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The Future of Mutual Funds

As the industry’s growth slows, expect the push toward ever-lower expenses to continue, with only the best stockpickers thriving.

Over the past year, Vanguard took in $224 billion in new money, securing its dominance: More than a fifth of all fund assets are in Vanguard products. Shutter_M/Shutterstock

After a half-century of robust growth, the mutual fund industry seems to have stalled. Overall assets last year dipped 1.4%, to $15.7 trillion, after rising at a 13% average annual pace since 1965, according to the Investment Company Institute.
The blame lies not with poor market performance, but with investors pulling their money out of traditional mutual funds in droves—a trend fund-tracker Morningstar has termed “flowmageddon.”
Some companies have been hit particularly hard, whether because of high costs or subpar investing results. Among the giants, the biggest losers have been Pimco, with $46 billion in investor withdrawals, leaving it with $301 billion in its funds, and Franklin Templeton Investments, which saw $44 billion leave the firm, giving it $387 billion in fund assets.
The biggest gainer, by far, has been Vanguard Group, where assets have climbed 7.2%, to $3.1 trillion, from a year earlier. No other firm comes close to Vanguard’s success, thanks to its combination of low-cost products—both traditional mutual funds and exchange-traded funds.

Over the past year, the firm took in $224 billion in new money, securing its dominance: More than a fifth of all fund assets are in Vanguard products.
BlackRock is gaining ground, as well, thanks to its iShares ETFs. The firm took in $83 billion over the past year, all of which went into the ETFs. All told, BlackRock (ticker: BLK) has just over $1 trillion in its retail funds, placing it fourth in terms of industry share. Capital Group’s American Funds, the second-largest fund group, with $1.2 trillion, saw inflows of $5.6 billion, while Fidelity Investments, No. 3, suffered $14.5 billion in outflows. American and Fidelity both have roughly an 8% share of the fund market. (Morningstar provided Barron’s with the industry’s flow data for the 12-month period ending in May.)
SPLITTING THE FUND INDUSTRY into active versus passive camps when assessing winners and losers is in vogue. It’s certainly worth noting that Pimco and Franklin have mostly active funds, while Vanguard and BlackRock are best known for their low-cost index funds and ETFs.

In the past 12 months, investors have pulled $308 billion out of actively managed mutual funds and poured $375 billion into passive mutual funds and ETFs.
But a more nuanced look at fund flows reveals what should be an obvious truth about the industry: Performance matters. Active management is being challenged, no doubt—on average, active managers underperform their benchmarks—but the top performers are still holding their own while the laggards are losing money hand over fist.
Using the Barron’s/Lipper 2016 Fund Family Ranking as a guide, the 10 fund shops with the best performance saw a median outflow of $598 million over the past year. If that sounds bad, consider that the 10 laggards lost a median $3.8 billion.
VANGUARD IS PICKING UP the industry’s pieces—but it isn’t just a passive affair.

Some $28 billion of the firm’s inflows went into actively managed funds. That gives them more than any other active fund shop—DoubleLine Capital is second with $16 billion. Clearly, investors are not eschewing active management for passive. But they are voting for low costs.
Industrywide, equity funds with expense ratios in the lowest quartile attracted $611 billion over the past 15 years, according to Vanguard’s research. All other funds suffered outflows.

This hasn’t been lost on the big money managers. Last month, Fidelity dropped the average price on its passive funds to 1/10th of 1%, undercutting Vanguard, which has been a low-cost evangelist for decades.

“This is something we’ve been talking about for 42 years,” says Vanguard CEO William McNabb. “But when you’re in the 1990s and you’re averaging 15% in equities, people just weren’t that interested in hearing the story.” More investors have bought into Vanguard’s vision now that a balanced portfolio is likely to return 5% a year over the coming decade, McNabb says. “If you’re paying 1% for that, you’re paying 20% of your return,” he notes.
 “Cost becomes so much more important in that kind of environment.”

This may strike some as obvious, but many obvious truths have been obscured by the way the industry has sold its products. Right now, what you pay for a mutual fund often depends on how—and through whom—you purchase the fund. The rampant use of share classes means that the same fund can have vastly different costs—and vastly different performance as a result. Fund companies strike different deals with different distributors— Charles Schwab (SCHW) versus Merrill Lynch, for instance—and the costs that fund companies would incur to be sold via a particular platform instead get passed on to investors.

Institutional share classes are generally the cheapest, intended for buyers investing $500,000 or more. This can include 401(k) plans and advisors who make large fund purchases on behalf of their clients. Everyday investors pay retail.

For example: At its priciest, the $86 billion Pimco Total Return fund (PTTAX) charges annual fees of 0.85% and comes with a 3.75% upfront sales charge, known as a load. The institutional share class of Total Return costs just 0.46%, with no sales charge. The more expensive retail shares have returned 5.9% over the past 10 years, whereas the cheaper institutional shares have returned 6.4%. Fees explain the difference. Over a 10-year period, that amounts to nearly $4,000 on a $50,000 investment.

SHARE CLASSES ALSO ACCOUNT for how much advisors make, but that’s about to change. In April, the Labor Department issued a rule that will require advisors to act as fiduciaries when choosing funds for retirement accounts. That means they must put their clients’ best interests first. Again, that’s something that seems as if it ought to be obvious, yet very often was not.

A fund’s load, as well as a portion of its higher fees in some share classes, is intended to compensate advisors. But commission-laden funds can put an advisor’s interests at odds with the clients’ interests—simply, good returns. Investors have grown wary of the practice, flocking to advisors who charge a flat fee, usually a percentage of assets. If clients’ portfolios are growing, so are the fees the advisor collects—an arrangement that keeps interests aligned and one that is compatible with the fiduciary standard.

At some point, the Securities and Exchange Commission will probably extend the fiduciary rule to cover all investment accounts. But even if it doesn’t, the new DOL rule is likely to become the de facto standard.

“There’s been so much cost put inside [mutual fund] share classes to incent people to sell one product over another,” says Charles Goldman, CEO of AssetMark, a technology and investment platform for independent advisors. “Under the DOL model, that doesn’t work. Advisors should buy the best product for the client.”

In many cases, the best product will be a low-cost, broad-based passive fund tied to an index of stocks or bonds. But this isn’t the death knell for active management. For starters, the latest passive craze—smart beta—is actually a form of active management. While based on an index, smart beta aims to beat the market by screening stocks based on a variety of metrics, such as volatility, price/earnings ratios, or dividends.

“It’s just another form of taking active risk,” says Joel Dickson, Vanguard’s global head of investment research and development. “This discussion of index versus active is much too blunt of a description.” Vanguard offers what some would call smart beta, such as its $22 billion Vanguard Dividend Appreciation    ETF (VIG), but the firm has so far been conservative in its smart-beta offerings.
OLD-FASHIONED STOCK-PICKING still has a place, as well. Cohen & Steers(CNS), an asset manager that specializes in real estate and infrastructure funds, saw $1.1 billion in inflows over the past 12 months—an impressive feat given that the firm has just $19 billion in fund assets, per Morningstar. The company’s latest annual report takes a strong stand on the future of active management: “It is time to acknowledge the truth. Long-only active management in its current form is no longer a growth industry.”
The firm says it will remain focused on specialty asset classes that are “well suited to active management.”

Even as the core of many investors’ portfolios becomes passive, actively managed funds could be used to provide growth and special opportunities. And here is where smaller firms can shine.
Companies like Harding Loevner, William Blair, and Primecap Management, which offer fewer funds and focus on keeping their stock-picking truly active, all had inflows in the past year. So did J O Hambro Capital Management, a London-based active manager with $4.5 billion in U.S. fund assets. CEO Gavin Rochussen says he sees active management becoming “the new alternative.”
But for now, swarms of investors are dumping active management—often to their detriment. Take Fidelity Contrafund (FCNTX), one of the world’s largest active stock funds, with $106 billion in assets. For a quarter of a century, manager Will Danoff has beaten the market by an average of three percentage points a year. But for some investors, logic no longer means much. Over the past year, investors have withdrawn $2.6 billion from Contrafund. Of course, the fact that the fund charges 0.7% despite its massive economies of scale may dissuade some investors. It’s worth noting that the average actively managed stock fund charges 1.2%, according to Morningstar.
THE FUND INDUSTRY has spent the past few months fretting about the impact of the Labor Department ruling. But many pros see real benefits. Shortly after the ruling, BlackRock CEO Laurence Fink told investors, “We need to have more investor confidence. If they believe the DOL rules will give them better transparency, better certainty that they’re being treated right, and they invest more money for the long run, it’s better for the country, it’s better for their financial future, and it’s really very good for the entire industry.”
Like any regulation, though, there could be unintended consequences. Rob Arnott, CEO of Research Affiliates and a smart-beta innovator, sees lurking problems. He worries that risk-averse advisors, fearful of running afoul of the new rule, will push investors into index funds, smart beta, and other investments that have had recent success. Advisors “can’t get sued for recommending something that has performed beautifully in the past,” Arnott says. And as we all know, past returns don’t mean much when it comes to the future. “So the DOL will be a big impetus to passive investing and performance chasing,” he says.
Another downside: As the rule pushes advisors into fee-based models, some clients will be shoved aside. A family or individual with $200,000 in assets won’t be worth the $2,000 in annual fees generated for an advisor. The good news is that technology has arrived in time to pick up the castoffs.
FOR THE MASS AFFLUENT, mutual funds, ETFs, and other products will be increasingly distributed via software-driven platforms, also known as robo-advisors. New York–based robo firm Betterment now has $4.9 billion in assets under management. Silicon Valley’s Wealthfront has $3.5 billion, at last count. But this technology-led upheaval isn’t like the ones that upended the music, publishing, and television industries.
Instead, Scott Burns, Morningstar’s global head of asset-management solutions, likens the robo movement to the 1990s advent of online banking.
“Online banking didn’t rise up and put Wells Fargo and Chase out of business,” Burns says.
“The banks built their own. Online banking was great for the customer. And it was great for the bank because it was superscalable and really lowered their cost.”
So who suffered? “It was bad for the bank teller,” he says. In today’s robo world, the bank teller is the advisor. But, Burns notes, in this case the advisors are the ones turning clients away. Established players like Vanguard, BlackRock, Fidelity, and Schwab are happily picking them up with their own low-cost services.
One year after its launch, Vanguard’s Personal Advisor Services platform has $41 billion in assets. The service uses a hybrid of technology and human call centers to dole out holistic investment advice. Schwab has about $7 billion in its new Intelligent Portfolios robo platform.
And BlackRock recently acquired robo firm FutureAdvisor to help its banking clients build out their own wealth management platforms.
Fidelity has been broadening its platform for years. The firm has $2 trillion in assets under management, and a total of $5 trillion in what it calls “assets under administration.” The larger figure includes money in non-Fidelity products held in Fidelity-managed accounts, like 401(k) plans and brokerage accounts. Fidelity has broadened its passive offerings, for instance, by partnering with BlackRock, whose iShares ETFs are available commission-free at
Brian Hogan, who runs Fidelity’s equity investment division, has been at the firm for more than two decades. Over that period, Fidelity’s assets under administration have grown faster than its assets under management—“and that’s been a purposeful strategy,” Hogan says.
“We’re able to do that by offering Fidelity and non-Fidelity products. The rationale is not, ‘Do we make more money selling a Fidelity fund or a non-Fidelity fund?’ What we think about is what’s the best possible solution for our shareholders and our customers.”
“What’s happened,” he continues, “is we have transformed ourselves from an equity-centric mutual fund complex into a very diversified financial-services company.”
Whether it be regulations, technology, or changing investment behavior, disruption is nothing new for the asset-management industry. “Pretty much in every decade there has been a major tectonic shift in the business,” says Vanguard’s Dickson. “Whether it is the money-market mutual fund of the ’70s and early ’80s, or the index-fund adoption in the late ’70s and its takeoff in the ’80s and ’90s, or the growth of ETFs and target-date funds in the most recent 10 to 15 years, there has always been some sort of major thing. When you look back over 10-year cycles, that’s a lot of change. Investors are demanding and using different approaches.”
SO WHAT WILL THE INDUSTRY look like 10 years from now?
Low costs, high returns, good technology, and big-picture thinking will be the recipe for success. The retail fund world will look more and more like institutional investing, meaning that low-cost passive investments will be complemented by sophisticated stock-picking and alternative assets, all under a fiduciary framework.
Vanguard and BlackRock already fit the bill. And don’t count out other players with big scale.
Fidelity can afford to take risks, and it should. Smaller fund shops that put a focus on quality stock-picking will always have a place. And smart-beta firms are carving out a niche that could lead the fund industry forward.
TECHNOLOGY WILL BE THE NEXUS of all change. ETFs and smart beta owe their success to tech innovation, but as much as asset managers gloat about technology, they barely scratch the surface of what’s possible. In fact, the industry looks like a dinosaur compared with much of Corporate America. Think about the data that (AMZN) has on its consumers.
Or Alphabet GOOGL ’s (GOOGL) Google. Even Target TGT  (TGT) knows far more about its customers than do financial firms.
“Would we build financial products differently if we actually knew about people?” asks Morningstar’s Burns. “It’s really taking big data and putting it to work. It’s one of the huge opportunities for asset managers. They still have investment expertise. And there is a lot of value in knowing when to buy—there’s a lot of alpha just in that skill. But how do you reimagine a world where you get all this data?”

Vanguard’s Dickson says technology can bring high-end customization to the mass-affluent investor, far beyond the fund world’s traditional competency. Asset managers will be able to provide insurance, financial planning, and tax guidance.

“What technology is doing is enabling all of that to come together and be evaluated holistically instead of in these silos,” he says. “The private client of today will be the ‘every client’ of tomorrow.”

Insurance recommendations could be tied to return assumptions, and vice versa. Of course, if the fund companies get into the advice-giving game, they’re going to have to give real advice, and they’re going to have ask better questions than how old are you and when do you want to retire.

Again, technology is the answer. Fund firms could build far better products if they knew about investors’ mortgages, credit-card debt, student loans, and medical bills—all easy to capture with today’s technology. Credit-card statements could be analyzed to create a better risk profile. How large is your balance? When do you pay your bill, and is it in full or at the minimum? Privacy concerns will need to be addressed, but investors could benefit. Asset managers could finally provide Amazon and Netflix-type recommendations.

There’s no reason that high-tech solutions should be limited to shopping and TV. Today’s threats, if handled properly, should become opportunities for both investors and the fund industry.

The World’s Rising Powers Have Fallen

There will be no bloc of “emerging economies” rising up to challenge the Western order. But what comes next may be more chaotic and dangerous.

By Suzanne Nossel

The World’s Rising Powers Have Fallen

As analysts and scholars compose their first drafts of the history of the Obama administration’s foreign policy, a chapter will surely address what were once dubbed “rising powers,” a group that included Brazil, Russia, India, China, South Africa, and others. But the optimism of 2008 — when the so-called “BRICS” were ascendant, ready to reshape global economics and politics — has turned to doubt. The impeachment trial of Brazilian President Dilma Rousseff and a Russian doping scandal that only a Soviet could be proud of are just the latest unmistakable signs that a surge of newly powerful nations collectively remaking the world stage is hardly a sure thing. A few years ago, a mortal rupture in Europe would have invited crowing over “the demise of the West and the rise of the Rest.” Now, the picture is more complicated: Europe is in disarray, as are several of the might-have-been beneficiaries of the continent’s turmoil.

And as the United States looks ahead to a new administration come January, its approach to shifting global power relations will be ripe for a rethink. Amounting to neither a freshly minted set of trusty democratic allies nor a cohesive counterweight to the Western order, newly powerful nations are proving to be less predictable, more fragmented, and ultimately more reinforcing of U.S. power than even Washington’s own intelligence establishment predicted a decade ago.

In the latter years of the George W. Bush administration and the early part of the Obama years, rising or so-called “emerging” powers seemed to captivate the foreign-policy establishment. Foundations and think tanks proffered rising powers projects, conferences, and white papers. Some were bullish. Analysts, including Princeton’s Anne-Marie Slaughter and John Ikenberry, predicted the rise of a group of new democracies — with Brazil, India, and South Africa topping the list — that would grow into natural allies for the United States.

Everyone from John McCain to Madeleine Albright (who promoted the idea nearly a decade before others cottoned on to it) advocated uniting democracies in a global alliance premised on shared values and joint action.

On the flip side, other academics and analysts anticipated that the rise of new powers could only herald an American decline. In 2010, University of Wisconsin-Madison professor Alfred L. McCoy predicted “imperial collapse” and “painful daily reminders of what such a loss of power means for Americans in every walk of life.” A detailed study prepared by officials from rising powers and published by Oxford University Press in 2012 explicated the “synergies and complementarities” that had “already catapulted the BRICS into a leadership position” globally. As Autonomous University of Madrid professor Susanne Gratius wrote in 2008: “In recent years a number of emerging nations have been challenging the position of dominance of the old powers, which are dropping down the international pecking order.” The downcast lot predicted that the decline in relative importance of the United States would be matched only by that of Europe, inaugurating what historian Timothy Garton Ash termed “Europessimism,” a creeping sense that the continent was being edged out by the fast-rising states of China, India, Brazil, and Russia.

The one thing the two sides agreed on was that the shifts wrought by rising powers would be tectonic. In “Mapping the Global Future,” an influential analysis published by the U.S. National Intelligence Council (NIC) in 2004, intelligence experts predicted that the “‘arriviste’ powers—China, India, and perhaps others such as Brazil and Indonesia—have the potential to render obsolete the old categories of East and West, North and South, aligned and nonaligned, developed and developing.” The report made headlines like “2020 Vision: A CIA report predicts that American global dominance could end in 15 years.”

Not so fast, as it turned out. Many of the premises undergirding these predictions evaporated in the ensuing decade. The genesis of global focus on rising powers was a 2001 analysis by Goldman Sachs’s Jim O’Neill that forecast faster, more consistent growth rates among emerging economies that would position them to gradually dominate the world stage, eventually leaving only the United States and Japan among the traditional industrial powers still ranking among the top six global economies. The bank focused on Brazil, Russia, India, and China — a group that O’Neill dubbed the “BRICs” and, later, the “BRICS,” after South Africa’s induction. While Goldman’s analysis was full of caveats, policy wonks focused on the breathless expectation of sustained, rapid growth by emerging economies. Goldman’s anointment of the BRICs as the emerging markets “most likely to succeed” prompted a flurry of prognosticators to formulate their own acronym accolades: MIST (Mexico, Indonesia, South Korea, and Turkey — which O’Neill designated as next in line after the BRICs) and SANE (South Africa, Algeria, Nigeria, and Egypt — supposedly the African continent’s leading up-and-comers). Britain’s Telegraph went so far as to publish a full lexicon of the emerging-market alphabet city.

Fifteen years later, several of those BRICS (not to mention MIST or SANE) are crumbling, done in by self-dealing, asset bubbles, stock market swoons, commodities fluctuations, and finite supplies of low-wage workers. In a warning published in January, the World Bank predicted negative growth in Brazil and Russia, just over 1 percent growth in South Africa, steady growth of 7.8 percent in India, and a shortfall from expectations in China topping out at 6.7 percent. As the Financial Times put it: “What had once been the brightest spark in the global economy has now become its big headache.” Late last year, Goldman finally shuttered its BRICS investment fund, which had lost 88 percent of its value since its 2010 peak.

The problems aren’t merely economic. Politically, several of the BRICS have proved similarly unstable. The rise of emerging powers was premised on the notion that they were domestically stable, ready and able to consistently project global influence. While some analysts spotlighted corruption, institutional weakness, and political dysfunction as risks, such concerns were often relegated to the footnotes. As the 2020 NIC project put it in its report: “Only an abrupt reversal of the process of globalization or a major upheaval in these countries would prevent their rise.”

Yet in South Africa, Brazil, and Russia, corruption and governance failures have proved catastrophic.

Whether you think Rousseff is being rightfully targeted or unfairly scapegoated — and no matter what you make of charges that her interim successor is trading favors for the votes to impeach her — none of it augurs well for Brazilian governance. In South Africa, President Jacob Zuma narrowly withstood an impeachment campaign and now clings to office as a lame duck in what is effectively a one-party democracy. While Russia and China continue to project firm centralized authority, their intensifying crackdowns on dissidents, lawyers, and influential cultural figures bespeak regimes nervous that corruption and economic slowdowns could turn their populations restive.

Back when rising powers were in style, theorists diverged on what to expect from their foreign policies. Some expected the leading democracies to align with Washington, whereas others foresaw a solid political bloc of BRICS holding Western influence in check. Neither vision came true. In their approach to international human rights and humanitarian intervention, rising democracies have been influenced by their post-colonial identities far more than their modern political bedfellows, emphasizing respect for sovereignty over the moral imperative of civilian protection or conflict prevention. Brazil and India abstained on the 2011 U.N. Security Council resolution authorizing the use of force against Libya’s Muammar al-Qaddafi, anxious about the prospect that intervention could lead to regime change. Those two countries and South Africa have taken a reticent approach to handling the civil war in Syria, straddling the middle, but with a tilt more toward Russia and China than the United States and Europe.

But while dreams of a powerful “alliance of democracies” have been dashed, the nightmare scenario of a solid BRICS wall has also failed to manifest. While the BRICS do meet periodically as a group, diverse growth rates, population sizes, carbon emissions levels, wealth, and other indicators dictate diverging interests on issues including the global economy and trade, climate change, nuclear proliferation, and conflicts in the Middle East. BRICS countries have come together to form their own development bank, a rebuke to the Western-dominated International Monetary Fund and World Bank system. But the two most powerful and stable nations in the bloc, India and China, are increasingly at odds over terrorism, Beijing’s regional ambitions in the South China Sea and beyond, and New Delhi’s strategy of hedging through strengthened relations with the United States and Japan.

Analysts were right to draw attention to the rapid growth and expanded international profile of a new set of countries. Individual nations, including China, Russia, and India, have become far more important to the United States and the rest of the world than they were a decade ago. Yet the expectation that this group — as a group — would collectively remake global power relations has not materialized. With most of the emerging-powers programs and projects having gone the way of Goldman Sachs’s erstwhile fund, it falls to the rest of us to consider what conclusions to draw from the rise and fall of the concept of “rising powers.”

A few observations arise. First, the United States’ status as what Madeleine Albright once called the “indispensable nation” remains intact. The United States is far from omnipotent and has bumped up hard against the limits of its diplomatic influence and military capabilities in places like Iraq and Afghanistan. But when it comes to catalyzing global action and providing the decisive voice in whether, and to what degree, a global conflict — Libya, Syria, the Islamic State, Ukraine, climate change, Ebola, take your pick — will be addressed at a global level, no other country’s say comes close to Washington’s. With the exception of Russia (where President Vladimir Putin seems motivated by dual desires to check the United States and perpetuate his own personal power), no other rising power has sought to call the shots nor assumed an obligation to lead outside its region.

Second, Europe still matters. The implicit logic of the rising powers was that they would leave the continent a relic of a bygone era of power relations. Despite its economic stagnation, political malaise, refugee crisis, and rising right wing, Europe remains, by far, the United States’ most stable and reliable major ally. While Brexit has dealt a major blow to the European Union, it is likely to further strengthen U.S. relations with Berlin, Paris, and any other European capital that may stand in for London as Washington’s go-to conduit within the union. Just as many Brits belatedly seem to be awakening to just how important the EU is, so Washington may emerge from the crisis with a heightened sense of appreciation for the bloc. Whether on Iran, Ukraine, the Islamic State, or virtually any other issue, European support is the necessary — if no longer sufficient — precondition for U.S. action to enjoy legitimacy.

As President Barack Obama came to recognize this, he was forced to maneuver what Politico described as a pivot from a pivot of sorts, turning back from his heralded “rebalance” to Asia to try to keep the continent in one piece amid severe political and humanitarian strains. Rather than a series of rotating pivots, each of which cancels the other out, Washington needs to perfect a 360-degree model of leadership, where focusing on one region does not come at the expense of others. If U.S. diplomats can pursue major new trade agreements at the same time as a nuclear deal with Iran and a climate change accord, there is no reason the commensurately robust, parallel regional overtures should be mutually exclusive.

A third conclusion derived from the uneven rise of new powers is that China’s rise has rendered the United States more, not less, globally important. Rather than becoming the has-been many predicted, the United States, due to China’s surging influence, has become a far more important ally to countries throughout Asia and beyond. As China’s regional neighbors seek to fortify themselves against the behemoth next door, their relationships with the United States have both broadened and deepened.

The U.S. pivot to Asia is now being driven as much by local demand for an American presence in the region as it is by Washington’s fear of being edged out. Recent discussions about arms sales and even the possibility of a renewed U.S. military presence in Vietnam are only the latest manifestations of thickening ties between the United States and numerous allies in the region, including South Korea, Japan, the Philippines, Malaysia, and Indonesia.

The reality of geopolitical ups and downs also warrants revisiting some of the major policy prescriptions that grew out of the rising powers literature. Many analysts stressed the urgent need to reform the U.N. Security Council to reflect updated global power dynamics. Analysts called for permanent seats for Brazil and India on a revamped U.N. Security Council and urged the United States to take the lead on restructuring, lest a reconfigured group be somehow foisted upon it.

If one subscribes to the idea that overhauling the Security Council (which still operates as it did when it was originally established in 1946, with five permanent veto-wielding seats reserved for Britain, China, France, Russia, and the United States) is inevitable in the near future, it may be to Washington’s advantage to push reform through sooner rather than later. But, unlike a decade ago, the incentive to move now is not because excluded countries are so strong. It’s because they are relatively weak. Brazil and South Africa, two of the most prominent Security Council aspirants, are limping. While India is in good shape, regional resistance to enhanced status for New Delhi remains entrenched. A new U.S. administration may be able to advance a proposal to address the Security Council’s anachronistic makeup while perpetuating a council that Washington can work with. Few countries will be fully satisfied with proposals to leave most of the council’s structure (including the crucial five veto-wielding permanent seats) intact while creating about half a dozen semi-permanent members that serve renewable, four- to five-year terms. But Washington and many others could live with this rather modest version of reform. The United States may be well-served by helping to effectuate it rather than awaiting a time when new powers are back in a position to demand more.

Presumptive Republican presidential nominee Donald Trump has a tendency to describe rising powers in apocalyptic terms: In 2007, he said, “We’ve gone from this tremendous power that was respected all over the world to somewhat of a laughing stock. And all of a sudden, people are talking about China and India and other places.” This year, he repeated his prediction that a Chinese “economic tsunami” that will “engulf” the United States. His Democratic counterpart, Hillary Clinton, has looked at rising powers pragmatically, helping to engineer a heightened U.S. focus on Asia and forging regular strategic dialogues with Brazil, India, and South Africa. As secretary of state, though, she resisted calls to privilege an anointed few and instead worked to cultivate a broad portfolio of partners, including Indonesia, Nigeria, the Philippines, Kenya, Chile, Japan, and many others. This portfolio approach to alliances — investing broadly, with the knowledge that some of the energy expended will be wasted, that other relationships will prove indispensable, and that it is hard to know in advance which is which — acknowledges that country trajectories hinge not just on growth fundamentals and geopolitics, but also on individual leadership qualities and luck.

After 9/11, and once the long-term damage to the United States’ global standing began to recover from the 2003 Iraq War, foreign-policy thinkers started opining about what would come after what Charles Krauthammer once dubbed the country’s “unipolar moment” following the end of the Cold War. Richard Haass of the Council on Foreign Relations projected a nonpolar era, with power widely dispersed. New America’s Sherle Schwenninger and others forecast a multipolar world. The prognostication-defying fate of the BRICS over the last decade, not to mention last week’s Brexit shocker, may point to a more unsettling prospect: an ambipolar world — ambivalent, ambiguous, ambient — where power is diffuse and national fortunes rise and fall to a rhythm too complex for any theory to adequately reflect.

So rather than betting heavily on specific winners and losers, the United States should diversify its diplomatic capital, recognizing that predicting the path of the world’s rising powers is an uncertain business at best.
 Suzanne Nossel is executive director of the Pen American Center and was formerly deputy assistant secretary of state for international organizations at the U.S. State Department.

sábado, julio 16, 2016



Coup in Turkey

The military has claimed a takeover of the government.

About an hour and a half ago, reports began to emerge out of Turkey that a coup was underway. As with all coups, the first reports were confused, conflicting and impossible to confirm. Recent developments, however, indicate to us that as of now the coup seems to have succeeded.

Here is what we know. Some elements in the Turkish military high enough to organize this attempted a coup. It was a large segment of the military. A source told us that the special forces were involved and were deployed in Ankara and battling resistance from the national police. At first it appeared that control of the media, one of the first key goals of a coup, was not yet solidified by those attempting the coup.

However, the military now seems to have control of Turkish Radio and Television Corporation (TRT). The announcers at TRT said they were made to read a statement coming from the military. The statement said that martial law had been declared across Turkey, that airports were closed, and that a "Peace Council" guaranteed the freedom of Turkish citizens, a new constitution and a secular rule of law. The military, then, controls state media and Atatürk airport.

It is increasingly apparent to us that the coup in Turkey has succeeded. Turkish media is reading statements from the military. There is a guarantee of the Atatürkian tradition of secularism. Meanwhile, President Recep Tayyip Erdoğan, who we believe was in Bodrum at the time of the coup, appeared on CNN Turk via FaceTime to attempt to tell supporters to come into the streets. There are various reports about Erdoğan’s whereabouts, including one from NBC citing a U.S. military source saying that Erdoğan is seeking asylum in Germany. None of that is clear yet, and more speculating beyond what we know, which is that a military faction appears to have taken control of the country. More analysis on what this means will follow as we have more details.

sábado, julio 16, 2016



Weekend Edition: Planet Debt

Editor's note: "Our" money system is not really "ours"…

Everything is controlled by the powerful, hidden force known as the "Deep State."

Today, we're sharing a recent essay on the subject from Agora founder Bill Bonner. Below, Bill takes a close look at what's really going on in our debt-ridden world. As you'll see, it's a serious issue that's only getting worse…

By Bill Bonner, editor, The Bill Bonner Letter

Donald Trump had already gone broke – twice – by the time Bill Clinton took office. But then, the combination of lower interest rates and rising asset prices saved him.

And extraordinary abundance and prosperity of the Clinton years owes little to Mr. and Mrs. Clinton and much to the fact that Alan Greenspan had inaugurated his famous “Greenspan Put” in 1987.

Greenspan reassured investors that he had their backs with a rate cut whenever the stock market took a turn for the worse.

This led to an “illusion of prosperity,” as stock prices rose, helping Bill get reelected… and gaining national prominence for Hillary as the aggrieved wife in the Monica Lewinsky affair.

Stock prices filled with hot air… until the bubble in the Nasdaq blew up in Clinton’s last year in office.

Both of this year’s presumptive candidates are “low interest rate” people, all right.

Their adult lives were marked by the credit cycle and their careers shaped by ballooning debt. And now, almost the entire world economy depends on low rates.

We live on Planet Debt.

Subzero Yields

The amount of government debt trading below zero yield rose to $11 trillion last week.

In Japan, negative yields run out the yield curve until 2051.

Overall, interest rates are said to be lower than they’ve been in 5,000 years. (This is a fanciful but entertaining factoid; you can’t compare the apples of Sargon the Great to those of Donald the Tremendous.)

“How cometh it to be that interest rates ride so low… while the hack and the hustler ride so high?” you might wonder.

We are glad you asked…

We have been connecting dots. These are dots that others do not want to connect. Because they connect to too many reputations, too many fortunes, and too many opinions.

We are talking about the line that runs from the post-1971 money system to the Deep State, passing through the spectacular rise of China… the spectacular fall of the U.S. (where the average man has made no financial progress in the last 40 years)… to the remarkable luck of the 1% (who got richer and richer, as most people around them lost ground).

Yes, the line ties together the great kvetches of our time: inequality… stagnation… alienation… globalization… debt… the failure of the economy… the failure of democracy… and the failure of our own culture.

According to political scientist Charles Murray, white middle- and lower-middle-class Americans now suffer from the ills that were once confined to ghettos – broken homes, drug addiction, unemployment, and violence.

Surely, we’re not going to try to pin that on the Deep State, too?

Yes… we are.

Deep State Money

“Our” money system is not “ours.” It is the money system created by, for, and of the financial insiders.

It is the Deep State’s money system!

But wait… we sense an objection: “Isn’t it the money system set up by our elected representatives… and supposed to serve us all?”

Oh, dear reader, sometimes you make us laugh. Really, where have you been?

America’s money system is largely under the control of one organization – the Fed. And the Fed was set up at a secret meeting of plutocrats and bankers. (No kidding they rode down to Georgia in a private train, using phony names so they wouldn’t be identified.)

It is not owed by the people… nor by their government. It is owned by private banks. And it is controlled by a small group of unelected insiders – mostly bankers and their economists.

It has never been audited. And no member of Congress really knows what it is up to.


On August 15, 1971, President Nixon made the fateful announcement that the world’s reserve currency, the U.S. dollar, would no longer be directly convertible to gold.

But do you think Mr. Nixon came up with that on his own? Do you think he was advised by our elected representatives?

No chance.

Instead, the insiders, the bankers, and the deepest of the Deep State elite had his ear. The president – and probably almost everyone else – had no real idea of what was going on… or why.

But that was 45 years ago. A lot has happened since. The new money was a Sahara for the common American; his income growth dried up… his wealth ceased growing.

But it was Miracle-Gro for the Deep State.

The insiders sank their roots deeper and deeper into the U.S. economy, sucking out more and more wealth and power.

Whether the insiders fully realized what they were doing in August 1971, we don’t know. But as the system developed, they liked it.

More than that, they became dependent on it.

And now, almost the entire world – its stocks, bonds, real estate, and collectibles… along with its businesses, retailers, factories, investors, bonused-up executives, papered-up speculators, Ph.D. economists, and politicians – almost everybody with wealth or power depends on the insiders’ cheap money.

“Government can have no more than two legitimate purposes,” wrote the 18th-century English political philosopher William Godwin, “the suppression of injustice against individuals within the community and the common defense against external invasion.”

But now it has another purpose… a goal it is desperate to achieve – keeping the low-interest rate planet spinning.



Germany Can't Save Deutsche Bank!

By: Chris Vermeulen

Deutsche bank (DBK) shares dropped to fresh new lows with the various news announcements, as well as a feeling that Germany will not be capable of bailing out the bank. The imminent outcome for DBK is 'bankruptcy' while the world will have to bear the brunt of the fallout from all of the complicated 'derivatives' which are being held by Deutsche Bank.

DBKs' outstanding 'derivatives' exposure is 20x the German GDP and 5x the Eurozone GDP.

Amongst all of the chaos, DBKs' head of currencies trading and emerging-markets debt trading, Ahmet Arinc, has left the company which is the most recent negative news to impact the banks' financial status. Traders slammed the stock by more than 6% during that trading session, to touch intraday lows of $12.5 after which the stock recovered marginally to close at $12.97. 

Germany will not be able to bail out DBK:

The latest bank which might require a bailout is the Italian lender Banca Monte dei Paschi di Siena which is the worlds' oldest bank. The European Central Bank warned that the Italian bank is holding dangerously high levels of bad debt.

Italy wants a bailout for Monte Paschi, however, the Germans are opposing any such move.

Wolfgang Schaeuble, the German Finance Minister, stated in a news conference, in Berlin, that Italy intends to stick to the banking-union rules, as was conveyed to him by his Italian Counterpart, Pier Carlo Padoan.

Italian Prime Minister hits back at Germany:

However, Italy did not wait before hitting back at Germany and it came from none other than the Italian Prime Minister, Matteo Renzi.

Mr. Renzi stated that "the difficulties facing Italian banks over their bad loans are miniscule by comparison with the problems some European banks face over their derivatives." He reminded the Germans that there were other European banks which had much bigger problems than Monte Paschi, in an indirect hint towards DBK.

"If this non-performing loan problem is worth one, the question of 'derivatives' at other banks, at big banks, is worth one hundred. "This is the ratio: one to one hundred," Renzi stated, reports Reuters.

More troubles ahead for DBK:

The bank is likely to lose its' place in the STOXX 50 index, according to analysts at Societe Generale. The bank will face renewed selling pressure as the index funds will have to reposition themselves, post the change, which is more than likely to bring about a fresh round of selling.

According to a statement by the IMF, DBK is now the most dangerous bank in the world. DBK is currently the riskiest bank which will bring down the entire financial banking system, globally.

Gold is the key asset to own:

The bond king, Jeff Gundlach, stated that "things are shaky and feeling dangerous". 

Regarding the European banking crisis, the Double Line bond king noted: "Banks are dying and policymakers don't know what to do. Watch Deutsche Bank shares go to single digits and people will start to panic... you'll see someone say, 'Someone is going to have to do something'."

Gundlach stated that "gold remains the best investment amid fears of instability in the European Union and prolonged global stagnation, as well as concerns over the effectiveness of central bank policies," reports Reuters.


The belief by Wall Street that Germany will not allow DBK to fail is fading. Post the Brexit, tensions are running high among the remaining members, as seen in the spat between Germany and Italy. Due to the earlier hard stance of the Germans, it is likely that any move to bailout DBK will face considerable resistance from all of the member nations. If allowed to fail, DBK will cause a 'crisis' many times over that of which Lehman Brothers did. The final meltdown commences!

Americans need to pay attention to this European Financial Crisis because its' very contagious and going to spread here.

Gold remains the asset to invest in, as I have been advising my subscribers for a long time now. DBK is failing and not even the ECB will be able to stop its' plunge into oblivion!

Next week I will share with you another asset class rarely mentioned or invested in which could explode in value going forward and actually become a major asset/currency world wide - Stay Tuned!