Stock Market Valuations and Hamburgers


“To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying -- – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

– Warren Buffett, Fortune magazine: “The Wit and Wisdom of Warren Buffett”

 
A few weeks ago I spent two days giving multiple speeches alongside my friend Steve Blumenthal of CMG in a very cold New Jersey on the heels of a rather strong blizzard that had left the countryside white and beautiful. I listened to Steve do deep dives on stock market valuations. He started each of his presentations with Warren Buffett’s hamburger story, quoted above, before jumping into multiple charts. After a while, we began to go back and forth during his presentations, as I had my own insights on market valuations, generally in sync with his.

I asked him if he would be willing to do a joint letter on valuations from time to time (as he puts a great deal of research into the topic), and he agreed. This will be the first of our occasional joint letters (assuming we get a good response), with Steve doing the first draft and then me jumping in with comments and charts from my own sources. I want to thank the Ned Davis Research team for allowing us to use a few of their charts and data. (I should note that Steve will be at my conference, for those attendees who would like to talk with him further on this topic.) So let’s jump right in.

Stock Market Valuations and Hamburgers

Warren Buffett is famous for talking about his pleasure when both stock prices and hamburgers are cheap. He appears joyous when prices are down and cries when prices are up.

So should we sing or weep? Warren Buffett has a brilliant way of making the complicated simple. Let’s think about valuations like we think about the price of hamburgers and see if we are going to get more or less for our money. We’ll share with you our favorite valuation charts and story them in a way that we hope will help you better understand the markets and your portfolios.

When we speak to advisors and investors, we use Warren’s hamburger analogy.

Heads nod. Eyes lock in. People get it. If, on the other hand, we talk about price-to-earnings ratios (P/E), price-to-sales ratios, price-to-book ratios, eyes glaze over.

People generally don’t get it unless they are financial professionals or sophisticated investors. I’m sure you understand finance language, but a lot of people don’t. So for now, let’s talk hamburgers.

We didn’t have all of this big data or computing power in Steve’s early days with Merrill Lynch in 1984 or when I started in the investment publishing industry in 1982.
 
But we do today. What you’ll see in the data that follows is that hamburgers are richly priced. We’ll define what that means in terms of probable returns over the coming 7, 10, and 12 years and what it means in terms of relative risks.
 
Valuations and Forward Equity Market Returns

Following are a number of our favorite valuation metrics. Let’s take a look at them and see what the research data tell us about probable forward returns (high-priced or low-priced hamburgers):

Median P/E (Price-to-Earnings Ratio)

Think of the P/E like this. Your business has 10,000 shares outstanding, and your current share price is $10. That means your company is worth $100,000 (10,000 x $10). Now, let’s say your company earned $20,000 over the last 12 months. That works out to $2 in earnings for every share of outstanding stock ($20,000 in earnings divided by 10,000 shares). So if your stock price is $10 and your current earnings per share is $2, then your stock price is trading at a P/E of 5 (or simply $10 divided by $2 equals 5). It is simply a metric to see if your “hamburger” is pricey or cheap.

Note, this P/E calculation is based on your previous year’s earnings, not your estimated next year’s, or forward, earnings. If you expect to make $25,000 next year, then your forward P/E ratio is 4. As we will see later, optimistic earning projections can make valuations appear much better than they are. It’s like the old warning: “Objects in the mirror may be closer or larger than they appear.”

With the P/E calculation as a basic starting point, we can see if your hamburgers are expensive or inexpensive. We can look at the S&P 500 Index (a benchmark of “the market”) and we can measure what the average P/E has been over the last 52 years – call that “fair value” or a fair price for a hamburger.

What we see is that a P/E of 5 is a really cheap hamburger. Now, I believe in you, and I believe you can grow your company’s earnings over the coming years; but, wow, if I can buy your great company at a low price, odds are I’m going to make a lot of money on my investment in you. And if I really think you’re going to grow your earnings by 25%, that could make you a bargain.

We can look at the market as if it were a single company and gauge how expensive stocks are now. Over the last 52.8 years, the median fair value for the S&P 500 is a P/E of 17 (we define what we mean by median below). That means a fair price for your company would be the $2 in earnings we already calculated, times 17, or $34 per share. If I can buy your stock for $10 per share instead of its fair value of $34, good for me.

Investors who use this approach are called value investors. I should note that, relative to the actual performance of the market, value investors have been severely underperforming for the past four or five years. They have been punished by seeing assets leave their funds and go to passively managed funds that have shown much better performance at much lower fees. (Note from John: In a few weeks I’m going to talk about the source of this underperformance and what you can do about it. This is a very serious investment conundrum.)

But what if you earn $2 per share and your stock is trading today at $48 per share, or 24 times your earnings? Well then, I’m buying a very expensive burger. So price relative to what your company earns is a good way for us to see if we should sing or weep.

Here is how you read the following chart (from Ned Davis Research):

• Median P/E is the P/E in the middle, meaning there are 250 companies out of 500 that have a higher P/E and 250 that have a lower P/E. Using the median number eliminates the effect that a few very richly valued companies have on the average P/E, which is what you normally see reported in the media and presentations.

• The red line in the lower section shows you how P/Es have moved over time.

• The green dotted line is the 52.8 year median P/E. So a P/E of 17 is the historical “fair value.” Simply a point of reference.

• You can see that over time the red line moves above and below the dotted green line.

• If you remove the 2000–2002 period (the “great bull market”), we currently sit at the second most overvalued point since 1964. (Note: 1966 marked a secular bull market high, to be followed by a bear market that lasted from 1966 to 1982.)

• In the lower section of the chart you also see the labels “Very Overvalued,” “Overvalued,” and “Bargains.”


One last comment on the chart. At the very bottom of the chart, Ned Davis states that the market is now 7.9% above the level at which it is considered to be overvalued.

• That means the market would need to decline from the March 31 S&P 500 Index level of 2362.72 to 2176.07 to get back down to the “overvalued” threshold.

• It would need to decline to 1665.72 to be get to “fair value” (the median). That’s a drop of 29.5%.

• Also note “undervalued,” which we could see in a recession (now -51.1% away).

So fair value for your company is $34 per share (that’s your $2 per share in earnings times the “fair” P/E of 17). I’m thrilled if your stock is selling for $10, because my forward returns will likely be outstanding. Let’s see what that looks like next.

Median P/E and Forward 10-Year Returns

Median P/E can help us predict what future 10-year annualized returns are likely to be for the S&P 500 Index. Will your future burgers be pricey or cheap? The price at which you initially buy matters.

Here is how you read the following chart. (Data is from 1926 through 2014.):

• Median P/E is broken down into quintiles. Ned Davis Research looked at every month-end median P/E and ranked the numbers, with the lowest 20% going into quintile 1, the next 20% into quintile 2, and so on, with the most expensive or highest P/Es going into quintile 5.

• They then looked at forward 10-year returns by taking each month-end P/E and calculating the subsequent 10-year annualized S&P return.

• They sorted those returns into quintiles and determined that returns were greatest when initial P/Es where low and worse when P/Es were high.

 

With a current median P/E for the S&P of 24, we find ourselves firmly in quintile 5.That tells us to expect low returns over the coming 10 years. Though it appears that most investors are expecting 10% from equities, history tells us that the market as a whole will have a hard time growing much faster than our country’s GDP does.

Note that 4.3% returns are the average of what happens when stocks are purchased in the top 20% of valuations. That forward return number goes down considerably if we are in the top 10% or top 5%, which is where we are today. The following chart, from Ed Easterling, shows what 20-year returns look like based on starting P/E ratios. Using average P/E ratios rather than the median, we are looking at an average annual return over 20 years of less than 3% from where we are today. Again, not what investors are expecting.


I should point out that, in research done with Ed Easterling and shared in previous letters, we turned up 20-year periods when investors actually lost money (inflation-adjusted). So, the next time you go in for a tune-up of your financial-planning program, have them adjust your forward returns based on some of the data presented above and below. And then be prepared to exercise restraint when they show you the results. And then be determined to work longer and save more, because that’s what you may have to do.

The reality today is that hamburgers are expensive. You’ll need to be mentally prepared to play offense when P/Es eventually shift back down into quintiles 3, 2, and 1; but for now it’s time to play defense and think differently about your portfolio.

Use this next chart as a guide to help you determine which P/E quintile we’re in, going forward. We are clearly in the most expensive valuation quintile now:


Next, let’s next look at some other valuation measurements used by people who know what they’re talking about.

Shiller’s CAPE (cyclically adjusted P/E) – a measurement process that smoothes P/E over the last 10 years

The current Shiller’s CAPE P/E is 28.94, higher than at the market high in 2007, and higher than the bull market peak in 1966. Only 1929 and 2000 were higher.  


Jeremy Grantham: GMO’s 7-Year Asset Class Real Return Forecast


Here’s how to read the chart:

• Each month for many years, GMO has published its forward return forecasts.
There has been a high correlation over time between what GMO predicted and what turned out to be. An approximate 0.97 correlation, actually. That’s as close to the middle of the fairway as any forecaster has hit the ball, as far as I know, which is why you really need to take this forecast seriously.

• In 1999, GMO predicted a -1.9% annual real return over the following seven years for large-cap stocks. “Real” means after inflation. Everyone was racing into tech stocks back then – I’m sure you remember. The actual returns turned out even worse than GMO had forecast. I should note that in 1999 GMO, led by the venerable and brilliant Jeremy Grantham, was seeing a lot of money take flight from its management programs because investors had concluded that Jeremy just didn’t get it. Those investors, many of whom went into conventional momentum-based strategies, then had their heads handed to them, messily, in the next two years. GMO’s assets rose spectacularly during and after the subsequent bear market. We are seeing the pattern repeat today. GMO is once again bleeding assets because investors still don’t think that Grantham gets it. They’ve decided his management style is simply antiquated and his forecasts j ust can’t be right. Sometimes they really do ring a bell.

• As of February 2017, GMO is forecasting a -3.8% annual return for US large-cap equities and a -0.8% for US bonds over the coming seven years.

• With a richly priced market (expensive hamburgers) and GMO’s strong return forecast history, we find it illogical and unwise to chase into passive buy-and-hold ETFs and index funds at this time. Yet that is what is happening.

Hussman’s 12-year Return Forecast

John Hussman shared this next chart, and it shows that his 12-year forecast is for 0% to 2% returns before inflation. This is a portfolio based on 60% equities, 30% Treasury bonds, and 10% Treasury bills. Basically, a typical 60/40 portfolio. Question: Do you really think there will be 0% inflation over the next 12 years?


What about Drawdowns?

The following chart is a look at the downside risk by valuation quintile.

When valuations are highest, not only are returns lowest but risk is highest. This chart shows that from where we are today we should expect an 18% drawdown in an average case and a worst-case -51% if there is a recession (more recession probabilities in a moment).


Household Equity Ownership Percentage vs. Subsequent Rolling 10-Year S&P 500 Index Total Returns

This next chart shows that household equity ownership percentage has a high correlation with future annualized returns.

Here’s how you read the chart:

• Think in terms of buying power. If individuals are fully invested in stocks, how much more money do they have available to buy more stocks? More buyers than sellers pushes prices higher. More sellers than buyers pushes prices lower.

• Of course there are other buyers and sellers: institutions, corporations, and foreign investors (and now even government central banks). Just stick with us at this point.

• The blue line tracks the percentage of total household financial assets that are equity investments, including mutual funds and pensions.

• Take a look at the top red arrow. At the market top in March 2000, the high level of equity ownership was forecasting a return of -3% annualized over the coming 10 years.

• The black dotted line plots total return over the subsequent 10 years, on a rolling basis.

• Again, focus in on 2000. The dotted black line shows that total return over the following 10 years turned out to be approximately -1%.

• Look how closely the dotted black line tracks the blue line over time.


 
We can use this chart as a guide. We will share it with you from time to time. The point is that we want you to be prepared to overweight stocks when the getting gets good. The hard part is that you’ll need to be a buyer when everyone around you is panicking. That’s when opportunity is always best. But for now, if you are betting that we’re at the beginning of a new bull market, you are really expecting this time to be different.

Average of Four Valuation Indicators – Way Above Trend

Here’s how you read this next chart:

• The chart is a simplified summary of valuations obtained by plotting the average of four arithmetic series. It also shows standard deviations above and below the mean.

• Standard deviation measures extreme moves away from normal trend

• The four valuation metrics are the Crestmont PE, the cyclical PE10 (similar to the Shiller PE), the Q ratio, and the S&P composite from its regression.

• Note the far-right number on the chart: 84%. That’s our current valuation, and it’s two standard deviations above trend – the second-most overvalued reading in the data series history.



Valuations – Everything Else: Price-to-Sales, Price-to-Operating Earnings, Etc. 

The chart below looks at 20 different ways you can value the stock market. Note that it is possible to come up with valuation metrics that show the market to be moderately undervalued. Most of those methodologies have something to do with yield.

That being said, look to the far right – most valuation metrics are “Extremely Overvalued.”



Median P/E – Selected Dates

(This next section is basically from Steve, triggered by a discussion he had with a reporter from a mainstream media business journal. The journalist was struggling to understand the concept of projecting future returns based on current P/E ratios. Steve gave her the following chart.)

To make this discussion a little more real, I selected several dates to give you an idea as to what the median P/E was then and what the subsequent annualized 10-year return turned out to be.

• Green is low P/E, high subsequent returns

• Red is high P/E, low subsequent returns


 
Take a look at the December 2002 median P/E of 18.8. A month prior, on November 11, 2002, Warren Buffett said, “The bubble has popped, but stocks are still not cheap….” He was right. The return over the subsequent 10 years was just 4.94%. Gentle readers, we sit at a median PE of 24.2 today – higher than at any other point in the above chart. Caution!

Earnings Estimates

We use median P/E because analysts have historically been too optimistic in their earnings forecasts. This is why we don’t – and don’t believe you should – trust Wall Street estimates.

Here’s how you read the chart:

• The upper end of each squiggly line is the first Wall Street consensus estimate; the bottom of each line is the last.

• Note that for 2016 (the orange line), the first estimate was for $137 earnings per share on the S&P 500 Index, and the last was for $106. That’s a big miss.

• Also note that 2016 may end lower than the actual earnings for 2013 (the black line).


Now, here is another way to look at that same data, from Crestmont Research. What the next chart shows is that the earnings per share for 2016 dropped to $94.55, which is indeed lower than for 2013 and 2014! The initial forecast for 2016, 24 months ago, was for earnings to be $124.20. And as Ed Easterling has noted, the analysts haven’t learned anything: They are starting their predictions for 2018 at well over $130 (upper-right small squiggle). Already, 2017 forecasts are down $10 from the original predictions and are on target to be close to the earnings for 2016!


 
Earnings have been basically flat for the last three years and haven’t really improved all that much in the last six years, and yet we are in a serious cyclical market. The last three years have seen the market rise by over 50% with no earnings increase. As my friend Jared Dillian says, “Dude, it’s a bull market.” Sometimes that simply the only explanation for why the market goes up.

And on top of all that exuberance, volatility has now plunged to 4%, the lowest level in all rolling 12-month periods since 1950. Traders who have been shorting the VIX simply because it’s low and a reversal seems so obvious have been carried out on stretchers for the last three years.



Bull Markets Go Out with a Bang

This next chart is almost self-explanatory. Look at the numbers in the boxes outlined in black, which show the final-year performance in every cyclical bull market since 1947. They typically end with a great final blowoff year. Which is precisely what leads investors to pile ever more frenetically into the market, convinced once again that this time is truly different.

 
What Will Trigger the Next Bear Market?

Every bear market correction since 1947 that didn’t come during a recession was relatively quickly reversed. Think about what happened in 1987 and 1998. There were serious corrections and then a bull market. The bull market that found its footing in 1987 lasted for another 13 years. In 1998, we were only a few years away from a major correction accompanied by a recession. It was in late 1998 and early 1999 that I began writing about a coming secular bear market. Watching the market go even higher throughout 1999 was frustrating, but my book was out, and my words had been immortalized.

Obviously, it’s important to have a sense of when the next recession will happen. But, though the economy is at stall speed and this past week’s employment report proved weaker than expected (though the U-3 unemployment number dropped to 4.5%), there are very few signs that we could actually enter a recession this year.

We also have to remember that, as of last month, we are officially in the third-longest period of time since the previous recession. The charts below are again from Ed Easterling’s Crestmont Research, one of the most useful websites I know of.

If there is no recession by 2020, we will have lived through the first decade in 120 years without one. But for that to happen, everything has to go right. We have to have major tax reform – reform that does not include some form of tariffs and/or a border adjustment tax. No tinkering around the edges, no small-ball. We must also have extensive healthcare reform. We have to figure out how to increase the labor force participation rate. And we have to hope that Europe doesn’t blow up, that Italy somehow figures out how to deal with its banking crisis, and that China evades a major credit crisis, etc. – all sorts of things that are out of our control.


We need to put this post-2009 bull market into some historical perspective. These last two charts from Crestmont Research show the beginnings and ends of every bull and bear market since 1920. Every bull market other than the current one began at a point when the market was at a low P/E ratio, and every bear market began when the P/E ratio was high. Since 2000, though, the market has never returned to low valuations.
 
Valuations certainly went down in 2009, but then they turned right around and started back up. This is the strangest “bull market” cycle so far in the last 100 years. Is it possible that it could be different this time? Certainly; anything’s possible. It’s a bull market, dude!



The market never got to “cheap hamburgers” in 2009. Maybe it doesn’t need to, but we need to be aware that valuations are at such a high level that a fall to a P/E level that would get us back into the green zone where most bull markets start would be a bear market of biblical proportions. Think down over 60%.
 
Some Final Thoughts from John

I’m not saying that we have to get back to the green area now – at some point in the future that will actually happen – but you need to understand that we are at a very interesting, very challenging juncture, and I don’t think traditional buy-and-hold investing styles will be rewarded very well going forward.

In a somewhat cautionary example, I had an associate over at Tectonic Advisors do a search on his Bloomberg for me, analyzing the stocks in the Russell 2000 Index. Just over 30% of those stocks have less than zero earnings – as in, they are losing money. So when somebody passively buys a small-cap index – almost any small-cap index – they are buying a high percentage of companies that have no earnings.

I understand that Amazon and Tesla have no earnings and yet there may be good reasons to buy them. There may be similarly good reasons to buy hundreds of small-cap stocks that have no earnings today, because of expectations of future powerhouse earnings. I am an investor in biotech stocks that have no earnings.

But those are targeted and specific investments, not passive index investments where you get the good and the bad indiscriminately. Yes, active management has had its collective head beaten bloody for the past few years; and the proclivity for passive investing may persist a lot longer than any of us imagine, driving markets higher than many of us believe possible; but I think the stampede into passive investment is going to end up painfully, at the bottom of a cliff, for many investors.

I want to make it clear that I am not suggesting you get out of the stock market. In my own money management program, which is based on diversifying among trading strategies rather than asset classes, the managers I am using all have systems that are telling them to be quite bullish on equities right now.

I am sure that Steve and I could have written a similar letter in early 1999 (if the data had existed) that would have been as cautionary as today’s letter is. And yet, the correct short-term and medium-term position to be in throughout 1999 was long equities. So yes, my call for the beginning of a secular bear market in 1999 was early. It was the correct long-term position, but it was painful to sit on the sidelines. Ditto the experience I had in 2007, when I said we would be having a recession and the markets would go down, which they did – but only after they went up 20% from the date of that call.

I didn’t have to be spanked more than a few times before I learned that trying to talk logic regarding the market – or at least logic as I understand it – is not a useful investment or trading style. Having a rigorous, systematic approach is far better. I’m putting the final touches on a series of white papers on how to invest that we will be releasing to you quite shortly, after the Easter weekend. They are the culmination of years of research and a lot of work on the part of our team of serious investment professionals, and I’m sure you will find them interesting.
 
Augusta GA, the Masters, and Tampa Bay

I find myself looking out over the Savannah River in Augusta, Georgia. I ended up having to come to Augusta earlier than I had planned due to bad weather and numerous flight cancellations, skipping Atlanta. Augusta is quite the lovely town, and looking out over the river into South Carolina is very relaxing. As you might imagine, my focus this weekend is on the Masters golf tournament, where I am spending the weekend as the guest of good friends. It has been stressed to me that I’m not allowed to bring any digital devices onto the course or into the club, so for the first time in a very long time, other than on very long plane rides over the pond, I will be without connection. Then again, out on that splendid course, one of God’s own very special places, I am sure that my life will be enriched by not having anything in my hands other than a drink and/or a pimento cheese sandwich, which friends tell me is something that you must at least sample.

Monday I head down to Tampa Bay to meet up with Patrick Cox and a few friends to do a deep dive into some of the latest developments in the revolution that is happening in antiaging medicine. And revolution is the precisely correct term. I am utterly amazed at the discoveries being made.

Sometime later next week I’m going to get together with George Friedman for a Skype interview, when we’ll go over some of the presentations and discussion at his Geopolitical Futures conference last week in Washington DC. It was a most thought-provoking event, and I do have a few questions that require further consideration. I will send you a link when that gets done.

And with that, I think I’ll hit the send button and go walk along the river on a beautiful Friday afternoon. Have a great week!

Your unplugging for a few days analyst,

John Mauldin


Buttonwood

The unusual gap between American and European bond yields

America has the world’s largest economy and a strong currency, yet it costs its government more to borrow than Italy’s
AMERICA may be the world’s largest economy, but these days its government pays more than many others to borrow money. Its ten-year bond yields are higher than those in Britain, France, Singapore and even Italy.

The gap between American and German ten-year yields has been above two percentage points. For much of the past 25 years, it was very rare for the difference to exceed a single percentage point. On occasions, American yields fell below German levels (see chart).
Go back a generation and you might have expected the country with the higher bond yields to be the one with the weaker currency; investors would demand a higher yield to compensate for the risk of future depreciation. But that is not the case today. The dollar has been strong, relative to the euro, and many people expect it to strengthen further. Indeed, the higher yield on American government debt is one reason why investors might want to buy the dollar.

Instead, the gap may reflect differences in both monetary and fiscal policy. In America the Federal Reserve stopped buying Treasury bonds a while ago and has raised interest rates three times since December 2015; the European Central Bank (ECB) is still buying bonds as part of its “quantitative easing” programme, and pays a negative rate on deposits. The Trump administration is committed to tax cuts and infrastructure spending that would increase the budget deficit and require more bond issuance. The euro zone has no plans of this sort for fiscal stimulus.

The present divergence recalls that between American and Japanese bond yields. The latter have been consistently low for much of the past 20 years, as the Japanese economy became mired in slow growth and deflation. Perhaps investors expect the euro zone to get stuck in a deflationary quicksand as the American economy returns to more robust growth.

But that view does not show up in inflation expectations. An oft-used measure, derived from the bond market, is known as the “five year/five-year forward rate”. At the moment this gauge is showing the market forecast for the average inflation rate in 2022-27. In America the forecast is around 2.1%; in the euro zone it is around 1.7%. Six months ago the forecasts were 1.68% and 1.34%. Both have risen a little, but the gap has not widened significantly.
 
So more may be going on than simple economics. Politics, perhaps. The French presidential election is approaching and Marine Le Pen, the far-right candidate, has talked about redenominating French government bonds in francs instead of euros. That would lead to big losses for international investors.

Although few people think Ms Le Pen will actually become president, investors have been burned by last year’s voting upsets. So there has been a tendency to opt for the safest bonds in the euro zone—those issued by the German government. The spread between French and German ten-year yields is more than double its level on October 28th.

Another factor may be the actions of institutional investors. In a recent speech Hyun Song Shin of the Bank for International Settlements (BIS), an organisation of central banks, pointed out that both life-insurance companies and pension funds tend to have long-dated liabilities, ie, claims they must meet over many decades. They try to match those liabilities by buying government bonds. Accounting and regulatory rules often require them to use long-dated bond yields to calculate their liabilities.

But there is a mismatch: the liabilities of these companies and funds tend to be longer-dated than the bonds they hold. So when long-dated bond yields fall, their financial position deteriorates. That means they need to buy more bonds. This drives prices up—and yields further down, making the problem even worse. The BIS says euro-zone insurance companies accounted for 40% of the net purchases of the region’s government’s bonds in 2014. American pension funds and insurers own around $1.7trn of Treasury bonds (out of more than $14trn owned by the public), but seem to play a less substantial role in setting yields than European institutions.

The trend may change again, of course. Kit Juckes of Société Générale, a French bank, says the factors that have widened the spread between American and German yields may start to dissipate.

Political worries may subside if Ms Le Pen doesn’t win; the ECB may scale back its monetary easing; Mr Trump’s stimulus plans may be delayed, or watered down. Whatever else history teaches us, it does not suggest that German ten-year yields of 0.41% will turn out to be a bargain.


Zig-Zagging on Syria

Trump's Foreign Policy Game

A Commentary by Roland Nelles

 U.S. President Donald Trump

It could turn out that Donald Trump's decision to bomb Syria was the right one. But thus far, he has no clear policy and there are several risks to his approach. One of them is the president himself.

For almost six years, the U.S. under the leadership of Barack Obama stood by helplessly as Syrian President Bashar Assad slaughtered his people, with the blessing of both Moscow and Tehran. For six years, efforts were made to find a diplomatic solution to the Assad problem.

But nothing worked, because Russian President Vladimir Putin was uninterested in abandoning his most important ally in the Middle East.

Now, U.S. President Donald Trump is returning to standard American practice: Instead of relying on words, he is resorting to bombs - in this case, Tomahawk missiles - and has punished Assad for the chemical weapons attack for which the dictator is likely to blame.

The new American severity results from the assumption that the Russians and Iranians can only be forced into concessions if the West demonstrates that it isn't "weak" and that it can strike with just as much brutality as they can - and that it is prepared for an escalation of the Syrian conflict.

Considering the situation, it is certainly reasonable to conclude that, since the softer approach yielded no benefits, it is perhaps worthwhile trying a more heavy-handed strategy. German Chancellor Angela Merkel and French President François Hollande apparently agree, which is why they released a statement on Friday accepting the U.S. strikes.

If things go well, Assad, Russia and Iran will be cowed by Trump's response and will agree to a negotiated solution that results in the end of the Assad regime. In such a scenario, it could prove helpful that Putin initially saw Trump's presidency as a possibility to improve relations with Washington and to end painful sanctions. Europe's moderating influence, particularly from Merkel, could help push things in this direction.

A Good Hand to Play

If things don't go well, Assad, Putin and the Iranians will redouble their stubbornness. They certainly don't want to give the impression of weakness in the face of Trump's onslaught. It is thus possible that they will simply allow things to continue as before. They might even seek to test Trump to see how far he is willing to go - by, for example, making new weapons deliveries to Assad or increasing the number of "military advisers" in the country.

Putin still has a good hand to play. He has plenty of ways to make things difficult for Trump and the West, by reheating the frozen Ukraine conflict and opening a new theater of operations, for example. Iran, meanwhile, could easily employ targeted provocations to escalate the never-ending conflict with Saudi Arabia. Trump would suddenly find himself confronted with several new areas of conflict to which he would have to formulate a response.

Whatever happens, it would be more comforting if there were a different U.S. president sitting in the Oval Office. Unfortunately, though, it is Donald Trump, and he hasn't thus far given any indication that he is able to develop an intelligent, coherent and rigorous strategy. Experience shows that cool calculation is not one of his strengths. Rather, he is more influenced by mood and instinct - and by his overwhelming need to be popular.

His zig-zag path in Syria is a perfect example. Just a few days ago, the U.S. government essentially agreed that Assad could stay in power, with Secretary of State Rex Tillerson saying it was up to the Syrian people to decide and U.S. Ambassador to the UN Nikki Haley saying "our priority is no longer to sit and focus on getting Assad out."

Trump gave the impression that ethics and human rights were not considerations for his administration. Now, though, he suddenly wants to be seen as a knight in shining armor - with the added benefits that the strikes distract from his domestic policy failures and from accusations that his administration is too cozy with Moscow. It could be that his popularity ratings will temporarily rise. But confidence in his ability to manage such a crisis remains at a premium.

Under Trump, American foreign policy seems like a mere game. Unfortunately, it is deadly serious for the rest of us.


Sprott Precious Metals Watch

Trey Reik, Senior Portfolio Manager


Precious metals resumed their upward climb during the first two months of 2017. During January and February, spot gold rose 8.34% (from $1,152.27 to $1,248.33) and spot silver increased 15.08% (from $15.92 to $18.32). During early March, however, precious metals suddenly reversed course, with spot gold declining 2.30% and spot silver declining 5.29% through respective March 15 closes of $1,219.68 and $17.35. Without question, the greatest variable affecting precious-metal performance during recent weeks has been market handicapping of the Fed’s March 15 FOMC meeting. On 2/22/17, Bloomberg consensus expectations for a rate hike at the March meeting measured 34%. Ten trading days later (3/8/17), this percentage had swelled to 100%.

We attribute this swift shift largely to a short stretch of particularly impassioned Fed jawboning, book-ended by the FOMC’s two crucial thought-leaders, Vice Chairman William Dudley and Chair Janet Yellen. On 2/28/17, Mr. Dudley commented, “I think the case for monetary policy tightening has become a lot more compelling,” but then raised eyebrows with uncharacteristic frankness about U.S. asset prices: “There’s no question that animal spirits have been unleashed a bit, post the election.

The stock market is up a lot. ” By 3/3/17, Chair Yellen sealed the deal for a 3/15 hike in a speech to the Executives’ Club of Chicago, in which she remarked, “Indeed, at our meeting later this month…a further adjustment of the federal funds rate would likely be appropriate.”

As avid students of Fed communication, we find the Fed’s tone change since 2/28/17 nothing less than abrupt. What factors account for this sudden shift to urgency following years of trademark caution? Might the Fed be reacting to strengthening economic data?

While “soft” economic data and sentiment measures have broadly improved since Trump’s election, “hard” economic statistics (historically favored by the Fed) have remained stubbornly weak. During the recent period of hawkish Fed rhetoric (2/28/17-3/3/17), soft data continued to surprise to the upside: the Chicago PMI registered 57.4 versus estimates for 53.5 (2/28); Conference Board consumer confidence came in at 114.8 versus estimates for 111.0 (2/28); and ISM indices for manufacturing (3/1) and services (3/3) totaled 57.7 and 57.6 respectively (versus estimates for 56.2 and 56.5). Hard data released during the same period, however, continued to disappoint: Q4 GDP (2/28) was adjusted downward to 1.9% versus estimates for 2.1%; wholesale inventories (2/28) fell 0.1% versus estimates for an increase of 0.4% (pressures Q1 GDP); the U.S. trade deficit (2/28) surged to the second worst reading since 2008 (expanding to $69.2 billion versus estimates for $66.0 billion); and construction spending (3/1) declined 1.0% versus estimates for a gain of 0.6%. On 3/15, the Atlanta Fed’s GDPNow forecast for Q1 2017 collapsed all the way to 0.9%, after registering 2.5% as recently as 2/27 and 3.4% on 2/1. As shown in Figure 1, the spread between hard and soft economic data surprises has now expanded to a 17-year high (Bloomberg). Something has to give, and history overwhelmingly suggests soft data and sentiment measures are likely to recede dramatically in coming weeks.

The Fed is well aware of these probabilities, yet still felt heightened urgency for a March hike.


Figure 1: Spread between Bloomberg’s Hard Data and Soft Data Surprise Indexes (2000-Present)
fig1.jpg
Source: Bloomberg.


Our explanation for newfound Fed resolve is that we believe the Fed is finally becoming exorcised over the accelerating bubble in U.S. financial asset prices. This past week (3/9/17), the Fed published its Q4 2016 Z.1 Report (Financial Accounts of the United States). According to the Fed, U.S. household net worth increased a staggering $2.043 trillion during the final three months of the year.

By way of context, during the same period, the U.S. Bureau of Economic Analysis informs us that U.S. nominal GDP expanded by some $180.20 billion. During Q4 2016, therefore, U.S. household net worth increased at a rate 11.33 times the rate of U.S. GDP growth. This ratio is patently absurd and seems to have commanded the Fed’s immediate attention. Unfortunately, the Fed’s apparent alarm over untethered U.S. financial asset prices is coming far too late to absolve FOMC participants of responsibility for yet another Fed induced boom-bust cycle.

After all, the gaping detachment of U.S. household net worth from underlying U.S. productive output has been in full swing for almost eight years. Since Q1 2009, the Fed informs us that U.S. household net worth has increased (through 2016) an astonishing $38.016 trillion (from $54.790 trillion to $92.805 trillion) during a period of time in which the BEA calculates a $4.766 trillion increase in nominal GDP (from $14.090 trillion to $18.856 trillion). During the past seven-and-three-quarter years, therefore, U.S. household net worth has exploded at a rate exactly eight times the rate of underlying GDP growth.

As the S&P 500 Index sets new all-time highs on a weekly basis, investors may view discussion of HHNW/GDP ratios as little more than academic flagellation. We beg to differ. There are many relationships of which we are unsure, but we are quite certain no society can increase wealth eight times faster than output forever. Indeed, we attribute gold’s ascent during the past 16 years to progressive recognition, at the margin, of precisely these imbalances. The Fed’s Q4 2016 Z.1 Report suggests U.S. household net worth ($92.805 trillion) has now reached an unprecedented 492% of GDP. To lend historical context, this ratio now rests 40% higher than the 353% average during the five decades prior to the Greenspan/Bernanke/Yellen era (Figure 2). Because the Fed has relied on growth in HHNW as a potent transfer mechanism for “stimulative” QE and ZIRP policies, we would interpret current resolve to hike rates amid faltering economic growth as clear signal the Fed views reigning financial asset prices as increasingly problematic. Because the Fed has a highly checkered history in evaluating negative impacts of pierced bubbles (generally of their own creation), we offer some perspective on how precarious current U.S. asset valuations may be, and how far they may need to fall to rebalance the U.S. financial system toward historical norms.


Figure 2: U.S. Household Net Worth as a Percentage of GDP (1952-2016)

fig2.jpg
Source: Federal Reserve Flow of Funds Report.


It stands to reason that in a normally functioning economy, household net worth should expand by some factor of GDPgrowth- plus-savings. The greater the savings rate, the greater the rate of capital formation, leading to higher household net worth. Our examination of history and a dose of logic suggest to us that a reasonable approximation of this relationship might be (Real GDP Growth Rate + Net National Savings as % of GDP) / Real GDP Growth Rate = Projected HHNW/GDP Ratio. In Figure 3, we apply our representative formula to actual GDP and savings growth-rates in decades since 1950 to calculate a reasonable expected rate of wealth formation. During the 1950’s and 1960’s, as real GDP averaged 4% growth and net savings grew by over 10% of GDP on an annual basis, the U.S. was experiencing what we would view as high-quality capital formation. Our formula suggests any society which can build wealth at such prodigious rates should enjoy a networth- to-GDP ratio approaching four, which was roughly the case in the U.S. throughout these decades, as reflected in the Fed’s reported ratios in Figure 2.

In subsequent decades, our formula continues to generate ballpark-type approximations of the Fed’s reported HHNW-to-GDP ratios, all the way until the 1980’s, when declining growth-rates for both GDP and savings cause our model to begin to project declining HHNW-to- GDP ratios (Figure 3). Of course, at exactly the juncture at which eroding productivity of U.S. economic activity should have begun to weigh on the HHNW-to-GDP ratio, the Fed’s increasingly loose monetary policies generated three waves of inflation in various financial assets (stocks, then real estate, then everything) leading to the three upward spikes at the right of Figure 2.


Figure 3: Real GDP Growth, Net Savings & Sprott Implied NW/GDP Ratio (1950-2016)
fig3.jpg
Source: Sprott Asset Management



Since the turn of the millennium, as the intrinsic value of U.S. economic activity has been declining, the valuation of U.S. financial assets has been levitated by the easy-money policies of the Greenspan-Bernanke-Yellen Feds. As the U.S. economy has been generating less and less quality growth and savings, valuations of financial assets should have been declining, yet the Fed has interceded and intentionally fostered financial-asset inflation. Given the poor savings and growth rates of the past 16 years, our model suggests it would not be unreasonable for the ratio of HHNW-to-GDP to clear somewhere between 250% and 300%, implying a decline of between $36 trillion and $46 trillion in the aggregate value of the three major U.S. asset classes (stocks, bonds and real estate). To us, the only question is which asset class will bear the greatest readjustment burden in coming years. As is always the case in assessing gold’s investment merits, critical variables are significantly long-term in nature. For example, we maintain high confidence that the eroding quality of U.S. economic growth guarantees that U.S. financial asset prices will eventually reflect their true eroding intrinsic value, to gold’s significant benefit. Along the way, such as during the S&P 500 Index declines of 2000-2002 (50%) and 2007-2009 (57%), gold has provided unparalleled portfolio protection as over-exuberant faith in U.S. financial assets has been punished. Should the Fed’s recent shift in rate-hike urgency prove to be motivated by concern for stretched valuations of U.S. financial assets, as we suspect, it will be interesting to see just how far the Fed will go to press its message. We have long suggested the Fed’s reticence to raise rates has reflected concern for the instability of excessive U.S. debt loads, and now the Fed may finally be forced to raise rates out of concern for the instability of excessive U.S. equity valuations. Our long-term expectation of a “rock and a hard place” may be the immediate reality in which the Fed now finds itself. If so, gold’s role as productive portfolio diversifier is about to reassume center stage.

Perhaps the single greatest misconception about gold, especially in contemporary trading circles, is the erroneous belief that rising U.S. short-term interest rates are inherently threatening to gold’s prospects. We believe rising rates have far less to do with gold’s performance than the reasons why rates are rising and whether the Fed is deemed to be “in control.” After all, when gold exploded to all-time highs in January 1980, the Fed’s discount rate was 12% and fed funds were targeted at 14%. Many will object that the January 1980 experience is not germane, because conditions in 1979 were substantially unique (inflation, oil shock, Iran hostages and Hunt brothers). Conceding all decades are different, we turn to the more recent past for evidence rising rates can coexist with surging gold prices.


Figure 4: Spot Gold Versus Upper Band of Fed Funds Target Rate (7/4/03-3/1/07)
fig4.jpg
Source: Bloomberg.


In Figure 4, we plot the Fed’s target fed funds rate versus spot gold from mid-2003 through early-2007. Between June 2004 and June 2006, the FOMC increased its target funds rate by 25 basis points at 17 consecutive meetings! During the span, fed funds more than quintupled, from 1.0% to 5.25%, yet spot gold climbed as much as 86% along the way (from a $392.55 close the day before 6/30/04 liftoff to an intra-day high of $730.40 on 5/12/06). Obviously, Fed tightening has far less reflexive impact on the gold price than commonly perceived. Should the Fed have the temerity to push fed funds along the confines of their most recent dot plot (three hikes in 2017, followed by three more in 2018), we would expect immediate upticks in default rates across a wide spectrum of sketchy components of the U.S. $66 trillion credit-market debt pile.

In an environment of long-overdue debt rationalization, we would expect gold’s traditional profile, as a portfolio asset immune to both default and debasement, to garner significantly renewed investor enthusiasm.


Muslim Anxieties and India’s Future

Devesh Kapur
. Narendra Modi election victory Uttar Pradesh

PHILADELPHIA – A couple of weeks ago, Narendra Modi was celebrating his biggest electoral triumph since becoming India’s prime minister in 2014. His Bharatiya Janata Party (BJP) had swept into power in Uttar Pradesh, India’s largest state and one of its poorest. The scale of the victory left the BJP’s opponents shell-shocked, and seemed to indicate that Modi will be a shoo-in to secure a second term in 2019. Anticipating deeper economic reforms from a strengthened Modi administration, India’s stock market surged.
 
But there is one group with little reason to celebrate the BJP’s victory: India’s 172 million Muslims.
 
For decades, most of India’s political parties have practiced forms of “strategic secularism” to secure a so-called Muslim vote bank – an approach that has stoked resentment among the country’s Hindu majority while doing little to improve Muslims’ wellbeing. The BJP has gone another route, focusing on drawing votes from aggrieved Hindus. In Uttar Pradesh, the BJP did not put up a single Muslim candidate, even though about 18% of the state’s population is Muslim.
 
That did not have to mean that a BJP victory would be bad for Muslims. On the contrary, the party’s success put it in a strong position to reach out to the Muslim community on core development issues. But, judging by the BJP’s actions since the election, this appears unlikely.
 
The BJP revealed its thinking within days of the election, when it appointed politician-priest Yogi Adityanath, first elected to parliament in 1998 at the age of 26, as Chief Minister of Uttar Pradesh. While Adityanath has a strong local power base in the abjectly poor eastern part of the state, which has supported his reelection five times, he has no administrative experience.
 
More troubling is that Adityanath represents some of the BJP’s most extreme elements. He is a poster child for sectarian strains of Hindu nationalism – a firebrand Muslim-baiter who, along with his followers, has been accused of fomenting communal riots.
 
Adityanath’s behavior has triggered multiple criminal cases against him, which are languishing in India’s notoriously slow-moving courts. (Now that Adityanath is in control of the state’s police, those cases surely will not move forward.) That behavior has also won him a stamp of approval from the BJP’s ideological parent, the Rashtriya Swayamsevak Sangh (RSS), which apparently strongly backed him for the chief minister’s position.
 
The appointment of Adityanath thus seems to indicate that the BJP will employ anti-Muslim animus in its effort to consolidate Hindu votes in the 2019 national elections. But that strategy is clearly at odds with Modi’s rhetorical focus on economic development. In fact, one of the likely consequences of Adityanath’s promotion – and the negative signal it sends to India’s largest religious minority – is that economic development will suffer.
 
India’s Muslims will be hit particularly hard, with further social and political marginalization undermining their economic prospects. Given the size of India’s Muslim population, this is bound to drag down overall economic development.
 
The consequences will be felt across Uttar Pradesh. If polarization and strife increase, much-needed investment will not materialize, and the state’s already scarce human capital will flee, making it all but impossible to improve economic performance. Because Uttar Pradesh is home to one-sixth of India’s population, this will have far-reaching consequences for the country’s overall economic growth. Likewise, Uttar Pradesh’s dismal social indicators – it has India’s worst infant and under-five mortality rates – will have negative externalities for the country as a whole.
 
To see what happens when politicians pander to religion, one need only look at neighboring Pakistan.
 
A bigoted chief minister running India’s largest state might well help the ruling party’s short-term electoral prospects, but it could have serious consequences for the country over the longer term.
The risks extend far beyond economics. While India is home to one of the world’s largest Muslim communities, its members have remained absent from anxious global conversations about militant Islam. This may reflect, at least partly, India’s pluralistic society and competitive democracy – a system in which almost all communities have felt included, even if their odds of winning have been low.
 
But if India’s Muslims feel deliberately shut out, as they might in the wake of Adityanath’s appointment, they may come to believe that they have little to lose. As it is, India’s burgeoning youth population is struggling to find employment opportunities, making them easy targets for troublemakers. With the Islamic State and Pakistan’s wayward security service, the Inter-Services Intelligence, looking to fish in Indian waters, overtly anti-Muslim policies amount to playing with fire.
 
The Uttar Pradesh elections gave Modi a strong mandate. But instead of taking that as an opportunity to lift up a backward state, he is opting for rank opportunism. While he called for humility from the BJP after the election, the appointment of Adityanath looks much like hubris. Like Icarus, Modi is flying too close to the sun, seemingly unaware of the grave risks.
 
 


Foundation - The Fall of the American Galactic Empire

By: The Burning Platform

"The fall of Empire, gentlemen, is a massive thing, however, and not easily fought. It is dictated by a rising bureaucracy, a receding initiative, a freezing of caste, a damming of curiosity - a hundred other factors. It has been going on, as I have said, for centuries, and it is too majestic and massive a movement to stop."  
- Isaac Asimov, Foundation

Isaac Asimov's Books

"Any fool can tell a crisis when it arrives. The real service to the state is to detect it in embryo." 
- Isaac Asimov, Foundation

I read Isaac Asimov's renowned award winning science fiction trilogy four decades ago as a teenager.

I read them because I liked science fiction novels, not because I was trying to understand the correlation to the fall of the Roman Empire. The books that came to be called the Foundation Trilogy (Foundation, Foundation and Empire, and Second Foundation) were not written as novels; they're the collected Foundation stories Asimov wrote between 1941 and 1950. He wrote these stories during the final stages of our last Fourth Turning Crisis and the beginning stages of the next High. This was the same time frame in which Tolkien wrote the Lord of the Rings Trilogy and Orwell wrote 1984. This was not a coincidence.

The tone of foreboding, danger, dread, and impending doom, along with unending warfare, propels all of these novels because they were all written during the bloodiest and most perilous portion of the last Fourth Turning. As the linear thinking establishment continues to be blindsided by the continued deterioration of the economic, political, social, and cultural conditions in the world, we have entered the most treacherous phase of our present Fourth Turning.

That ominous mood engulfing the world is not a new dynamic, but a cyclical event arriving every 80 or so years. Eight decades ago the world was on the verge of a world war which would kill 65 million people. Eight decades prior to 1937 the country was on the verge of a Civil War which would kill almost 5% of the male population. Eight decades prior to 1857 the American Revolution had just begun and would last six more bloody years. None of this is a coincidence. 

The generational configuration repeats itself every eighty years, driving the mood change which leads to revolutionary change and the destruction of the existing social order.

Isaac Asimov certainly didn't foresee his Foundation stories representing the decline of an American Empire that didn't yet exist. The work that inspired Asimov was Edward Gibbon's multi-volume series, The Decline and Fall of the Roman Empire, published between 1776 and 1789. Gibbon saw Rome's fall not as a consequence of specific, dramatic events, but as the result of the gradual decline of civic virtue, monetary debasement and rise of Christianity, which made the Romans less vested in worldly affairs.

Gibbon's tome reflects the same generational theory espoused by Strauss and Howe in The Fourth Turning. Gibbon's conclusion was human nature never changes, and mankind's penchant for division, amplified by environmental and cultural differences, is what governs the cyclical nature of history.

Gibbon constructs a narrative spanning centuries as events unfold and emperors' successes and failures occur within the context of a relentless decline of empire. The specific events and behaviors of individual emperors were inconsequential within the larger framework and pattern of historical decline. History plods relentlessly onward, driven by the law of large numbers.

Asimov described his inspiration for the novels:
"I wanted to consider essentially the science of psychohistory, something I made up myself. It was, in a sense, the struggle between free will and determinism. On the other hand, I wanted to do a story on the analogy of The Decline and Fall of the Roman Empire, but on the much larger scale of the galaxy. To do that, I took over the aura of the Roman Empire and wrote it very large. The social system, then, is very much like the Roman imperial system, but that was just my skeleton. 
It seemed to me that if we did have a galactic empire, there would be so many human beings”quintillions of them”that perhaps you might be able to predict very accurately how societies would behave, even though you couldn't predict how individuals composing those societies would behave. So, against the background of the Roman Empire written large, I invented the science of psychohistory. Throughout the entire trilogy, then, there are the opposing forces of individual desire and that dead hand of social inevitability." 

  Is History Pre-Determined?
"Don't you see? It's Galaxy-wide. It's a worship of the past. It's a deterioration - a stagnation!"  
- Isaac Asimov, Foundation
"It has been my philosophy of life that difficulties vanish when faced boldly." 
- Isaac Asimov, Foundation

The Foundation trilogy opens on Trantor, the capital of the 12,000-year-old Galactic Empire.

Though the empire appears stable and powerful, it is slowly decaying in ways that parallel the decline of the Western Roman Empire. Hari Seldon, a mathematician and psychologist, has developed psychohistory, a new field of science that equates all possibilities in large societies to mathematics, allowing for the prediction of future events.

Psychohistory is a blend of crowd psychology and high-level math. An able psychohistorian can predict the long-term aggregate behavior of billions of people many years in the future.

However, it only works with large groups. Psychohistory is almost useless for predicting the behavior of an individual. Also, it's no good if the group being analyzed is aware it's being analyzed - because if it's aware, the group changes its behavior.

Using psychohistory, Seldon has discovered the declining nature of the Empire, angering the aristocratic rulers of the Empire. The rulers consider Seldon's views and statements treasonous, and he is arrested. Seldon is tried by the state and defends his beliefs, explaining his theory the Empire will collapse in 300 years and enter a 30,000-year dark age.

He informs the rulers an alternative to this future is attainable, and explains to them generating an anthology of all human knowledge, the Encyclopedia Galactica, would not avert the inevitable fall of the Empire but would reduce the Dark Age to "only" 1,000 years.

The fearful state apparatchiks offer him exile to a remote world, Terminus, with other academic intellectuals who could help him create the Encyclopedia. He accepts their offer, and sets in motion his plan to set up two Foundations, one at either end of the galaxy, to preserve the accumulated knowledge of humanity and thereby shorten the Dark Age, once the Empire collapses. Seldon created the Foundation, knowing it would eventually be seen as a threat to rulers of the Empire, provoking an eventual attack. That is why he created a Second Foundation, unknown to the ruling class.

Asimov's psychohistory concept, based on the predictability of human actions in large numbers, has similarities to Strauss & Howe's generational theory. His theory didn't pretend to predict the actions of individuals, but formulated definite laws developed by mathematical analysis to predict the mass action of human groups. His novel explores the centuries old debate of whether human history proceeds in a predictable fashion, with individuals incapable of changing its course, or whether individuals can alter its progression.

The cyclical nature of history, driven by generational cohorts numbering tens of millions, has been documented over centuries by Strauss & Howe in their 1997 opus The Fourth Turning.

Human beings in large numbers react in a herd-like predictable manner. I know that is disappointing to all the linear thinking individualists who erroneously believe one person can change the world and course of history.

The cyclical crisis's that occur every eighty years matches up with how every Foundation story centers on what is called a Seldon crisis, the conjunction of seemingly insoluble external and internal difficulties. The crises were all predicted by Seldon, who appears near the end of each story as a hologram to confirm the Foundation has traversed the latest one correctly.

The "Seldon Crises" take on two forms. Either events unfold in such a way there is only one clear path to take, or the forces of history conspire to determine the outcome. But, the common feature is free will doesn't matter. The heroes and adversaries believe their choices will make a difference when, in fact, the future is already written. This is a controversial viewpoint which angers many people because they feel it robs them of their individuality.

Most people don't want to be lumped together in an amalgamation of other humans because they believe admitting so would strip them of their sense of free will. Their delicate sensibilities are bruised by the unequivocal fact their individual actions are virtually meaningless to the direction of history. But, the madness of crowds can dramatically impact antiquity.

Nutcases taking selfies with crooked hillary
"In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first." 
- Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

Many people argue the dynamic advancements in technology and science have changed the world in such a way to alter human nature in a positive way, thereby resulting in humans acting in a more rational manner. This alteration would result in a level of human progress not experienced previously. The falsity of this technological theory is borne out by the continuation of war, government corruption, greed, belief in economic fallacies, civic decay, cultural degradation, and global disorder sweeping across the world. Humanity is incapable of change. 

The same weaknesses and self- destructive traits which have plagued them throughout history are as prevalent today as they ever were.

Asimov's solution to the failure of humanity to change was to create an academic oriented benevolent ruling class who could save the human race from destroying itself. He seems to have been well before his time with regards to creating Shadow Governments and Deep State functionaries. It appears he agreed with his contemporary Edward Bernays. The masses could not be trusted to make good decisions, so they needed more intellectually advanced men to guide their actions.

"The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized.  
Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. …In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons - who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind." 
- Edward Bernays - Propaganda

In Part Two of this article I will compare and contrast Donald Trump's rise to power to the rise of The Mule in Asimov's masterpiece. Unusually gifted individuals come along once in a lifetime to disrupt the plans of the existing social order.