Doug Noland: There Will Be No Way Out When This Market Bubble Bursts

This week Doug Noland joins the podcast to discuss what he refers to as the "granddaddy of all bubbles".

Noland, a 30-year market analyst and specialist in credit cycles, currently works at McAlvany Wealth Management and is well known for his prior 16-year stint helping manage the Prudent Bear Fund.

He certainly shares our views that prices in nearly every financial asset class have become remarkably distorted due to central bank intervention, first with Greenspan's actions to backstop the markets in the late-1980's, and more recently (and more egregiously) with the combined central banking cartel's massive and sustained liquidity injections in the years following the Great Financial Crisis.

All of which has blown the biggest inter-connected set of asset price bubbles the world has ever seen.

Noland foresees tremendous losses as inevitable, as the central banks lose control of the monstrosity they have created:

This is the granddaddy of all bubbles. We are at the end a long cycle where the bubble has reached the heart of money and credit.

There will be no way out. We're not going to get enough private credit growth to reflate things when this bubble bursts. It's going to have to come from central bank credit; it's going to have to come from sovereign debt.

When this bubble bursts, it will shock people how far the central banks will have to expand their balance sheet just to accommodate the deleveraging in the system. And they won't really be able to add new liquidity to the market; they're just going to allow the transfer of leveraged positions from the leveraged players onto the central bank balance sheets.

When you get to that point, when the market sees that transfer occurring, I predict there's going to be fear of long-term financial instruments. We'll see rising yields. That's when things will become problematic.

There will be losses. Of this global bubble, I think European debt is about the most conspicuous. Sure, European junk debt is nuts, too. It currently trades at 2%. Why? Because the ECB is buying large amounts of corporate debt. The ECB has kept rates either at 0% or negative. The perception is that the ECB will keep those markets liquid.

But look at Italy. It's rapidly approaching 135% in terms of government debt to GDP. That debt will not get paid back. But yet, the market is willing hold that debt at 1.7%. This is debt that has traded at over a 7% yield back in 2012. But here it is today at 1.7%. I mean, Europe is just grossly mispricing its huge debt market. The excesses that have unfolded in European debt across the board are just staggering.

So when we get to that point when the central banks begin aggressively expanding their balance sheets (again) but the bond markets are not happy about it, then the central banks will finally have to decide if they want to continue to inflate or if they're going to focus on trying to keep market yields down. This will be a very, very difficult situation for central bankers when it unfolds.

Click the play button below to listen to Chris' interview with Doug Noland (54m:31s).

This is a companion discussion topic for the original entry at

It would be easier to read the transcript if it was not all in bold.

Obviously, there's been a shift in our thinking:

Self-control can be excessive. Indeed, excessive self-control is as prevalent as insufficient self-control. Excessive self-control is evident in the tendency to spend less today than is ideal, driving tightwads to extremes beyond frugality. The prospect of spending money inflicts emotional pain on tightwads even when it might be in their interest to spend.

Thank you for this; content at its finest!
Interesting to hear that Chris, too, is feeling disheartened by gold’s failure to crawl out of its never-ending bear market in spite of, well, everything. Between the 5- 10% annual returns bog-standard 60/40 "stocks’n’bonds"TM portfolios have been seeing over recent years and now the crypto-currency mania I have never felt so close to capitulation on PMs. But, given what the likes of Chris and Doug Noland have to say surely fundamentals will reassert themselves…eventually. It would be a fine thing to live to see…
BTW, do others here read the Surplus Energy Economics blog done by Tim Morgan? His work on ECoC or energy cost of energy aligns neatly with the work of Chris, Nafeez Ahmed, Gail Tverberg and others from the shamefully small pool of analysts who have grokked the energy/economy (and everything else) connection. I think he would make a terrific guest for an interview.

I had never heard of Mr. Money Mustache (MMM) before, but I’ve given his site a cursory read since coming across it in one of Chris’s posts. The guy and his wife retired at about age 30 if I remember correctly. He did it by spending very little money and saving a ton. I bet he’s so miserable now that he’s in his mid 40s and been “retired” for 12 years. Yup, I bet he has a ton of “emotional pain” that he’s carrying from the days of very limited spending.
I, for one, could figure out something to do with my spare time. Perhaps I’d work more on my food forest. Maybe I’d take a permaculture class and design food forests for others, pro bono. I could work with an instutition to experiment with a larger permaculture setup, like maybe a church with a large lot and in the process teach young people about permaculture. I could help sequester carbon by planting wood perennials while at the same time building carbon in the soil. I’d save gas and CO2 emissions because I wouldn’t have to drive anywhere I didn’t want to. I could help shovel elderly neighbors driveways/sidewalks, for free. The list goes on and on and on.
All of that due to “excessive self control”. What a pity it would be that the banks would miss out on all the profits from me not borrowing money for this that and the other. Damn that self control, it could destroy the country…

I’ve read Doug Noland’s Credit Bubble Bulletins (CBB) since the year 2000! No kidding. 17 years. Amazing! I’ve learned so much from them — both his insightful commentary and the excerpts he posts from news stories he picks up each week. It’s kind of a 1-stop shop for financial news and highlights each week. If I read nothing else, I read his CBB and John Hussman’s formerly weekly — now monthly — comments.
I have tried with colleagues to argue the intellectual case for the bubble thesis that we read about in Doug’s CBB, John Hussman’s commentary and here at Peak Prosperity, where I think there have been 2 “crash alerts” since 2013 (IIRC) and the market is up, I don’t know, 40% since then? Recent leadership at a former employer wanted nothing to do with this kind of thinking and considered it part of the looney fringe of the business. In a way I think they held it against me, that I’d try to voice these concerns.
In a way, evidence (so far anyway, and it’s sure not over until it’s over, but in markets it’s never over! LOL) bears out their skepticism. Despite years of bearish prophecies and jeremiads — by many people around the industry, not just those I noted above and not just Doug — it’s hard to define just what will “pop” the alleged bubble. The housing bust in 07/08/09 was quite specific and identifiable as a phenomenon — you could say, as Doug did, that mortgage finance had gone nuts. The tech bust in 01/02 likewise had a pretty clear and clean identity. In both cases, calling the timing of the bust was a matter of luck but the bubble itself could be pretty easy to describe.
Today, what does it mean to be in a global bubble? The Everything Bubble? It’s a strange idea for sure when Central Banks backstop risky bets that went bad, and when saving markets is idealogically and morally equivalent — in the peculiar ethical reasoning of contemporary central banking — to saving “the economy” for the widows and oprhans among us. Bailing out markets becomes an act of virtue for the good of the group. In that regime, what is an everything bubble and how does it pop? What happens to pop it and what happens when it does?
This is a very difficult, complex analysis. It may be that the pain and misery across flyover America is a slow pop and that we won’t see any kind of fast pop — like the South Sea or Tulip bubbles. As Chris says, bubble popping transfers claims to real wealth — but the things that make the wealth remain there before and after, all the buildings, trees, gardens, farms, animals, etc. etc. They don’t go anywhere, but who owns them changes. I’d add one more idea to the definition of real wealth and that’s access to social cooperation. Even so called resources and commodities can’t be useful unless forms of social cooperation exist to turn them into socially useful products. This is a bit abstract, but corporations are today’s dominant cooperational structures, similar to tribal groups in non-monetary societies. So by “saving the system” the Central Banks are saving the dominant social cooperational structures from collapse. The CBs then argue they save society, since society can’t function as we know it without these structures. And yet the support of these structures — along with their ability to increase their dominance — inherently produces winners and losers. The losers may be the evidence of the slow pop. This topic deserves a longer form treatment than I have time for here and I may not be makiing complete sense.
Bubbles aren’t frequent enough to lend themsevles (no pun intended) to rigorous classical statistical analysis. There have only been a few interest rate supercycles since the Civil War. There haven’t been that many market cycles. In classical statistics, the standard error of any estimate is high if the sample size is low A high standard error means an imprecise estmate. If you add the idea of free will, human nature and political evolutions, it becomes very hard to make estimates about anything related to markets or economies. This is so trivial I’m almost embarrased to note it, I sure as heck didn’t invent this. But when we call things Bubbles, I think we need some more precision as to just what it is we’re talking about. No knock at all on the integrity that everyone I’ve noted here displays in all their thinking. I respect and appreciate it and have learned a lot from everyone I’ve noted. But the English scientist JB Haldane famously said “the universe is not only stranger than we suppose but stranger than we can suppose.” Maybe economies and markets are too. After all, as Chris has said (and me too elsewhere) money is nothing more or less than a form of social imagination. It’s not a Newtonian object that obeys the laws of classical physics. It’s something that is created in minds and imaginations and obeys those laws. Those are strange laws. And any presumption about their innate natural structure is tenuous at best — at least given our current understanding of group psychology and the analysis of human identity and consciousness. It maybe that the current economic superstructure will be far more enduring and far more resistant to any change that we would perhaps otherwise believe. And that the bubble this time may be an everywhere bubble in addition to an everything bubble, and it pops not all at once, but in places one by one, life by life and job by job. So that it’s popping is a slow and silent burn and nearly invisible.

…is self control’s cousin
what you stock up over time
seems to make a difference

Sorry, but I can’t resist it: Stock control = Shock control

Prices for everything are driven in part by belief. In consumer goods the belief that a particular brand is special will drive up demand and correspondingly price. With markets belief that the economy is healthy and will improve further (or that taxes and regulations will go down) has a similar effect.
The control of the media by the elites makes belief that much easier to manipulate. In the recent crashes the elites didn’t think things were that bad so they didn’t do much to actively counter peoples perceptions. It appears they do recognize the current predicament and have shifted the PR machine into overdrive.

Agreed on Tim Morgan - lots of work on EROEI, moral hazard and more. He would be a great guest.

This was a terrific interview. I have followed Doug Noland for years on Safehaven.

His analysis is is top-notch in terms of the mechanics of the financial markets - the cause and effect, the dynamics, the “moneyness” or otherwise of the units in which transactions are done but he never gets close to the ultimate cause of manias that lead to destructive bubbles. We call them bubbles because they do what bubbles do - they explode.

The tendency of such analysis is towards blame - it is the fault of Wall St or Central bankers or politicians. Of course they play a very large role in manias because they are at the top of the power pyramid. Analysis often mentions sentiment, mood, animal spirits, confidence, pessimism, certainty, uncertainty - all states of mind - without ever coming to grips with the idea that it is these states of mind in aggregate that drive human endeavour, politics, belief systems, fashion, popular music and, indeed, everything that makes up a society.

I don’t know whether Chris has ever interviewed Robert Prechter but now would be an apposite time. He recently published 2 books on his theory of socionomics which bring together 30+ years of his and others work. I recommend “Socionomic Studies of Society and Culture” as a brilliant introduction to the field of socionomics.

Conventional market analysis tends to be linear - it looks for triggers that lead markets to peak or to bottom. Most times there is no particular trigger but analysts and journalists are very good at rationalizing events afterwards. There are always plenty of reasons but, in reality, they are effects rather than causes.

Doug has been writing about bubbles for perhaps 20 years. Central banks have been taking evasive action - at least since 1998. There were no shortages of potential triggers for downturns to happen at any time during that period. There was 34 months of bear market from early 2000 and 17 months of “global financial crisis” from October 2007. Neither of these bear markets were crashes, although both had days that seemed like a crash. The collapse of Bear Stearns and Lehman Brothers happened almost a year after the market topped in 2007. My point is that the market is a very good indicator of what is to come. People, in aggregate, buy when they are feeling good and confident and sell when they don’t feel so frisky. Building a business takes a lot longer. More businesses get started, money spent, employees taken on etc during times when the mood is confident but it takes time for the economic effects ro be seen. Buying and selling in the markets is such an instant transaction and reflects the mood in real time.

Right now, we have all the conditions for a crash but the same conditions (only slightly less worse) have been in place for several years. Doug has been talking “bubble dynamics” for a long time. It will happen when it happens. Elliott Waves, which can give a very good indication of where we are in a bull or a bear market cycle, have just kept extending to the point of being very hard to read in real time.

No doubt that cheap money has helped enable the countless short squeezes too but the side effects keep mounting. The Fed is raising rates but if you examine their timing against market rates you will see that the Fed is part of the herd too. They follow market rates most of the time. Members of the FOMC have no special insight. They are subject to the phases of mood that affect all human actions. They will do what the herd is doing and it would appear that rates have reached a long term bottom.

I think Doug makes a very important point when Chris asks him about his thoughts on natural limits. He mentions the cost of technology and ecological damage in China. These questions have been asked for some time now on this forum but these ideas are gaining strength. That is to say the mood is changing. No one talks about costs in the middle of a bull market.

Prechter has speculated that the 3 steps forward and 2 steps backward nature of human progression (as any Elliott waver understands from index charts) is nature’s way of recalibrating.

This is going to be one hell of a recalibration. It surprises me that Doug thinks gold will do extremely well. The world is so leveraged right now that if we have a crash, the first thing that will be sold is gold to cover the margin calls. However, if assets prices fall harder than gold does then the purchasing power of gold will increase. In the longer term I think gold is a very good store of value and a reliable indicator of real value.

One of the most interesting charts is that of the Dow 30 in terms of gold. It topped in 1999 and has made only a modest recovery. It suggests that the real wealth or purchasing power of the Dow at the time peaked then and in real terms it has gone nowhere (despite more than doubling in nominal terms) over the last 18 years. That would also help to explain the strange mixture of outright confidence and outright pessimism that has been displayed from time to time over that period and especially over the last 8 years.

Craazyman, in the comments, touches on a very interesting subject - the idea that the co-operational structures of today are the global corporations. That may be true but being global they do not appear to have any particular allegiance to anything but their bottom line. Just think of the billions that Apple has in low tax havens around the world while it borrows to buy back its shares.

Their chief advantage appears to be that they bring the price of everything down through efficiency gains. It is arguable that these efficiency gains are not worth much if the cost to taxpayers of bailing them out is taken into account. QE and all the financial shenanigans over the last 8 years has resulted in an enormous cost for most people who are up to their ears in debt. The system has not been saved. Quite the opposite as we are more vulnerable than ever to economic disaster.

The other side effect of scale and “efficiency” is that we are now dependent on a sort of economic monoculture with no inbuilt redundancy. Perhaps next time round we may take a closer look at the way nature does things. Nature is inefficient in the sense that it is profligate and wasteful but that waste is re-cycled with great efficiency. Nature exploits every environmental niche it can while we try to scale everything into as few “efficient” models that anti-trust law will countenance but we leave ourselves extremely vulnerable. It is easy to blame Wall St and politicians for the world we live in but we are the end users who demand that prices keep dropping. Ironically, that is bound to happen as asset prices get crushed in a crash and deflation destroys our happy imaginings. Nature, on the other hand, has extreme diversity which is the greatest insurance policy for survival.