want to be good neighbors, they want to be good citizens, they want to have balanced careers. A record number, according to the UCLA Freshman Survey, said they want to get married and have children. If you ask them how they want to spend their free time, they say with their families. We have never seen a generation so close to their parents. There is a virtual disappearance of the generation gap today.
Millennials actually believe in the market. They believe in globalism. They believe in free trade. Interestingly, they are not a populist generation… It might help to think of the Millennials as capitalists, but they want capitalism with a public purpose. Through regulation, incentives, and social engineering, they want the markets to be orchestrated toward some end that we all want. But they do not want to stop markets with pointless regulations. That is not where this generation is coming from.
As Howe indicates above, this is not your hippie or radical generation. This is a group of people who want to work together to solve the world’s problems and then live a somewhat moderate life with their families. After all of the excesses of the last 30 years and the boom and bust cycles in the economy, maybe the Millennials are precisely what America needs to get back on a more sustainable track.
However, while Howe definitely seems optimistic about the positive ways in which he believes today’s young people will change the world, it is important to remember that generational shifts of influence take a lot of time. Accordingly, Howe is not what I would call optimistic about the near future. In fact he anticipates the need for some sort of calamitous and catalytic event to take place in order to spur on the necessary changes:
We think of Fourth Turnings as a formidable time, a time of danger, a time of crisis, a time to be scared, a time whose most popular images are death and destruction. I think it is very important to keep in mind that a Fourth Turning is a time when society wipes away old ways of doing things so that new, better systems can be built.
This is what nature does. There is a winter, things die, seeds are planted under the ground, and the deck has cleared for new life to come forth. Just as nature needs to do that, society needs to do that. We occasionally have to clear away institutions, not only to make room for new ones, but also to create an atmosphere of new trust. That is what we no longer have today.
While I believe in the need for some Darwinian creative destruction in the business world, what Howe is talking about is revolution. In his estimation, previous Fourth Turnings occurred after the Revolutionary War and the Civil War. My guess is that most people on Main Street and Wall Street are not expecting anything that severe to result from current crisis. But Howe warns that we have not yet seen the worst:
DAVID: But if I’m understanding you correctly, we are not very far into this Fourth Turning. So that the actual Crisis, the Crisis that is really going to test the mettle of humanity, if you will, is still very much ahead of us. Is that a fair statement?
HOWE: Yes, absolutely.
DAVID: On a scale of 1 to 10, if the worst it is ever going to get during the Fourth Turning would be a 10, where are we today?
HOWE: I would say 2 or 3.
DAVID: So what people need to understand is that there is much worse to come, but as with all the cycles in time, this too will pass.
In closing, whether you agree with the dire predictions of Neil Howe or not, it is unambiguous that going forward investors will be well-served to understand the lasting impact of the crisis on the Millennial generation that will only become more powerful and influential in the coming decade. The recent stock market roller coaster has even shown value investors who have traditionally almost exclusively focused on bottom’s up analysis that it can’t hurt to have some understanding of the macroeconomic circumstances. Therefore, my humble advice is to start having conversations with people who are in their 20s. While they may not have as many interesting stories as those people who lived through the Depression, the way they react to their current circumstances may be a good gauge of how they will approach the world going forward.
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Outlooks and changes in behavior in the GD were shaped by decades of hardship and a world at war. Hard to imagine there will be any lasting effect of the current crisis unless the unspeakable happens. Nice sophomoric try!
If the hero concept in general is sound, then, logically, the young adults referred to in this article, should be the pre-hero generation. The real hero generation should be the ones age 5 to early teens, or even younger. That's because the need to take down existing establishment requires a high level of hatred against them. The scale of the current crisis so far is also too mild to be really life altering.
As someone who apparently fits the definition of the Millenial generation (born 1982-2004) I have to say this seems about right. We entered the job market after the 2001 "jobless recovery" and are accustomed to finding work unstable and hard to come by. Thanks to house price inflation we have been paying high rents to Boomers ever since we left home (those of us who could afford to, of course). We generally don't believe that any pension promised to us, government or private, will actually be paid when we get old. Many of us have spent too long in education and taken on too much student debt after we were assured by our elders that it was the route to a better life. We don't trust anybody who wants to lend us money, trap us in long contracts or upgrade us to a more expensive model "because we're worth it." We're not stupid, we can see that the powers that be are using bailouts, inflationary monetary policy and deficit spending (that we will ultimately pay for) to prop up asset prices and protect the "wealth" of the older generations, especially the Boomers. Well I can't blame you for trying, but actually I'm not interested in paying $$$$ for your house and your Amazon shares so you can spend your retirement on a Caribbean cruise while I struggle to make ends meet in a high tax-low pay economy. How's about we raise interest rates just a teensy bit and see what happens?
The definition of wealth will be changed.
The truly rich will be defined as those who need little....versus those who want much. A magic trick. Courtesy of the Man On High. He's done it before, and He's doing it again. And we still can't figure out how He does it. But we sure know why.
There are heroes, hippies, radicals and thieves in every generation. Percentage of each changes from time to time
there I go again, leaving the tag off.
to the analogy, I add :
To prime the sink fountain, the market-makers have to put their money back on the table. (rising market on low volume with a short squeeze)
repeat:
The old families employed multi-national corporate agency to drain the nation / state balance sheets into income, in a debt machine that created $500T in unfunded liabilities, offset by $500T in non-performing assets. Then the nation / states started selling sand in the resulting desert.
It's an accounting sink draining into a sink draining into a sink. Soros and his friends are watching this show and betting on which nation / state will crack next. Can you blame him?
Ultimately, the kids have the only watering hole, and they are not going to pay one dime of that manufactured debt. Before it's all over, even Soros is going to need water.
This is not the first rodeo. Once the last fool buys a ticket, the system explodes, the old families re-write the History, and put up a new gate, that's all.
Right now, we simply await to see whether the perps are going to be kicked out of the nucleus, or if the entire fulcrum is going to collapse. As always, bet heads I win, tails you lose.
This is not a game of chance. It's a moving pyramid of chess boards. The long term players on top, manipulating the short term games below. The kids moved their individual pieces out from under the bottom right corner of the pyramid, until it fell, and they are still on the move at a rather fast clip relative to the pyramid. The pyramid can catch back up and rejoin, or it will fall off the back of the fulcrum. To do so, it has to lose some weight, or the kids will not slow down, and the spring will release. The kids win either way, as they always do.
The old families employed multi-national agency to drain the nation /state balance sheets into income, in a debt machine that created $500T in unfunded liabilities, offset by $500T in non-performing assets, globally. Then the nation / states started selling sand in the resulting desert.
It's an accounting sink draining into a sink draining into a sink. Soros and his friends are watching this show and betting on which nation / state system is going to crack next. Can you blame him?
Ultimately, the kids have the only watering hole, and they are not going to pay one dime of that manufactured debt. Before this is all over, Soros is going to need water too.
This isn't the first rodeo in History; The old families write the History books, that's all.
Nice work!
Baby Boomers, Gen X, and Echo Boomers will pull together to do what needs to be done.
Somewhat politically charged language in the snippet: "redistribution", "conservative".
People of that era (like my parents) are 90% foaming Republicans and 10% Communists. There wasn't much middle ground, because it was clear that industrial capitalism was a completely discredited system.
Odd, my impression of those in the 20-40 age bracket in large corporations is that a sizable percentage of them have the intellectual depth of the North Platt river in January and the moral compass of a cockroach: it's all about "me" and my piss-ant so-called "career"; the ends justify the means; if my boss wants it, it's the most important thing in the world; etc. JMVHO, of course. I could be wrong or dealing with too small a sample. Or maybe it's just the culture at a certain very very large tech firm where I used to work.
Agree with you, from what I, a 45 year old that grew up in a Archie Bunker white working class neighborhood in St. Paul, MN, see of young white kids in MN - from age 16-25, matches very similarly with the “kids these days” impressions of a friend of mine that is a 45 black law professor that grew up fairly poor working class, stable neighborhood in Detroit. Her critiques of several 16-18 year old nephews is almost strangely identical to mine, as is also our critiques of young co-workers, or in her case, students. They are generally good kids, not real troubled as they have good solid families and their families have had good economics, at least til now. They generally seem to get the idea of working hard at the education thing, technology etc. however they seem spoiled (not necessarily rotten, but soft), protected and have a sense of entitlement (not huge ego but like they do not think they have to prove themselves, things will just come) and they don’t have much of work ethic outside of bookish/computer stuff…like they don’t seem over-eager to work any type of normal “first” job or do yard work for an extra buck. They don’t seem to be hip to the whole older people will criticize you but it’s your job as an young adult growing up that you will take your lumps and you do it also because you have a sense it’s how you learn and you will be way better for it down the road. They seem wholly unprepared for this useful learning method (I’m not talking hostile abusive critiques, just critiques)
They don't seem to get that while some can get by chutzpah, talent, luck, pluck - the law of averages is most will have to just keep plugging and hope they acquire enough experience or enough knowledge/skills to make it further, basically just through a long time of hard work. While they are not overtly, in-your-face ingrates, like say some kids in the 60s or even 80s punks were, they definitely do not seem to have an attitude of past generations, like be respectful, humble, learn from elders etc’. They seem over-commercialized, don’t have much of that "get away from the system" attitude. If they are green, they are more likely to start a green business than run-off to a farm.
I’m afraid, that they are the least equipped generation to deal with the economic hardships ahead, but maybe I’m wrong, or maybe they will learn fast…what about the 30 yr old techie kid that has had great, coddling jobs since graduating but now his job is in India, how is he going to deal with that?
A friend of mine who puts things more bluntly says of the yougner generation...they are as useful as tits on a bull.
Now some is this is probably good, younger generation being softer in some ways, as each generation’s attitudes, developed in their young formative years, may be a bit anachronistic for the conditions they encounter later in their life. Maybe these kids are better suited for the new economy they will be running when they are 30-55 year olds in charge, who knows.
One example I see of this is: I myself notice a distinct difference in liberal women, like myself, that are say, only 15 or 20 years older than me. While I certainly see and acknowledge sexism and gender bias all the time, it has not gotten horribly in my way most of my days.While I deal with it and make a stand about at times, I’m distinctly less riled up about it than these slightly older women, who had it thrown in their face when they were younger. They tell me stories like getting fired for a group of them daring to wear pants rather than skirts to work a dirty blueprint room job, getting sexually harassed all the time, piggish husbands etc. We all see the same continuing biases and pick up on the situations with similar spotting of gender bias, but we see it through completely different lenses. It seems I feel less threatened by it, or to state it in-artfully, less insecure about it, while the older women seem to have more of an axe to grind and have way more of reaction to a whiff of sexism. I can see they distrust my lack of “fightiness” about it, and yet I have done well in a male-dominated field, and have not sold-out to do this. I think my lack of exposure at an early age to the overt, more brutal sexism and my being surrounded by men and women of my age who saw it normal to have women in the field and who treated me like peers, left me in a very different frame of mind. Not that I don’t think there is still much sexism to deal with, but I do have a different attitude about it that may actually be a better, more productive place for women of my age to be, who knows. I see black friends my age discussing and assessing younger black folks in regards to how the deal with racism in a similar way that older women seem to assess me in regards to gender bias.
It’s almost like the older generation that worked so hard to give a better situation to the younger generation is somewhat betrayed by them not joining with sufficient vigor to complete a battle so hard fought. It's the very success of the older generation that sets up the younger generation to be different. I never felt I had to prove that as a women, I was just as good as I guy because I knew I was just as good if not likely better and I rightly assumed most people my age thought so to…the older guys, of course, were a different story. So the feisty older women spawned a more relaxed and secure younger woman because they gave me a better environment to grow up than they had, and I return the favor by not being so feisty and probably not appreciating the fight sufficiently.
Same probably goes for economic strides generation to generation too…
The entire post was scrupulously gender-neutral. Why did you feel the need to insert gender into the discussion?
Debt-free is the greatest feeling in the world, it's extremely addicting. It changes people for life. The angry citizens are chopping cc's and walking away from scam mortgages. The vast majority that begin this journey to freedom never return to the chains of the PIGMAN'S USURY. These people are the ones that will demand state public banks. They will also demand or 'else clauses' in regulations.
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Thanks. I really enjoyed this article.
While stats and surveys are nice, nothing beats testimonials.
Studs Terkel's "Hard Times" provides some great insights into lasting attitudes from the Depression.
Most interesting, you'll find that while 25% were unemployed, 75% still had a job and many reflect that they were largely unaffected except when they had occasion to have to travel past a soup kitchen or witness the plight of a family member.
The lesson is, the more you read and pay attention to it, the more it will affect you!
good article, important concepts and hints at the generational "conflicts" of haves and have nots being reconciled with a restoration of togetherness in families. Maybe Howe is also pointing out that a "war" is on the way. As with most wars it will be about the seizing of resources by bully boys for their own wasted uses at the expense of the victims. I draw the parallel in a different way; that is, we are in the modern equivalent of serfs and lords. 90% of us are serfs and this number is growing. Let's face it the ludicrous situation where the government/fed/regulators of banks with worse balance sheets than the majority of those they lend money too are able to charge 5% borrowing costs whilst borrowing at zero from the Fed. We have all been focussing on the escalation in u/e 6 to 16%, the default rate average across all loans escalating to 10% whilst missing what crime is being perpetrated on the 75 % of people who have (not of 80/90/ or 120% FHA sponsored mortgages) LTV's of 60% 50% 40% ... Let me put it another way. Banks have 10% Tier 1 capital (leave aside how they got it or whether its real or whether tangible common equity is a better measure), this means they have an equivalent loan to value ratio of 90%. These banks receive money at zero from the Fed, they take this money with this crap balance sheet and lend it individuals and companies with 50% loan to value at 5% (whether through mortgages or loans). I am not talking about the fails and defaults that make the headlines. I am talking about the majority of company and individual balance sheets that are sound and have only 50% loan to value of assets...even after market sell-offs. Here is the rub, who on earth says that our Government should sponsor a structure where those who are highly leveraged (banks) should receive a 5% cheaper funding rate than those who are lowly leveraged (companies and individuals). This is sickening and even worse, the longer it persists, the smaller will become the pool of companies and individuals with lower loan to leverage ratios. It has always failed, it will always fail and why on earth are we still supporting a failed (bank based) model? There should be an instution that can lend money at lower than bank borrowing rates because the security is better..why don't we have a system that charges interest according to loan to value, so that those with high ratios (banks) pay more than those with low ratios (majority of companies and individuals).
well said, like the leverage point, given the levearge they have, why do they need to be subsidized.
this really does confirm my agreement with Ellen Brown, if we are to fractiaonl resrve banking, at least we should have the state have public banks like the state of ND, for starters...