GLD: Get Ready For A Reversal And New All-Time Highs



I believe that GLD is hitting a low for this correction either today or tomorrow.

GLD is now retesting its 200-day, and this level should act as reliable support just like in the previous bull market.

I feel the timing is good for the reversal to take place.

I believe this is another incredible buying opportunity in GLD and the mining stocks and I'm now ramping up exposure again.

The SPDR Gold Trust ETF (GLD) tanked again on Monday and is down in early market trading on Tuesday to just over 169. Now, more and more investors are starting to question the bull market in gold. But I'm not at all surprised by this decline, as it's been my forecast since the August peak that GLD would correct for a few months, and it was highly likely it would retest its 200-day by around November. Everything is going according to my forecast. Investors are now bailing on gold; this is not what they should be doing. The time to sell was in August, not now. I believe that GLD is hitting a low either today (Tuesday) or tomorrow (Wednesday), and I expect a major reversal to have started by the end of this year. 2021 should be another exceptional year for precious metals and mining stocks; this is an incredible buying opportunity to capture all of those gains.


The gold bull market is far from over. The main driver has been and will continue to be money supply growth (I'm talking U.S. M2 and gold priced in USD). We have seen zero new stimulus, yet M2 is still rising fairly aggressively, as the money stock has grown by over $150 billion per month since August. When the next stimulus package arrives, M2 will surge.

(Source: Federal Reserve)

I always like to post this graph as it's a great visual representation of how the increase in M2 is unprecedented.

(Source: FRED)

The CBO projects the deficit in the U.S. will be $1+ trillion each year over the decade, and that doesn't take into account any new major stimulus packages (which would substantially increase the deficit in 2021). There is no way to balance the budget, which is why money supply growth will continue unabated. 

This is about the dilution of the USD, and the reason gold has been such a productive asset over the last few years, and why it will continue to be a great store of value for the foreseeable future. Everything else - Fed nominees that are pro-gold, the direction of the USD, who is the President of the U.S., etc. - is irrelevant. 

The price of gold will be driven by significant monetary inflation.

(Source: CBO)

The chart below is extremely important. Notice how in the previous bull market (2001-2011), 95% of the time gold never broke below its 200-day. In the first half of that bull run, the ascent was more slow and steady, with gold continuously retesting its MA (200) and always finding support at this level. 

In the late stages of the bull market, the same happened even though the move was more extreme. The 2008-2009 financial crisis was a one-off event that doesn't accurately represent how gold behaved during that decade. 

In other words, during those 10 years, there was really only one time when the 200-day failed to hold - and it was during the worst financial crisis since the Great Depression. 

Gold is back in a well-defined bull market, and the 200-day should act as a reliable retest level as the move advances higher. What's occurring now in gold is similar to the short-term blow-off top/correction in 2006. 

At that time, many also (incorrectly) assumed that the bull market in gold was over. Interest waned as gold corrected and then did nothing for many months. But of course, that wasn't the end of the bull market, and gold came roaring back (more than tripling in value over the next five years). 

Gold is following a similar corrective path, which shows this is completely normal. I fully expect gold to regain form and hit new all-time highs next year. 

As I said back in August when gold started to tank: "It's in the process of working off much of the recent excessive bullishness and should then build a strong base, which will allow it to catapult higher either at the end of this year or early next year. That's when gold breaks hard above $2,000 and likely reaches $2,500+."


It would be odd for gold to break above the previous 2011 highs, hitting new all-time highs, only to break down again. Especially given the extraordinary, stimulus-driven environment we are in at the moment. Never say never, but I feel the chances of this scenario playing out are low.

The gold miners have also precisely behaved as expected. As I told subscribers of The Gold Edge in a sector update in July, when the HUI was at 317 and change:

I will reiterate, I still believe that the HUI will eventually top in the 350-400 region over the next several weeks before it corrects. Actually, the low end of that range might be too low. It could be closer to 375. I didn't pick this region out of thin air, as there is key support/resistance at 375-400. I lean towards the HUI surging towards this highlighted area of resistance, and then possibly pulling back to current levels sometime in the fall of this year....If the HUI does peak in that range, then I would expect at least a decent sized correction back down to the 300-325 region over the coming months.


The HUI topped just below 375 in August, and at that point, I refined my target correction low for the HUI to 280-300, with the low end of that range as the most likely price objective. From a technical perspective, a retest of the 280-285 region made a lot of sense as it's a backtest of the breakout, and the 200-day was looking like it would intersect here as well. 

It's been my contention that the HUI isn't going to hit 250 during this correction. I believe the index is bottoming right now.


I felt the timing was right for a correction back in August given seasonality, the slowing of M2 growth, lack of new stimulus, uncertainty with the U.S. Presidential election, and of course, how overbought the sector was at that stage. Now I feel the timing is good for the reverse to take place, as the sector has now worked off those overbought conditions, GLD and the HUI are now at key support levels, M2 will get a shot in the arm (no pun intended) as it seems a new stimulus package will now come sooner rather than later, the election is seemingly out of the way, and the sector is close to entering a strong seasonal period.

Let's look at that last point in a little more detail.

December 15. Keep that date in mind. The sector almost always bottoms by that time. If you analyze the price action in the HUI (an index of gold producers) from December 15 to say the end of January in the following year, over the last 7+ years, there has been a consistent pattern of gains during those 1.5 months.

Below are performance charts of the HUI from December 15 - January 31 of the following year for each of the last seven years. The index averaged double-digit gains over those 1.5 months since 2013. For GLD, it has consistently gained 7% during that period for the last six years. While anything is possible this year, seasonality favors a rebound. I would argue, given how oversold the sector is at this stage, that the odds are good that this streak of gains will continue.

(Source: YCharts)

I believe the sector is bottoming now, but I expect the big gains will come from mid-December and onward. The next few weeks might be more about solidifying the bottom.

In August, I aggressively sold out of my mining stocks, significantly reducing exposure in order to: 1. protect substantial profits, and 2. have plenty of cash in anticipation of the likely correction - in order to take advantage of the decline and increase my outperformance.

I believe this is another incredible buying opportunity in GLD and the mining stocks. If one is looking to trade gold, I think GLD is the best option as it's the largest and most liquid physical gold ETF. Debates about gold-backed ETF products have been prevalent ever since these ETFs came into existence, and there will be debates about them for as long as they continue to exist. There is counterparty risk with GLD (the main complaint and concern), but the ease of buying and selling GLD, along with the low expense ratio, gives it a major advantage over physical gold.

Another significant advantage, and as I've mentioned before:

There's a premium paid on any physical gold purchase, which is one major drawback, especially for short-term holding periods. For example, the spot price of gold is currently $1,925 an ounce. If an investor wants to purchase a 1-ounce American Eagle, the current premium is about $100 per ounce (or 5%). If gold hits $3,000 in the next 2 years, the gain on the purchase is 48%, vs. 55% for GLD (taking into account the 0.40% annual expense fee). An investor might be able to close that gap somewhat if they receive a 1-2% premium on that 1-ounce American Eagle when they sell it, but the total return in GLD would still be 5 percentage points higher in that scenario. That doesn't even take into account the storage cost and cost to insure physical gold.

If an investor wants gold to make up a large percentage (10-20%, or more) of their portfolio and they plan to hold for the long term, then I think physical gold is the best option. For everything else, I believe GLD is the better route.

All of my new buying, though, is going towards the miners (not GLD), given their leverage and still cheap valuations. What most investors don't realize is the gold producers are having exceptional quarters as they are wildly profitable, even at $1,750 gold. It's highly likely that the HUI will surprise to the upside; I believe the index will be north of 400 next year. Many gold stocks are now very oversold, and I think there will be stellar gains from current levels. I'm now ramping up exposure again.

While I can't be 100% certain how things will play out, and there is still a chance that the gold sector declines further (just keep watch of the levels discussed to make sure key support holds), I feel that the fundamentals and technicals are signaling that a likely low is now forming. It's worth taking a risk and increasing exposure at this stage. 

Back to Liberal American Hegemony

Although Joe Biden's victory in the US presidential election has been met with sighs of relief around the world, America's European allies should not assume that its core strategic interests have changed. Still, Biden will bring a very different tone to US foreign policy, and, as the French say, it is the tone that makes the music.

Josef Joffe

HAMBURG – After four years of Donald Trump, his impending departure has sent hopes soaring. The Great Disruptor will be replaced by Joe Biden, an internationalist and institutionalist. He likes Europe and NATO, and, unlike Trump, he will treat America’s friends better than its traditional foes, including by honoring free trade. 

In the realm of security, he won’t clobber allies with threats amounting to “pay up, or we pull out!” Multilateralism will again guide American policy. It will be back to liberal hegemony instead of Trump’s narrow-minded illiberal version.

“Liberal” implies a rules-based international order, the promotion of democracy, and open societies. Trump not only ditched these principles, but also demonstrated a penchant for the world’s strongmen, alternately flirting with the likes of Russian President Vladimir Putin and North Korean dictator Kim Jong-un. (Of course, the United States’ coddling of Saudi Arabia cannot be pinned on Trump; every administration has adhered to the time-honored dictum: “He may be a bastard, but he’s our bastard.”)

Trump’s game was strictly zero-sum, especially on trade. This was a marked departure from the post-war American tradition, which stressed positive-sum outcomes in which both sides won. Trump dragged the world back to nineteenth-century power politics: states have no permanent friends, on this view, only permanent interests.

Naturally, we now hope for a restoration of the old liberal order. Some reconstruction will happen under Biden, a president schooled for nearly a half-century in the habits of America’s liberal empire. But note that Trump was not a total aberration. America’s shift toward “more for us” and “less for them” precedes the Tweeter-in-Chief.

Recall that while Trump ordered the withdrawal of thousands of US troops from Europe in 2020, Barack Obama’s administration (in which Biden served as vice president) did the same thing in 2012. For all of Trump’s Europe-bashing, Obama also groused that, “Free riders aggravate me.” 

It was he who initiated the retrenchment of US power in the Middle East, cutting troops in Afghanistan and Iraq while refusing to intervene against Bashar al-Assad’s chemical warfare in Syria.

When Trump promised to end America’s “forever wars,” he was merely copying Obama. It was his progressive predecessor who began to experiment with neo-isolationism, proclaiming that “it is time to focus on nation-building here at home.” 

Trump echoed that line by pledging a $1 trillion infrastructure program – “America First” for the sake of domestic development and welfare.

The point is to show that America’s inward turn predates Trump, and will not be completely reversed under Biden. After all, protectionism – holding off foreign competition – appeals to both the right and the left. 

A generous immigration policy was fine as long as Democrats were in the opposition, depicting Republicans as mean-spirited nativists. 

But the Biden administration will hardly throw open America’s doors to the world’s huddled masses and tear down those parts of the Mexican border wall built under Trump.

Nor will the Biden administration abandon the power competition with China, whose own protectionist policies and appropriation of intellectual property are an abiding source of tension. The US will continue to assert itself in the Western Pacific, where a classic rivalry between a rising land power and an established sea power is escalating. 

Democrats and Republicans are largely committed to Containment 2.0, corralling regional players such as India, Japan, South Korea, Taiwan, and Australia.

In the Middle East, Biden has already confirmed that he will try to restore the Iran nuclear deal, albeit not in the well-meaning ways of his old boss, Obama. The incoming administration will leave intact the new anti-Iran alliance between Israel and Arab Gulf states, and it will not repeat the Obama administration’s mistake of pursuing a “reset” with Russia.

Since 2009, Putin’s Russia has turned into an expansionist power pressing on Europe, North Africa, and the Middle East. While Europeans cheer Biden’s victory, they should be prepared for renewed American demands that they increase their defense spending. 

By the same token, Germany should expect more US pushback against the Nord Stream-2 pipeline, a joint Russian-German project that bypasses Eastern Europe and increases Germany’s energy dependence on Russia.

Even as Biden presents himself as the anti-Trump, he will continue to pursue some of the same core US strategic interests when it comes to China, Russia, and commercial competition with Europe. Still, as the French say, it is the tone that makes the music. 

The Biden administration will bring a most welcome change to the style of US diplomacy, replacing Trump’s brutishness with well-mannered professionalism.

As in private life, respect and civility go a long way in international relations. Beyond improving the tone, Biden will pursue fewer zero-sum, and more positive-sum, games. 

He will focus on common interests and seek to restore American leadership by winning consent, rather than through boorish unilateralism. For example, he intends to stop the withdrawal of US troops from Europe ordered by Trump.

In abandoning Trump’s “America First” doctrine, Biden will offer relief – but not a free lunch – to the rest of the Western world. As he wrote earlier this year in Foreign Affairs, his administration’s “policy agenda will place the United States back at the head of the table,” where it will lead “not just with the example of our power, but also with the power of our example.”

At the end of the day, however, power is power, and American power remains unrivaled across the board. All those who feared and despised Trump should be reassured by the 2020 election result. Biden will undoubtedly wield America’s mighty sword more judiciously, and with a friendlier face. 

Come Inauguration Day in January, America will be open for business once again. But the world should be prepared for some hard bargaining.

Josef Joffe, a fellow at Stanford University’s Hoover Institution, serves on the editorial council of the German weekly Die Zeit. 

The Strangeness of an Analytic Life

Thoughts in and around geopolitics.

By: George Friedman

I have spent a good part of my life as an analyst, and for the past quarter-century as an analyst of geopolitics – the impersonal forces that shape nations and their relations to each other. I have also spent my life as an American, grateful for the refuge it gave me, and in love with its greatness and pettiness. 

Like people, nations have character, and none is without flaws, however obvious or hidden they may be.

The virtue of an analyst is indifference. The world is filled with people who have strong views of what should be, of what makes a good leader, of the strength or weakness of policies. Having opinions is one of the great pleasures of human life. 

We are filled with opinions on all manner of things, judging the world as well as the moral standing of those with different opinions. 

I once had an argument with someone who actually believed that the Boston Red Sox were intrinsically better than the New York Yankees. We raged and drank and made up statistics and took enormous pleasure from the argument. 

Even when we rage against someone we truly loath, there’s pleasure derived from expressing our opinion. Rage is a sort of aphrodisiac.

Most of us have little power. Our own lives are shaped by massive and impersonal forces over which we have little control. Our jobs become obsolete, viruses plot against our lives, our bodies rebel against us. 

But opinions are the realm in which we are free and in control. 

We can believe what we want, and in many countries we can even say our opinions out loud. They give us a semblance of control our lives deny us. Opinion even is not answerable to truth or falsehood. 

It even has power over the past, as we debate who did what to whom and when, with lies and false memory in command.

Every profession demands that you surrender something of profound interest and pleasure. My profession demands that I give up the pleasure of having opinions. The self-evident virtue of the Yankees is granted me. Judging nations and politicians is not. 

The foundation of my work is that history is not made by individuals who may appear all-powerful but by impersonal and complex forces that shape, elevate and destroy leaders and nations according to its logic and laws. 

Seven billion people do not create history, nor does one leader with strongly held opinions. 

History is made by the forces generated by 7 billion people pursuing their own ends in a world they did not make.

My job, the one I chose for myself, is to understand those forces and to create a roadmap for humanity. Some choices are ours and I chose this one. 

Or more precisely, born in Europe just after World War II and the holocaust, becoming conscious in the Cold War and anticipating my death at the hands of nuclear war, and watching the permanent and awesome Soviet Union crumble, I quickly learned that my control of history is non-existent, and that what seems obvious frequently isn’t. 

So my choice was less a choice than the recognition of reality. 

As Karl Marx put it, “Men make their own history, but they do not make it as they please.”

So my childhood taught me that I did not have the power to shape my world, but if I could understand it, I could predict its course. And if I could predict its course, I could stay out of its way. 

Living in America stole my fear of history. Here it was possible to believe that all things are possible, that you are the master of your fate, and that others would not dare disrupt your nation. 

These are dubious assumptions, but I absorbed them to the point of trying to map coming events as an intellectual enterprise rather than as an existential necessity.

This was essential to my work. It freed me from evaluating events based on the potential effect they might have on my life and allowed me to see things in a way the partisan and opinionated could not. People with opinions know what should happen and also what shouldn’t have happened. 

They understand good and evil. The job I chose was to understand why the past was what it was, and to understand why what is happening happened, and to understand from the forces I have seen what the future holds. 

I no longer believe in the permanent invulnerability of my country, but I continue to force myself to avoid opinions on what the world should be like. I cannot change the world, but perhaps I can understand it. I will leave it to others to judge my success.

For me, the cost is the pleasure of opinion. If I don’t forfeit my opinions, I will confuse what I wish will happen for what I think will happen. There is a tragedy here. I love the United States with the passion only a refugee can feel. 

It has given me a life where the world I was born into was filled with death. The hardest thing I can do, but absolutely must, is to view the United States as something other than a nation-state. The work I do demands that every event be viewed clinically, against a history of such events, and before the history of future events. 

If I don’t take that view, then what little I have been able to achieve in my life is washed away. I cannot celebrate my love, and cannot condemn it.

An analyst cannot take sides, not even in something as fraught as last week’s presidential election. An analyst must understand why the election was fought as it was, and what will come next. 

It is like a fantastic party is being held next door, and you are invited but have to turn it down. I love the responses I get from readers, some accusing me of supporting President Donald Trump, as if it were obvious that no reasonable people can, some accusing me of opposing Trump, as if no reasonable people might. 

I feel like a monk, barred from the pleasures of human life. Or at least the pleasure of arguing opinions beyond the obvious and eternal excellence of the Yankees.

Active managers struggle to prove their worth in a turbulent year

Consolidation and increased outflows are predicted as traditional money managers fail to lift performance during the pandemic

Robin Wigglesworth in Oslo

© FT montage; Bloomberg | Stockpickers have mostly failed to outpace the growth of exchange traded funds even in the Covid crisis

The history of financial markets has more wild plot twists, temper tantrums and triumphant comebacks than a daytime soap opera — or a US presidential election for that matter. Even by Wall Street’s standards, 2020 has been exceptional, yet for some active asset managers it offered the promise of salvation of sorts.

Over the past two decades there has been an epochal shift of power from the pedigreed stockpickers and bond kings who have straddled markets, to the cheap, passively-managed index funds now in the ascendancy.

In the past 10 years, passive equity funds have enjoyed inflows of more than $2tn, even as traditional, active ones have suffered outflows of over $1.5tn, according to data provider EPFR. There is now over $12tn in index funds globally — either passive mutual funds or the increasingly popular exchange traded funds — according to Morningstar.

This underestimates the heft of passive investing, as many big pension plans and sovereign wealth funds now manage index-tracking strategies internally. “In many ways it’s now the default,” says Christopher Harvey, a senior analyst at Wells Fargo who covers the investment industry.

Traditional money management groups have long argued — particularly loudly in the past decade — that they would prove their worth in the next downturn. The coronavirus-triggered mayhem of 2020 has been a perfect opportunity to demonstrate the merits of human “active” management, while staunching the outflows or even beginning to reverse them.

“It’s markets like this . . . where active managers get to show outperformance,” Jenny Johnson, chief executive of Franklin Templeton, told analysts in April. “And as you have outperformance, the flows will follow.”

In contrast, the weaknesses of index funds would be revealed, some industry executives predicted. 

“The shortcomings of mechanised trading, better known as passive trading, will come into sharper focus,” Peter Harrison, chief executive of Schroders, wrote in the FT in March. “The answers will not be conjured up by arms-length algorithmic investment management.”

‘Active is not dead,’ says Nicolas Moreau, chief executive of HSBC Global Asset Management. ‘The more the market is inefficient, the more active management is important’ © Kai Pfaffenbach/Reuters

Yet, despite such predictions, 2020 looks like it will end up as another muddled year for active management. With a few notable exceptions, the results have mostly been mediocre, with problematic consequences for the industry. 

“It will further accelerate the demise of traditional active management,” says Yves Bonzon, chief investment officer at Julius Baer, a Swiss private bank.

Asset management executives and analysts expect this to speed up consolidation in the industry, as investment companies seek out the shelter that size offers them. There has already been a spate of deals in recent years. 

But with the promises to outperform in downturns once again unfulfilled, and likely to reinforce investor scepticism of active management, the battle for market share is set to become even more ferocious.

“Buoyant financial markets lifted asset levels over the past decade, but masked underlying challenges and deteriorating fundamentals at asset managers,” Michael Cyprys, an analyst at Morgan Stanley, said in a recent report on the industry. 

“We expect the implications of the crisis to have a lasting impact on the industry, accelerate existing trends, and motivate managers to take strategic decisions faster than anticipated.” 

A better environment

The investment industry dealt well with many aspects of the Covid-19 pandemic. 

Shifting thousands of portfolio managers, traders, analysts, risk managers, fund accountants and compliance staff out of the office — at a time when financial markets were in a tailspin — without any major mishaps was an under-appreciated achievement.

“The resilience was a big success,” says Keith Skeoch, chairman of the Aberdeen Standard Investments Research Institute. 

“Not only did business get done, but liquidity kept flowing . . . A huge amount of money has been raised in the bond and equity markets. The industry continued to fulfil its role in transforming savings into investments.”

However, when it comes to the primary job of a money manager, the record is more blemished. Analysts slice and dice the overall performance of active funds in different ways, which can lead to differing results. 

Yet one of the most comprehensive, regular snapshots — the S&P Dow Jones Indices’ “Spiva scorecard” — makes unhappy reading for anyone seeking evidence that active management is having a bright 2020.

Only about a third of US equity funds beat the broader market in the year to the end of June. The longer-run Spiva — the S&P Indices Versus Active — results are even grimmer, with under 13 per cent outperforming over the past 15 years. 

The story is broadly similar for bond funds, despite fixed income markets generally being considered less efficient and therefore offering more opportunities for skilled money managers.

According to Jenny Johnson, chief executive of Franklin Templeton, it’s in turbulent markets like the current one created by the pandemic: “ . . . where active managers get to show outperformance”

Nor has the third quarter helped much. Bank of America estimates that 40 per cent of US equity funds have surpassed their indices in the first nine months of the year. This is narrowly ahead of the 36 per cent long-term average since 1991, when its data began, and the turbulence around the recent US presidential election may have helped. 

But it means a majority of funds still underperformed their index even in a supposedly better environment and is unlikely to alter the entrenched trend of outflows affecting the industry.

“This has been anything but a normal bear market,” says Michelle Seitz, chairman and chief executive of Russell Investments, pointing to extraordinary central bank stimulus and the dominance of big technology stocks in the subsequent recovery. “I don’t know how valid it is to look at a cycle like this and try to draw too many conclusions from it.”

There are important nuances, for example, that active managers generally perform better in certain markets, such as international equities; or in smaller stocks that are less well covered by Wall Street’s army of analysts. “Active is not dead,” says Nicolas Moreau, chief executive of HSBC Global Asset Management. “The more the market is inefficient, the more active management is important.”

Higher returns also mean the sensitivity to performance can be diminished. Investors are unlikely to dump funds that focus on racier “growth” stocks just because they have narrowly trailed behind their benchmark.

Nonetheless, the overall shift into index funds has continued apace — with another $375bn going into passive vehicles in 2020, according to EPFR.

The main driver is the fact that fixed-income ETFs — which some analysts had warned would prove to be fragile in a downturn — performed better in the coronavirus market tumult than many investors had feared, says Sheila Patel, chairman of Goldman Sachs Asset Management.

“A number of institutional investors say they were pleasantly surprised by the liquidity and functionality of using ETFs in March-April,” she says. “So I definitely think it’s cemented a place on the fixed income front.”

     The S&P Dow Jones Indices’ ‘Spiva scorecard’ provides evidence that active management is not having a bright year © Justin Lane/EPA-EFE/Shutterstock

Stock market underperformance

Equities remain the hardest area for asset managers to retain investors, and the hurdle is getting higher. In the 1990s the top six deciles of best-performing funds saw inflows, while in the 2000s only the top three deciles did so. In the past decade only the top-decile funds enjoyed positive flows, according to Morgan Stanley.

Even Fidelity’s Contrafund — the world’s biggest actively-managed equity fund — has suffered steady outflows in recent years, despite its manager William Danoff beating his benchmark by an average of over 3 percentage points a year over the three decades he has managed the fund.

Underscoring how far the pendulum has swung in favour of passive investing, this summer Coloradan industrialist Clarence Herbst sued the state university’s foundation — which he had previously chaired and donated to — for eschewing index funds in favour of pricier, poorly-performing active funds. 

The case was thrown out by a Denver judge in October on the grounds that Mr Herbst had no standing to sue, but the fact that it was filed was emblematic of the shifting views of investors.

Tellingly, the shares of most big investment groups have underperformed the broader stock market this year, falling by an average of 2.4 per cent compared with the S&P 500’s 10 per cent gain. Over the past decade BlackRock — the world’s biggest provider of ETFs — is the only US asset manager whose shares have beaten the S&P 500.

Industry executives are aware of the unfavourable data on their overall performance, and know that for a durable active asset management comeback this will need to change. But there is cautious optimism that the coming decade will prove more fertile for their stockpicking stars and bond kings.

Given the prospect of more market volatility, lower overall returns that necessitate a more aggressive approach and widespread economic disruption, the future of active management is brightening, Mr Skeoch argues.

“It’s up to active management to show that it can deliver . . . But I would argue the environment is going to be materially different,” he says. “The opportunity is there, we’ll see if people step forward and take advantage of it.”

Consolidation picks up pace

Staunching the industry-wide outflows matter because scale is becoming increasingly important for asset managers. Many big institutional investors are trimming how many employees they hire, while wealth brokerages are also culling how many mutual funds they make available to retail investors. Size both means that an asset manager has more sway with potential clients, and that they are better able to pay for their rising costs.

Analysts argue that the turbulence triggered by the pandemic is more likely to shift money between active managers — with those that prove their mettle winning business from underperformers — than arrest the ongoing shift into passive investment vehicles. Morgan Stanley’s Mr Cyprys, estimates that the churn between active managers is actually nearly three times greater than that between active and passive.

Traditional money management groups have long argued that they would prove their worth in the next downturn. Yet, despite such predictions, 2020 looks like it will end up a muddled year for active management © Michael Nagle/Bloomberg

As a result, there has been a spate of mergers and acquisitions. The latest deals involved Franklin Templeton buying Legg Mason for $6.5bn in February; and Morgan Stanley paying $7bn for Eaton Vance to combine it with its own money management arm. The deals catapulted both buyers into the club of groups with $1tn of assets under management.

The former deal in particular represented a doubling-down on a bet that active management is on the cusp of a comeback, according to Ms Johnson. “If you’re driving a car down a well-paved road you don’t need a lot of the safety features. But if you’re going to head to the mountains and you get a snowstorm you’re going to wish you had those safety features,” Franklin Templeton’s chief executive told CNBC in a recent interview. “And that’s what active management is.”

Adding to the sense of an industry shake-up, activist investor Nelson Peltz has taken big stakes in both Invesco — which is still digesting its 2019 purchase of OppenheimerFunds — and Janus Henderson, itself a product of a 2017 merger of Janus Capital and Henderson Global Investors, and is clamouring for further consolidation. At the same time, Société Générale, Bank of Montreal and Wells Fargo are all reportedly looking to sell their asset management arms.

There is plenty of scope for consolidation. Morgan Stanley analysts point out that the 10 biggest investment groups control just 35 per cent of the $90tn industry, making it the most fragmented sector outside of the capital goods sector. They predict that the Covid-19 crisis will further accelerate its consolidation.

“M&A is not a panacea. But strategically combining firms to meet the needs of the capital markets, to meet the needs of the clients and to adapt to the changing landscape is absolutely vital. Every CEO should stay open-minded,” says Ms Seitz, whose company is one of those said to be up for sale by its private equity owner TA Associates.

In addition to bulking up, investment groups are exploring other ways to future-proof their businesses. These efforts include investing heavily in technology to both improve the performance of their fund managers and to cut costs, expanding internationally — with Asia particularly high on the agenda — and accentuating their credentials on environmental, governance and social issues, as ESG considerations become more important to clients.

Yet increasingly, size is seen as the most important imperative.

“The ones with the most amount of assets are going to survive and thrive,” Mr Harvey says. 

“But if you’re not a behemoth already, it will be tough to become one.” 

The Calm Before the Exchange-Rate Storm?

Core dollar exchange rates have so far been surprisingly stable during the pandemic, most likely because major central banks’ policy interest rates are effectively frozen at or near zero. But although the current stasis could last awhile, it will not last forever.

Kenneth Rogoff

CAMBRIDGE – With alternative assets such as gold and Bitcoin thriving in the pandemic, some top economists are predicting a sharp fall in the US dollar. This could yet happen. But so far, despite inconsistent US management of the pandemic, massive deficit spending for economic catastrophe relief, and monetary easing that Federal Reserve Chair Jerome Powell says has “crossed a lot of red lines,” core dollar exchange rates have been eerily calm. 

Even the ongoing election drama has not had much impact. Traders and journalists may be getting worked up about the greenback’s daily travails, but for those of us who study longer-term exchange-rate trends, their reactions to date amount to much ado about nothing.

To be sure, the euro has appreciated by roughly 6% against the dollar so far in 2020, but that is peanuts compared to the wild gyrations that took place after the 2008 financial crisis, when the dollar fluctuated between $1.58 and $1.07 to the euro. 

Similarly, the yen-dollar exchange rate has hardly moved during the pandemic, but varied between ¥90 and ¥123 to the dollar in the Great Recession. 

And a broad dollar exchange-rate index against all US trading partners is currently sitting at roughly its mid-February level.

Such stability is surprising, given that exchange-rate volatility normally rises significantly during US recessions. As Ethan Ilzetzki of the London School of Economics, the World Bank’s Carmen Reinhart, and I discuss in recent research, the muted response of core exchange rates has been one of the pandemic’s major macroeconomic puzzles.

Economists have known for decades that explaining currency movements is extremely difficult. Nevertheless, the overwhelming presumption is that in an environment of greater global macroeconomic uncertainty than most of us have seen in our lifetimes, exchange rates should be shifting wildly. 

But even as a second wave of COVID-19 has stunned Europe, the euro has fallen only by a few percent – a drop in the bucket in terms of asset-price volatility. Fiscal stimulus talks in the United States are on one day, off the next. 

And although America’s election uncertainty is moving toward resolution, more huge policy battles lie ahead. So far, though, any exchange-rate response has been relatively small.

Nobody knows for sure what might be keeping currency movements in check. Possible explanations include common shocks, generous Fed provision of dollar swap lines, and massive government fiscal responses around the world. 

But the most plausible reason is the paralysis of conventional monetary policy. 

All major central banks’ policy interest rates are at or near the effective lower bound (around zero), and leading forecasters believe they will remain there for many years, even in an optimistic growth scenario.

If not for the near-zero lower bound, most central banks would now be setting interest rates far below zero, say, at minus 3-4%. 

This suggests that even as the economy improves, it could be a long time before policymakers are willing to “lift off” from zero and raise rates into positive territory.

Interest rates are hardly the only likely driver of exchange rates; other factors, such as trade imbalances and risk, also are important. And, of course, central banks are engaged in various quasi-fiscal activities such as quantitative easing. But with interest rates basically in a cryogenic freeze, perhaps the single biggest source of uncertainty is gone. 

In fact, as Ilzetzki, Reinhart, and I show, core exchange-rate volatility was declining long before the pandemic, especially as one central bank after another skirted the zero bound. COVID-19 has since entrenched these ultra-low interest rates.

But the current stasis will not last forever. Controlling for relative inflation rates, the real value of a broad dollar index has been trending up for almost a decade, and at some point will probably partly revert to the mean (as happened in the early 2000s). 

The second wave of the virus is currently hitting Europe harder than the US, but this pattern may soon reverse as winter sets in, particularly if America’s post-election interregnum paralyzes both health and macroeconomic policy. 

And although the US still has enormous capacity to provide much-needed disaster relief to hard-hit workers and small businesses, the growing share of US public and corporate debt in global markets suggests longer-term fragilities.

Simply put, there is a fundamental inconsistency over the long run between an ever-rising share of US debt in world markets and an ever-falling share of US output in the global economy. (The International Monetary Fund expects the Chinese economy to be 10% larger at the end of 2021 than it was at the end of 2019.) 

A parallel problem eventually led to the breakup of the post-war Bretton Woods system of fixed exchange rates, a decade after the Yale economist Robert Triffin first identified it in the early 1960s.

In the short to medium term, the dollar certainly could rise more – especially if further waves of COVID-19 stress financial markets and trigger a flight to safety. And exchange-rate uncertainty aside, the overwhelming likelihood is that the greenback will still be king in 2030. 

But it’s worth remembering that economic traumas such as we are now experiencing often prove to be painful turning points.

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.