Introduction

Risk Disclosure

U.S. Treasury Securities and U.S. National Debt

This website is comprised of the following pages:

Background

Boards of investment funds sold to the public should consider robust risk disclosure of U.S. Treasury securities (i.e. Total Public Debt Outstanding – national debt), and the U.S Government’s trillion-dollar plus projected annual budget deficits, its balance sheet liabilities, and the growing present value of unfunded, future liabilities.

At September 30, 2019, federal government debt, liabilities and unfunded obligations less commercial assets was a negative $103.7 trillion, an $8.3 trillion increase from the prior year (JustFacts). This was before the adverse affect of COVID-19, both on debt and GDP, for which the additional costs and the impact to the economy are currently incalculable. These debts and liabilities are funded via U.S. Treasury securities. The U.S. Government is the issuer of U.S. Treasury securities.

Form N-1A, Item 16(b) Description of the Fund and Its Investments and Risks – Investment Strategies and Risks require a Registrant to “describe any investment strategies, including a strategy to invest in a particular type of security used by an investment adviser of the Fund in managing the Fund that are not principal strategies and the risks of those strategies.” In addition, Item 16(d) Temporary Defensive Position states: “if applicable, the types of investments that a Fund may make while assuming a temporary defensive position describes in response to Item 9(b).”

Many Funds invest in, or have the right to invest in, U.S. Treasury securities as a principal investment strategy, as part of an investment strategy, or for cash management, temporary defensive purposes, and for other reasons. Many Funds use boilerplate language to disclose general risks such as credit, issuer, and sovereign debt. Funds investing in U.S. Treasury securities may require more than overly simplified, boilerplate, risk disclosure given the size, uniqueness and significance of U.S. Treasury securities in relation to other securities, financial markets, and to investors.

Three Risk areas discussed below are: 1) the growing size and trajectory of U.S. Treasury securities outstanding and future additional issuances including those for COVID-19, 2) the repeated failure of the U.S. Government (issuer of U.S. Treasury securities) to ever receive an Unmodified (clean) audit opinion on its annual financial statements, and 3) individual retail investors’ and registered financial advisors’ lack of knowledge and discussion of the issuance of U.S. Treasury securities to fund the U.S. national debt, and advisors possible conflict of interest in not discussing it.

1) The unabated growing size and trajectory of U.S. Treasury securities outstanding and future issuances – (Written before COVID-19 – will be updated as numbers become available). U.S. Government Treasury securities outstanding (debt) is larger than the U.S. economy. Pre COVID-19 Debt-to-GDP was approximately 107% and growing. The annual growth of U.S. Government’s Treasury securities issuances to fund annual deficits was approximately 5% and increasing. Annual GDP growth was declining and it was projected to decline from an average of 2% to approximately 1.8% for at least the next decade.

This increasing debt was fueling the U.S. economy and consumer/investor confidence, thus increasing U.S. stock markets valuations and risks. Stock market valuations and GDP have declined and debt is rapidly increasing.

The already massive, and growing, Total Public Debt Outstanding ($23+ trillion), and net current and future, unfunded liabilities ($80+ trillion – to be funded through additional U.S. Treasury securities issuances) create risks to the economy, financial markets, investment funds and to investors.

The president, government departments and government officials have been issuing public statements and warnings that the growing size of U.S. Treasury securities outstanding (debt) is on an unsustainable trajectory, and it is a threat to U.S. economic and/or national security. President Trump said in his 2021 annual budget we are in a “debt crisis.” Again, this was before COVID-19.

Despite the obvious growth in U.S. Treasury securities outstanding and repeated warnings, Congress and the Executive Branch have reduced revenue, increased spending, and thus increased the need for greater amounts of U.S. Treasury securities issuances, thereby increasing risks. They show no visible sign or willingness to seriously address the annual muliti-trillion dollar issuances of U.S. Treasury securities to fund maturing securities, annual deficits and the mounting debt outstanding.

Although U.S. Treasury securities have been often referred to as “Risk-Free Return” some have incorrectly conflated this as “Risk-Free.” It can be said that no security is risk-free.

The current and projected size of U.S. Treasury securities outstanding, frequent auctions and their daily trading volume can have a material impact on the U.S. economy and financial markets, and a systemic impact on world economies and world financial markets, individual securities, and investors should an adverse event(s) occur.

Treasury securities played a, yet to be fully disclosed, material role in causing an adverse event in September 2019. Turmoil resulted when yields in some markets spiked from approximately 2% to approximately 10%. The Federal Reserve did an emergency, unplanned injection of tens of billions into the market and stated they would inject hundreds of billions more.

Given these warnings from credible government organizations, and adverse events, it is reasonably likely another event(s) could occur resulting in a material adverse outcome to investors. As presented in Public Warnings – CBO wrote:

“…. But all else being equal, the higher the debt, the greater the risk of such crisis.”

2) the repeated failure of the U.S. Government (issuer of U.S. Treasury securities) to ever receive an Unmodified (clean) audit opinion on its annual financial statements. Since enactment of the Chief Financial Officers Act of 1990, the U.S. Government has never received an Unmodified (clean) Opinion on its audited annual financial statements. For example, in FY 2019 it once again received a Disclaimer of Opinion. Due to a series of ongoing, substantive internal control weaknesses and other deficiencies the General Accountability Office (independent “Auditor”) could not render an Unmodified (clean) opinion. Thus the Auditor continues to be unable to state the financial statements of the U.S. Government are presented, in all material respects, with the applicable financial reporting framework.

3) individual retail investors and registered financial advisors lack of knowledge and discussion of the U.S. national debt, and advisors possible conflict of interest in discussing it – findings from recent nationwide surveys of retail investors and advisors show that despite self-identifying as being knowledgeable or somewhat knowledgeable about the U.S. national debt (U.S. Treasury securities issuances) investors and advisors are not knowledgable about the debt, they do not often discuss it, yet they are both concerned about it. Also, a majority of advisors surveyed acknowledged that their firms earn revenue off of U.S. Treasury securities (the debt) and if their clients had a better understanding about the debt (U.S. Treasury securities) it may adversely impact consumer/investor confidence and the financial markets. This would adversely impact asset values. Most advisors generate significant levels of their compensation based on asset values.

Prudent Man – Each point above is a risk “red flags.” A single red flag may be explained or rationalized away to avoid addressing the underlying issue or satisfying a self-interest. Multiple, ongoing, substantive, public red flags are virtually impossible for a “Prudent Man” to ignore.

Would a “Prudent Man” (Board) conclude it appropriate not to disclose the risks of U.S. Treasury securities knowing the:

unabated trajectory of annual deficits, debt outstanding and liabilities,
unsustainable fiscal path,
public warnings,
risks,
knowledge and perceptions of individual retail investors and registered financial advisors,
projected slowing down of GDP growth with a growing debt burden,
partisanship of the two major political parties with each adding to the risk while neither taking serious action to address the deficits and debt,
the President’s attempted politicalization of the Federal Reserve,
the unpredictability of the President, who some might say has not demonstrated risk management skills,
and their individual and cumulative effects on the financial markets, Funds, and investors?

If Boards of investment funds sold to the public currently do not disclosure risks related to the Issuer of U.S. Treasury securities or U.S. Treasury securities, or securities with a U.S. Government guarantee, securities which could be adversely affected by U.S. Treasury securities, or disclose the massive and growing U.S. national debt they may want to consider reviewing the facts and consider what their investors should know to enable them make an informed investment decision.

If a Board deems it prudent to disclose, they should consider disclosure in their next post-effective amendment filing since time will, more than likely, increase risk and not decrease it. If a Fund currently discloses the issues and risks, they may want to consider augmenting or updating the disclosure.

The intended purpose of this website is to provide facts about the financial position and risks of the Issuer, and of U.S. Treasury securities, and to advocate for prospectus risk disclosure. It is intended to present high-level information so the reader can focus on the big picture – so they can see the forest through the trees.

This website is not presented as an original work product. Its content is primarily sourced from organizations and individuals the website creator considers credible with respect to their content herein. In addition to government sources, non-government sources include: the Committee for a Responsible Federal Budget, Peter G. Peterson Foundation, The Concord Coalition, Just Facts, U.S. Government Spending, Compact for America, The Balance and others.

Unless otherwise stated, page and pdf references are to FY18 Financial Report of the United States Government . Footnotes and references that may have been inadvertently missed will be included once pointed out. The website will be updated for recently issued FY19 Financial Report.

This website is not intended to: 1) duplicate the work product or efforts of others, 2) provide charts, graphs, or exhaustive financial analysis – others do a much better job, or 3) stimulate a debate on economic theory since economists, some partisan, may drag us down into the weeds, or agree or disagree on the importance of facts/data points and future implications. Likely, some will have opposing views.

While not intending to disparage the economic profession, bear in mind what Joan Robinson, a noted British Economist, said:

“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

Comments, questions and suggestions for additions, deletions and modifications may be emailed via the Contact US page or by calling 914-815-1133.