Doug Noland Interview: "In The Next Crisis The Fed's Balance Sheet Will Hit $10 Trillion"

Tyler Durden's picture

The global bubble that central banks have kept afloat for the past eight years, based on sovereign and government debt, as well as central bank credit, runs right to the heart of the monetary system. That, according to Doug Noland, means we are in for a bigger crash and deeper dislocation when it all comes to an end, and Noland has a good idea which will be the first central bank to crack.

Doug Noland of McAlvany Wealth Management has a long history in the hedge fund industry as a short seller, having worked with Gordon Ringoen and Bill Fleckenstein among others, but is perhaps best known for his ability to spot bubbles ahead of the crowd.

Studying credit data, he was initially concerned about the balance sheet expansion of Freddie and Fannie in the early 90s and started writing about the mortgage finance bubble in 2002. He also called the government finance bubble in April 2009.

In an interview with Real Vision TV, Noland said the current market bubble is a dangerous place to be and there has been a major shift from previous boom bust scenarios, where the impact has been more limited. He also examines how support from central banks has led the markets to ignore the risk - and what happens when that support is taken away.


Deeply Systemic Bubble – Consequences Unknown

“This bubble is deeply systemic,” he said “I thought the bubble burst in '08. I thought we were going into another depression. I wrote as much. Well, in early '09, I had to come out and say-- I started warning about the potential for what I called back in, I think it was April 2009, the global government finance bubble.

“I think we're late, but this is a different type of a bubble because it's global. Very different dynamics. The other thing is it's gone to the heart of money and credit. Right now this bubble is being fed by government debt, sovereign debt, and central bank credit. Back when WorldCom debt and Telecom debt was driving the technology bubble, in my mind that can only go on so long. People will have enough of that junk debt and that will end that cycle.

“The mortgage finance bubble was a little different. That was more money-like. Moneyness of credit is a term I used during that period. People had insatiable demand for GSE credit, insatiable demand for AAA rated mortgage backed securities. That bubble could go much longer, as it did, go longer, have a much deeper impact on economic structure.

“This bubble, again, it's gone to the heart and soul of money and credit. And right now central bankers are basically doing everything to keep it going. So this one, we're what, eight years into it? I think we're really late, but we don't know to what extent central bankers will continue to try to sustain the backdrop.”

* * *

Which Central Bank Domino Will Fall First

Although the markets are ignoring the risk and continuing to move higher, cracks are starting to appear in the global environment, Noland said. As stresses and strains become evident among central banks, the discussion is turning to which will be the first of the dominos to fall, because the greater concern is that once faith goes in one central bank, the ripple effect will be fast and fatal.

“There’s a lot of complacency here in this country because the Fed postponed its QE, and the bull market just continued and everything looked fine,” Noland said. “Well part of the reason they were able to do that is because of the massive QE globally and the flow of finance into the US from QE abroad.

“But right now, it seems like the Bank of Japan is in the crosshairs. They've tried to devalue their currency, that didn't work. Their latest spin is to try to manipulate their yield curve, and that certainly hasn't worked so far. So I think the Bank of Japan is in the forefront of a credibility crisis. I think in Europe, the ECB is only one step behind. Their QE has certainly destabilized finance throughout Europe and is playing a major role in the European bank issues right now.

* * *

Danger, Desperation and a $10 Trillion Balance Sheet

All the policy measures in play now are reactive, with helicopter money and fiscal stimulus the latest ideas on the table and we’re now hearing the Fed wants the ability to buy equities. With the Fed looking at a balance sheet of around $10 trillion, Nolan said things are starting to look desperate.

“I've often contemplated the size of the Fed's balance sheet, and I don't think $10 trillion is ridiculous,” he said. “I said that before and it sounded outrageous. I think the next crisis, the next serious de-risk and de-leveraging, the Fed's balance sheet is going to probably have to double again. Larry Summers was out also saying there's a role for buying-- continuous buying of stocks and corporate debt by central bankers. Yeah. They're desperate. It's a global bubble. And the markets believe they'll do anything to keep it going, and that's just a very dangerous place to be.“

* * *

Markets Believe Central Banks Will Save Them but Cracks Mean Caution

Markets are convinced that central bankers will not allow an institution like Deutsche Bank to fail, Noland said, but indications of stress can be seen in the currency swaps market. “You don't hardly even see it in Deutsche Bank senior CDS because the perception is there's no way they're going to allow this,” he said. “Their CoCo bonds and some of the more mezzanine debt, yeah, that's under pressure. But in the market there is confidence that they will not allow a crisis with that institution.”

“To me there are enough cracks out there, there are enough cracks to be extremely cautious. For me, I would not be exposed to global securities markets, I would not be. We're in the environment now where to survive, people have had to ignore risk. And they're ignoring it today as much as ever. I don't want to be in that situation because the risks are so high. I don't want to be in the market when everyone else comes to realize, recognize that there are risks.”

* * *

The Short Opportunity of a Lifetime

For now, Noland is in the process of putting together a new venture with David McAlvany, which he said is exciting and because he thinks “this is the opportunity of a lifetime on the short side. But I'm happy to be watching from the sidelines right now,” he said, with some ferocious tops in chaotic markets.

“I think it's time to be risk averse. I'm a big fan of the precious metals, I think they're investable. To me, marketable securities, they're not investable to me because I don't know what the risk is. And I know the market wants to ignore the risk. What do we do if central bankers back away? What is the risk profile for economies, for the financial markets?

“I was very concerned back in 2007. I was very concerned with the consequences of this bubble imploding. I'm much more worried today. In 2007, I wasn't worried about the world. I wasn't worried about geopolitical. And I never want to be part of the lunatic fringe, but if people aren't concerned about geopolitics right now, they're not paying attention.

* * *

A Destructive Bubble Squandering Wealth

When this particular episode ends and people really understand how much money has been spent propping up a broken system, the divisions in society and mistrust of governments evident in the past year could move to more extreme levels.

“For me, bubbles are always about a redistribution and a destruction of wealth. During the bubble, there is perceived wealth that keeps the system inflating. People believe there's all this wealth and securities and asset prices, etc. And they find out when the bubble bursts that a lot of that wealth was actually squandered. The problem with this global government finance bubble-- we'll call it that-- is this is a redistribution of wealth globally.

“And this is not going to sit well. Right now, global central bankers are all working together to try to keep the global financial system liquid, levitated. Politicians generally are cooperating, but you can see society starting to fray here. This is not working right. This is archaic, but this is the consequence of unsound money. History tells us this, right? Society here in the US, people don't trust their institutions, they don't trust their politicians, they don't trust Wall Street, they don't trust the banks. That's not a good place to be.”

Watch the full interview on Real Vision TV, one of the best sources of in-depth interviews with many of the worlds most respected investors, analysts, investment strategists and geopolitical analysts.  No ads, no bias, no bullshit.  Try it free for 7 days.

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Miskondukt's picture

How can we be sure. The Fed resfuses, adamently, any kind of audit. Sure, it let us see their bailout finances, but what about the whole shibang?!

jmack's picture

If someone refuses transparency, assume the worst.

johngaltfla's picture

Doug Noland is a fucking pollyana.

Soul Glow's picture

Conservative estamate.  It's likely they will need to use the same percent increase which means the balance sheet would approach $17 trillion.

johngaltfla's picture

Try $40 trillion in "current" USD. They will have to issue new currency or worse trash this one to cover all the debt. We will go full Zimbabwe before defaulting, watch and see.

Soul Glow's picture

Well, if the Fed tries to do it it will cause hyperinflation, the IMF will have to unleash SDRs to every private bank and world treasury and gold will sky rocket to $10k almost over night.  The lasting affect will see gold at $20k, at least.

Delving Eye's picture

Another advertorial for PMs.

Troy Ounce's picture


If Doug Noland talks, I listen!

MalteseFalcon's picture

I used to read Nolan a long time ago when the concept of bubbles was new and dangerous sounding.

He was wise then.

But it's clear we can live with bubbles for a very long time and if you short them, you get killed.

Nolan really has no idea when or if this bubble will implode.

So where's the value?

$10 trillion is a nice, round scary number, but BFD.

PlayMoney's picture

10 trillion........and thats just the first month

// //
Davidduke2000's picture

In counterfeit money . 

blindman's picture

relax, every four years they beg for your vote
in public. then, they arrest you. in four years
minus the time for litigation, you can request clemency
redress or vote for some other o bama nation. does
it get better than that in a-merica?
i am sick, i know.

wisehiney's picture

Hey Noland, ain't gonna happen.

Shit's gonna blow long before.

Mini-Me's picture

Central banking not only doesn't work, it CAN'T work.  Economic central planning fails every time it's tried.

End the Fed.

Bopper09's picture

What?  You mean printing endless amounts of 'money', backed by debt, to cover past debt, will fail?  Huh.  But the people on teevee says things are great.

hedgiex's picture

When has this guy ever been considered by his peers in the HF Industry to have called the 08 GFC ? Now again just jumping on the meme of meltdowns (Who do not know).  Go pay your 2/20 to these "echos" 

NobodyNowhere's picture

Bernanke once said (while answering concerns regarding debt), "US is a very wealthy country."  To me it was like a vulture watching a sick man in the wilderness.

Billy Shears's picture

So, that will put the S&P at around 4500, give or take 3 or 400 points, right?

Soul Glow's picture

Here lies the rub.  Increasing the asset base will add inflation, increasing prices which is the point of neo-keynesian economics, yet what they don't ever price in is that wages have not increased and neither have the tax reciepts.  This is fantastic for the rich who already have millions stashed in stocks, bonds, and cash, yet there would be a point where there isn't enough spending to continue the charade.  This would result in a loss of faith in the system and hyper inflation of the currency.  It's bound to happen and when the next crisis hits and the Fed is forced to take rates negative in order to expand their balance sheet to accompany the collapse it should be the final nail in the neo-keynesian system.

Seer's picture

A loss of faith is one thing.  An actual loss of millions of participants is another!  When there's nothing in it for the bulk of humanity then the game is pretty much over.  It's only a matter of time: the rising tide is sinking nearly all boats!

JailBanksters's picture

10 Trillion of what ?

If it is 10 Trillion of beans at least that would be worth a hill of beans.


The Duke of New York A No.1's picture

Just a couple more hard-drives at the FED to keep track of the extra data.

Trucker Glock's picture

Only $10T?  I'd have thought higher.

yogibear's picture

Zimbabwe econimics, Federal Reserve style.

cognitive dissident's picture

as a stacker I say "BRING IT BITCHES"


yogibear's picture

Yep, Fed's policy is ever more QE. More printing until it blow up the currency.

DrZipp's picture

Just stop the trillion dollar fuckery already and go full quadzillion you pussies for fucks sake.

pparalegal's picture

Noland just told us why Trump scares the crap out of the rulers and their leashed pet politicians of both stripes.

TnAndy's picture

10 trillion  or 100 what ?  Unless SOMEONE (important.....not us piss ants) calls "bullshit",  does it really mean anything ?

In a world selling negative interest bonds, or fifty year bonds, or bonds from a govt with 20 trillion admitted debt and probably 100 trillion promised, AND DAMN FOOLS STILL BUYING ALL OF IT, what really matters any more ??

billhicks's picture

It's all about confidence. That's all the holds up the system when the system is fiat-money-debt. Trump and Brexit have started the avalanche it's just happening in slow motion right now...

BetweenThe Coasts's picture

Confidence is the intersection between greed and fear. Could be more like a waterfall event than an avalanche though. This is the big one though as confidence in government is at the heart of everything else. The optomistic hope that this time is the transition between a debt based model of economic activity to an equity based model but it could just as easily be transition to 400 years of Dark Ages as eveything is lost. Since bond markets outsize every other "investment", if only a few percent of debt capital switches to equities or gold or real estate that market will meltup. When confidence turns panic will chainreact through the currencies. With no personal crystal ball to go by I'll take Martin Armstrong who says the $ will be the last to fall, as early as 2018, more like 2020. China will be the financial center of the universe after that but will that be of an interlinked world or a few hundred kilometers surounding Beijing?

Iconoclast421's picture

Damn right the Fed balance sheet will hit $10 trillion. And it will be Clinton cronies who mop up that extra $6 trillion. You think they wont spend a few billion now to steal an election with $6 trillion in Fed funny money at stake?