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.