Generational Chaos Ahead

By John Mauldin

“This generation of Americans has a rendezvous with destiny.” 

– Franklin D. Roosevelt 
“Each generation imagines itself to be more intelligent that the one that went before it, and wiser than the one that comes after it.” 

– George Orwell

After a lifetime of watching financial markets, the speed at which traders react still amazes me. Sometimes it seems to me like they hail from the “ready, shoot, aim,” school of thinking. Economic trends almost never turn on a dime; and though we can look back and find a moment that was the exact bottom or top, there were forces building that caused people to move from one side of the boat to the other, tilting the economy or markets or society in a different direction. New data can alter our probabilities – but rarely as fast as trading algorithms seem to think. Long-term trends, by definition, change slowly.
I had that thought in mind when I asked Neil Howe to be our kick-off speaker at the Strategic Investment Conference and invited Niall Ferguson to wrap it all up three days later. As historians, they both gaze back through time to identify patterns and draw lessons. They were the bookends who framed the wide-ranging discussions in between. They have both been very influential in helping me develop my understanding of the world.
As I said two weeks ago, the experts I brought to the conference, even the ones I expected to be raging bulls, were mostly bearish. The surprise was Niall Ferguson, who has become the new raging bull. That’s pretty much the one thing you can count on at my conference: surprises! But you can see that even Niall is deeply concerned about much of what is happening in the world.
Now, as I reflect, I see how the various crisis forecasts fit Neil Howe’s “Fourth Turning” formula. Today I’ll tell you why. I’m going to do something a little different in this letter in that I’m going to borrow wholesale from Neil’s speech at the conference and his voluminous writings in order to give us a view of what to expect in the next five to eight years. And given that the Brexit vote looms next week and that it’s part and parcel of what Neil is talking about, I will offer some final thoughts on Brexit. That should be enough to keep us occupied for the next few minutes.
Before we dive in, let me note that I realize this letter is very US-focused. That said, the concept of generations and turnings is not just a US or Anglo-Saxon phenomenon. All nations, all peoples, experience their own recurring cultural seasons and changes. No part of humanity is exempt from this process. Some of my best late-night conversations with Neil have been about the generations and turnings of different countries (especially China).

Sometimes, at the end of the evening, I wish that I had secretly recorded our conversation so I could have it transcribed and review it later. Alas, I’ve never had the foresight to do so.

The Fourth Turning

I think the framework of “generational change,” and specifically the concept of the Fourth Turning, originally appeared in a 1997 book by that name, written by Neil Howe and William Strauss (who, very sadly, died a few years ago from pancreatic cancer – a great loss) are very important in understanding what is happening in our society. The concepts don’t attempt to explain the current turmoil in its entirety, but they do enable us to frame our thinking about our time in context, in the stream of history.
It is one of the great ironies of life that each generation believes its experiences are unique. This is not unlike teenagers thinking that their parents can’t possibly understand the emotions pouring through them, certain that the old fuddy-duddies could never have experienced such emotions themselves. The reality is that we have seen this movie before – with different actors and main characters and plot twists and technological devices, to be sure – but the basic plot seems to push along a hauntingly familiar path.
I have to warn you: some of what follows won’t be encouraging because, as Neil says, we’re in a Fourth Turning. Fourth Turnings are crisis periods, and we are barely halfway through this one. But take heart: better times await us on the other side of the crisis.
Neil has a research service that looks at how generations affect markets and economics and products and companies. I find their work fascinating. The service is not cheap, but if you are running a major fund or are responsible for choosing specific investments, I think you will be richly rewarded with ideas and insights for your dollar. You can learn more about Neil’s firm at You can also see six free videos of interviews of Neil discussing a wide variety of subjects, at
And now I will try to take my notes from Neil’s speech and my familiarity with his writings and distill the essence of his lessons. This letter will not substitute, though, for your actually buying The Fourth Turning and reading it; and those who want further understanding can go back and read Strauss and Howe’s previous book, Generations: The History of America's Future, 1584–2069.
Attitudes Are Generational
Every parent who has watched children grow into adults knows that our personalities form early in life. Psychologists from Sigmund Freud forward have generally agreed: our core attitudes about life are largely locked in by age five or so. Changing those attitudes requires intense effort.
Howe and Strauss took this obvious truth and drew an obvious conclusion: if our attitudes form in early childhood, then the point in history at which we live our childhood must play a large part in shaping our attitudes.
Howe and Strauss added a corollary: it’s not just early childhood that forms us. We go through a second formative period in early adulthood. The challenges we face as we become independent adults help determine our approach to life.
These insights mean we can divide the population into generational cohorts, each spanning roughly twenty years. Each generation, then, consists of the people who were born and came of age at the same point in history. They had similar experiences and thus gravitated toward similar attitudes.
Members of each generation are also individuals, of course. Family and other circumstances leave each person more or less attached to the broader attitudes of their time. Generational attitudes don’t determine everything, but they’re still important.
At SIC, Neil illustrated the point with this cartoon. (I think we should now add an illustration of a couple texting on their phones, saying “Let’s tell our friends online first.”)

Amusing, yes, but true. Young love, a universal experience, took different forms for Americans who grew up in the 1950s vs. the 1970s vs. the 1990s. Ditto for many other aspects of life.
Until recently it was unusual to have more than four generations alive at the same time. Improved longevity means we now have six generations among us.
Our oldest citizens are from the “G.I. Generation,” or what Tom Brokaw famously called the “Greatest Generation.” Born from 1901–1924, their childhood milieu included World War I and the prosperous Roaring ’20s. As young adults, they experienced – and eventually overcame – the challenges of the Great Depression and World War II.
The Silent Generation, born 1925–1942, watched as children while their parents met head-on the great economic and military challenges of that day. With the exception of a few, they were too young to participate directly in the war and entered adulthood in a time of post-war peace and prosperity. Howe calls that period the “American High.”
Those two generations have now either passed away or are well into retirement. They control a great deal of wealth, which gives them influence, but they no longer wield the levers of power. That role now belongs to the Baby Boomers (born 1943–1960) and increasingly to Generation X (born 1961–1981).

Next in line are the much-discussed Millennials (born 1982–2004) and then today’s young children, whom Howe dubs the Homeland Generation (born 2005–2025?). The social and economic influence of these latter two generations is growing as that of the Boomers and Generation Xers declines.
Heroes, Artists, Prophets, & Nomads

In their unbelievably prescient and prophetic 1997 book, The Fourth Turning, Howe and Strauss identified four generational archetypes: Hero, Artist, Prophet, and Nomad. Each consists of people born in a roughly twenty-year period. As each archetypal generation reaches the end of its 80-year lifespan, it is replaced by a new generation of the same archetype.
Each archetypal generation proceeds through the normal phases of life: childhood, young adulthood, mature adulthood, and old age. Each tends to dominate society during middle age (40–60 years old), then begins dying off as the next generation takes the helm.
The change of control from one generation to the next is called a “turning” in the Strauss/Howe scheme. The turnings have their own characteristics, which I’ll describe shortly. First, let’s look at the archetypes and how they match the generations alive today.


Birth Year
Generational Name
Baby Boom
Generation X

The characteristics of each archetype aren’t neatly divided by the calendar; they are better seen as evolving along a continuum. (This is a very important point. It is why we get trends and changes, not abrupt turnarounds. Thankfully.) People born toward the beginning or end of a generation share some aspects of the previous or following one. Obviously, individual differences can also outweigh generational identity for any particular person. (We all know people who were seemingly born in the wrong era.)

The archetypes simply describe broad tendencies that, at the larger societal level, add up to significant differences.
Hero generations are usually raised by protective parents. Heroes come of age during a time of great crisis. Howe calls them heroes because they resolve that crisis, an accomplishment that then defines the rest of their lives. Following the crisis, the Heroes become institutionally powerful in midlife and remain focused on meeting great challenges. In old age they tend to have a spiritual awakening as they watch younger generations work through cultural upheaval.
The G.I. Generation that fought World War II is the most recent example of the Hero archetype. They built the US into an economic powerhouse in the postwar years and then confronted youthful rebellion in the 1960s. Further back, the generation of Thomas Jefferson and James Madison, heroes of the American Revolution, experienced the religious “Great Awakening” in their twilight years.
Artists are the children of heroes, born before and during the crisis but not old enough to be an active part of the solution. Highly protected during childhood, Artists are risk-averse young adults in the post-crisis years. They see conformity as the best path to success. They develop and refine the innovations forged in the crisis. Artists experience the same cultural awakening as Heroes, but from the perspective of mid-adulthood.
Today’s older retirees are mostly artists, part of the “Silent Generation” that may remember World War II but was too young to participate. They married early and moved into gleaming new 1950s suburbs. The Silent Generation went through its own midlife crisis in the 1970s and 1980s before entering a historically affluent, active, gated-community retirement.
Prophet generations experience childhood in a period of post-crisis affluence. Having not seen a real crisis, they often create cultural upheaval during their young adult years. In mid-life they become moralistic, values-obsessed leaders and parents. As they enter old age, prophets lay the groundwork for the next crisis.
The postwar Baby Boomers are the latest Prophet generation. They grew up in generally comfortable times with the US at the height of its global power. They expanded their consciousness when they came of age in the “Awakening” period of the 1960s, defined the 1970s/1980s “yuppie” lifestyle, and are now entering old age, having shaped the culture by virtue of sheer numbers.
Nomads are the fourth and final archetype. They are children during the “Awakening” periods of cultural chaos. Unlike the overly indulged and protected Prophets, Nomads go through childhood with minimal supervision and guidance. They learn early in life not to trust society’s basic institutions. They come of age as individualistic pragmatists.
The most recent Nomads are Generation X, born in the 1960s and 1970s. Their earliest memories are of faraway war, urban protests, no-fault divorce, and broken homes.

Now entering mid-life, Generation X is trying to give its own children a better experience. They find success elusive because they distrust large institutions and have no strong connections to public life. They prefer to stay out of the spotlight and trust only themselves. Their story is still unfolding today.
After the Nomad archetype, the cycle repeats with another Hero generation, the Millennials (born from 1982 through about 2004), who are beginning to take root in American culture. They are a large generation numerically, filling schools and colleges and propelling new technology into the mainstream. If the pattern holds, they will face a great crisis. It will influence the rest of their lives just as World War II shaped the G.I. Generation Heroes.
And guess what: we are all in that crisis right now.
A Turning Roughly Every 20 Years

If Strauss and Howe are correct, the four generational archetypes literally created Anglo-American history. A new era, or “turning,” begins every twenty or so years.

Four turnings bring a complete cycle, matching the 80–90 year human lifespan.
The Romans used the word Saeculum to describe this length of time, meaning “a long human life” or “a natural century.” In their book Generations, Strauss and Howe outline seven full saecula, going back to the 15th century. Much like the changing seasons, the turnings within each saeculum follow a recurring pattern.
The first turning is called a High, a confident time in which social institutions are strong and factions pull together for the greater good.
The second turning is the Awakening. This period is marked by cultural and religious renewal – changes accompanied by resistance and conflict.
The third turning is an Unraveling. People lose trust in institutions and embrace individualism.
The fourth turning is the Crisis, a time of major upheaval when some great threat forces a redefinition of core institutions and public behavior.

US history confirms that the pattern is more than coincidental. Begin with a day when crisis was triggered: December 7th, 1941. The attack on Pearl Harbor might not (or at least should not) have been as surprising as many think, but it did mark the onset of a new crisis for a nation already dealing with the Great Depression.
Eighty-five years earlier, Confederate forces fired on Fort Sumter, launching the Civil War and redefining the core institutions surrounding state’s rights and individual rights.
Dial the calendar back another eighty-five years, and we find a group of men in Philadelphia committing lives, fortunes, and sacred honor by signing the Declaration of Independence.
The pattern continues: four generations before the American Revolution our country experienced the 1689 “Glorious Revolution.” One lifespan earlier the English navy defeated the Spanish Armada, which followed by a century the bloody War of the Roses, creating Tudor England as a modern nation-state.
Halfway between these crisis periods we see Awakening periods like England’s Protestant Reformation, the American Transcendental era of the 1820s and ’30s, and the 1960s American spiritual and social upheaval. Like the seasons, turnings unfold gradually, almost unnoticeably at first. They can also vary, just as we experience warm autumn days and springtime cold fronts.
Social forces drive the turnings, just as planetary forces create seasons. At any given time, four generation are alive: children, young adults, middle-aged, and elderly. Each experiences history from its own perspective. If you were six years old, listening to the radio with your 65-year-old grandmother on December 7, 1941, you heard about Pearl Harbor together. Your reactions, however, were quite different. You were on the way up; Grandma was on the way out. And if you were a young man or woman, your reactions were altogether different from those of the six- or the 65-year-old.
Guide to the Fourth Turning
Each Fourth Turning is a Crisis. When Howe uses that word, he doesn’t mean a short period of difficulty. He means an existential crisis, one in which society’s strongest instititions collapse (or are severely challenged and stressed) and national survival is in serious doubt. The Crisis can be economic, cultural, religious, military, or all the above.

Sound familiar? It should. By Neil Howe’s timeline, we are today about halfway through the Fourth Turning’s Crisis phase. We may have another decade to go. When it’s over, we will be able to look back and see that important changes occurred.
If this Fourth Turning is like previous ones, here is what we should see. See how the following Fourth Turning characteristics match today’s headlines. Remember, Howe and Strauss were writing all this in 1997, well before today’s events.

Rising Community: Notice in the Orlando shooting coverage how often people use the word community to designate the different groups with which people identify.
Following the tragic nightclub events, Orlando’s communities drew together to support their members and each other. We see the same behavior in other stressful events. “Je suis Charlie,” the motto that emerged from the January 2015 Paris shootings, comes to mind.  
Think of all the other disasters we have seen in recent times, and the public response to them. I am not suggesting that community comes to the fore only during a Fourth Turning – far from it. But it does gain strength during such periods.

Strengthening Government: Small-government conservatives like me and possibly you are on the defensive. We live in a time when most voters would rather enlarge government than shrink it. We can expect to see stronger government action regardless of who wins this year’s presidential election.

Party Realignment: Donald Trump is obviously changing the Republican Party into something quite different than it was just four years ago. Bernie Sanders, by forcing Hillary Clinton to tack left in the primaries, may have done the same to the Democrats. I don’t think this is over yet. We will see a lot of shifting and movement between the two parties as they redefine themselves. I am really quite taken with an interview that Trump did a few weeks ago where he talked about his vision that the Republican Party would be a “workers’ party” within four to eight years. You spring that on me four years ago, and I smile indulgently. Now, within the framework of the Protected versus the Unprotected, I wonder… (The background music has to be from my generation’s chief prophet, Bob Dylan, and the song is “The Times They Are A-Changin’.”)

Introverted Foreign Policy: Fifteen years on, the U.S. is increasingly tired of the War on Terror. Donald Trump and Bernie Sanders both gained traction in the primaries with a less aggressive approach to foreign engagement.

Technology to Scale: The Internet has outgrown its adolescence and entered adulthood. The technology industry now views the Internet as a platform on which to build new capabilities: virtual reality, home automation, video content, and more.

Rising Income Equality: The years of ZIRP and QE served mainly to drive up asset prices, enriching those who are already wealthy and doing little for everyone else.
Now a backlash is building against wealth concentration. We may see attempts to raise taxes on the wealthy, higher working-class wages, and other measures intended to “level the playing field.”

Wage Disruption: In the last year we’ve seen major retailers hike hourly pay; $15/hour minimum wages passed in California and elsewhere; and there are growing calls for labor to get a bigger piece of the pie.

Fourth Turnings bring social and cultural changes, too.
Fertility Bust: Birth rates are now near or even significantly below replacement rate throughout the developed world. Much of the Millennial Generation feels financially or otherwise unprepared for parenthood.

Falling Immigration: Both the US and Europe are trying to control immigrant flows.
Refugees from the Middle East are the exception in an otherwise less migratory world.

Falling Crime: Criminal activity varies tremendously depending on where you are, but overall rates are down considerably from the 1980s and 1990s.

Strengthening Family: This one may seem counterintuitive with birth rates down and young people reluctant to marry. My observations are that people delay marriage today precisely because they respect it so much. They want to do it right or not at all. And once they do have kids, they take parenting very seriously. My Millennial Generation children, Howe’s Hero archetype, are amazingly protective of their children, as are all their friends. They seemingly script every moment of their children’s lives. My three-year-old granddaughter just started school, for God’s sake. My generation just didn’t approach child rearing like that. (Okay, your personal mileage may vary as to how you raised your kids. I am talking about a now-older generation, which surprisingly includes me.)
Practical Culture: The financial crisis forced a new standard of frugality on many Americans in 2008 and afterward. Now it has evolved into the “sharing” economy exemplified by Uber and Airbnb. We even see the trend in fashion: Millennials have little interest in prestige labels and much prefer the low-priced “fast fashion” they can buy at Zara or H&M.
Rediscovered Norms: The Fourth Turning is a time when people rediscover the values and norms that launched the previous saeculum. That process can take many shapes, of course, but we may again see the “all-together” ethos that brought the US through the Depression and World War II.

Overprotective Parenting: My Baby Boomer peers and I love to recall the unsupervised play and relative independence of our childhood years. Growing up as a country boy on the edge of a small West Texas city, I roamed the woods and ranches of our neighbors.
The barbed wire fences were built to keep the cattle in, but they didn’t keep the kids out.
We knew which fields had the bulls we wanted to steer clear of. We explored quarries and lakes and rivers, clambered down into caves, and in general did things that would scare the pants off of today’s younger parents. It’s not that my mother didn’t love me; it’s just that in summer, your kid took off with all the other kids and came back in time for dinner.
Maybe. We might all end up at someone’s house, eating dinner there. Mothers would call each other, and decisions would get made. I look back now and realize that it was an idyllic time, and I wonder if it will ever come again. Neil’s work suggests it will, but that’s hard to foresee today.

Today’s cautious parents won’t let children out of their sight – and often with good reason.
As the Crisis unfolds we should see growing concern for protecting children from harm.
The Worst Yet to Come
So after Neil Howe explained all this at the conference, it was time for questions.
Naturally I voiced the question that we all want to know the answer to: “Will the Crisis be over soon?” Neil’s answer was succinct, and not encouraging. He thinks we are only halfway through; and if the next few years play out like past Fourth Turnings, the worst is yet to come.


Right now we are in a period that roughly parallels the 1930s. Then, Franklin Roosevelt was battling the Great Depression with vast public works and relief programs. Could we do the same now?

We could, yes, but we have a problem. FDR had room for fiscal stimulus because government debt was minimal. That is clearly not the case now. The next recession, which would precipitate the next portion of the Fourth Turning Crisis, will see our national deficit balloon to $1.5 trillion; and with the off-balance-sheet requirements, the national debt will grow by $2 billion a year, quickly bringing us to a $30 billion total debt.

The government is in hock up to its eyeballs, and the Federal Reserve has used up most of its monetary policy tools. There is little room to add public spending in one sector unless we take it away from another.

And the developing Crisis is not just a US problem. Europe is coming to realize that it faces an existential crisis; in Japan Abenomics is losing credibility; and China is well into a period of severe financial and cultural struggle. The emerging markets will be tossed to and fro on the whims of financial flows. Yes, there will be great technological leaps forward, and over the next decade or two we will see three billion people move into the middle class around the world – which will create an even greater potential for cultural change worldwide.

But coming back to the US, who among us will give up the goodies we get from Washington so that someone else can have more? While I see a few hands here and there, my reading of the mood of the voters is that they’re not going to willingly hand back their Social Security or Medicare or anything else. I don’t talk to too many people who feel they are not being taxed enough. Dear gods, in some states you are already paying 60% of your income in taxes. Yes, that means you made a lot of money. It also means that many of you have already thought about moving to lower-tax states or changing the nature of your income.

That’s the problem we face now. The times are going to force major change upon us, and none of us are going to be very happy about it, because the challenges ahead are going to require a common sacrifice. Admittedly, it’s a different type of sacrifice than World War II required, but it will be just as wrenching to the people who are involved.

I really see no way around Crisis – which means we’ll have to plow straight through. The message is, make sure you’re ready. The good news is that we still have some time (even if we don’t know how much time). We can prepare our portfolios and lives to deal with the coming changes. Properly handled, meeting the challenges of a Crisis can be a very positive experience and one that can benefit us as individuals, as well as our families and communities. If you leave your future up to the vagaries of whatever forces are brought to bear upon you, without planning and preparation, you will probably not be happy with the outcome.
Some Final Thoughts on Brexit Before the Vote
If you have not read last week’s Outside the Box and the links I put in it, I urge you to do so. As of today, the Brexit vote is really too close to call. Even though the Leave contingent has a small lead in the polls, in other previous separatist votes, like Québec leaving Canada in the ’90s or Scotland leaving the United Kingdom two years ago, the Leave contingent was slightly ahead in the polls but ultimately lost. The Leave voters probably need to have a 3% cushion in the polls to actually pull off a win for Brexit, as it appears that when we actually go into the voting booth, the prospect of real change becomes daunting to some of us, and we reverse our votes.

That said, the underlying cultural phenomenon we see is a rejection of the establishment. I’m told by friends who live in Britain that you can’t turn the TV on without hearing some authoritative economist or business leader or politician arguing that it would be an disaster to leave the European Union. The cultural and elite cognoscenti, the establishment, is arguing strenuously, not to say desperately, for staying. And yet there is a huge pushback from people who are more concerned about their day-to-day lives than they are about the fate of their European overlords, and who don’t see that the current leadership has improved things for them. They are seemingly willing to take a chance on the unknown.

This cultural angst is not going away, no matter which side wins the vote in Britain on Thursday. It is a phenomenon that is playing out all over the world, but especially in the developed world.

Finally, if in fact the vote is to leave the EU, it is not clear what the immediate economic consequences will be. It would be at least two and maybe three years before the final agreements are confirmed and documents are signed. The most important consequence may be the potential for “contagion” to the rest of the European Union. The sense that the EU is a sinking ship will be heightened. The concerns about immigration and lost national sovereignty will come intensely to the forefront. The Deutsche Bank chief economist whom I quoted last week excoriating the European Central Bank for its destruction of the economic prowess of the EU will be joined by many other powerful voices.

Where are the strong leaders that Europe needs today? Merkel is increasingly looking beleaguered, and she is going to have to pull back from some of her immigration and economic policies if she is going to survive the vote next year.
Hollande is a lame duck who won’t even make it onto the final ballot, where the conservatives and the National Front will likely meet in the runoff. Spain’s next vote is right around the corner, and it is likely to end up with the same decision as last time, which is no decision, with no government able to be formed because of all the splinter parties that won’t work with each other. Italy? It’s having its own crisis and can’t stomach the leadership of Northern Europe. Ninety percent of the Dutch citizens polled this month wanted their own exit referendum. Greece lurches from one crisis to the next. Belgium? You’ve got to be kidding, right?

I could add a number of other factors, not just in Europe but globally. And it’s not just economics. Technological change is going to force dramatically different lifestyles in terms of work and social interaction on cultures that are not really prepared for them. And unlike the 1870s through the 1930s in the US, when we went from being a largely agrarian country to one that was largely urban and manufacturing-based, these changes won’t happen over the course of 60 years.
The transition will seem more like the twinkling of an eye.

And that is precisely what Neil Howe was telling us, back in 1997, that the climactic phase of the Fourth Turning would be like. Were Howe and Strauss looking forward and seeing the Iraq war? Brexit? The rise and then the potential upheaval in China? No, they weren’t making any specific calls. They were simply telling us that at this moment in time this is what happens in a generational turning.

It is important that we understand the times we are in. Is our fate sealed? No, not in the sense that we are all doomed and there is nothing we can do about it. We are going to live through a period of stress and crisis. Coincidence? Some will argue so, and maybe they are right. Some argue that seeing history through a generational lens is shaping the facts to meet your story. Okay, you can have whatever narrative you want, but the fact remains that there are forces in the world today that are aligned to bring about a pretty damned serious global crisis and recession.

And the recovery from the next recession will be even slower and more frustrating than it has been from the last one, given the response of our central bankers. If you think the mood of the country (pick a country, almost any country in the developed world) is going to be brighter and happier in four years when we are enduring yet another slow-growth recovery (or are still in recession, with high unemployment and all of the stress that creates), then you have a greater faith than I do in our current leadership’s being able to navigate the challenges that loom.

Do I think it’s possible that we could avoid or largely mitigate the next recession?
Absolutely. I think I can see a path that would lead to an improving economic situation, at least for the US. I don’t see much hope for Europe. But do I think it’s likely that we’ll be so fortunate? Sadly, no. The choices that would have to be made are so radical and so out of the mainstream that the current political, economic, and monetary policy establishment will just not be able to get their heads around them. They would have to reject what are, for them, are core beliefs. I just don’t see it happening.

Finally, I suggest that you remember that we will get through this Crisis, whatever it demands of us. Life will go on, and before you know it we’ll be on the other side of the crisis, breathing a sigh of relief and enjoying a “Happy Days” growth era comparable to the 1950s. Our goal is to make sure that we get to the other side of the Crisis as well-prepared as possible, in order to benefit from what will be not just a powerful new bull market but a glorious expansion of human capacity and ability.

I am truly the most optimistic person in the room about the long term. It’s just that I see a little stress and upheaval over the short term. And that’s what we’ll be addressing over the coming year in this letter. Stay tuned…
Las Vegas, Maine, and Writing Time
Speaking of Brexit, I’m going to use it as an excuse to have a party. It turns out the British polls generally report later than we are used to in the US, so that 6:30 PM here in Dallas is a good time to tune in for the results. Surely somebody will be covering the vote live from London. Drop me a note if you’re in the area and want to come by. My special chili, fabulous ham and beans (never cooked together!), and guacamole and chips are on the menu. Summer, friends, and great conversation – it doesn’t get much better.

I was in Cleveland for what was one of the most enjoyable NBA experiences I’ve ever had, watching the Cleveland Cavaliers manhandle the Golden State Warriors. Now, Cleveland came out hot, and Golden State never really got it together. They made some runs but never could get within seven points.

Normally, that does not make for a memorable game. What was fascinating was that the normally cool and nonconfrontational LeBron James and the league MVP, Stephen Curry, were increasingly in each other’s faces. We ended up having to switch seats at the last minute, so I didn’t get my “rockstar” seats, but I still sat with my friend Dr. Mike Roizen in good seats that allowed us to watch the Jumbotron easily. It was a little different from being at a Dallas Mavericks game, because the camera focused on the faces of the players more than I was used to.

You could easily read their lips and grok their emotions. LeBron and Steph were openly taunting each other, giving each other the “look,” and from time to time accompanying it with a few emotionally charged words and name-calling – not exactly the language I’d want my kids using, but it did punctuate the intensity of the moment. Then Curry got thrown out of the game on fouls, and the crowd went nuts. You could feel the intensity of the players on both sides at that moment.

I’ve been watching NBA for 34 years, and that was one of the most entertaining games I’ve ever seen. I will confess that I don’t watch the NBA very often on TV, and I certainly don’t sit and watch a whole game. I hate feeling like I’m wasting time sitting through commercials. It’s not like the Super Bowl where you watch the game in order to see the commercials. But Sunday night I’m going to record the game, and about an hour in I will retreat to my man cave and fast-forward through the commercials to watch this one. I don’t know whether it will be the game of the decade or a blowout, but this is one I don’t want to miss if game six was anything like a hint of the great B-ball to come. Hearing about it after is not the same thing.

I know, I said I’m not planning to leave Dallas until I finish my book; but Mark Skousen talked me into coming to his big libertarian blowout in Vegas, called Freedom Fest. Since I’m not really doing a vacation this summer, I thought I could go and moderate a few panels with old friends like Steve Forbes and Rob Arnott. I have tons of friends coming to the conference, and I’ll also do a breakout speech that I’ve have been wanting to do for quite some time but that I know nobody will pay me to do, entitled “The Invisible Hand, Evolution, and Why I Am an Economic Atheist.” It will be a short 20 minutes on a topic I have thought about a great deal and am passionate about. Again, not a commercial speech.

Shane and I will catch a few shows (I will once again see the Cirque du Soleil show called “Love,” featuring the music of the Beatles) and spend time with friends. I will even catch some of the other conference speeches and panels. You can see the lengthy list of speakers and topics by going to It happens July 13–16 at the Planet Hollywood casino. I think there will be something like 2,000 attendees, representing all wings of the libertarian world. Trump spoke there last year, and I think Gary Johnson is speaking this year.

Then I’ll be back home until the first week of August, when I will head to our annual Maine fishing trip with a bunch of unruly economists. Afterward, I’ll show up in New York for a few days. Then my calendar is travel-free until the middle of September.

Okay, this letter has run long, so I will hit the send button and wish you a great week.

Your wondering what the Brexit vote will be and who will win Game 7 analyst,

John Mauldin

Peru Keeps Driving Right

The Latin American success story elects a center-right reformer.

More good news from Latin America, if you can stand it. Center-right candidate Pedro Pablo Kuczynski has won Peru’s presidential runoff election. Can Peruvians export whatever they’re drinking to Europe, or the U.S.?

Peru has been one of Latin America’s fastest-growing economies, with a falling poverty rate, but slower growth of late has not kept up with rising middle-class expectations. Without deeper reforms, Peru’s capitalist revolution could stall.

Mr. Kuczynski, known as PPK, arrives right on time, even if his margin was merely 40,000 or so votes. Though his rival Keiko Fujimori lost her bid to follow her father and former president Alberto Fujimori, her Popular Force Party won 56% of congress versus 14% for Mr. Kuczynski’s party.

Peruvians seem to prefer divided power.

Peru’s large black market continues to be a drag on development because it can’t provide access to credit. Mr. Kuczynski, a former finance minister and successful investment banker, made this an issue in the campaign. He argued that by cutting taxes and reducing the regulatory burden he could bring entrepreneurs into the formal economy and boost government revenues. With greater resources he promised to improve public security and make running water available to all Peruvians.

Mr. Kuczynski’s victory follows Argentina’s turn away from Peronism in November, and Brazil’s tentative steps toward pro-growth economics and cleaning up corruption. Let’s hope he can keep the free-market momentum going in Lima and show how a more open, transparent economy can spread prosperity to even the poorest parts of the country.

On the Brink: How a Brexit Could Fracture a Fragile Europe

British citizens are just days away from deciding whether England should exit the powerful European Union. The results of the June 23 referendum known as Brexit, an abbreviation for British Exit, will have long-lasting consequences for the United Kingdom and the entire continent as Europe grapples with its changing role in the global economy. In a recent segment on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM Channel 111, Wharton management professor Mauro Guillen, also director of The Lauder Institute at the University of Pennsylvania, discussed the complex issues facing Europe, including a possible recession.

Knowledge@Wharton: This time last year was a really heady time for Europe. At the end of June 2015, Greek banks had closed and the European Central Bank began to freeze lending.

There was talk about the beginning of the end for the eurozone, and things looked very bleak.

Give us a recap of what’s been happening in Europe over the last year.
The euro continues to be a viable currency as long as the European Central Bank is willing to do whatever it takes — and remember those are Mario Draghi’s words from about three years ago. But the gap between north and south, the gap between east and west, the unemployment, all of those things continue with no end in sight, so we shall see what the future brings.

Knowledge@Wharton: In the EU now, growth in the first quarter was about 0.5%, so that’s maybe about 2% a year. There was some reaction in the markets that maybe Europe is finally getting liftoff, maybe the economy is starting to rev up. Then you get the first not-so-wonderful numbers for the next quarter, and hopes get drained again. All of those concerns about deflation and inability to grow are still hanging around.

Guillen: The markets, especially these days, are always looking for good excuses to feel optimistic about things. If you look hard enough you can certainly find some good signals. I would say that by far the two most important positive developments of the last year and a half have been that the European Central Bank is now doing what the Federal Reserve did beginning in 2009 and 2010. It’s a little bit too late now, but it’s better than never.

The other important development is that German employees have more money in their pockets because wages have been rising in Germany, especially over the last three years. This is good because Germany is the largest economy, and more consumers there with money means that they spend more money. At least part of those purchases of goods and services go to the southern periphery in the European Union. What hasn’t happened yet is that the German government itself would be a little less frugal and would engage in a little bit more spending.

But they are very adamant in that they want to have a balanced budget. Although they can borrow money at negative interest rates, they are not willing to do anything.

So here we are, with this interconnected set of economies in which we have essentially three groups — the east, the north and the south — each with very different conditions. But 19 countries in the eurozone, unfortunately, have the same monetary policy with the same scheme in place, so it’s very hard to get anything done in that situation.

Knowledge@Wharton: You hear Mario Draghi sort of pleading in his quiet, diplomatic way for fiscal stimulus and not getting that response, which leaves him with quantitative easing, which has limits. Now we’re heading into the possibility of England leaving the eurozone. The impact of that could be as big or bigger than a hard landing in China.

Guillen: I don’t disagree with that. You made a distinction that may ultimately be an interesting one between the U.K. and England. Technically speaking, the nation state that is a member of the European Union is the United Kingdom, but public opinion is bitterly divided there between those who want to stay and those who don’t. If you go to Scotland, you find that most of the population is in favor of staying. One of the risks of Brexit is that Scotland might want to become independent because it really wants to remain within the European Union, and this would only fuel the independence movement there.

The European Union is the largest economy in the world. It’s not as rich as the U.S., but it is bigger in terms of gross domestic product if you combine those 28 countries. If there is a crisis of confidence that undermines consumer spending and business confidence, then you are going to get into maybe even a third recession. That would be devastating for Europe itself, but it would be really bad for everybody else in the world that has business with Europe, including the United States. Exporters to Europe and American companies that have investments in Europe are going to suffer. Companies such as GE or GM or Boeing, 20% to 30% of their business is in Europe, so it could have a large impact.

If there is a Brexit, the pound sterling would lose value. The euro would also lose value because there would be such an erosion of confidence. These days, although the dollar is increasingly not that strong, it is perceived as being the only safe haven. What we would be witnessing then is a strengthening of the dollar, and that would also make it harder for American companies that export to do so, and that is going to have a negative impact on the United States. All of these chains of events that I have described are quite likely if there is a Brexit.

I don’t want to doubt Prime Minister David Cameron’s motives as to why he is organizing this Brexit referendum. He does want to put this question to rest within his party. He is playing with the future of Europe for the sake of settling a problem within his party, which is a pretty risky way of doing it. The U.K. has been in the European Union since 1973. It has always had doubts about it. If you remember, we went through several re-negotiations of the relationship between the U.K. and the European Union, especially under Margaret Thatcher. From the point of view of the U.K., if I were a voter over there, I would think at the end of the day I am getting a few things that I really want, which is access to that big market. I am also more influential as a country because I get to go to the meetings and exercise not only a vote but also an opinion. The U.K. is one of the three largest economies in Europe, so they have some influence.

Knowledge@Wharton: It is interesting to see how all of this is playing out. There is no leaning right now one way or the other, and we’re closing in on this vote coming up at the end of the month.

Guillen: The divisions run deep, but they are somewhat predictable. The Greater London area, which is much more cosmopolitan, where there are more people who have connections to the rest of Europe, which is the financial center, they are pretty much in favor [of remaining in the EU]. If you go to smaller towns throughout England, then you get more people opposed. You cross the border into Scotland, then most people are fiercely in favor of staying within the European Union because they believe in European policy making, they believe in the welfare state, they believe in all of these things.

This is the problem with Europe, that 10 years ago before the crisis, it may have been somewhat divided or there were differences of opinion about this or that. The single most important effect of the crisis in Europe has been that whatever divisions existed have become much, much, much bigger, so these gaps in terms of the different perspectives that people have in different parts of Europe have become much, much wider. All of this has been fueled by a number of issues: the sovereign debt crisis, the problems with the euro and the more recent migration crisis.

Knowledge@Wharton: Recently, the leaders of Germany, the Netherlands, Spain and Ireland all came out pretty strongly against Brexit, saying it’s a bad idea. Is that predictable or is that a strong statement?

Guillen: I don’t think that there is any political leader in Continental Europe right now who would be in favor of a Brexit.

Knowledge@Wharton: But they’re stepping into a local political issue in a way.

Guillen: Yes and no, because again this is the way in which David Cameron framed it. Some people accuse him of implicitly framing it as a problem within the Conservative Party, which is pretty strong in England. The Labor Party is not doing well at the present time. But whether you want it or not it is a European-level issue, absolutely.

Of course, every country is sovereign and can organize whatever referendums they want to organize about any issue, including this one. But for a country that has done so much in terms of contributing to European integration over the last 40-plus years to now decide “been there, done that, on to something else” is kind of strange. The English Channel separates the U.K. from the rest of Continental Europe, but the U.K. is a European country, nonetheless. It may want to preserve a certain element of independence or autonomy in terms of foreign policy, but when you think about their interests, every single analysis that I have seen concludes that it would be harmful for the U.K. to exit. It would have very negative effects, so I’m hoping that appealing to that kind of an argument would turn the undecided voters in the direction of remaining within the EU.

Knowledge@Wharton: According to the Organization for Economic Cooperation and Development, Ireland would lose 1.25 percentage points off of its GDP as an immediate consequence.

Guillen: Ireland would be devastated by this for two reasons. One is that its economy is very much driven by two things: its close relationship to the U.K., which is of a historical nature, and that Ireland has become a hub for doing business in the rest of Europe. A lot of American firms started their operations there. Google is going to be hiring 10,000 employees outside of Dublin. Ireland plays a very important role from that respect. If the U.K. gets out, that is going to mess up Ireland’s strategic position in the world.

The other way in which the Republic of Ireland is going to be affected is because of Northern Ireland. If the U.K. were to get out, there will again be border between Northern Ireland and the Republic of Ireland. If we were to go back to having a border, that could re-ignite some of the conflict, some of the tension, some of the friction. I’m not concerned that they wouldn’t be able to reach an agreement. What I’m concerned about is that now we have an arrangement that seems to work. There’s no violence.

Knowledge@Wharton: Why mess it up?

Guillen: Exactly. Brexit would essentially mean, hey we have to go back to the table and talk. At the present time, people can move freely across that border. But if the U.K. were to exit, that border would exist again.

Knowledge@Wharton: Another interesting thing about that is economic conditions have reversed. Belfast in Northern Ireland used to be the economic powerhouse of that island for years and years. That has completely reversed, their economy has shrunk, their population has shrunk, and Southern Ireland has blossomed for all of the reasons that we are talking about.

Guillen: The southern part of Ireland is doing quite well thanks to some initiatives that they have set into motion, including Shannon Airport and some hubs for high-tech industry. But yes, it is very clear that the Republic of Ireland has done quite well over the last 30 years. They did have a problem with real estate bubble and their banks eight years ago, but they have put those problems behind them. Now it is growing really quickly.

Knowledge@Wharton: Another important thing in Europe is this rise of right-wing politicians and right-wing movements. Poor economic conditions and the immigrant crisis are fueling it. But even before that, this trend was happening. What’s your take on that?

Guillen: This is also very worrisome. It is very difficult to generalize because in each of these countries, the origins and the drivers of these right-wing extremist parties are different. Some people in the last few days have been blaming Mario Draghi for the rise of these parties. I think that is totally wrong, because I think there are very, very distinct historical patterns.

These parties existed before the current migration crisis, but the crisis has exacerbated the problem in the minds of some of these people. Whenever you have a crisis such as that one, there is always the potential for opportunistic politicians to take advantage of them. This problem is now apparently in many of these European countries, although not in Italy or in Spain or in Portugal. But there is enough of a critical mass of voters who are true believers in bringing immigration down to zero, closing the borders and re-writing some of the rules so that there are restrictions on what minorities can do throughout the continent.

If there is a crisis, if the economy is not performing well, then you have a whole bunch of other people who are desperate or near desperate, who also vote for those parties. But they are not really true believers. I think if you asked them, “Do you really believe that we should get rid of all of the Muslims in France?” They would say, “No, no, of course not. I have many friends who are Muslim.”

So, the people who vote for these parties come in two types. One is the true believers, and those are the really dangerous ones, the unconditional supporters. And then you have the other ones who, depending on the circumstances, vote for these parties or not. The problem is right now for the second group, there are plenty of reasons to think that those conventional parties don’t have the solutions to these problems. There is a lot of anxiety.

Knowledge@Wharton: Regardless of Brexit, you talked about the possibility of recession in Europe again.

Guillen: If you want to put it in those terms as to whether in 20 or 50 years from now, some of the topics that we are discussing will be just a footnote in a history book or the title of a chapter, I think they are going to be footnotes because Europe is facing so much more fundamental challenges than any of these things.

Europe is facing a huge challenge with population and aging. In many countries across Europe now, each woman is having 1.2, 1.3 children over her lifetime. This is the current fertility rate in Europe.

There is no way you can run those economies with that kind of a demography unless you have some kind of an orderly policy for bring in immigrants with a variety of skills that would help you continue having a dynamic economy.

This is one problem. The other issue is Europe’s own diminishing importance in the world, which is from many points of view just something to be expected because other parts of the world are growing much faster. So, it’s the decline of Europe, which has been brewing for a very long time. On top of all of that, we have the divisiveness and the frictions among all of these different countries. It’s not just two blocks, like the frugal countries and the spendthrifts.  No, we have multiple different kinds of countries there. It is a mosaic, and what I think most people are realizing is that the old policy, the old approach of trying to integrate everything in Europe, to try to bring everything under one common standard, is a self-defeating exercise.  Unless you are very careful as to how you build the institutions, how you lay the foundations for that integration, you are likely to intensify the tensions and the frictions as opposed to reduce them, which is what I think has happened over the last decade or so.