Last month, Stan Druckenmiller sat down for a fireside chat with Paul Tudor Jones at the 11th annual Robin Hood conference in New York.
“He’s gonna give you the most authentic, honest, unvarnished and sometimes brutally pointed thoughts and dialogue on topical things today,” Jones promised, on behalf of Druckenmiller.
Let me just say, up front, that if it’s the “unvarnished” truth you seek (about anything), I recommend consulting oracles other than billionaire traders. In fact, I can scarcely think of a worse place to go in search of enlightenment than a casual chat between two hedge fund managers.
Longtime readers are already laughing, but just so there’s no confusion: It’s my deeply-held belief that the hard cutoff age for idolatry vis-à-vis other humans is 14. If you’re older than 14 and you’re still idolizing, you need to stop. With that in mind, the fact that millions of adult men idolize Druckenmiller (another adult man) is pitiable.
I make almost no exceptions for my idolatry age cutoff, and the exceptions I do make certainly aren’t for any hedge fund managers. So, if you’re spending your evenings reveling in the career exploits of traders, financiers and hedge funders, you may as well be a 10-year-old shooting fadeaway sock jumpers into your laundry hamper. (“Kobe!”)
With that out of the way, it gives me great pleasure to report that a former Treasury official took some time this week to suggest that, at least as it relates to the management of US debt issuance, Druckenmiller is either a moron, full of sh–t or, quite possibly, both.
Of course, Amar Reganti — now a Managing Director at Wellington Management, but formerly the Deputy Director of the Office of Debt Management at Treasury — didn’t name Druckenmiller, but he didn’t have to. Here’s what Druckenmiller said to Jones during their “Bush & Bush“-esque chat:
When rates were practically zero, every Tom, Dick, Harry and Mary in the United States refinanced their mortgage. Unfortunately, we had one entity that did not, and that was the US Treasury.
Yes, “unfortunately” the US government didn’t mistake itself for a company.
Admittedly, I made the same joke (about Treasury not refinancing its “house” at low rates). Twice actually. I made that joke twice, including three days ago in an article about corporate maturity walls.
But Druckenmiller was abrasive, and he made it personal. “I guess because political myopia or whatever, Janet Yellen was issuing two-years at 15bps when she could have issued 10-years at 70bps or 30-years at 180bps,” he said. “I literally think if you go back to Alexander Hamilton, it was the biggest blunder in the history of the Treasury and I have no idea why she has not been called out on this. She has no right to still be in that job.”
Yellen was diplomatic in her rejoinder. “Well, I disagree with that assessment,” she told CNN, noting that other “Wall Street professionals” prefer “regular and predictable issuance of maturities across the spectrum,” because that’s “critical to having deep and liquid markets” which, in turn, is what keeps borrowing costs lower over time.
I applaud Yellen for her restraint. Nobody in the administration would’ve blamed her for saying, “Well, Stan is trying to stay relevant in pseudo-retirement, and the US government isn’t going to be a party to that effort. Next question.”
Reganti was diplomatic too, but he was a bit more… “pointed,” as Jones might put it. Here’s what he had to say:
Some market participants have begun questioning why the US Treasury did not issue more longer-term debt to ‘lock in’ its financing at lower borrowing costs. This topic has been debated with particular fervor of late as large portions of the US economy, such as consumers and corporate treasurers, have somewhat immunized themselves to higher rates via 30-year mortgages or terming out their corporate debt issuance. However, thinking of the Treasury department as a corporate or household debt manager is a deeply flawed comparison. The Treasury seeks to finance the government’s debt at the lowest cost over time. It achieves this through a regular and predictable issuance pattern.
Reganti went on to gently note that in sticking to the regular and predictable issuance doctrine, the department was effectively adhering to guidance pioneered by Paul Volcker.
Reganti could’ve stopped there, but “for the sake of argument” (as he put it), he walked through the “adverse consequences” of a Treasury department which decides to act like a corporate issuer.
First, Treasury has a reserve currency to manage. And that means you can’t just abruptly term out the entire debt profile. If you did, the whole system would collapse. “It is simply not possible to have a reserve currency without a massive supply of short-duration fixed income securities that carry no credit risk,” Reganti wrote.
In other words, the US has to issue an ample amount of bills, FRNs and short-dated coupon securities. It’s not optional for the reserve currency issuer. In case there were any questions about that, Reganti cleared them up: Those securities, he said, “are absolutely required.”
Second, moving all (or most or even an inordinate amount of) issuance to the long-end would be self-defeating for obvious reasons: You’d be flooding the market with duration — increasing supply dramatically. If there isn’t sufficient demand, then what happens to those low yields you were trying to lock in? And that’s to say nothing of market functioning.
Relatedly, Reganti lampooned (literally) the math. “There is some amusement in thinking that the Treasury could change its issuance tactically, with the agility of a corporate treasurer, and have an actual impact on the term structure of its liability portfolio,” he wrote. “Given the constraints on the amount of demand at the long-end of the curve and adhering to a regular and predictable mantra so as not to disturb broader market functioning, it would take the Treasury years to noticeably shift its weighted average maturity even longer.”
Finally, Reganti noted that “if the Treasury had decided to dump duration into the market as the Fed was buying, it would be working at cross purposes with monetary policy.” In other words (and in words no Treasury official, former or current, would ever use): Do we really want to make this Ponzi scheme even sillier than it already is by forcing the Fed to work even harder to engineer the same scarcity?
Reganti summed it up: “If the Treasury embarked on this ‘locking in’ strategy, it could destabilize rate markets, all the while starving those markets of the shorter-duration paper that is critical to the functioning of modern capital markets.” As he put in the title of his blog post, “This isn’t a corporation.”