Surviving The Fourth Turning | Neil Howe

Neil Howe · Hedgeye Risk Management

Trump's Golden Dome missile shield is an infeasible, unpriced line item meant to reassure, not a real defense.

Howe argues the Golden Dome is not feasible technology, has no end date for completion, and has no affordable price tag. He reads it as a political signal: a line item designed to make the public feel the government is in control rather than a credible defense program.

“We hear from our government. Well, we got a golden dome. ... This is no feasible technology, no end date, you know, when this could ever be built and and no affordable price tag. This is basically a line item just designed to say, don't worry, we're in charge.”at 9:09

Neil Howe · Hedgeye Risk Management

Offensive missiles and drones beat defenses; new glide vehicles and drones will challenge military doctrine.

Howe argues the offense dominates the defense. Interceptors are much harder and more expensive to build than offensive missiles, and offensive systems are easier to evade interception. He cites hypersonic glide vehicles at Mach 10 to 20 that can maneuver and are hard to knock down, plus jet-powered drones used in Ukraine. He concludes that militaries will have to rethink doctrine, since taking down the arrows may not be enough and the archers may be hidden underground.

“dominates the defensive. It's much harder and more expensive to build interceptor missiles than another offensive missile.”at 39:57

Neil Howe · Hedgeye Risk Management

US defense spending will ramp up sharply after the lame-duck Congress passes a new defense appropriations act.

Howe says defense spending is rising in almost every country, and that the US, which had been the exception in recent years, will follow. He expects the lame-duck Congress to pass a new National Defense Appropriation Act that will 'ramp defense spending way up.' He presents this as part of a global pattern of warming up for conflict, with wars between states and within them at a level not seen in thirty years.

“Defense spending is rising in almost every country around the world... The lame duck Congress is going to put through a new National Defense Appropriation Act, which is likely to ramp defense spending way up.”at 49:00

Neil Howe · Hedgeye Risk Management

Defense is a fourth-turning theme his fund goes long, alongside nationalized industries.

Howe describes his fund's third bucket as long/short positioning on fourth-turning themes, naming defense and nationalized industries. He gives no detailed valuation or earnings case for defense. The support is the thematic link to a fourth turning, which he argues brings collective and national priorities.

“the third part is just going long short and forth turning like themes and this is things like defense, nationalized industries”at 1:25:02

Neil Howe · Hedgeye Risk Management

Howe sees a growing likelihood of a financial crash that could shut markets down.

Howe frames a financial crash as one of three main threats that fourth turnings bring, and says it is on the table now. He argues the likelihood is growing, drawing on his generational cycle framework and the probabilities he lays out in his book, and he says investors need to plan for markets ceasing to function, not just for losses in their portfolios. The support is mostly framework-based, with little market-specific data.

“If we do go in this direction, as I think there's a growing likelihood we will, and I I go through probabilities in the book.”at 4:05

Neil Howe · Hedgeye Risk Management

Extreme valuations, with CAPE in the 40s, point to poor decade returns, so avoiding drawdowns comes first.

Howe says the stock market is at extremely high valuations. Shiller's CAPE is in the 40s, and on average the decade-long return after that level is negative. He concludes the first priority is preventing drawdown. His fund does this by holding cash to deploy as valuations fall, which he says is Buffett's approach (holding up to 50% of public assets in cash when valuations were high). It also uses CTA and trend-following allocations and buys out-of-the-money puts against gap-downs. He cites four twentieth-century US bear periods lasting about 10–13 years of zero real return, and the 2000 to GFC stretch, to argue that long flat periods follow high valuations.

“at a time of extremely high valuations right in the stock market... Schiller's cape is like way up in the 40s and we know what the decade return is on average after that it's negative.”at 1:23:14

Neil Howe · Hedgeye Risk Management

Macron's collapse and France's left turn to unrest will hand Marine Le Pen a landslide.

Howe says Macron is about to lose the presidency and is advocating that young people burn schools. He also says Macron's answer to the fiscal problem is to cancel the debt and have banks write it off. He argues that when the left turns to violence it usually helps the extreme right, so if this continues it will be a landslide for Marine Le Pen. He adds that a similar dynamic happened in Germany in the 1930s.

“Take a look at France right now... Macron... is about to lose... If this continues, it's going to be a landslide from Marine Le Pen.”at 1:11:35

Neil Howe · Hedgeye Risk Management

EU members' veto power blocks a common foreign or energy policy, including on Russian gas and oil.

Howe argues the EU has no common will that all members accept as paramount, as the US settled its federalism question through civil war. Any single country has a veto over EU foreign policy. As a result the EU has no concerted policy on buying Russian gas or oil, on the Balkans, or on Iran. He contrasts this with Russia, which is smaller economically but unified, and argues Europe would need to act together to defend itself.

“Any single country in Europe has a veto power over any foreign policy action of Europe as a whole. That's why it has no concerted policy about buying gas or oil from Russia”at 1:21:05

Neil Howe · Hedgeye Risk Management

Cyberattacks on infrastructure control systems are the biggest threat, able to take down grids cheaply.

Howe says cyber is probably the single biggest threat. Adversaries can attack SCADA control systems and cripple aging infrastructure at a few critical points until the grid, gas pressure and other systems go down, without any need for nuclear war. He points to Russia's grid attacks on Mariupol, where the first step was taking down the grid and about 20,000 people died, and argues that 100 million people in the 20 largest US urban centers could face mortality risk from a three-week outage.

“cyber is probably the single biggest threat... All you need to do is cripple our decrepit infrastructure at a few critical points until the grid goes down”at 38:36

Neil Howe · Hedgeye Risk Management

Fixed income is a poor holding: inflation erodes bonds and governments will keep rates low to fund crises.

Howe says his fund is not long fixed income for two reasons. First, inflation blindsides fixed-income holders and devalues them. Second, in a crisis governments keep interest rates low, below everything else, to save money at bondholders' expense (financial repression). He names insurers, banks and hedge funds as the owners who get squeezed, and argues politicians are willing to do this because those holders are easy to vilify. His fund's underweight is tied to this view.

“we are not long fixed income securities. That's one of the reasons. Not only because inflation blindsides fixed income security and devalues them, but also you will be spoon fed low interest rates below everything else on earth”at 58:52

Neil Howe · Hedgeye Risk Management

In crises the state takes ownership of industrial capital, as in WWII and the Civil War.

Howe argues that in a real crisis, gains and losses get socialized, and the state will take over productive assets. He cites the fact that by the end of World War II the federal government owned slightly more than half the capital of US manufacturing companies, funding plants that were run by private operators on cost-plus contracts. He also points to the Civil War, when the Union took over the railways and requisitioned munitions inputs. He treats the current government taking equity stakes in strategic companies as part of this pattern and expects more of it.

“One little known fact is that half the capital of all manufacturing companies by the end of World War II was owned by the federal government, actually slightly more than half.”at 1:00:19

Neil Howe · Hedgeye Risk Management

Democratic socialists are electorally penalized in US primaries; their ideology is unpopular with voters.

Howe says wherever democratic socialists run or have a conspicuous presence in Democratic primaries, they are a penalty to their races. He cites Abdullah Syed in Michigan, who will probably win but by a much smaller margin than his primary opponent would have had. He attributes the weakness to socialists not distancing themselves from Leninists who, he says, hate America, and he contrasts this with the anti-communist liberals of the 1950s.

“the Democratic socialist, wherever they are running or wherever they have a conspicuous presence in the Democratic primaries... are a penalty to their race. ... voters are not drawn to that, right?”at 1:05:28

Neil Howe · Hedgeye Risk Management

Commodity futures and precious metals beat government bonds over time, especially when inflation threatens.

Howe's fund avoids fixed income, is occasionally short bonds, and holds commodity futures and precious metals to offset its equity exposure and protect against inflation. He cites commodity futures' 'brilliant record over the past century and a half', saying they outperform government bonds, and that they do particularly well when inflation is threatening.

“We are in commodity futures and precious metals, particularly commodity futures have a brilliant record over the past century and a half. They actually do better than bonds, than government bonds and they particularly do better at a time when inflation is threatening.”at 1:24:51

Neil Howe · Hedgeye Risk Management

Hugely leveraged 3x chip funds swing wildly, so their arithmetic returns mask real losses from volatility drag.

Howe cites leveraged 3x funds on micro-cap chip stocks in South Korea that can rise 150% in a day and fall 300%. He says some have day-to-day arithmetic returns near 45% yet still lose money for an investor compounding at around 20%. He uses this as a case study of volatility drag, arguing that arithmetic averages (including the Sharpe ratio) are misleading and that investors should keep volatility down.

“these hugely leveraged 3x funds in micro chips... go up one hundred and fifty percent one day and go down 300%... some of these things have an arithmetic return day to day of something like 45% but they're actually losing money”at 1:28:04