- Frank Byrd, CFA, CFP®
We Are Fracturing
We are fracturing. Not just politically, but socially. It’s tempting to blame Trump or Bernie Sanders. Yet, they are merely the offspring, not the creators of this new world order. The true cause of our fracturing is a structural shift, which means we are witnessing a secular social shift, not a cyclical one. In other words, don’t sit there waiting for the pendulum to swing back. You need to get moving. There is more fracture to come. And from that, we expect three big changes to follow. If we can understand the true nature of this fracturing, we will be better equipped to position our investments – and more broadly our lives – for the changes ahead. At least, that’s the ambition. All we know is that things are changing. As investors, we don’t want to be “that guy” that invested heavily in railroads decades ago instead of Microsoft and Amazon. To understand where we are today, we first need some context… The Big Shifts What’s behind the big shifts in history … behind the revolutions? The first things that come to mind might be food shortages or scarcity of natural resources. Yet historically, that has not been the case. The fall of the Roman Empire, the French Revolution, the American Revolution, the American Civil War -- these dramatic, violent shifts came about not from starving peasants but from cultural and intellectual elites. Noah Harari, in his bestseller Sapiens, argues that human beings’ dominance of the earth is because we are the only animal that can cooperate flexibly in large numbers. This, he contends, arises from our unique ability to conceive and maintain widely held belief structures. Our collective belief in gods, nations, money, and human rights bind large groups of us together. Harari calls these belief systems myths. He does not mean that a “myth” is necessarily untrue – or foolishly fictitious like Santa Claus. Rather, he describes myths as a shared belief system, such as the US Constitution, socialism, Catholicism, or chemistry. Belief systems are an attempt to frame reality. Some myths appear to do this more accurately than others (think physics versus astrology). Harari contends that myths are the great catalyst that took us from living in small 150-person tribes to living in large cities inhabited by thousands of highly coordinated builders, farmers, and soldiers. Myths allowed mass coordinated activity. But myths can change. Just think of the myths that have evolved over history – some within our lifetime – in religion, in society, in economics and politics. Dramatic changes came about because the myths changed. Another way to think about it: as the perceptions of reality shifted, this brought about a changed reality. The Great Depression, for example, led to the creation of Social Security and Medicare. The New Myths What are the catalysts for major myth shifts? Follow the money. Money flows shift when technology shifts the dynamics of power. Overlaying this framing onto Harari’s in Sapiens shows a nice fitting correlation. For example, consider the agricultural revolution, the invention of papyrus, and the invention of the printing press. Each was concurrent with progressively larger – and more sophisticated – societies. Today we are in the midst of another major technology shift that is behind the fracturing of our society. The culprit is technology. The invention of industrial printing presses in the 1840s created scale advantages, which led to an oligopoly in the news industry. This meant that there were only one or two dominant newspapers at both the national and local levels. The same held true for broadcast TV. This dynamic meant that news organizations had an economic incentive to serve the center. That was how to maximize their revenue. Over a century after the industrial printing press changed the world, the technology has again shifted. First, it was cable TV. Then came the internet. Together, they’ve broken the economic scale advantage of the incumbent news organizations. Upstarts like Rupert Murdoch, Arianna Huffington and Glenn Beck have built fortunes bypassing traditional news oligopolies. They maximize their revenues serving niche audiences. This has crushed traditional news organizations that served the center. The only survivors among the old guard, such as the New York Times and Wall Street Journal, have fragmented and now cater explicitly to the left and right respectively. The result? We now individually curate our own news. We live in our own self-created echo-chambers. This shift in technology is quite literally breaking us. We are fracturing. As fewer people accept the belief system of America … or capitalism … or organized religion … we will fracture further. 3 Changes Ahead? Changes in belief systems are the catalysts of instability, conflict, and (on a more positive note) opportunity. It is thus critically important to identify not only which myths are dying and which are emerging, but what changes come about as a result. We believe there are three types of changes coming:
Conflict: Once we had a melting pot. Now we have identity politics. Future conflicts will be more localized. Increasingly, the “tribe” with which people align themselves is defined less by geography and more by ideology. The enemy lives next door, not on the other side of the planet. We no longer see ourselves as a melting pot. We are identities. The ascending zeitgeist is to break, not to heal. Expect this to lead to greater conflict, not less. Not that this is necessarily a bad thing. Conflict can bring about positive change. Further, not all conflict leads to bloodshed; sometimes it can be peacefully resolved.
Migration: People will seek to live near people who share their values. Once the COVID crisis is behind us, we expect to see an acceleration of migration initially within borders. Maps will look more crisply red and blue, and less purple.
Privatization: Greater migration will create winners and losers among cities. Those losing population will see declining tax revenue, which will force cuts in services. This creates vicious cycles for losers and virtuous cycles for winners. In an effort to cut costs, local governments will be forced to outsource more services to private contractors. Further, as cities cut the quantity and quality of services, citizens will proactively shift to private companies. If my city cannot educate my kids, pick up my trash, or protect my neighborhood, I’ll hire someone else to do it … or move. That might mean hiring another city (migration) or a company. This will drive demand for private companies that provide security, trash collection, education, and other such essential services. Ironically, amidst the recent protests against capitalism, we may well see the size of government shrink – not by choice, but out of desperation.
These changes will feed on themselves reflexively. Opportunity & Prosperity We want to avoid the folly of predicting the future. Rather, we are observing great change. Our goal is to understand its nature and carefully consider the best way to position our clients’ portfolios (as well as our clients' broader financial and estate plans). Pessimists will see dark times ahead from these changes. Optimists will see opportunity. We are optimists at heart, but realists by nature. What do you think? We would love to hear your own observations. Our greatest insights often come from our ongoing dialogue with our smart clients and friends. (If you get this note, you’re in the category!) What old myths do you see dying? Which new ones emerging? The safety and prosperity of our families depend on it.
Very Best,
Frank Byrd, CFA, CFP®
Fielder is an independent, fee-only adviser that provides asset management and family office services.
Disclaimer: While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.
