On December 31, 2019, I sat on a roof top in Melbourne grateful and hopeful for what was to come. I now know that I was living in the throws of a bread and circus faux reality.

[F]or that sovereign people that once gave away military command, consulships, legions, and every thing, now bridles its desires, and limits its anxious longings to two things only,—bread, and the games of the circus! ---Juvenal, Satire X

Today I wanted to write an article reflecting on 2020--thus far. As I sit here and think about the world today and where things are globally I have an eery sense of foreboding that I feel the need to write down.

Where to begin...

A global pandemic—check, stalled global growth—check, a political class globally doing whatever it takes to "hold-on"—check, US Supreme Court with only 8 justices teeing up a deadlock contested presidential election scenario with a deadlocked Supreme Court of 4 to 4—check, global populations under stress and in fear seeking a leader to save them—check, global protests from disaffected groups with real concerns (i.e. police brutality, political oppression, far left and far right, techno authoritarianism rising, etc.)—check, a presidential election season in the US that promises to be interesting—check.

What could go wrong?

In a word everything could go wrong—very fast; however, this is not new. On the contrary, humans have always had a way of oscillating between extreme pessimism and extreme optimism in sentiment and circumstance.  Specifically, the cognitive fallacy of recency bias is present for everything I mentioned above. What this means is that while the above list of catalysts are upon us, humans tend to over emphasize the significance of recent events and extrapolate them into the future. Moreover, humans also tend to be nostalgia prone when reality was much less ideal. Remember the Reagan era?—conservatives tend to reminiscence upon this time as a golden era; however, if you happened to be from the "inner city " in America, born in Latin America or South Africa and of the wrong color you had a very different reality during the 1980s.

We all live and experience life from our specific view point and I have had a number of conversations with people over the last few months with very divergent lived experiences in 2020.  On one end of the spectrum, as with Chinua Achebe, things literally fell apart. On the other end of the spectrum, people have been able to get richer during these times through asset price inflation and can actually buy more homes, cars or luxury watches during these times.  

I am of the opinion, that these extreme divergences are foreshadowing a phase transition in the global socio-political order from our old way of ordering society and doing things to something different, something new, something that will ultimately be more egalitarian for better or worse.

Phase Transition

Photo by Kelly Sikkema / Unsplash

In physics, phase transitions can generally be thought of as first order phase transitions and second order phase transitions. Let's use room temperature water in a pot as our example of a societal baseline.  

First Order Phase Transition

Act 1

The first order phase transition began during the 2005 to 2007 time period where we had our most recent experience with generally favorable economic conditions globally. During this time, mortgages and credit flowed freely across the globe, business was good and workers experienced an improving sense of wealth and financial well-being. Refer to this 2005 to 2007 time frame as the "Liquid" phase below.

Source

The blue Liquid box in the diagram above that I used to describe 2005 to 2007 was a particular point in time that I consider an instructive time period to showcase the transition from a first order phase transition to a second order phase transition. Just like with the pot of water after you cut the stove on, not much appears to be happening.

The blue Liquid box in the diagram above that I used to describe 2005 to 2007 was a particular point in time that I consider an instructive time period to showcase the transition from a first order phase transition to a second order phase transition.

Act 2

As we approached mid 2007, the world began to enter into the noticeable portion of the first order phase transition. This first order phase transition was noticeable through people taking out multiple mortgages, no income loans, law students were able to take job "offer letters"  and get mortgages for new homes during this time frame from 2005 to early 2007. Then something peculiar happened, seemingly, out of nowhere. All of a sudden defaults began to emerge in sub-prime (low credit quality) mortgages and this infection spread throughout the banking system and led to the Great Financial Crisis (GFC). During the period where the water in the pot is simmering you know something has begun--in this period we are observing the first order phase transition moving towards vaporization with the ultimate next phase being the transformation from a liquid into a gas.

As fate would have it, my first day of work, as a young lawyer, was in New York City on September 15, 2008. Even more ironic, my walking route to work that morning took me past the offices of Lehman brothers and it was quite a sight to see. My working thesis is that we have been in the first order phase transition since 2007 and are still currently still in the first order phase transition.

As the world muddled through the time period from 2009 to 2019 everyone seemed to believe the GFC was behind us and all was generally well. What actually happened was the levering up of corporate America and Millennials were forced to lever up to pay the inflation in undergraduate and graduate level education  over this 10 year period. Moreover, the global economy began showing cracks in the "all is well" narrative since 2018----when global growth peaked and began to slow. Coming into 2020, those in the know had been calling for a slowdown in global growth which only needed a catalyst for the major trigger. That global catalyst is CV-19.

Non-Financial Corporate Debt

Source Board of Governors of the Federal Reserve System

In the above chart, note that each grey bar represents past recessions since the Fed has tracked the data versus corporate debt levels. The most recent grey bar in the GFC recession and it is clear non-financial corporate debt has doubled since Q2 2009. This chart above illustrates why Congress rushed out the Paycheck Protection Program and it also visualizes why Congress will be forced to extend the program or face a tsunami of debt defaults that will make the GFC seem trivial in comparison.

The chart above illustrates why Congress rushed out the Paycheck Protection Program and it also visualizes why Congress will be forced to extend the program or face a tsunami of debt defaults that will make the GFC seem trivial in comparison.

Additionally, Millennials went on an education fueled debt binge during the same time period and are equally tapped out.

Source

The above chart only shows Millennial median undergraduate debt levels. Given that most high paying careers require some level of graduate education it is important to include that data as well which is noted below.

Source

All of the above leads to one simple conclusion. The post 2009 narrative of growth was false and built on the re-levered backs of corporate and millennial borrowers. Both of these groups were under growing stress, but it did not matter because asset prices kept growing and job opportunities had no end in sight. At this point, it is obvious that the prior period of prosperity was a mirage.

My thesis is that the past 10 years was all a part of Act 1--the first order phase transition period. Under my framework, the second order phase transition for the entire world is set to being on November 3, 2020.

My thesis is that the past 10 years was all a part of Act 1--the first order phase transition period. Under my framework, the second order phase transition for the entire world is set to being on November 3, 2020.

Second Order Phase Transition

November 3, 2020 is the day the US votes to elect a new president and I am of the opinion that for myriad reasons (first time mail-in voting at scale, CV-19, legal challenges, far left and far right clashes, etc.) there is a high probability of no definitive winner being declared and accepted during Q4 2020. In a normal period this would not be an impactful global issue. However in a post CV-19 world, the faltering of the US election process along with the domestic US and geo-political fallout as a consequence has the potential to eviscerate the last veneer of global stability and usher in an era of meaningful volatility. To be clear I am referring to political, economic, and social volatility that the world has not seen since the turn of the 19th century which brought us all of the "isms".

What we all need to realize is that what is being experienced is the swinging of life's pendulum in real-time. Pandemics are not new, they are just new to the group of people who happen to be living on earth right now and lack a historical perspective on current events. The rich and powerful today may become the poor and disaffected of tomorrow if things are not handled very thoughtfully.  See the American Revolution, Russian Revolution, Cuban Revolution, South African Revolution and many others for historical precedents. We would do well to dust off the myriad books on these topics and re-read them as I suspect we are entering this phase which Neill Howe referred to as the Fourth Turning.

While traumatic, these Fourth Turnings are a natural part of life that allow for the destruction of the old and creation of fertile ground for the renewal and beginning of the generational cycle to play out all over again.