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Tallal’s Tips

Developing a Global Strategy for a Fouth Turning

The first step in developing a strategy regarding a Fourth Turning is to determine just how likely you believe it is that something will happen. Hopefully, the April 15, 2006 edition of Tallal Tips stimulated you enough to buy and read The Fourth Turning: An American Prophecy, written by William Strauss and Neil Howe. In my opinion, this is a critical first step. It is crucial that you determine for yourself if this information rings true to you, so I can simply share my ideas and strategies for developing a balanced portfolio and plan of action. The next several editions will cover steps for developing a global strategy.

The book defines The Fourth Turning as a time of crisis — a decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one. Do I think a Fourth Turning is imminent? In all candor, I do not have a clue. In fact, nobody does.

All we know for sure is that a Fourth Turning has occurred 5 times in the last 500 years in specific time periods immediately following First, Second and Third Turnings. We also know that a First, Second, and Third Turnings has already occurred without distortion in the last half of the twentieth century exactly as they have in each of the previous 5 cycles.

Obviously, the future is never certain, but it is reasonable to project when a woman gets pregnant, a baby will most likely be born in 9 months. We can’t know whether the economy will boom or bust, what inflation or investment yields will look like 5 or 10 years down the road, or even what the tax code will be. But not knowing doesn’t mean we should not plan. The best course of action is to evaluate the available data, look at historical trends and then make an educated guess. If you build in enough flexibility into your strategy, you can quickly maneuver to adjust as adjustments are necessary.

The remainder of these series of newsletters are going to reflect my opinions using my financial background and knowledge and apply it to the pattern of a Fourth Turning. Therefore, let me apologize in advance for using “Master Talk” from this point forward. When you hear me say something as if it is a fact, if I don’t reference it with a footnote, then please assume it is simply my opinion based on the above criteria.

So what is the first step? You need to determine the likelihood that something significant might occur. Break it down to percentage odds. If you think there is a 20% chance you should respond differently than if you think there is a 70% chance. We will use your personal percentage odds later as we develop your individual courses of action.

Our real challenge is, not only do we not know if anything will occur, but if it does how it might unfold. Will it start as a result of a single major event with things falling apart within hours (like the Great Depression did in 1929), or will it start slowly and continue to build momentum until it becomes a run away train? Will the catalyst be a foreign influence or domestic? Will it be an act of aggression or a financial issue? Will it be created as a result of natural events like a virus or natural disaster, or will it be
intentionally inflicted? These are all questions which are impossible to answer. But they will influence how it would unfold and thus the appropriate actions to take.

While it is impossible to know what such a catalyst might be, keeping an eye on likely prospects can provide advance warning. This in turn can provide you with critical extra time to take actions that could dramatically influence the success of your strategy.

Therefore, let’s look around for a few potential catalysts that could cause the next Fourth Turning. As we do, it is important to remember these are merely potential illustrations and not predictions. And please remember it is not the catalyst itself that causes a Fourth Turning, but instead how we as a society interact with each other in our response to it. This includes both the government and the populace at large.

First, let’s look at a potential unraveling of our economic situation. Currently, China and India are in the middle of an Industrial Revolution. Let’s put this in perspective as what that means to our world.

The West had its Industrial Revolution from the mid 1750’s – 1850’s with a total population involved of around 250 million people. During this period, the society changed from an agrarian based, manual labor society to an urban society that manufactured products. We moved from individual producers to individual consumers. In essence we moved from a producer based society to a consumer based one. Our Industrial Revolution was fueled by the steam engine, powered by coal, and the introduction of all
metal machine tools which enabled us to build machines that built things. During this period up to the present, China and India’s economies were relatively dormant and remained agrarian based, manual labor societies.

Within the last decade this has dramatically changed. Both countries are both now firmly rooted in the largest Industrial Revolution in history. Instead of a quarter of a billion people, China currently has 1.3 billion and India an additional 1.1 billion (that’s ten times what the west had). This represents roughly one-third of the world’s current population of 6.6 billion.

The West had steam engines and newly developed metal machine tools. The foundations of India’s and China’s Industrial Revolutions are based on high technology, aerospace and nuclear technology, and they are progressing at light speed compared to how long it took the West 200 years ago.

In fact, to put what is occurring there in prospective, there are a many cities in China today that have populations in the several millions that ten years ago were farm fields. These cities are pristine and very modern. The same people, who used to live in grass huts, burning a single lump of coal at night as their only source of energy, are now living in high rise building using electricity and talking on cell phones.

This incredible expansion is placing a huge demand on an already tight supply of the world’s available natural resources. Three dollar per gallon gasoline is a result of a new consumer who is competing for that limited world resource. Timber, steel and cement prices in this country, and around the world, are sky rocketing as previous non-existent players a decade ago are now buying everything they can acquire without regard to cost. This creates major inflationary pressure at the least and a real potential financial crisis/conflict at the worst.

In this same arena, the United States is facing a growing dilemma with its mounting national debt. According to the U.S. Treasury Department, America's first 42 Presidents from George Washington (1789) to Bill Clinton (2000), borrowed a combined total of $1.01 trillion from foreign governments and financial institutions. From 2000 to 2006, the Bush White House has borrowed $1.05 trillion alone.

China holds huge amounts of US Treasury debt, which gives it significant economic leverage over the US. This allows them to ensure the trade gap continues favoring China and hurting the US economy. Through holding this debt, they can virtually control US buying patterns, interest rates and economic policy. We can no longer risk imposing any form of tariffs or sanctions because they can simply call this debt at will with no way for us to repay.

Another possibility is the illegal alien problem in this nation. This issue is compounded as it has become “Political Incorrect” to address real solutions for this problem without being labeled racist. Not counting illegals, according to U.S. Sen. Jeff Sessions, one aspect of the current Senate Immigration Bill will allow for an additional 193 million new legal immigrants over the next twenty years. To put that in perspective, that is a number greater than 65 percent of the current U.S. population of 295 million. Would such a proposal have even been possible to see the light of the Senate floor during the first 30 years following World War II?

But this merely dwarfs the real issue, which is the expense and damage being done to our system by illegal aliens. Illegal aliens account for 95% of outstanding murder warrants in LA County, and 66% of outstanding fugitive felony warrants. There are 1.5 million school-aged illegal immigrants residing in the United States plus an additional 2 million of their U.S.-born siblings. The cost on the local school districts is enormous, estimated for 2004 at over $28 billion Dollars. The cost for California alone was $7.7 billion, Texas $3.9 billion, New York $3.1 billion, Illinois $2 billion, etc. All of this falls on the shoulders of working taxpayers without any tax support from the people whose children are being educated.

A review of Colorado, a state in the middle of the country, demonstrates the financial strain placed on its local economies. One out of every 21 Coloradans is an illegal alien. Illegal alien births in Colorado cost taxpayers $43.4 million per year. Illegal aliens on Colorado’s Medicaid program cost Colorado taxpayers $64.5 million per year. Colorado school-age children with illegal immigrant mothers cost Colorado taxpayers $899.3 million per year. Incarcerating illegal immigrants in Colorado costs
Colorado taxpayers $61.7 million per year.

Compound this with the recent openly aggressive demonstrations by the illegals themselves calling for their rights to citizenship and you can easily see the potential repercussions of this should this powder keg explode. Look at the photos on the next page. These are students at a high school in California recently.

What do you think would have happened in the 1950s, 1960s or 1970 if a group of illegal aliens staged protests and boycotts? Do you suspect back then the government might have at least chosen to strategically place a couple of INS vans at the staged demonstration points in each of the major cities in which the promoters threatened to demonstrate.

To complicate all of this, our politicians in Washington, DC have completely caved in to the lobbying efforts of the Hispanic coalition. On May 18, 2006, the US Senate voted to allow illegal aliens to collect Social Security benefits based on past illegal employment -- even if the job was obtained through forged or stolen documents. The reasoning used focused on the lack of fairness of denying them social security benefits when they have been working in our society for years, even though they were illegal aliens. Sen. Jim DeMint, a South Carolina Republican Senator, sums up the lunacy of this Bill with his statement, "It makes no sense to reward millions of illegal immigrants for criminal behavior while our Social Security system is already in crisis. Why in the world would we endorse this criminal activity with federal benefits?”

The point is that in the First, Second and early part of a Third Turning, each of the issues referenced above would have been addressed differently, and what we are seeing today, would not be occurring then because the responses to them would have been different back then.

Once again, this issue is also worthy of continuing scrutiny as a potential catalyst for a Fourth Turning. Remember it is how we internally choose to deal (or not deal) with issues that confront us as a society which causes the unraveling.

Another worthy issue discussion is Iran, Iraq and the War on Terror in general. Right or wrong, the Iraqi war has caused deep divisions with our allies abroad and more important, with our citizens here at home. Radical Islam is not representative of the Islamic faith . . . far from it.

However, the basis of their religion demands that when any Muslims are in a fight with the Infidels, it is mandatory that all Muslims worldwide come to their defense. This dates back to the original blood-pact treaty that Mohammad proposed and made with the Medinahans when they offered him refuge from the Meccan's who where trying to exterminate him and his followers. He created a doctrine that tribes and country do not matter when it comes to the Nation of Islam. You could liken this to what often happens between brothers. They may fight like cats and dogs with one another; but if someone attacks one of them, they will instinctively band together against the common threat.

Islam is approximately 1300 years old. Like all religions it is evolving and maturing. Non-Muslims look with disdain at what appears to them to be archaic customs and barbarous laws. We are repulsed and horrified by the violent tactics they are willing to use today to fight for their religion.

However, how much different is this than Christianity? Where was Christianity 1300 years into its evolution? The Spanish Inquisition is a reminder of how Christians saw their duty to God to convert the non-Christian world. It took only a handful of powerful clergy members to dominate the populace at large, who complied without question for fear of their own salvation (either while they were alive, or after their death). Seven hundred additional years have made a huge difference in the conscious awareness and growth of this religion, as it will to Islam when it has had the same amount of time to mature.

The challenge is that in the 1300’s, the technology of the day was bows with arrows and swords. Today, through the loose exchange of technology and materials, radical Islamics have gained access to weapons of mass destruction. Unfortunately, they are as ready to use them with the same eagerness as Christians would have been 700 years ago to convert people to the way of the Lord. And as was in the 1300, a handful of powerful clerics control millions of minds and souls.

Iran would appear to be the most immediate of potential threats. Obviously they appear intent on obtaining access to the nuclear club. Unfortunately, they are strategically posed to succeed as they already have the ultimate weapon . . . Oil!

In a recent interview with the Wall Street Journal, Iran’s Oil Minister Kazem Vaziri Hamaneh made his position perfectly clear when he stated: “The need of the world for energy is soaring, and if Iran is taken out of the equation, prices will shoot up and there will be big difficulties in the energy markets.”

If the US and its allies attempt military action, Iran is again strategically positioned to extract a very heavy toll that the world can not afford. Iran controls the Straights of Hormuz. The Straights are a narrow, four-mile corridor between Iran and Oman. Every tanker exiting the Persian Gulf has to pass through this vital corridor. If Iran chose, it could seriously endanger travel through this vital passage and seriously disrupt the global economy. John Burke, an ex- Marine intelligence specialist, explains it this way:

Iran can deploy helicopters dedicated mine layers and Russian-built Kilo-class submarines.

Iran can launch its large fleet of fast-attack ‘swarm boats’.

It can also deploy its vast array of sea, air and land-launched missiles targeting commercial and military ships that must pass through the Strait.

Although the West might prevail and secure the Strait, the cost of that victory could ultimately amount to nearly doubling the world’s oil bill and more than doubling your gas bills. Iran has also made strategically important deals with Russia and China for desperately needed oil. Russian Foreign Minister Sergey Lavrov said recently that Beijing and Moscow would not vote for using force to resolve the nuclear dispute.

In a May 17, 2006 AP article, Iran's president mocked a package of incentives to suspend uranium enrichment, saying they were like giving up gold for chocolate. “They say they want to offer us incentives," he said. "We tell them: keep the incentives as a gift for yourself. We have no hope of anything good from you." An Iranian state radio later quoted him as then saying, "We are prepared to offer economic incentives to Europe in return for recognizing our right (to enrich uranium)".

Iran indeed has the power of oil and is cleverly using it to fulfill its nuclear ambitions. This would not be nearly as troublesome if we were not also dealing with the issues mentioned earlier about the stage of evolutionary development of the fundamentalist Islamic views. Again, how we deal with whatever challenge this produces will determine whether or not such a catalyst triggers a Fourth Turning.

Another issue worthy of mention is the very division in this nation over core beliefs and philosophies. It is safe to say that in our lifetimes we have never seen such polarity across the board. The last couple of elections where split down the middle, with each side 180 degrees diametrically opposed to the thoughts and beliefs of the other. The depth of this cavern is so immense that neither side can even discuss the other’s point of view. Each demonizes the other’s thoughts and feelings with a rabid intensity that precludes logical discussion.

How can such intelligent people on both sides of an issue be so vehemently different on fundamental issues that they simply can not even communicate? This would appear to be the epitome of the very foundation needed to trigger a Fourth Turning.

The final item which will be addressed (and certainly not the only remaining issue to observe) is the current plans to deal with the Avian Flu, should it ever occur. Let me restate one of the scenarios the authors of The Fourth Turning used and an example for identifying whether a Fourth Turning has begun.

• The Centers for Disease Control and Prevention announces the spread of a new communicable virus. The disease reaches densely populated areas killing some. Congress enacts emergency quarantines measures. The president orders the National Guard to throw Prophylactic cordons around unsafe neighborhoods. Mayors resist. Urban gangs battle suburban militias. Calls mount for the president to declare martial law. (The Fourth Turning – page 273)

The Avian Flu has only killed a handful of people (under 70 worldwide), and without even reaching densely populated areas, last week President Bush unveiled his plan for dealing with such a crisis should it occur. In asking for more than $7 billion in emergency funding, the following are some of the Presidents comments.

An outbreak would pose difficult policy challenges, Bush said, including the question of imposing a regional quarantine. "It's one thing to shut down your airplanes, it's another thing to prevent people from coming in to get exposed to the avian flu," he said. Doing so, Bush said, might require using "a military that's able to plan and move."

The only pieces from this scenario left to occur, if a flu outbreak happened, would be the “Mayors resist. Urban gangs battle suburban militias, and subsequent calls for the President to declare Martial Law.” With a prescient road map so richly laid out for us by the authors of The Fourth Turning, this is obviously another area to watch.

OK, so what’s next? Since we have identified potential catalysts to watch which could trigger a Fourth Turning, the next step is creating a strategy for hedging against the events that might follow. As noted earlier, the first step of this process is you should determine for yourself the likelihood of something happening, down to the percentage of odds. For example, if you believe there is a 40% chance of a Fourth Turning crisis, you should set aside 40% of your assets in your Fourth Turning portfolio.

The standard method of hedging against a situation is to hedge the same percentage of assets as the projected percentage of risk. Only you can determine what makes most sense for you. Hopefully, this issue has provided some food for thought.

The next issue will begin to look at strategies in developing actual hedges for your assets. This issue will address different potential economic outcomes and what will work best in each and why. If you have any question about the contents of this issue, please don’t hesitate to contact me.

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