The Storm Before the Calm

The war isn't over, Europe is finally awake, and SpaceX is going public

The war is over. Not so fast. Headlines suggest de-escalation. The facts on the ground suggest a managed pause, not a resolution. Energy markets agree, oil prices are still pricing risk, not relief.

Has Europe finally woken up? After three years of half-measures, there are signs the continent is starting to take its energy and defence vulnerability seriously. Late, but better than not at all.

SpaceX launches, and Elon talks more BS. The pattern continues. The achievements are real. The promises are not. The IPO that the SEC has obligingly cleared the path for is something else entirely. We will get to that.

Pauline Hanson hits the front pages. One Nation is back in the news cycle. Whether it lasts is anyone's guess, but the political fragmentation underneath it is a structural story, not a passing one.

George Friedman's two cycles, and why the 2020s are different

The framework this week comes from George Friedman's The Storm Before the Calm. His argument is that the United States runs on two great cycles, and they don't usually overlap. This decade is the first time they do.

The institutional cycle runs about 80 years. It governs how the federal and state institutions relate to each other and to citizens. The last one ended in 1945 with the close of the Second World War. The current institutional cycle is ending right now.

The socioeconomic cycle runs about 50 years. It governs the rules of the economy, who benefits, and how power is distributed. The last shift was around 1980 with the Reagan revolution. The next is due around 2030.

Each cycle alone is disruptive. Both at once is unprecedented in American history.

Institutional cycles end through war or systemic crisis. Socioeconomic cycles end through political and economic upheaval. Both close in this decade.

Friedman's read on Trump is worth pausing on. He is not the figure who ushers in the new era. He is the first tremor of the conflict between the two classes whose collision will end the old one. The transition president, the one who actually writes the rules of the next cycle, comes in 2028 or 2032. The 2020s are the failure decade. The 2030s are the creation decade.

When everyone speculates, the cycle is near its end

One of the cleanest tells of a late-cycle market is universal participation. Not just the professionals. Not just the wealthy. Everyone, at every income level, betting on something. We are there.

The asset class differs by income. The behaviour does not. The pattern itself is the warning.

If you are wealthy, you can speculate on anything. The top 10% of US households own 87 to 93% of all stocks and mutual funds. If you are middle class, the speculation vehicle for the last 25 years in Australia has been property. If you are young, it is Bitcoin and crypto. If you are poor, it is the footy, the pokies, the lottery.

Different rungs of the ladder, same psychology. Everyone is looking for the asymmetric payoff that gets them to the next rung. And when the entire population is doing that, the cycle is closer to its end than its beginning.

The SpaceX IPO is the perfect specimen

The SEC has just changed the listing rules to accommodate the SpaceX IPO. Worth thinking carefully about who that change actually benefits.

This is not new. It is the same machinery that ran in 1999, in 1929, and in 1873. The financiers sit in the penthouses and the Rolls Royces. The investor who entrusted their money to the machinery gets what is left after the fees, the legals, and the early exits.

Seventeen years, five times your money

The current bull market has compounded at roughly 13% per year for 17 years. A dollar in the S&P 500 at the March 2009 low is worth around five dollars today. That is one of the longest, strongest runs in market history. It has bred a generation of investors who have never seen a meaningful bear market or a sustained period of low returns.

The longer and steeper the run, the harder the maths gets for the next decade. CAPE of 41 is doing a lot of work to justify the extrapolation.

This is not a prediction that it ends tomorrow. Nobody can call that. It is an observation that the maths from here is materially harder than the maths over the last decade. CAPE of 41 says next-decade real returns are likely to be low single digits, possibly negative. Buy and hold the index, which has been the right strategy for 17 years, is not obviously going to be the right strategy for the next ten.

Russia is constrained. China is Japan on steroids.

Friedman's Next 100 Years applies the same cycles thinking to international affairs. The picture isn't pretty for the major non-Western powers.

What we like and don't like this week

You don't need to predict the storm. You need to adapt to it.

Friedman's whole point is that the cycles are visible if you know what to look for. The institutions creak. The political alignment fractures. The speculation goes everywhere. The old playbook stops working. We are watching all of that happen in real time, and the 2024 election was the last one fought on the rules of the old cycle. The next will be different.

For investors, the practical translation is simple. The strategy that worked for the last 17 years was buy-and-hold the index. The strategy for the next 10 is going to need to be more adaptive. More diversified across regimes. More willing to take profits when the market gives them and more willing to wait when it doesn't. Inflation eats returns the way it did in the 1970s. Tax regimes shift. Passive becomes harder than it was.