Washington, DC -- (ReleaseWire) -- 03/28/2016 --DAWN BENNETT: Doug Noland is the publisher of the Credit Bubble Bulletin, which he begun publishing in the 90s and in the latest issue he wrote about the broadening credit slowdown that would lead to weaker U.S. GDP and corporate earnings. Doug, welcome back to Financial Myth Busting.
DOUG NOLAND: Hi, Dawn. Thanks so much for having me back.
BENNETT: This year, we've gotten off to a pretty rocky start, with markets tumbling and the biggest sell-off in history. But after the first three weeks of March, now the Dow and the S&P have recovered almost all of their losses. Are we out of the woods, or is there something else the financial media isn't picking up on, or even the financial institutions, namely that the move back up is being driven by central banks?
NOLAND: No, things are great. Everything's resolved. I wish we were so fortunate, but...
BENNETT: (Laughs) Okay, interview over. We're lucky. That's it; done. We can both go home!
NOLAND: Well, it was just a few weeks ago that the markets were in the midst of a crisis of confidence in central banking. It appeared that the ECB was out of bullets, the Fed was going to continue to raise rates, the markets were unwinding because of this crisis of confidence. Well, what do you know? Over the last few weeks, there's been a concerted effort by global policy makers. We've seen dramatic steps taken by the Chinese to stimulate their credit system and to stabilize their currency. We saw Draghi and the ECB reverse course and actually increase QE by almost a third, and said that they were going to start buying corporate debt and do other things; basically throwing the kitchen sink at this. And the Fed came out, basically, and they're in no hurry to even begin to normalize interest rates. So we have this market environment that's very unstable. When the markets are nervous, there's tremendous selling that comes across the globe. But then when central bankers get the markets reversed and you have these short squeezes, and then everybody jumps on board the rally; folks can't miss the rally. So you get this dramatic volatility, and the markets have recovered over recent weeks. But no, we're not out of the woods, by any stretch.
BENNETT: Do you think it's desperation on the part of the ECB and the Fed? Janet Yellen looked like she was just dancing and waffling during the entire conference last week.
NOLAND: Right, and there's been some speculation that there was this secret Shanghai accord last month at the G20 meeting, you know, that there would be concerted efforts to stimulate. Well, in my mind, these concerted efforts go back at least to 2012, when you had the European financial crisis that was on the verge of a global financial crisis. So I think these central banks are just lost and basically trying to support the bubble. Because whenever the markets start to unwind, it unwinds so quickly that they panic, but then their policy response is just to lead the markets to inflate again. They're basically trapped in these bubbles of their own making, and really losing credibility along the line, with the waffling back and forth at policy making. And that's by the ECB and certainly by the Yellen Fed.
BENNETT: Doug, I want to get your opinion on something. I have a sound bite, and it's an interview with the Dallas Federal Reserve, Richard Fisher, on CNBC's Squawk on the Street. And I wanted to get your take on this; take a listen.
HOST: Richard, you were there.
FISHER: I was there.
HOST: Are you taking credit for this nearly 200% rally on the S&P since then?
FISHER: (Laughs) It's actually 2.6 since it bottomed in March, 2009. By that point, the Federal Reserve obviously had cut rates to zero, but also had doubled its footings to 1.75 trillion, first round of QE, and that was the beginning of the take-off. So I think the congratulations should really go to Ben Bernanke and his committee. I had the privilege of serving on that committee, but it obviously ignited a rally that has continued to this day.
HOST: But really, since the end of QE3, back in 2014, it hasn't been quite as robust. I know you've warned about the efficacy of the last QE.
FISHER: Right. I voted against QE3.
HOST: But do you think that central banks still have the power behind the stock market?
FISHER: I think that power is running its course. I'd like to say that we injected cocaine and heroin into the system, and now we're maintaining on Ritalin, how's that?
BENNETT: Isn't that awful? The Dallas Federal Reserve, Fisher, comparing the liquidity injections to cocaine and heroin. I mean, that just leads to addiction. It's just insane, some of the things that they're saying. And the fact that even he's saying that he thinks Bernanke deserves all the credit; you almost wonder if he wants to get a job at Citadel with Bernanke.
NOLAND: It wouldn't surprise me. And Dawn, this really goes back. Throughout history, they've called it inflationism. The current variety is more sophisticated. The central banks inject liquidity into the markets. And it's been almost seven years ago, in my blog, that I warned that the crisis response to the collapse of the mortgage finance bubble could lead to what I referred to as the global government finance bubble, a bubble driven by these enormous deficits and this monetization, this money printing by central banks. But I never imagined it would go to this extreme. The problem with inflationism, things always look good when you start to print some money—it helps the economy, it can help asset prices—but you can't rein it in. And you do become addicted, because you elevate price levels, and if you don't continue to throw purchasing power, new liquidity, new credit at the system, these prices will start to deflate. And that's where they are; they're trapped right now.
BENNETT: They are. I mean, they seem to be, like Fisher, issuing so many statements lately, trying to reassure everybody out there that they'll take whatever measures are necessary to keep the global economy from going to tatters. But I think the volatility and lack of true volume is telling everybody that the markets and the investors are losing faith in the healing power of central banks, don't you?
NOLAND: Yeah, exactly. And I think what we're seeing right now, we're seeing some major losses in the hedge fund community. So we could have outflows there, which leads to de-risking, de-leveraging. I think, importantly, we have a lot of volatility, unpredictability in currency markets, which again, I think is going to lead to a lot of unwind of leverage. I believe the global bubble has burst, where you have de-risking, de-leveraging, less liquidity, and weakening asset prices, and that feeds on itself. But then again, we can have these short squeezes and these rallies, and during these rallies, it looks like liquidity abundance. But now we'll just have to wait for the next risk-off and see how quickly again markets become illiquid, because I think they'll become illiquid very quickly.
BENNETT: Oh, absolutely. I think that the listeners need to know that these hedge funds out there, and even mutual funds and money managers, they're getting obliterated. Nobody's making any money. But when you see the markets go up like this and you hear Richard Fisher laughing on CNBC, like everything is a party, you've got to wonder who's on Ritalin .
NOLAND: Well, if you sit back and look at it, we know now there's a $3 trillion ETF industry. And this is basically money that just goes into these funds to play the market; it's trend following. The hedge fund industry is $3 trillion. And you have this massive derivatives industry complex that basically acts as risk insurance, where people think they can buy insurance to protect against a decline. Well, when the markets start to go down, the hedge funds are selling, the ETFs are selling, people are pulling money out of markets, and those that sold that risk insurance have to sell. So it really, unfortunately, is an accident in the making.
BENNETT: What do you see as the next trouble spot to flare up? It just seems like every major economic sector, both here and abroad, is going to these heroic lengths in order to keep up appearances and stave off a collapse one more day, one more week. And we literally are down to that. Is there any sector that you see as close to breaking up or at a breaking point?
NOLAND: Well, we know that there's a lot of pressure, obviously, on commodities and energy. There's a lot of overextended balance sheets; there's going to be a lot of bad debt that comes out of this. There's been a temporary reprieve with the rally in oil. On a global basis, China is very concerning to me. Just a week ago, Chinese policy makers basically said that they were going to target almost $3 trillion worth of credit growth this year. And I liken that to if U.S. policy makers back in 2007, during the height of that bubble, would've said, 'Okay, we're going to make sure credit grows again next year, with all that risky mortgage debt.' So the Chinese have a real problem in their credit system, and at the same time, they're trying to stabilize their currency, because they're having a lot of capital outflows. So emerging markets, historically, that's their problem. They can't just print money, because it'll lead to a currency collapse. So I look at China as a potential accident to occur. And also we're seeing just a political instability; we're seeing it domestically and we're seeing it internationally. I think that's another major risk to global markets, just this instability. And again, that comes from these bubbles, because bubbles really are just redistribution of wealth, and at the end of the day, that leads to a lot of problems.
BENNETT: You know, you mentioned oil, and this rally that began in mid-February. I think it's almost certainly going to fall apart. It seems to be very similar to that false rally that we had back in March and June of 2015. And in both cases, it was largely just because of the press, right? You know, the storage volumes are too large and the demand is still too weak in order to sustain these prices. And I'm wondering if Americans get caught up in this. And again, I don't know if they get it, that it's almost head fakery.
NOLAND: Yeah, and the most vicious rallies are these bear market rallies, because you get a lot of short positions and derivatives. So those can be dramatic, and we've seen that in energy. I'm with you; I think it's short term, because there's so much pressure on the suppliers throughout the world to keep pumping, to generate cash flows, to try to pay off debt. Although I'll say, Dawn, the dollar has started to weaken. So if the dollar really does weaken here, that will give some support to commodity prices, because globally they're priced to dollars. So we'll have to watch the currencies closely also. But yeah, I think this is probably a temporary bounce in energy.
BENNETT: On the Credit Bubble Bulletin there was an item about the market for luxury goods, like premiere real estate and rare artwork. And after an insane 2015, which saw property listed for $200 million, this market is actually starting to flat line. What do you make of that?
NOLAND: Well, my thoughts are that it's another indicator of a changing trend. And I think last year you had a lot of, let's say, hedge fund—we'll call it the hedge fund billionaires, buying art, buying whatever they could find that they think would be a store of value outside of financial assets. I think you had enormous amounts of money coming out of China, out of the emerging markets; the wealthy, again, just trying to find some stores of value. And I think that's probably peaked, and now we see losses in the hedge fund community and we see the Chinese basically trying to impose capital controls to keep this money from flying out of China. So I think we've probably seen the peak in that super wealthy segment of luxury spending.
BENNETT: China, though, it's interesting; some of the people we work with over in China say their business is as strong as it's ever been. So I don't know if it's necessarily affecting everybody. You always have to wonder what is a real headline with real facts behind it, and what is not.
NOLAND: That's right. And very, very challenging analysis these days. Here's my take on China. Over a year ago, they really decided to try to rein in their credit excess. They had tried timidly a few years back; that's not going to work. Well, they started to tighten; things started to unwind. They wanted to devalue their currency; that did not go well. So then they loosen up again, and that led to that huge stock market rally that collapsed. Now they stimulate again, and now the money's going into real estate, especially in big markets. So they have monetary disorder, they have record credit growth. Segments of their economy will be booming, but at the same time, their corporations now, especially their exporters, are in serious trouble, with all this debt and collapsing prices. And they're dealing with unprecedented risky credit that somehow they're going to have to try to deal with, and I think a global crisis of confidence in the economic model in China, Chinese policy making, and inevitably, Chinese finance. So it's a frightening scenario unfolding in China, especially since they don't have a ballot box there too, so there's all this geopolitical issues that will manifest over time.
BENNETT: Doug, we've been talking about Donald Trump's threat to impose massive tariffs, should he become president. What's your take on that?
NOLAND: Hopefully they're just threats. You know, Dawn, years ago we started printing money, IOUs, running huge current account trade deficits, right? Just basically flooding the world with IOUs and importing all these goods. I always thought the world would protest, and there would have to be a change, and we would have to reindustrialize. Well, they just kept taking our IOUs, and they joined the bubble. But now we're at the point with the U.S. economic structure, a lot of people feel they've been cheated, a lot of people have lost skilled jobs, a lot of people feel that these trade agreements that we've enacted around the world are hurting them directly.
BENNETT: Thanks, Doug.
For over a quarter century, the experienced advisors of Bennett Group Financial Services, LLC have been successfully guiding clients through the complexities of wealth management. Bennett Group Financial Services provides individual investors, corporations and foundations with holistic investment strategies using unique portfolio solutions across a breadth of asset classes. Our unique vision and insight into market trends makes Bennett Group Financial Services a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to our highly regarded weekly talk radio program - Financial Mythbusting. Through attentive service and prudent, thoughtful advice, Bennett Group Financial Services, LLC strives to consistently provide its clients with the highest quality of guidance and personalized service available.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.