US Treasuries: the lessons from March’s market meltdown

The authorities are looking at ways to buttress a market that is the bedrock of the global financial system

Colby Smith in New York and Robin Wigglesworth in Oslo

© FT montage; Bloomberg | The $20tn Treasury market experienced wild swings in March

Kevin Walter’s work-from-home experiment lasted mere hours. On March 12, the Barclays trader was so alarmed by the turbulence flaring up in the US government bond market that he jumped in a car and made a dash from his home in Connecticut to his office in the normally crowded Times Square.

Trading conditions for US Treasuries had been poor for a while. But that Thursday — the day after Covid-19 was declared a pandemic — unnerving glitches escalated into mayhem. “It was a shock to see these distortions in the market,” says Mr Walter, co-head of global Treasury trading at the British bank.

It is hard to overstate the importance of the roughly $20tn market for US government debt, or the alarm that its mounting dysfunction in March caused. The Treasury market is the biggest, deepest and most essential bond market on the planet, a bedrock of the global financial system, and the benchmark off which almost every security in the world is priced.

Trading conditions for US Treasuries had been poor for a while, but the day after Covid-19 was declared a pandemic, unnerving glitches escalated into mayhem
Trading conditions for US Treasuries had been poor for a while, but the day after Covid-19 was declared a pandemic, unnerving glitches escalated into mayhem © Michael Nagle/Bloomberg

The wild price swings in March meant many investors struggled to offload even modest Treasury positions at sensible prices. Suddenly, broker screens were going intermittently blank and showing no pricing information for what is considered the world’s risk-free rate.

Deirdre Dunn, global co-head of rates at Citi, says it was the most dysfunctional Treasury market she has seen in her career, surpassing even the global financial crisis of 2008. Layer on top of that the practical complications of many traders working from home and the emotional stress of a pandemic, and things were getting chaotic. “The intensity of everything at that time was remarkable,” she says.

Urgent calls took place between banks and the Federal Reserve as well as the US Treasury department. Rumours of hedge funds collapsing due to imploding Treasury bets went through industry WhatsApp groups like wildfire. Some even fretted that the Treasury might face the previously unimaginable scenario of a failed auction of US government debt.

Line chart of 10-year US Treasury yields, % showing Signs of strain emerge in world's largest government bond market

“There was a point in time when we were wondering if the bond market would really ever function again,” says Nick Maroutsos, co-head of global bonds at Janus Henderson, an investment group. “If it continued for a couple of weeks, we were thinking we were looking at doomsday.”

To avert calamity, the Fed delivered an unprecedented series of measures, surpassing even its response to contain the crisis over a decade ago. Trading conditions soon began to stabilise, volatility ebbed and before long, the central bank had stoked a historic rebound in financial markets.

Nonetheless, the events of March have cast a long shadow. Such turmoil simply shouldn’t be possible in the Treasury market, analysts say. If the financial system is a house, then Treasuries are its foundations — the safe, solid bedrock on which everything else relies. Investors can deal with a fire in the attic or leaky plumbing, but if the foundation starts creaking, it can shake the entire structure.

Bid-ask spreads blow out in dash for cash

Policymakers must now grapple with not only what caused such a critical market to crack, but also how to address the fragility within the market that was revealed during this period of indiscriminate selling. Some experts suggest tweaks to the regulations put in place following the previous crisis, while others make the case that highly-leveraged players warrant more scrutiny.

“In a crisis like this, all the weak spots get revealed,” says Bill Dudley, former head of the New York branch of the Fed. But no one expected Treasuries to be one of them, and a thorough postmortem is now necessary, he argues. “The Fed will be doing a deep dive into this to understand what happened, and what needs to be done to prevent it from happening again.”

Bob Michele of JPMorgan Asset Management says he thought “something’s wrong here. Something broke', on March 9
Bob Michele of JPMorgan Asset Management says he thought “something’s wrong here. Something broke', on March 9 © Victor J. Blue/Bloomberg

'In a crisis like this, all the weak spots get revealed,' says Bill Dudley, former head of the New York branch of the Fed
'In a crisis like this, all the weak spots get revealed,' says Bill Dudley, former head of the New York branch of the Fed © Christopher Goodney/Bloomberg

Something broke’ 
The first signs of strain emerged in early March, just days after the Fed delivered its first emergency interest rate cut since 2008. Treasury yields had been falling for weeks, a sign that investors were gearing up for an extraordinary economic shock.

But on March 9, “all hell broke loose”, says Bob Michele, chief investment officer at JPMorgan Asset Management. Oil prices cratered on a price war between Saudi Arabia and Russia, while stocks tumbled. To the surprise of many investors, so too did Treasuries.

The previous Friday, 10-year Treasury yields hovered around 0.76 per cent. That Monday, they plummeted to an all-time low of 0.31 per cent before whipsawing higher to 0.6 per cent. Yields on 30-year notes dropped from 1.28 per cent to below 0.7 per cent, before climbing again.

These may seem like modest moves compared to the wild swings often seen in stocks, but for Treasuries, it was discombobulating. “Something’s wrong here. Something broke,” Mr Michele thought to himself that day.

The core cause was a panicky “dash for cash” by companies, foreign central banks and investment funds girding themselves for torrential outflows at a time when financial hubs globally were transitioning to working from home. That meant selling what is typically easiest to sell: Treasuries.

Soaring Treasury volatility prompts unprecedented Fed action

But the panicked move to raise liquid funds was not the only reason. Compounding the volatility was an under-appreciated evolution in the Treasury market ecosystem. Over the past decade, high-speed algorithmic trading firms have become increasingly integral in matching buyers and sellers in the Treasury market, with many “primary dealers” — the club of big banks that arrange government debt sales — copying their tactics.

Electronic-style trading activity now accounts for more than 75 per cent of liquidity provision in the Treasury market, according to estimates from JPMorgan, up from just 35 per cent after the 2008 crisis.

The trend has been magnified by post-2008 regulations that made it more costly for banks to store bonds on their own balance sheet and therefore less able to ensure that markets function efficiently, analysts say.

In normal times, algorithmic market-making helps to keep trading conditions smooth and ensures tiny gaps between bids and offers for even big chunks of Treasury bonds. But when volatility spikes, market-makers automatically ratchet back the size of trades they are willing to do, and pricing quotes on purchases and sales are widened to compensate for the additional risks.

Clogged balance sheets limit dealers ability to absorb sales

Moreover, banks and dealers’ holdings of Treasuries were already elevated at the onset of the crisis. That meant they had less capacity to absorb the relentless pace of selling. As a result, the bid-offer spread for 30-year Treasuries at one point blew up to more than six times the average since the crisis, according to the New York Fed. For 10-year notes, the benchmark Treasury, it doubled.

The biggest dislocation was in “off-the-run” Treasuries, which make up the majority of outstanding Treasury debt. These are older issues of bonds that trade far less frequently and are therefore a little cheaper than more recently-issued “on-the-run” Treasuries. At some points in March, investors say, market-makers were simply not quoting prices.

At the time, some analysts and investors blamed so-called “risk parity” funds for contributing to the turmoil. These are leveraged investment funds that allocate to a wide array of assets weighted according to their volatility. In theory, this ensures a more mathematically balanced and diversified portfolio than merely allocating fixed dollar amounts to various asset classes. When Treasury volatility spiked, they had to pare their positions. But most analysts now reckon that they were only a minor factor in the chaos.

Line chart of Prices between US government bonds and the corresponding futures contract*  showing Unwind of leveraged Treasury trade adds to turmoil

The dysfunction was instead exacerbated by the unwinding of what is known as the “basis trade”. It involves highly-leveraged market participants arbitraging the difference between Treasury futures and Treasury bonds, which are slightly cheaper than futures due to different regulatory treatment. A favoured trading strategy has been to buy cash Treasuries and sell the corresponding futures contract.

The price differential is often small, but hedge funds can juice returns by using huge amounts of leverage. The main way to do so is by swapping Treasuries for more cash in the “repo” market, one of the world’s largest hubs for short-term, collateralised loans. The extra cash can then be recycled into even bigger positions, repeating the process to further augment returns.

These trades have exploded in popularity since the financial crisis, as hedge funds — such as Capula Investment Management, Millennium Management, ExodusPoint Capital Management and Citadel — jumped into the void left by hamstrung bank trading desks.

According to the Bank for International Settlements, these “relative-value” strategies were also at the heart of the crisis that gripped the repo market last September, exacerbating a cash crunch that sent short-term borrowing costs soaring. In a recent report, the BIS called the 2019 event “a canary in the coal mine” for March’s ructions. In July, former Fed chairs Ben Bernanke and Janet Yellen also singled out the role that hedge funds played in March. Capula, Millennium, ExodusPoint and Citadel declined to comment.

Column chart of Net purchases of long-term Treasuries, $bn showing Chunky  Treasury sales linked to Cayman Islands-registered funds

When Treasury prices began sliding compared to the corresponding futures contract — as investors ditched US government debt to raise cash — the trades began racking up steep losses. Banks then demanded more collateral from hedge funds, forcing many to cut their losses and worsening the dislocations.

Relative value players are big buyers of Treasuries, but the exact size of their basis trade exposure is unknown. One proxy is gross short futures positions for leveraged funds. According to data from the Commodity Futures Trading Commission, the main US derivatives markets regulator, the size of these positions has grown approximately eightfold since 2010, and at the start of the year it was more than $750bn.

In March and April, it dropped by about $200bn, according to Josh Younger, an interest rate strategist at JPMorgan.

Moreover, recent transactions data from the Treasury showed that foreign investors offloaded a record roughly $300bn long-term Treasuries in March, and another $177bn in April. More than a third of March’s sales came from the Cayman Islands — a favourite domicile for hedge funds, analysts say. The following month, the low-tax jurisdiction was the largest net seller.

A continuation of this pattern could have been dire. “With the market dislocated to that extent, it raised the risk that the government couldn’t fund itself,” according to a senior hedge fund executive. “It just had to be fixed.”

Recognising the Treasury market’s mounting fragility, the Fed stepped into the fray and ramped up its liquidity injections into the repo market from March 9 onwards. Days later, it had cut rates to zero and expanded the scope and scale of securities it would buy, among other emergency measures.

Line chart of Total assets held by the US central bank, $tn showing Federal Reserve's balance sheet soars to new heights

When that proved insufficient the central bank pulled out all the stops on March 23, pledging unlimited asset purchases and wading into corporate debt markets. It later rolled out a facility to limit Treasury sales from foreign central banks, eased a bank capital rule and unveiled programmes to support an extensive swath of asset classes.

In taking decisive action to stabilise the Treasury market and avert a more acute crisis, the Fed has received many plaudits. But the mayhem in March is a thorny topic that will not fade as easily. It has raised uncomfortable questions about the unintended consequences of the Fed’s interventions and the underlying vulnerabilities of what is supposedly the financial system’s safest haven.

Moral Hazard

One issue involves the heavily-leveraged hedge fund trades, and the de facto rescue that some say the Fed provided as these positions were unwound. “I understand why the Fed did this, but they basically bailed them out,” says Mr Dudley. “There’s definitely a moral hazard here.”

Many in the finance industry agree, questioning whether relative-value traders should be encouraged to build so much leverage given the post-crisis landscape.

“One can argue that the [activity] helps to lower interest costs for taxpayers during periods where there is no volatility, but are we comfortable with central banks having to step up in this magnitude and become liquidity providers of last resort when this levered trade blows up going forward?” asks Matthew Scott, head of the global rates, securitised assets and currency trading teams at AllianceBernstein.

Donald Trump meets oil industry executives. In early March, oil prices cratered on a price war between Saudi Arabia and Russia, while stocks tumbled
Donald Trump meets oil industry executives. In early March, oil prices cratered on a price war between Saudi Arabia and Russia, while stocks tumbled © Doug Mills/Getty

A trader walks beneath a stock display board at the Dubai Stock Exchange
A trader walks beneath a stock display board at the Dubai Stock Exchange © Giuseppe Cacace/AFP/Getty

To redress this, the BIS has recommended “full fledged stress tests” to evaluate the potential for forced selling among highly-leveraged traders and vicious feedback loops. They say monitoring should include “what if” questions that look beyond periods of market tranquility.

The March meltdown has also prompted calls to “upgrade” the Treasury market's trading infrastructure in order to improve transparency.

More broadly, investors fear the consequences of a world in which the Fed has the sole balance sheet flexible enough to absorb securities ditched during fire sales, especially at a time when Treasury issuance has soared to fund a record-setting deficit. In just six months, the Fed’s balance sheet has ballooned from over $4tn to $7tn.

Some advocate for the regulatory relief measures extended temporarily to banks be made permanent, enabling these entities to step in more forcefully during periods of stress. Others accept that these rules mean the Fed sometimes has to play an “activist” role, as Mr Younger puts it.

But for Peter Fisher, formerly the head of the Fed’s market desk and BlackRock's bond investing division, now at Dartmouth’s Tuck School of Business, this fragile equilibrium will only grow more brittle as the Fed wades deeper into the fabric of financial markets.

“The big balance sheet undermines the behaviour of market liquidity and replaces it with, ‘you can do business with the Fed’,” he says. This results in a more placid trading environment, but risks more ferocious bursts of turmoil.

“The Treasury market is still the biggest and deepest bond market in the world. But compared to expectations, it clearly fell far short in March.”

Invisible men

How objectivity in journalism became a matter of opinión

In America, political and commercial strains have led to questions about its value and meaning

HAVE YOU heard the news? It’s about the news. As correspondents covered the widespread protests on the streets of America in recent months, many were engaged in a parallel protest of their own—against their employers.

On private Slack channels, public Twitter feeds and in op-ed columns, journalists revolted.

Editors apologised, promised change and in some cases were sacked, their downfall promptly written up in their own papers.

The immediate cause of this rebellion is race: how it is reported and how it is represented among staff. More than 150 Wall Street Journal employees signed a letter saying that they “find the way we cover race to be problematic”.

Over 500 at the Washington Post endorsed demands for “combating racism and discrimination” at the paper. Journalists at the New York Times tweeted that a senator’s op-ed advocating a show of military force to restore order “puts black @nytimes staff in danger”.

But at the heart of many of these arguments is another disagreement, about the nature and purpose of journalism. As a Bloomberg employee is said to have remarked at a recent meeting, reporters are meant to be objective, but to many the distinction between right and wrong now seems obvious.

A new generation of journalists is questioning whether, in a hyper-partisan, digital world, objectivity is even desirable.

“American view-from-nowhere, ‘objectivity’-obsessed, both-sides journalism is a failed experiment,” tweeted Wesley Lowery, a Pulitzer-winning 30-year-old now at CBS News.

The dean of Columbia Journalism School described objectivity as an “inherited shibboleth” in a message to students.

The Columbia Journalism Review pondered: “What comes after we get rid of objectivity in journalism?”

Objectivity hasn’t always been a journalistic ideal. Early American newspapers read a bit like today’s blogs, says Tom Rosenstiel of the American Press Institute (API), an industry group.

Benjamin Franklin’s Pennsylvania Gazette and Alexander Hamilton’s Gazette of the United States were unashamedly partisan. As they sought wider audiences in the 19th century, newspapers became more concerned with what they called “realism”.

Some of this was provided by the Associated Press (AP), founded in 1846, which supplied stories to papers of diverse political leanings and so stuck to the facts.

As the news pages became more even-handed, publishers established editorial pages, on which they could continue to back their favoured politicians.

Hot takes and alternative facts

Only in the 1920s did objectivity truly gain currency. “A Test of the News”, by Walter Lippmann and Charles Merz, found that the New York Times’ coverage of the Russian revolution was rife with what today might be called unconscious bias. “In the large, the news about Russia is a case of seeing not what was, but what men wished to see,” they wrote.

At the same time, as communism advanced, Joseph Pulitzer’s view of the centrality of journalism to democracy—“Our Republic and its press will rise or fall together”—gained adherents. These lofty aims overlapped with commercial ones. Advertisers wanted less partisan coverage to sit alongside their messages.

And so objectivity became journalism’s new lodestar. As Lippmann put it, the journalist should “remain clear and free of his irrational, his unexamined, his unacknowledged prejudgments in observing, understanding and presenting the news.”

A century later, four trends have put this principle under strain. (The Economist, a British publication, has grappled with most of them.) One is Donald Trump’s rise and the challenges it has posed to traditional reporting. Some of his statements can be accurately described as lies, or as racist. But such words are so seldom used of sitting presidents—except by partisans—that writers and editors have reached for euphemisms.

After Mr Trump told four non-white congresswomen to “go back” to the “crime-infested places from which they came”, the Wall Street Journal called his words “racially charged”; the Times plumped for “racially infused”.

The Trump era has also exposed problems with journalistic notions of balance. Giving equal weight to both sides of an argument is an easy shortcut to appearing objective. Yet this “bothsidesism” has sometimes come to seem misleading.

At an impeachment hearing in December, “the lawmakers from the two parties could not even agree on a basic set of facts in front of them,” reported the Times. Which facts were real? Readers were left to guess.

A second cause of doubts about objectivity is the changing make-up of the American newsroom.

Amid more diverse recruitment, the share of the Times’ editorial staff who are white is falling; the proportion who are women is rising.

Not only has this sharpened sensitivity to odd phrases like “racially infused”; it has also made some wonder if the “objective” viewpoint is in fact a white, male one. The “view from nowhere” is just the view of “a white guy who doesn’t even exist”, Dan Froomkin, an outspoken media critic, has argued.

Concerns like these might in the past have remained on the shop floor. But a third factor—the rise of social media—has given dissenters a megaphone. It has also highlighted the contrast between the detached style journalists are meant to adopt in print and the personal approach many employ online—something bosses seem unsure whether to encourage or deter. Readers, for their part, are bathed on the web in highly partisan content that whets their appetite for more opinionated news.

The division between news and comment, clear on paper in American journalism, dissolves on the internet. A study for the API in 2018 found that 75% of Americans could easily tell news from opinion in their favoured outlet, but only 43% could on Twitter or Facebook.

Keeping up appearances

The final reason for the turn against objectivity is commercial. The shift away from partisanship a century ago was driven partly by advertisers. Today, as ad revenues leak away to search engines and social networks, newspapers have come to rely more on paying readers.

Unlike advertisers, readers love opinion. Moreover, digital publication means American papers no longer compete regionally, but nationally.

“The local business model was predicated on dominating coverage of a certain place; the national business model is about securing the loyalties of a certain kind of person,” wrote Ezra Klein of Vox. Left-leaning New Yorkers may switch to the Washington Post if the Times upsets them. The incentive to keep readers happy—and the penalty for failing—are greater than ever.

These pressures are changing the way newspapers report. Last year AP’s style book declared:

“Do not use racially charged or similar terms as euphemisms for racist or racism when the latter terms are truly applicable.”

Some organisations have embraced, even emblazoned taboo words: “A Fascist Trump Rally In Greenville” ran a headline last year in the Huffington Post. Others are inserting more value judgments into their copy. A front-page news piece in the Times this month began:

President Trump used the spotlight of the Fourth of July weekend to sow division during a national crisis, denying his failings in containing the worsening coronavirus pandemic while delivering a harsh diatribe against what he branded the “new far-left fascism”.

Disenchanted with objectivity, some journalists have alighted on a new ideal: “moral clarity”.

The phrase, initially popularised on the right, has been adopted by those who want newspapers to make clearer calls on matters such as racism.

Mr Lowery repeatedly used the phrase in a recent Times op-ed, in which he called for the industry “to abandon the appearance of objectivity as the aspirational journalistic standard, and for reporters instead to focus on being fair and telling the truth, as best as one can, based on the given context and available facts.”

The editor of the Times, Dean Baquet, called Mr Lowery’s column “terrific” in an interview with the “Longform” podcast. Objectivity has been “turned into a cartoon”, he said. Better to aim for values such as fairness, independence and empathy.

Back in the 1920s, Lippmann might have agreed with much of this. He saw objectivity not as a magical state of mind or a view from nowhere, but as a practical process. Journalism should aim for “a common intellectual method and a common area of valid fact”, he wrote.

That does not mean using euphemisms in place of plain language, or parroting both sides of an argument without testing them. Indeed, when journalism has erred in recent years, it has often done so by misinterpreting objectivity, rather than upholding it. The most persuasive calls for moral clarity today articulate something close to Lippmann’s original conception of objectivity.

The danger is that advocates of moral clarity slide self-righteously towards crude subjectivity. This week Bari Weiss, a Times editor, resigned, criticising what she said was the new consensus at the paper: “that truth isn’t a process of collective discovery, but an orthodoxy already known to an enlightened few whose job is to inform everyone else.”

Earlier Mr Rosenstiel warned, in a largely supportive response to Mr Lowery’s column, that “if journalists replace a flawed understanding of objectivity by taking refuge in subjectivity and think their opinions have more moral integrity than genuine inquiry, journalism will be lost.”

As reporters learn more about a subject, he adds, the truth tends to become less clear, not more so. Recognising and embracing the uncertainty means being humble—but not timid.

Hedge fund titans grab lion’s share of industry spoils

Investors end up paying high fees for poor returns while managers accumulate personal fortunes

Chris Flood and Ortenca Aliaj

© Getty Images

Paulson & Co and Lansdowne Partners this month decided to shut their flagship hedge funds after periods of disappointing performance that destroyed much of the wealth created by these managers in earlier years.

The erratic performance of many hedge funds means investors can be charged high fees for disappointing returns.

But at the same time some hedge fund titans, including John Paulson, still walk away with multibillion-dollar personal fortunes.

US pension schemes earned just 5 per cent a year on average from their hedge fund investments between 1998 and 2017 according to data from more than 200 public and private retirement plans compiled by CEM Benchmarking, a Toronto-based investment consultancy.

The pension schemes earned annualised returns of 9 per cent over the same period from S&P 500 stocks, an investment that could be made in a tracker fund costing just a few basis points.

Yet more than half of the profits earned by hedge funds over two decades were taken by their managers, a revenue split that will fuel debate over whether investors are receiving fair value for the performance fees they are being charged.

The debate over profits comes at a difficult time for the hedge fund industry as a growing list of former star managers, such as Silver Ridge, Stone Milliner, Jabre Capital, Omega Advisors and Eton Park, either shut funds or close their doors entirely.

Performance fees traditionally accounted for 20 per cent of any profits created by a hedge fund above an agreed benchmark, an arrangement intended to align the interests of managers with their clients.

But the inconsistent returns delivered by many managers and the early closure of many hedge funds after bad results have resulted in investors often paying substantial fees for mediocre performance.

Investors earned $228bn in aggregate gross profits and paid $133bn in incentive fees in a sample of 6,000 hedge funds (over a third of the hedge fund industry) between 1995 and 2016, according to a study by the finance professors Itzhak Ben-David and Justin Birru from Ohio State university and Andrea Rossi from the University of Arizona.

“There is a considerable disconnect between the returns generated and incentive fees earned across all but the worst-performing 5 per cent of hedge funds,” says Mr Ben-David.

After including annual management fees that are paid regardless of performance, investors earned just 36 cents of each dollar of gross profits generated by the funds above their benchmark.

The other 64 cents were collected by hedge fund managers.

“Adding insult to injury, these results are obtained before even adjusting fund returns for the risk embedded in these investments,” says Mr Rossi.

A senior executive from a major hedge fund, who did not want to be identified, says ending management fees would make the hedge fund industry much more “robust”.

US pension funds net annual returns and expenses

The study concluded that investors would have paid $70bn less if the hedge fund managers had made repayments from their own pockets for any periods of underperformance.

“A clawback provision could drive the effective performance fee down,” says Mr Rossi. Yet, only fewer than one-in-six hedge funds offer investors any clawback of past fees in case of poor performance.

More symmetric agreements, known as fulcrum fees, which are designed to ensure that a manager holds real “skin in the game” beside their clients’ money, could have saved investors about $194bn over the 22 years if applied across the entire hedge fund industry, according to the academic study.

“Despite the long history of poor outcomes associated with the prevailing fee model, the hedge fund industry does not appear to be moving en masse towards a more symmetrical incentive structure,” says Mr Birru.

Tension over fees between clients and managers have risen in recent years, leading to an erosion of the industry’s historic “two and 20” fee model.

More than half of the respondents in a survey of 227 institutional investors with $706bn in hedge fund assets were renegotiating or looking to renegotiate fees in 2019, according to JPMorgan.

It found that 17 per cent of its respondents had implemented a “one or 30” model. Under this, an investor pays a 1 per cent management fee that switches to a 30 per cent performance fee once an agreed target has been reached.

DE Shaw, one of the world’s oldest and most successful hedge funds, increased its fees last year to “three and 30” on the back of strong performance.

Steven Cohen, the founder of Point72 Asset Management who opened his family office to outside investors in 2018 following a two-year ban by the Securities and Exchange Commission, now charges a 2.85 per cent management fee and performance fees that can go up to 30 per cent depending on returns.

But loading up incentive fees might not improve the link between long-run performance and fund costs or reduce the total amount paid by investors over a full market cycle, warns Mr Ben-David. “Increasing the incentive fee rate is unlikely to protect investors from paying managers that perform poorly in the long run,” he says.

Chris Walvoord, global head of hedge fund portfolio management and research at Aon, the investment consultant, says the academic study paints an unrealistically bleak picture of the fees paid by investors.

“A carefully constructed portfolio of a dozen hedge fund strategies seldom matches the aggregated risk and return of the entire hedge fund industry,” says Mr Walvoord.

“There are positives and negatives to hedge fund performance fees that investors need to consider carefully.

The lower fees that an investor can negotiate, then the better off they will be.

Investors would be better off negotiating a 10 per cent performance fee in return for a slightly higher management fee”, he says.

Preferential fees and terms offered by hedge fund managers

Aon pays close attention to the capacity limits of hedge fund strategies — maximum effective operating size — when constructing portfolios.

“Funds that attract a lot of assets and exceed the capacity of their strategy can earn high management fees as well as large performance fees in good years.

But their returns over time tend to be substandard and they go out of business. So the capacity of a strategy is a very important consideration when constructing a portfolio of hedge funds,” says Mr Walvoord.

High fees and lacklustre returns have prompted some investors to look for lower cost alternatives, leading to net withdrawals of $175bn from hedge funds since the start of 2016, according to HFR, the data provider.

But interest from US pension schemes, the hedge fund industry’s most important client group, has weakened only slightly. Hedge fund allocations by US pension schemes rose from 1.5 per cent in 1998 to a peak of 8.4 per cent in 2014 before dipping to 6.6 per cent in 2017, according to CEM Benchmarking.

Credit Suisse recently surveyed 160 institutional investors with $450bn invested in hedge funds and found a clear improvement in appetite. “Hedge funds are the top investment strategy choice for asset allocators moving into the second half of this year.

A net 32 per cent of the investors surveyed plan to increase their hedge fund allocations as these strategies performed as well or better than expected during the market turmoil triggered earlier this year by coronavirus,” says Vincent Vandenbroucke, head of capital introduction and prime consulting in Europe at Credit Suisse.

Mr Vandenbroucke says there is evidence that hedge fund managers are responding creatively to pressure from investors for a stronger alignment of interest with more customised managed accounts. These products can be better tailored to suit client needs, with a variety of fee discounts and a greater range of enhanced terms.

“More than a third of investors receive fee discounts in return for agreeing to longer lock-up periods or for ‘big-ticket’ orders,” said Mr Vandenbroucke.

But divergences between managers and investors over fees and terms persist. About 57 per cent of investors see hurdle rates — agreed targets that trigger performance fee payments — as valuable.

But hurdle rate conditions are agreed with fewer than a third of investors, according to Credit Suisse. Clawbacks to recover fees after disappointing performance are highly valued by a third of clients but just 15 per cent are provided with such facilities.

“Clawbacks are perceived to be difficult to implement fairly in pooled vehicles where there are regular investor inflows and redemptions. Managers also believe that clawbacks are inconsistent with their fiduciary duty to all clients — past, present and future — in their fund,” says Mr Vandenbroucke.

Offering preferential fees and terms might persuade some clients to remain loyal but big improvements in performance will have to be achieved if more of the hedge fund industry’s wealthy titans want to avoid following Mr Paulson through the exit door.

Moscow Under Stress on Its Periphery

Russian interests are being tested in the Caucasus and Levant.

By: Allison Fedirka

Two weeks ago, Russia concluded a constitutional referendum meant to shore up the power of the Kremlin and especially of Vladimir Putin. Under the revised constitution, which was approved by nearly 79 percent of voters, Putin can theoretically remain president until 2036 – by which time he would be in his 80s.

The move came not a moment too soon: Crises involving Russia-backed partners are erupting in the Levant and the Caucasus, not to mention the long-standing war in Libya, where Russia is a key player.

And as if that wasn’t enough, there are faint signs of anti-government unrest in Siberia. For a while, Russia has faced a number of serious economic problems, and we have been alert to signs of domestic destabilization.

Thus, any signs of domestic trouble, not to mention events on Russia’s periphery that threaten its strategic interests and raise the likelihood of high-stakes conflicts, are quick to grab our attention when they appear on our radar.

Domestic Instability

At its core, the internal threat for Moscow concerns the government’s ability – or inability – to maintain a basic standard of living for Russians after a sharp decline due to low oil prices, sanctions and, most recently, the coronavirus pandemic.

On July 11, a leading architect of the Russian economy, Alexei Kudrin, made scathing remarks about the government’s management of the economy in recent years. Kudrin called for structural and institutional reforms and highlighted how disappointing Russia’s economic growth has been since the fall of the Soviet Union, a period when output should have surged as the economy transitioned to capitalism.

This was one of the harshest recent critiques of the Russian economy, but it was far from the only one. Presidential spokesman Dmitry Peskov said that economic difficulties lie ahead for the country, and Putin himself said Russian authorities need to act more decisively and make the economy more competitive, or risk becoming mired in an economic “swamp.”

Amid the coronavirus outbreak, the Kremlin is struggling to hide the country’s growth slowdown, stubbornly low exports, rising unemployment and declining real incomes from the population. Public dissatisfaction with the socio-economic situation and government policy is rising, especially in those peripheral regions that are remote from Moscow.

These regions are mostly poorer and lack the infrastructure and economic diversity of the major urban centers. State welfare programs prop up the few areas with above-average incomes. Indeed, the results of the constitutional vote showed that the Kremlin is losing support in these regions: In the Nenets Autonomous district, which receives generous state subsidies and thus has the country’s second-highest incomes, 55 percent of voters opposed the draft changes.

Even farther away from Moscow, in Khabarovsk, which borders China, turnout was only 44 percent, and 36 percent of voters opposed the constitutional changes.

Khabarovsk is interesting for other reasons as well. On July 10, the region’s governor, Sergei Furgal, was arrested in connection with the attempted murder of two businessmen in 2004 and 2005. (He pleaded not guilty.)

The arrest has brought out protesters demanding the release of Furgal, who defeated candidates from Putin’s United Russia party to become governor in 2018, for several consecutive days.

According to official estimates, 12,000 people rallied in support of Furgal on July 11, though unofficial estimates put the number of participants nearly three times higher. Subsequent protests have apparently not reached the same scale.

The Kremlin is no stranger to large protests, but demonstrations of this magnitude usually occur in places like Moscow or St. Petersburg. The sheer size of the July 11 protest suggests a high degree of organization and logistical support; it would have been difficult to bring out as many as 35,000 people for a completely spontaneous demonstration. The protest is also notable for its cause; typical triggers for unrest are things like wage arrears, not allegedly politically motivated arrests of local officials.

A single protest in Siberia – even several days of protests – is hardly going to destabilize Russia.

However, what happened in Khabarovsk is enough of an outlier that – in combination with the country’s increasingly dire economic situation – it warrants Moscow’s attention, as well as our own.

The Caucasus

Besides domestic pressures, Russian interests are also under threat abroad. In a still-murky incident, Russian-led security forces on July 11 wounded and detained a Georgian citizen for unknown reasons in Georgian territory, near the border with South Ossetia, which Russia has occupied since 2008.

Detentions by Russian forces are not uncommon in this area, but the shooting of a Georgian citizen stands out as unusually aggressive. The Kremlin itself has not commented on the incident, but it did recently complete major military drills together with units of the local army in the territory of Abkhazia, which was also invaded by Russian troops in 2008.

Meanwhile, Azerbaijan has grown more antagonistic toward Armenia over the disputed Nagorno-Karabakh region. On July 10, during a security council meeting, Armenian Prime Minister Nikol Pashinyan went beyond normal talking points of highlighting Armenia's claim over Nagorno-Karabakh and its strategic value to Yerevan.

Pashinyan also emphasized the need to be tough on foreign powers trying to influence Armenian affairs. The next day, there was gunfire along their shared border at Tovuz, far from Nagorno-Karabakh but nonetheless a common point of dispute.

Azerbaijan’s Defense Ministry accused Armenia of violating a cease-fire and targeting civilians. Armenia said the attack targeted army engineering infrastructure and technical facilities.

Fighting resumed again on July 13. 

This incident is notable because of Turkey’s reaction to it. The Turkish government, normally quiet over the Nagorno-Karabakh issue, threw its support behind Azerbaijan.

Armenia and Turkey are long-standing enemies, so naturally Armenia accused Turkey of provoking instability.

Because the South Caucasus is a strategic buffer zone for Russia, tensions there naturally draw in Moscow. While Russia doesn’t need to fully control the South Caucasus to maintain territorial integrity, it needs to influence the area enough to reduce the risk of threats on its border.

Russia therefore tends to be a moderating force between Azerbaijan and Armenia in the Nagorno-Karabakh conflict, working to ensure no major conflict erupts in the region. But with Turkey submitting an official position, Russia will have a harder time being the voice of reason.

Turkey’s involvement would force Russia to throw its support behind Azerbaijan since siding with Armenia would squarely position Russia against Turkey. Azerbaijan’s ambassador to Moscow has already warned of the potential for the situation to escalate into a major conflicto.

It may come to nothing, as clashes in Nagorno-Karabakh almost always seem to, but Turkey’s mere statement will make Russia uneasy.

The Levant

Finally, there is Lebanon, which is not geographically part of the Russian periphery but part of the periphery of Syria, which is an important Russian ally and recipient of Russian security guarantees. The country is experiencing its worst economic crisis since World War I.

Mass economic dislocation has shattered the middle class and has made food financially inaccessible for the majority of the population, many of whom now suffer from malnutrition.

Virtually every government effort to remedy the situation has failed. If things don’t improve, the possibility of national instability, even civil war, can’t be ruled out.

So why does this matter for Russia?

Because the Eastern Mediterranean is critical to Russia, and the Levant, and Lebanon’s position in it, is critical to the Eastern Mediterranean. Russia has parlayed its presence in Syria into an attempt to restore its image as a powerful military force. Security in Lebanon and in Syria have historically been intertwined.

During the Lebanese civil war, the Syrian army occupied Lebanon in 1976 to project influence, counter Lebanese and Palestinian guerilla groups that threatened the Assad regime, and act as a counterweight against Syria’s main rival, Israel.

Syrian troops withdrew in 2005, but Lebanon still serves as a buffer zone, with sectarian tensions, political gridlock and economic instability that create ripe conditions for foreign influence.

As Beirut weakens, outside powers will move in to protect and advance their interests. They cannot abide the uncertainty of political instability in Lebanon nor allow one country to acquire more power there at the expense of their own. In this kind of environment, it doesn’t take much for conflict to escalate.

Chaos in southern Lebanon may give Israel, for example, the opportunity it has been waiting for to move against Hezbollah. Hezbollah may see war as a better option over isolation and thus draw in Iran and Syria.

The U.S. and Russia would not be able to ignore it. The degree of cooperation between Israel and Russia, while variable, would rile the United States. Turkey would have an opportunity to make a play for influence in northern Lebanon where the location lends greater access to the Mediterranean.

Maintaining control over its periphery has always been a challenge for Russia, but it’s not one it can ignore. Which puts Moscow in the position of managing four regions – one domestic, three foreign. Domestically, Russia faces a host of economic challenges.

This, combined with signs of brewing public unrest, raises the possibility of regional disintegration and thus is a major threat to Moscow. Whether or not these same forces will be reckoned with through political settlements or military conflict remains to be seen.


Chris Vermeulen
Chief Market Strategist

Our trading team witnessed a big drop in Platinum and Palladium prices early this morning while Gold and Silver continued to push moderately higher. We began to question this move and investigate any historical relevance to previous patterns. 

Our research team pointed out that both Platinum and Palladium rolled lower just 3 to 4 days before the breakdown in the US stock markets on February 24, 2020, while Gold and Silver were reaching recent price peaks. Could the patterns in precious metals be a warning of another potential volatility spike and price decline in the near future?


Our research team created the charts below to help highlight the pattern that we are seeing in Precious Metals right now. First, we highlighted February 24, 2020, with a light blue vertical line to more clearly illustrate where the markets initiated the COVID-19 breakdown event. 

Next, we drew shaded rectangles around new downside price rotation levels that took place near this peak in the US stock markets. Lastly, we drew a red line that highlights the subsequent price decline that took place in Precious Metals as the markets tanked in late February and early March 2020.

The current downside price move in Platinum and Palladium are very interesting because it appears Platinum and Palladium both initiated a downside/contraction price event just 3 to 4 days before Gold and Silver, as well as the rest of the US stock market, began to collapse on February 25, 2020. 

You can clearly see in the bottom two charts that Platinum and Palladium initiated a downside price correction a few days before both Gold and Silver reached their peak levels and began to move lower. Once this peak rotation took place, all four of the major metals groups moved moderately lower for about 7 days before pausing, then collapsed even further.

Our researchers believe the current setup in Platinum and Palladium may be mirroring the February 2020 peak rotation and warning that a massive volatility event and downside price contraction event may be setting up and just days away from initiating.

The breakdown in Precious Metals at a time when the US stock market is crashing is usually a result of margin calls – where traders experience losses in their trading accounts and much liquidate Precious Metals positions to cover these losses. 

This time, the downside event in Precious Metals may not be as deep or exaggerated as the February/March collapse. Skilled traders have already positioned their accounts to avoid margin calls. Only the novice traders may be in a position to experience this type of event in the near future.


Our researchers believe any future downside event in precious metals will likely stall near the recent support levels on these charts and immediately rotate back into a bullish trend because fear and greed won’t allow metals to fall too far before greedy traders try to scoop up these positions at discounted price levels. Our Support levels for the four Precious Metals shown are:

Silver: $19 to $21
Gold: $1780 to $1820
Platinum: $750 to $850
Palladium: $1915 to $2090

We believe any attempt to reach these levels in any of these four various Precious Metals would present a very strong buying opportunity for skilled technical traders. If it were to happen while a US stock market volatility event was taking place and/or the US stock market began a new downside price decline, then skilled traders should understand we may be seeing a similar type of price rotation event to the one that took place in February/March 2020 – representing a fantastic trading opportunity for those lucky enough to take advantage of the discounted price levels.

This next chart highlights what we believe may be the downside price event as it potentially takes place over the next 10 to 20+ days. Pay special attention to the differences in how Silver, Gold, Platinum, and Palladium react to the fear event and where real opportunity exists near the end of this potential event. Platinum and Palladium will likely fall 15% to 25% where Gold may fall only 8% and Silver may fall 15% to 20% before bottoming.

As technical traders, we can’t pass up an opportunity like this when Precious Metals gift us with a potential 15% to 45%+ rotation in price that should be moderately easy to trade given our expectations. 

If this event takes place as we have described, skilled technical traders could begin to acquire smaller positions near our target levels, then wait to acquire bigger positions as the bottom sets up. 

Take a look at how Gold and Silver rallied after the February/March collapse – Gold rallied back to new highs within 45 days whereas Silver rallied higher over 4+ months, then broke higher just recently on a huge upside breakout move. Platinum and Palladium rotated more diligently throughout a 90-day span – never really reaching new highs after the peak in February 2020.

The reality of patterns like this is they are fun and exciting to find at this early stage of the setup. We’re not 100% confident this pattern will play out as we expect yet – but we believe the probability is high that a volatility event is about to take place and that Precious Metals could react very similarly to the February/March 2020 price reactions again.


As technical traders, we love this type of “telegraphed event” – even if it does not take place exactly as the previous event took place. It means we have an opportunity to take advantage of increased volatility and price rotation in one of our favorite sectors – METALS. 

Get ready for this move if we are correct – it may be your last chance to buy Gold and Silver at deep discounts for quite a while.


by Egon von Greyerz

The global financial system has for half a century undergone an act of contortion that few believed was possible. This has led to a warped system with fake money and false markets.

Just like the picture on the left, few understand how the world can be in such a contorted position. Or is it all an illusion?

Let’s be clear, it is not just an illusion but a totally deluded and twisted system that can never be bent back into a natural shape again without destroying many vital parts.


You wonder where Veritas, the Roman goddess of truth is in all of this. Few people have realised that she has always been there throughout history although not many have noticed her in recent years. In the financial system, gold has always told the truth even when governments try to suppress or manipulate it. All financial systems have over time been destroyed by greed. Not a single fiat currency has survived in its original form.

It was Nixon (not a truth teller) who demolished the current system. Once the gold standard was abolished in 1971, it has been a free for all money printing bonanza for 50 years.


Since August 2019, the Fed and the ECB have orchestrated a crescendo of QE, requiring ever more fake money in a futile attempt to stop the inevitable collapse. As the world is now in the very end game of the current currency system, there had to be a vicious catalyst to finish it off. Sadly that came in the shape of a pandemic which the world is coping extremely badly with.


In the beginning, every country thought that they would not be affected. And once they were, they didn’t take it seriously. Also Trump initially thought that the US was too strong and mighty to be severely affected. But neither more debt nor more weapons can beat the invisible CV enemy.

The few countries that did take early stringent measures have so far escaped with much less damage. What is scandalous in this globalist era is that there has been no cooperation between countries in how to treat CV-19. It shows that all these glorious unions, like the EU for example, only work in normal times. When a crisis starts it is every man and country for himself.

The hope is now that a vaccine will solve it all. Firstly, history tells us that vaccines always take longer to develop and test than hoped. So two years seem a minimum before we have any certain results. And even so, the success rate so far of these type of vaccines are normally less than 30%.

In the meantime the number of cases and deaths worldwide are increasing rapidly. And we still have the risk of a second wave. In Spain for example it seems to have started already. I doubt that the world and the world economy will function normally a year from now.

Whatever the course the pandemic takes in the next few months, it has already had major effects on the world. Firstly there is the loss of lives and the long term effects of the disease for survivors that are often severe and chronic. Then we have permanent loss of jobs, businesses closed with major sectors like leisure and travel which will never get back to where they were. Same with retail, town centres, offices etc. And world trade will contract substantially for a very long time.


On top of the above problems, is the financial system that was already bankrupt before CV.

The combination of massive printing of fake money, credit expansion to unsound debtors and bad debts will be the death knell for the system.

Accelerated money printing will ensue in a desperate attempt by governments and central banks to save the world. But printing worthless money will of course have no positive impact.

Instead we will see the end of the currency system as all currencies fall to their intrinsic value of ZERO.

Governments and central banks are doing a stellar job in withholding the truth about the destruction of their country’s money. All currencies are down 98-99% measured in gold since the Fed was created in 1913. But also since Nixon closed the gold window in 1971, the US dollar, the Canadian, British, Australian and Swedish currencies are all down 98-99%. – See Chart below.

And if we look at the last 20 years since 2000, all currencies except for the Swiss franc are down 82-88% in real terms or gold.

No wonder that governments don’t tell their people that they are totally destroying the currency and the economy.

The trend has been clear for over 100 years and accelerated since 1971 and turned exponential since 2000.


Again, history tells us the truth (Veritas is always present) but more than 99% of the population swallow the lies that governments and central banks feed them with. It is really so simple, history tells us where to look for the truth and what will happen next and gold reveals governments deceitful actions in destroying the currency and the economy.

So with two simple factors – history and gold – we can find the truth. That governments will not let the people know the truth is obvious. The truth is their biggest enemy. When any honest person becomes a politician, he turns into a spinner of yarns and a liar. In this sense, a central banker is also a politician.


But most people don’t want to hear the truth because it is uncomfortable. I and a few others have been standing on a soapbox for 20 years warning people about the destiny of the financial system and the importance of gold.

When one of my daughters got married 18 years ago, I even told the 150 guests to buy gold – quite an unconventional part of a father of the bride speech! But then I have never been accused of being conventional. Still, I doubt that a single person who attended bought gold then or has since.

Instead people invest in stocks, since they always go up. But no one has told stock investors that is has been a very poor investment. Virtually nobody knows that the Dow for example is down 70% against gold since 1999 (excluding dividends). No conventional journalist or analyst will ever mention this. They are just too lazy to check out the real facts.

The Dow – Gold ratio is today 14, having been 45 in 1999. It went down to 6 in 2011, corrected up until 2018 and has now resumed the downtrend. In 1980, Dow-Gold reached 1 to 1. The long term trend (not shown) projects a target 0.5 to 1.

This means that the Dow is likely to fall at least 95% from here in real terms or gold.

So stock investors including the recent retail investor mania are in for a total shock as stocks and the economy collapse together.


Finally a word about the gold price. This week it broke the 2011 all time high of $1,920. I have never considered the $1,920 level important. Since gold has in the last couple of years made new highs in all other currencies, it was always clear that the high for gold in dollars would be breached. Only surprising that it took 11 years.

But we must remember that gold is not going up but the dollar is collapsing. Just this century the dollar has lost 85% of its value in real terms – gold.

As the dollar reaches its intrinsic value of zero in the next few years, it is obviously totally meaningless to measure gold in dollars since the price in worthless fiat currency will be infinite.

Instead we can be certain that gold will maintain its purchasing power as it has over 5,000 years. But due to the overvaluation of most assets and the undervaluation of gold, gold is likely to perform much better than just keeping up with purchasing power. The shortage of physical gold and the failure of the LBMA system and gold futures markets will be major factors in this as I discussed last week.

It is fascinating that only 0,5% of global financial assets are invested in the only asset that has held its purchasing power in history. In the next few years investors, from retail to institutional, will all want gold. GOLD will be the SINE QUA NON investment that everyone wants to own.

Future gold supply will be extremely limited and demand massive. So the only way to get hold of gold will be at prices which will be multiples of the current price, even measured in today’s money. But remember to hold physical and don’t store one ounce within the bankrupt financial system.  

NATO Is Dying

Last December, NATO commemorated 70 years of underpinning peace, stability, and prosperity on both sides of the Atlantic. But cracks in the Alliance are deepening, raising serious doubts about whether it will reach its 75th anniversary. The time for Europe to shore up its defenses and capabilities is now.

Ana Palacio

palacio108_LUDOVIC MARINAFP via Getty Images_erdoganmacron

MADRID – NATO may be “the most successful alliance in history” – as its secretary-general, Jens Stoltenberg, claims – but it may also be on the brink of failure. After a turbulent few years, during which US President Donald Trump has increasingly turned America’s back on NATO, tensions between France and Turkey have escalated sharply, laying bare just how fragile the Alliance has become.

The Franco-Turkish spat began in mid-June, when a French navy frigate under NATO command in the Mediterranean attempted to inspect a cargo vessel suspected of violating a United Nations arms embargo on Libya.

France alleges that three Turkish ships accompanying the cargo vessel were “extremely aggressive” toward its frigate, flashing their radar lights three times – a signal indicating imminent engagement. Turkey denied France’s account, claiming that the French frigate was harassing its ships.

Whatever the details, the fact is that two NATO allies came very close to exchanging fire in the context of a NATO mission. That is a new low for the Alliance – one that may herald its demise.

Lord Hastings Ismay, NATO’s first secretary-general, famously quipped that the Alliance’s mission was to “keep the Russians out, the Americans in, and the Germans down.” The dynamic obviously changed over the subsequent decades, especially the relationship with Germany. But the broad basis of cooperation – a common perceived threat, strong American leadership, and a shared sense of purpose – remained the same.

Without US leadership, the whole structure is at risk of crumbling. It is no coincidence that the last time two NATO allies came this close to blows – during the Turkish invasion of Cyprus in 1974 – the US was preoccupied with the Vietnam War. In fact, the spat between Turkey and France occurred just days after it was revealed that Trump had decided, without any prior consultation with America’s NATO allies, to withdraw thousands of US troops from Germany.

Germany may no longer be on the front line, as it was during the Cold War, but US forces there still serve as a powerful deterrent to Russian aggression along NATO’s eastern flank. By drawing down those forces, Trump has sent a fundamental message: ensuring European security is no longer a top US priority.

While America’s drift away from Europe has accelerated under Trump, it began over a decade earlier. In 2011, when Trump’s predecessor, Barack Obama, was touting his “pivot to Asia,” then-US Secretary of Defense Robert Gates warned that, unless NATO proved itself relevant, the US may lose interest.

NATO did no such thing: until last December, its summit declarations failed even to acknowledge the challenges posed by China’s rise. By then, the US had lost interest. And now, under Trump, that disinterest has become open hostility.

Without the US as a rudder, NATO allies have begun to head off in different directions. Turkey is the clearest example. Before the recent squabble with France, Turkey purchased a Russian S-400 missile-defense system, despite US objections. Moreover, it has brazenly intervened in Libya, providing air support, weapons, and fighters to the Tripoli-based Government of National Accord.

Turkish President Recep Tayyip Erdoğan seems confident that his direct relationship with Trump will protect him from suffering any consequences for his behavior. Trump’s decision not to impose sanctions over the missile purchase, beyond cutting Turkey’s participation in the F-35 fighter jet program, seems to vindicate Erdoğan’s reasoning.

But Turkey is not alone in striking out on its own; France has done the same, including in Libya. By providing military support to the Russian-backed General Khalifa Haftar, who controls eastern Libya, to fight Islamist militants, France has gone against its NATO allies.

While President Emmanuel Macrondenies supporting Haftar’s side in the civil war, he did recently express support for Egypt’s pledge to intervene militarily against Turkey, which he says has a “criminal responsibility” in the country.

As tensions with Turkey rise, France is more insistent than ever that a European approach to security and defense – one that would be de facto led by France – is vital. The fact that popular support for Macron within France is waning only augments his sense of urgency.

Political motivations aside, Macron has said aloud what few others have acknowledged: NATO is experiencing “brain death,” owing to Trump’s dubious commitment to defend America’s allies.

Given that the US drift away from NATO began well before Trump, there is little reason to believe that this trend will be reversed, though it may be slowed if he loses the November election.

Unless Europe begins thinking of itself as a geopolitical power and takes responsibility for its own security, Macron argues, it will “no longer be in control of [its] destiny.”

Last December, NATO commemorated 70 years of underpinning peace, stability, and prosperity on both sides of the Atlantic. But cracks in the Alliance are deepening, raising serious doubts about whether it will reach its 75th anniversary.

The time for Europe to shore up its defenses and capabilities is now.

Ana Palacio, a former minister of foreign affairs of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University.