Houston Chronicle Op-Ed

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As I mentioned in an earlier blog, I wrote an Op-Ed piece for The Houston Chronicle.  I didn’t know if it would be published, but they published it on Sunday (yesterday).  Here’s the link.


I’ve re-printed it below.  Enjoy.




UTIMCO’s Investment in Gold is a Warning Sign


Last week, the Chronicle reported that UTIMCO (The University of Texas Investment Management Company) invested $500 million in gold.  Normally, it’s not significant news when UTIMCO allocates three percent of their portfolio to a particular investment, but this particular investment decision was widely reported (rightfully so).


We never know the entire reason that smart money moves into a particular investment.  But, one possible reason for this investment should worry all of us – a U.S. debt crisis.


The Simple Explanation — Diversification

From an investment perspective, UTIMCO’s move could be taken as a simple reminder that when we put together a portfolio, there is a need to search for securities that not only have attractive risk / return tradeoffs, but also don’t move up and down at the same time as the other securities we own.


An investment in gold does well in an inflationary environment.  Inflation is the enemy of bond investors and can also hurt stock multiples.  UTIMCO’s CEO, Bruce Zimmerman cited the fiscal and monetary stimulus as a potential source of inflation.


The Darker Side of the Gold Coin

Unfortunately, there’s another scenario in which gold might help to hedge UTIMCO’s portfolio.  That scenario is a loss of confidence in the US dollar and our ability to repay our debts.  In other words, while unstated by UTIMCO, we should consider the possibility that they are hedging against a US meltdown.


The financial problems we face are immense.  In addition to our trillion dollar deficit, our total debt is approaching 85% of GDP.  A recent academic study by Reinhart and Rogoff suggested that 90% seems to be a tipping point for countries and that a debt level above 90% of GDP results in slower growth.


In reality, I would be ecstatic if our debt level was only 90% of GDP.  The real issue is that we have approximately $50 trillion of unfunded liabilities – Social Security, Medicare and Medicaid.  This is a daunting liability.  Public investors such as mutual funds, pension funds, endowments, hedge funds, foreign governments and individuals have all combined to loan the United States approximately $8.5 trillion to fund our accumulated deficits.  If we wanted to be fully funded in today’s dollars, we would need to issue another $50 trillion of debt!


Of course, it would be impossible for us to issue this huge amount of debt.  Our biggest creditors (China and Japan) have actually been decreasing their holdings of our debt during the past year.  In other words, we need to borrow more and our creditors want to loan us less.  This is a dangerous combination.


Is a Budget Meltdown Inevitable?

In the next 25 years, the aging of the baby boomers is going to result in our budget blowing up.  The situation was best described by the Congressional Budget Office in their report “The Long-Term Budget Outlook” that they released at the end of June.  They said, “the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed.”  The problem is that our tax revenues have averaged 18% of GDP for the past 65 years.  In effect, the CBO is telling us that Social Security and healthcare will use virtually our entire budget within 25 years.  There will be nothing left for our national defense, healthcare spending or responding to disasters.


This is an upcoming disaster.  Republicans and Democrats who study the situation both see it.  Former Fed Chairman Alan Greenspan said this week, “Unless we start to come to grips with the long-term outlook, we are going to have major problems.  I think we misunderstand the momentum of this deficit going forward.”  Erskine Bowles, the Chief of Staff under President Clinton and the co-chairman of President Obama’s Debt Commission said, “This debt is like a cancer.  It is truly going to destroy the country from within.”


I will speculate that UTIMCO is hedging against more than just a huge stimulus program.  They’re hedging against the risk that our politicians will continue to kick the can down the road and not address our structural deficit.  They are hedging against the possibility that our “leaders” will not make the hard decisions and that our leaders will continue to treat our debt crisis as a partisan issue.  We should all hope that UTIMCO’s hedge is unnecessary.

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