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With the world’s attention focused on Syria and North Korea in recent weeks for obvious reason, another geopolitical hotspot is on the verge of eruption. According to AFP, after weeks of increasingly more violent protests, Venezuelan President Nicolas Maduro has ordered the army into the streets as the insolvent nation braces for what the opposition has vowed will be the “mother of all protests” on Wednesday.

Maduro, who recently backed down from a bid to usurp supreme power after a Supreme Court decision left the local Congress powerless, only to reverse itself following furious blowback even from his own party, has faced violent protests over recent moves to tighten his grip on power, and ordered the military to defend the leftist “Bolivarian revolution” launched by his late mentor Hugo Chavez in 1999.

“From the first reveille (on Monday morning), from the first rooster crow, the Bolivarian National Armed Forces will be in the streets… saying, ‘Long live the Bolivarian revolution,'” Maduro said Sunday night in a televised address. State TV showed images of army units marching in the streets of Caracas as Defense Minister Vladimir Padrino watched although there was no sign of soldiers on patrol Monday morning in the capital.

As noted previously, Venezuela has been rocked by two weeks of unrest since Maduro’s camp moved to consolidate its control with a Supreme Court decision quashing the power of the opposition-majority legislature. The court partly backtracked after an international outcry, but tensions only rose further when authorities slapped a political ban on opposition leader Henrique Capriles.

In the ensuing protests, at least five people have been killed and hundreds wounded as riot police clashed with demonstrators. All this took place as the country was scrambling to collect $2 billion to make a bond principal repayment for domestic energy giant PDVSA (which it did last week), even if it meant briefly running out of gasoline for domestic consumption.

 

Maduro’s recent attempt to concentrate power  – which unlike those of Erdogan proved unsuccessful for now – led to a powerful backlash, with near daily protests around the country and capital; these are expected to climax on Wednesday when Maduro’s opponents have called for a massive protest, a national holiday that marks the start of Venezuela’s independence struggle in 1810.

Meanwhile, the president’s supporters have called a counter-demonstration the same day. As AFP puts it, April 19 is a touchy date in Venezuela “where Chavez and Maduro have built a politics of populist, left-wing nationalism around the struggle for independence from colonial Spain and its hero, Simon Bolivar.”

Maduro is fighting off the center-right opposition’s efforts to force him from power amid an economic crisis that has sparked severe food shortages, riots and looting.

Maduro denounced his opponents as “traitors” and called the new deployment a sign of the military’s “honor, unity and revolutionary committment.”

Despite pervasive public anger at the Maduro regime driven by an economic collapse that has resulted in the Bolivar losing all value in recent years, so far the key arbiter of Venezuela’s fate – the army – remains on his side.

Opposition leaders have urged the military, the only remaining pillar of Maduro’s power, to turn on the socialist president. So far, they have been unsuccessful, and if Wednesday’s preview is any indication, this won’t change any time soon: the defense minister vowed the army would show its “fighting spirit ahead of April 19,” but said the deployment was “a call to peace.” “We don’t want confrontation.”  For the ordinary people, millions of whom have little if anything left to lose, a confrontation may be the only option.

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Following news earlier this morning from South Korea’s primary news outlet, Yonhap, that the Pentagon has directed a total of three US aircraft carriers toward the Korean Peninsula, Sean Spicer is scheduled to take the stage momentarily to brief the press on the latest developments regarding North Korea.

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April looks set to be the worst month since August 2015 (when China devalued and turmoil spread across the world) for global financial stress.

As Bloomberg reports, rising geopolitical concerns are pushing a gauge of anxiety for global asset classes to this year’s high.

Bank of America Merrill Lynch’s Global Financial Stress Index climbed to 0.24 last week, meeting the peak reached in February and rebounding from a low at the end of March. A positive reading indicates more financial-market stress than normal.

This signal suggests more possible downside to US equities…

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Authored by Zaki Laidi via Project Syndicate,

In a few weeks, France will elect its next president. Given the French executive’s considerable powers, including the authority to dissolve the National Assembly, the presidential election, held every five years, is France’s most important. But the stakes are higher than ever this time.

The two frontrunners are the far-right National Front’s Marine Le Pen and Emmanuel Macron, who served as economy minister under Socialist President François Hollande, but is running as an independent. If, as expected, Le Pen and Macron face off in the election’s second round on May 7, it will be a political watershed for France: the first time in 60 years that the main parties of the left and the right are not represented in the second round.

France has not endured such political turmoil since 1958, when, in the midst of the Algerian War, General Charles de Gaulle came to power and crafted the Constitution of the Fifth Republic. That shift, like any great political rupture, was driven by a combination of deep underlying dynamics and the particular circumstances of the moment.

Today is no different. First, the underlying dynamic: the rise, as in most developed countries nowadays, of popular mistrust of elites, feelings of disempowerment, fear of economic globalization and immigration, and anxiety over downward social mobility and growing inequality.

These sentiments – together with the French state’s historical role in fostering national identity and economic growth – have contributed to a surge in support for the National Front. Le Pen’s nationalist, xenophobic message and populist economic policies resemble those of the far-left candidate Jean-Luc Mélenchon.

Although support for the National Front has been growing for more than a decade, the party has so far been kept out of power by France’s two-round electoral system, which enables voters to unite against it in the second round. And, given the National Front’s inability to make alliances, power has remained in the hands of the main parties of the left and the right, even as France has moved toward a tripartite political system.

Now, Macron is taking advantage of current circumstances to blow up the tripartite system. Macron’s great insight, which few initially recognized, was that the right-left divide was blocking progress, and that the presidential election amounted to a golden opportunity to move beyond it, without the help of an organized political movement. At a time when the French people are increasingly rejecting the traditional party system, Macron’s initial weakness quickly became his strength.

It helped that, as Macron himself recognized, both the right and the left have fragmented in recent years. This is particularly true on the left, where a clear division has emerged between a reformist current, led by former Prime Minister Manuel Valls, and traditionalists, represented by the Socialist Party candidate, Benoît Hamon. The Socialists’ problems are compounded by the existence of a radical left working actively to eliminate them, much as Spain’s left-wing Podemos party has sought to replace the Socialist Workers’ Party there.

The source of the mainstream right’s travails is less clear. Its forces remain generally united on economic and social issues. In fact, until a few months ago, its presidential candidate, the Republicans’ François Fillon, was expected to lead the pack in the first round by a wide margin. But a scandal over his personal conduct (he allegedly paid his wife and children for non-existent jobs while he was a member of parliament) damaged his candidacy – probably fatally.

Whatever the reason for the right’s decline, Macron has benefited substantially from it, as well as from the rifts afflicting the left. Now, there is a real chance the young independent could be elected president on May 7, upending the Fifth Republic’s political system.

But an electoral victory is just a first step. To govern in France’s hybrid presidential-parliamentary system, Macron would need to secure a majority in the National Assembly. This opens the possibility of two scenarios.

In the first scenario, Macron quickly gains a parliamentary majority, as French voters seek to reinforce his mandate in June’s National Assembly election. This is conceivable, but not certain: it is here where the lack of an organized political movement on the ground remains a weakness for Macron.

That is why the June election could give rise to the second scenario: cohabitation with a parliamentary coalition comprising a small right-wing faction, a large centrist faction, and a hopelessly divided left-wing faction. Such a development would be familiar in many European countries. But in France, where republicanism gave rise to the left-right ideological spectrum that shapes politics throughout the West today, it would be a genuine revolution – one that could spell the end of the Socialist Party.

Given the symbolic power of the left-right divide, France’s voters and political leaders alike have long tended to frame virtually all of the country’s problems in ideological terms. The public and its politicians have little experience with government based on broad coalition agreements. This partly explains why the political system becomes gridlocked, sometimes making reforms difficult to implement, and why Macron’s message, which includes clear reform plans, is so unusual for France.

If Le Pen somehow comes out on top, French politics – not to mention the European Union – will be turned upside. But even the ostensibly moderate Macron represents, in his own way, a truly radical stance. With both candidates likely to make it to the second round, France is on the verge of a political revolution, regardless of who wins.

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Over the past several years we have repeatedly stated that despite protests to the contrary, the single biggest factor explaining the underperformance of the active community in general, and hedge funds in particular, has been the ubiquitous influence of the Fed and other central banks over the capital markets. 

Specifically, back in October 2015, we wrote that “as central planning has dominated every piece of fundamental news, and as capital flows trump actual underlying data (usually in an inverse way, with negative economic news leading to surging markets), the conventional asset management game has been turned on its head. We have said this every single year for the past 7, and we are confident that as long as the Fed and central banks double as Chief Risk Officers for the market, “hedge” funds will be on an accelerated path to extinction, quite simply because in a world where a central banker’s money printer is the best and only “hedge” (for now), there is no reason to fear capital loss – after all the bigger the drop, the greater the expected central bank response according to classical Pavlovian conditioning.”

Several years later, Goldman Sachs confirms that we were correct.

In a note released overnight by Goldman’s Robert Boroujerdi titled “An Rx for Active Management” and which seeks to explain the now chronic underperformance of the “smart money”, the Goldman analyst says he has identified two key considerations impacting the performance of actively managed equity funds including 1) the nature of market regimes and 2) behavioral tendencies of portfolio managers.

Among the various considerations described by Goldman, both market and behavioral, chief among which the observation that alpha is cyclical and that “there have been 4 distinct alpha cycles since 1990, with prior periods of persistent alpha (1990-94; 2000-09) each followed by a respective period of underperformance (1995-99; 2010-2016)”…

… the smoking gun in the report was the admission that “QE has been a headwind… Low Rates, Low Vol, Low Dispersion -> Low Alpha.”

And the punchline: in a slide titled “A word on QE: Does Active Have A QE Hangover“, the simple answer is: yes.

He makes three main points:  

1. The current run of active manager underperformance began shortly after the onset of QE (see top-left exhibit).

 

 

2. QE drove real interest rates lower (measured by the yield on 10yr TIPS). This trend towards 0%, and even negative, real rates coincided with the shift from active outperformance to underperformance (see bottom-left exhibit).

 

 

3. Equity market dispersion and volatility, both key drivers of manager tracking error and excess returns, have remained stubbornly low throughout QE and served as headwinds for manager performance (see bottom-right exhibit).

 

The slide in full:

Ironically, it has been the hedge fund community which during the current decade has been among the most vocal supporters of first Bernanke and then Yellen, and QE in general. Meanwhile, as central banks “saved” markets, they unleashed the passive, ETF revolution which is the real “great rotation”, as every weeks sees tens of billions in funds shifted from hedge funds and other active managers to low-cost passive alternatives.

What can fix this abnormal market state? Here the answe is also straightforward: a market crash.

As Goldman shows, active investing lags in up markets and outperforms but only in down markets:

• Market upside vs. downside capture for actively managed mutual funds is not symmetric.
• In “up markets” (SPX 1-month return +2% or more), the median active manager underperforms the market by approximately 20bps, on average.
• However, in “down markets” (SPX -2% or more), actively managed funds have outperformed their benchmark by nearly 40bps, on average.
• In the two most significant drawdowns since 1990 (Sept. 2000 – Sept. 2002) and (Nov 2007 – Feb 2009), the median long-only active manager was able to cushion downside and outperform the market.

Which brings us to a conclusion we have stated repeatedly on many previous occasions: while hedge funds, especially established ones with significant AUM, find the current status quo relatively comfortable – after all they get to clip their management fees year after year (forget the “performance” upside), extrapolating current trends in central-bank dominated markets would eventually lead to “active” extinction, and the complete domination of ETF-based and other low-cost passive strategies. Furthermore, taken to its thought experiment extreme, a situation in which there is only passive management would guarantee that the next market crash would be truly unprecedented with few hedge funds there to hunt for bargains.

Ironically, the only event that can break this sequence of events would be a market crash, one which finally ends the current pernicious equilibrium and resets the capital markets. For that to happen however, both the Yellen and now Trump put would have to be eliminated. And that, as the past 8 years have shown, is easier said than done. For the sake of hedge funds and their dwindling assets under management, however, they better fund a way and soon.

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Authored by Jeff Thomas via InternationalMan.com,

Regarding the Great Depression… we did it. We’re very sorry… We won’t do it again.

– Ben Bernanke

 

Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both.

– Janet Yellen

In his speech above, future Federal Reserve Chairman Ben Bernanke acknowledged that, by raising interest rates, the Fed triggered the stock market crash of 1929, which heralded in the Great Depression.

Yet, in her speech above, Fed Chair Janet Yellen announced that “it makes sense” for the Fed to raise interest rates “a few times a year.” This is a concern, as economic conditions are similar to those in 1929, and a rise in interest rates may have the same effect as it did then.

So let’s back up a bit and have a look at what happened in 1929. In the run-up to the 1929 crash, the Federal Reserve raised rates to 6%, ostensibly to “limit speculation in securities markets.” As history shows, this sent economic activity south rather quickly. Countless investors, large and small, who had bought stocks on margin, would be unable to pay increased interest rates and would be forced to default. (It’s important to understand that the actual default was not necessary to crash markets. The knowledge that investors would be in trouble was sufficient to send the markets into a tailspin.)

Mister Bernanke was quite clear in 2002 when he stated that the Fed would not make the same mistake again that it made in 1929, yet, then, as now, there’s been a surprise victory by a Republican candidate for president. Then, as now, a wealthy man who had never held elective office was unexpectedly in the catbird seat and had the potential to endanger the control of the political class, at a time when that political class had been complicit in damaging the system by creating massive debt.

Then, as now, conditions were ideal for the Deep State to create a solution to all problems: An economic crash was inevitable; therefore, create a trigger for it to occur and blame the collapse on the conservative political outsider. Demonstrate to all that the collapse was due to the greed of the outsider and those who were of like mind. Use that leverage to demonstrate to the hard-hit populace that what was needed was the opposite of what the outsider had proclaimed. Recommend far greater control by a new government that was staunchly liberal—a government that would change the political landscape in such a way that all those who suffered would be saved by a benevolent collectivist government.

And, of course, when it’s stated that way, it’s an easy sell. In 2017, it will be an even easier sell than it was in 1929, as the new president has already set himself up for a fall. In his inauguration speech, he focused on a single topic—the return of power to the people and away from Washington’s bureaucracy.

Beginning by decrying Washington for what it truly is, he stated that “for too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost. Washington flourished—but the people did not share in its wealth.”

He then went on to describe that his presidency would bring about a metamorphosis:

I will never, ever let you down. America will start winning again, winning like never before. We will bring back our jobs. We will bring back our borders. We will bring back our wealth. And we will bring back our dreams. We will build new roads, and highways, and bridges, and airports, and tunnels, and railways all across our wonderful nation. We will get our people off of welfare and back to work—rebuilding our country with American hands and American labor… We will reinforce old alliances and form new ones—and unite the civilized world against radical Islamic terrorism, which we will eradicate completely from the face of the earth… We will not fail. Our country will thrive and prosper again.

Of course, new presidents are prone to making big promises when they first take office. However, Mister Trump has, in his brief speech, effectively declared himself the enemy of the Washington bureaucracy. In so doing, he’s left himself wide open to be the fall guy if the economy does not rebound, if the average American’s lot does not improve, and if the US does not dominate the world through an expanded military.

In short, the Deep State and their cronies, who were instrumental in creating the economic, social, and political house of cards that now exists, have the perfect opportunity to bring on the collapse and blame the new president for it.

Were Mister Trump to have honestly stated that the US is effectively a house of cards and that he’ll begin the laborious job of trying to salvage what’s left of it and begin to rebuild it, he would have provided himself with a justifiable excuse when the house of cards does collapse. However, by making such lofty claims to “Make America Great Again,” he’s lost this opportunity.

In the last year, whenever I was asked who I hoped the Americans would elect as their president, I replied, “Bernie Sanders.” To those that were shocked by this answer, I would add, “An economic collapse is inevitable. No one, no matter how capable, can prevent it. The best that can happen is that the collapse occurs under a president who’s an avowed socialist. That would ensure an eventual return to smaller government and more conservative economics.”

As unfair as it may be, a nation’s people almost always blame whoever is on watch when a collapse occurs. It matters little who or what is actually at fault. People need a “face” to vilify for the disaster and the sitting leader is almost always spontaneously chosen by a nation as that face.

And, of course, the opposing party invariably makes the most of the situation. Just as in 1929 and for years thereafter Herbert Hoover received the lion’s share of the blame for a Wall Street crash and the subsequent Great Depression, even though he was not at fault, so too will the US come to blame the new president who made promises that were far beyond what he could deliver.

The die is cast. The patsy-in-chief is now installed. The media will do all they can to discredit Mister Trump and civil unrest will be funded by his opponents. The US economy is more debt-laden than any country in the history of the world and, historically, this has always resulted in economic collapse. At present, there are scores of triggers that could bring about collapse. Any one of these black swans could do the job, but it’s entirely possible that the Federal Reserve will serve once again as the trigger, as it did in 1929.

This is unquestionably the smart way to play the game. Rather than wait for a random occurrence, if a date is set for a controlled collapse, those connected to the Deep State will have a brief time to disconnect their wealth from the system, as was done in 1929.

The trigger would be pulled by the Fed and the US economy would go down in as controlled a fashion as Building Seven in the World Trade Center.

When is this likely to occur? Herbert Hoover was given just under eight months. The date for the next collapse could be earlier or later. But the question is not when that date might be, but whether we’ve prepared ourselves for the eventuality.

*  *  *

The Fed could start its controlled demolition of the US economy any day now. This collapse will be much worse and last much longer than the Great Depression or the 2008 financial crisis. Doug Casey and his team have critical, time-sensitive information about preparing for this economic meltdown. They’re sharing need-to-know details in this urgent new special report. Click here to download the PDF now.

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