When the US bond market loses control
US debt is at $38.9 trillion and climbing – and a loss of confidence in the US bond market could be the most destabilising event of our investing lifetimes.
I wasn’t going to make this video, because it’s not something you probably want to hear. It is something quite disturbing, but it is real. It’s not YouTube hype. This event is seismic and it has to do with US debt – what we call the big one: the US losing control of the bond market, not being able to service its debt, seeing a precipitous fall in the world’s reserve currency. I’m going to tell you what that means for asset prices, what that means for you as an Australian retiree, and more importantly, what some of the smart money in Australia is doing about it. And for anyone who’s got money sitting in Macquarie Bank (ASX: MQG) accounts like me, you need to listen to this.
Ray Dalio and the 80-year debt cycle
You’ve probably heard of Ray Dalio – his fund was one of the biggest hedge funds in the world, made more money for investors than any other hedge fund, and has predicted things like the 2010 European debt crisis and the 2008 global financial crisis. He’s written a book called How Countries Go Broke. And he says all empires fall the same way – including the Dutch Empire, the British Empire, and interestingly, the Roman Empire. What every empire does wrong is it doesn’t take its currency seriously enough. It spends more than it earns, starts raising debt, and eventually that debt devalues the currency. The Roman soldiers don’t turn up for work.
And of course, what happens when you devalue your currency like that? It’s the equivalent of printing money, which the US has been doing hand over fist since 2008. Ray tells us it’s an 80-year cycle, and the US is in the last stages of this big debt cycle. At the moment, it has $38.9 trillion worth of debt. It pays $970 billion a year in interest – about $3 billion a day. And where does it get the money from? It has to go to the bond market and constantly issue bonds. And in order for that to be successful, there have to be people who want to buy the bonds.
It’s a confidence game. And if you lose confidence in the US bond market – if suddenly you feel like there’s just a chance the US is going to go bust – you don’t want to be the person buying their bonds, lending the money, because you might be the last one in the queue if everybody after you decides they’re not buying any more. In which case, the currency falls, and it falls hard. You’re talking about the reserve currency of the world falling 10, 20, 30%. If the world loses confidence in the US bond market, every asset priced in US dollars is going to shoot through the roof. They’re going to get hyperinflation because the US dollar isn’t going to buy anything. Their currency is going to fall over. Every asset class is going to fall over.
And I can tell you, in Australia, it’s going to be exactly the same thing. If their stock market falls over, our stock market falls over. If their house prices fall over, our house prices will fall over. It could absolutely screw the stock market, and it could happen very suddenly. In fact, it almost happened last April, when Trump introduced that board with all the tariffs – averaging 29%, against an expectation of 10%. That was going to kill trade, kill the US economy. 30-year bond yields in the US started to spike, and somebody got into Trump’s ear and said, “You better turn this tariff stuff around – if the world loses confidence in the bond market, you are going to be the first president who has screwed the pooch in four months of getting into office.” And he paused tariffs for 90 days, something like seven days after introducing them. So this could happen precipitously.
How countries are already hedging
And the incredible thing about it is some countries have been hedging this possibility for some time. You’re probably aware that China has very publicly been buying gold. Buying gold is like buying trust. And the next reserve currency China hopes will be the yuan. And in order to give it credibility, they need to buy gold. They have large holdings of US bonds. If the US bond market did fall over, they’re going to lose money. So they’re out of bonds, buying gold.
And the same thing could potentially happen in Japan. They have traditionally held very large holdings of US bonds, but their interest rates are going up at the moment. It’s worth repatriating money from the US bond market back to Japan. That weakens the US bond market as well. Some countries are already getting out of US bonds, hedging the possibility of some sort of loss of confidence in the bond market. And it would take years to develop the yuan as a new reserve currency, but they are in the process of doing that. China is recruiting other countries to its bloc – Russia, Indonesia, India, North Korea – all being brought on board to support or use the yuan.
You may think this is fanciful, but I had a conversation with an Australian family office and they are already thinking about doing something about the possibility that the US, with this level of debt, goes bust. It’s very unlikely to become precipitous – it’s well known that the US will simply print more money in order to dig itself out of any bond market hole. But when you’re talking to a family office, they are protecting a dynasty. Descendants are coming after them, and they have to act responsibly now to make sure that dynasty continues. And although the probability is low, there is absolutely no doubt that family offices in Australia have begun to hedge the possibility of a fall of empire in the US.
What you can actually do about it
What could you do about it if it was going to happen? Well, the most obvious thing is gold. This is not a promo for the gold price. But if the US currency was going to collapse, everybody’s going to move to what are called hard assets – tangible assets. That’s metals, and it’s also driving things like copper. And anything priced in US dollars – if the currency collapses, the price just skyrockets.
The obvious trade, if this was to happen, is to be holding gold, not holding market assets like equities or even housing. Everything is going to be worth less. And – can you believe it – because you can’t print it, the suggestion is that crypto, Bitcoin in particular, might also be one of the hedges against the US printing money hand over fist as it tries to get out of a debt hole. All I would say is: whilst you might consider making gold a genuine asset class, even though it’s a small sector in Australia, it might be worth adding to your portfolio. Especially if you are very wealthy – it might sound silly, but if you’re very wealthy and don’t need a yield on your money and you’re more concerned with protection, then gold is an obvious asset class. Not gold stocks. Gold. Gold is a genuine defensive asset class.
Outside of that, if this was to happen, you don’t want a whole load of debt. Don’t stick your neck out. Don’t go and do some massive gamble on something – some investment that’s very risky that includes debt. And the third thing: keep an eye on it. You do need to be vigilant. Keep it in the back of your mind that at some point, this is about the only event that could happen in my lifetime that could really upset things for me.
And talking to this family office – they were talking about: don’t think US dollar, don’t think US bond market, don’t think the housing market, think Macquarie going bust. We are unique in Australia in that most of us, especially in the financial markets, have Macquarie cash management accounts. We are using them to back our stock market trading, using them in our family banking. Macquarie is touching all sorts of asset classes that would be at risk if this event happened. Just think what would happen if customers started to question Macquarie’s ability to give them their money back. It would be devastating in this country because we are so concentrated in a stock like that. But let me tell you – it’s not just Macquarie. It’s every bank. Suddenly imagine they are all compromised. That’s the sort of thing that could happen.
How do you get out of that? Well, one of these family offices is – this might sound silly, but it’s true – buying property in Switzerland and putting as much as possible into the Swiss franc. This is a safe haven currency with a very well-funded government behind it. And go and look at the chart – the Swiss franc is going up.
So we all have to keep an eye on US debt and the confidence in the US bond market. That’s why bond yields are so important. That’s why Trump has his buttons pushed by the bond market. That’s why he chickens out. Everybody’s on to it. You’re on to it now.
To follow it, sign up for a free 14-day trial of Marcus Today – we’ll be all over it every day. There’ll be plenty of signs before it happens, and it’s already something we’re talking about. And if you’d prefer a hands-off approach, take a look at MT20 – we’ve got a portfolio that only invests in Australian ETFs, and we time the market. If this sort of event comes along, we’ll be out of everything and into gold for you.