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Words of Doom About the U.S. Treasury Market Reverberate 15 Years Later

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Words of Doom About the U.S. Treasury Market Reverberate 15 Years Later

By John McDonald 

In January 2004, former president Clinton’s Treasury Secretary and not-yet-president Obama’s future director of the Office of Management and Budget (OMB)penned an apocalyptic white paper warning of “a fundamental shift in market expectations [that would result in] fiscal and financial disarray [while] depressing economic activity much more than the conventional analysis would suggest.”

The authors, Robert Rubin (Treasury secretary) and Peter Orszag (OMB), feared that ongoing budgetary imbalances would soon create a global economic catastrophe, permanently damaging the world’s largest and most liquid financial market, the U.S. Treasury market. Today, 15 years later, that white paper’s warnings certainly sound even more relevant and even more foreboding.

Christopher Ailman, chief investment officer for the California State Teachers’ Retirement System, explained, “The United States is a debtor nation.  We owe people money. And when the borrower owes money to a lender, you are usually subservient to and at the mercy of that lender.”

Ailman said he does not expect a catastrophe necessarily “in my lifetime,” but warned, “At some point…being a debtor to other people is going to come home to roost.” However, said other analysts, there may be nowhere to hide from the “rising public indebtedness” that may threaten U.S. treasuries but has not, as yet, created an opening in the market for a similar safe-haven asset other than possibly investment in precious metals.

“One of the main reasons we considered gold was the diversification benefits it provides to portfolios dominated by equities, as most pension funds are,” observed the Teacher Retirement System of Texas (TRST)’s gold fund manager Shayne McGuire in a World Gold Council interview in 2016. He added, “Despite the collapse of commodities during the 2008 financial crisis and metal’s initial decline, gold was one of the few assets that ended up positive for the year.” McGuire began investing in gold using the TRST gold fund in 2007.

For investors running pension funds, which rely heavily on there being enough money in the “piggy bank” when members retire and begin to make withdrawals, gold and precious metals represent a valuable hedge against more volatile assets. However, traditionally U.S. treasuries have represented such a hedge as well. This time, some analysts say, the traditional measures of adjusting interest rates and bringing in the Federal Reserve to dampen the downswing may not be enough.

“There is not really a lot of backstop for a downturn,” warned Verger Capital Management CEO Jim Dunn. “This is a scary, fragile market. It gets crazy at the end of the cycle,” he added.


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