March 29, 2017; Doug Noland: Central Bank Credit Risks Reaching New Highs

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“We want to build a long-term business. We’re looking for long-term relationships. We think we can be part of a portfolio for years, and as we have a proven track record and grow our assets, then we’ll do quite nicely. I think now is a great time. Again, we’re seeing major inflection points unfold here in some fundamentals and I don’t think it will be too awfully long until the markets have to come to terms with the changing environment.”

– Doug Noland

Kevin: Dave, as a continuation of last week’s program, people were wanting to have more detail on the strategy that Doug Noland specializes in.

David: We’ve done two things. One, we’ve created a four-part video series to kind of explain what, how, why the tactical short works. That is the newest offering from McAlvany Wealth Management, managed by Doug Noland.

Kevin: How can listeners see those?

David: If you go to mwealthm.com, you can view those videos. Also, if you’re interested in having more of a conversation with us about that offering, and may want to engage us in that fashion, then I would suggest that you join us for a conference call.

Kevin: That’s a conference call, and that is taking place at the end of the month, March 30th.

David: The details of that are also on the website, but set aside some time. You will need to register ahead of time and there are limited spaces available, capping that at about 1500 listeners for the conference call that will be on March 30th.

Kevin: Of course, Doug Noland has been a guest of ours through the years, and Doug has been someone that we’ve read for decades, but now he is on the team.

David: We’re honored to have him on the team.

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David: Doug, you have 25 – actually more than that, but over 25 – years’ experience finding short opportunities – that is to say, ways of taking advantage of volatility, making money when the prices of an asset or a sector goes down. Could you start with exploring – what is your theoretical framework?

Doug: Sure. The theoretical framework starts with this macro perspective, top-down analysis, that credit is critical, that finance drives economies, that financial conditions are key to market dynamics. So, my framework – I start with a big picture. How aggressively is credit being grown? And then I look at risk intermediation. I’m looking for distortions in the marketplace, a lot of focus on speculative leverage because in a bull move, that is a self-reinforcing mechanism for adding liquidity to the market when speculators leverage in various securities markets. That also creates the vulnerability and the potential for a tightening of financial conditions if you have speculative de-leveraging. So, a lot of the framework is the top-down credit, financial conditions, and then the market dynamics, looking for if the market is leaning risk-on or risk-off? Depending on that analysis, that has a major impact on how I want to be positioned on a short side in the marketplace.

David: You have a story. You are a small-town guy from Oregon, got a CPA designation, went to work as a treasury analyst with Toyota. This goes back to 1987 – a part of your story is things that you saw for the first time and were sort of these moments of epiphany, where you think, “Oh, that’s interesting. This is fascinating. Oh, my!” And so, from an educational perspective, as a CPA, you’re seeing things. And as a treasury analyst at Toyota, 1987 rolls around, and we’ve got a market crash in October. Again, this was before you got your MBA and began working on the short side of the market. But I can imagine that you saw some interesting and curious behavior in the markets late in that year. Tell us about that.

Doug: I feel like I’m the luckiest guy in the world because I was a Price Waterhouse CPA, and at college in Oregon I was an accounting finance major, and I didn’t like accounting at all, but fortunately, someone convinced me along the way that it was a good background. And the accounting background has been key to my analysis of money and credit all along because we’re just talking about debits and credits here in this massive global general ledger. But getting back to 1987, I moved from Portland down to L.A., filled up my little car and went down and was a treasury analyst, lucky break during 1987, sitting in front of a Telerate machine there on the treasury desk, watching interest rates spike and currency chaos, and then the 1987 stock market crash. I remember I was focused more on fixed income back them, watching bonds rally 11 points in one session. It was just amazing.

So, I was fascinated by the markets, the macro-analysis. A very, very interesting time to work for a major Japanese corporation in 1986 and 1987. There was a lot of concern by management at U.S. Toyota as far as the bubble in Japan. There were major concerns of a crash in 1986 and 1987, and actually, it looked like the Japanese bubble was in the process of collapsing in 1987, but central banks reversed that, and that bubble inflated spectacularly for another two years before it burst in 1990. So, I became very interested in the dynamics of bubbles when I was at Toyota and that interest followed me to my MBA in Indiana, and then with my career on the short side.

David: In the 1990s you were working with Kurt Richebacher, doing some writing for him. What was one of the greatest lessons you learned when you were working with Kurt?

Doug: Yes, the good Dr. Richebacher – what fond memories. Another lucky break. I started reading the Richebacher letter in 1990 and was fascinated. He had a perspective that I found nowhere else. It certainly piqued my interest in Austrian economics. Dr. Richebacher always said, “Look first to credit. Look first to credit.” So, that was beginning my interest and deep dive into credit theory, Austrian economics, and so I got the idea that I would fax a letter to Dr. Richebacher with my thoughts on the U.S. markets, and credit, and the economy. I also asked him for a photograph that I kept on my desk for years. And then we exchanged a lot of faxes, and he asked if I would like to help write his letter. But I couldn’t, I was just working such long hours in the hedge fund industry. And then in 1986 I just decided, yes, I would love to. So, I think it was five to six years I assisted Dr. Richebacher with his monthly letter, a great experience for me, and I learned a tremendous amount from one of the great economists.

David: “Look first at credit. Look first at credit.” Well, the time in the hedge fund industry in the 1990s was probably a bit different than the mutual fund industry in the 2000s where you ultimately migrated to. What did both of those experiences teach you that you bring into our latest endeavor on the short side – the tactical short?

Doug: The hedge fund industry – what an experience that was in the 1990s. My first year working with Gordie Ringoen we were up 63%, and we were the geniuses, we had it all figured out. I was going to be wealthy, and all of that. But it didn’t turn out that way. The Federal Reserve, in particular, in 1991, lowered interest rates aggressively. They reflated the system. So I spent a lot of sleepless nights trying to understand how this impaired banking system could morph into the new and improved new age financial system and prosperity and bull market. So, for me, the hedge fund experience was analytically just invaluable for diving in, trying to understand the dynamics driving and inflating asset prices in a growing economy – invaluable. And a lot of sleepless nights trying to figure out how you manage short exposure better in such an environment.

The old hedge fund model with concentrated positions where we knew the companies better than the longs – that was not working. All of a sudden there was liquidity for basically any company that wanted to borrow. If they couldn’t tap a bank, they would do a securitization in the marketplace. It completely changed the rules of finance as we started to get into securitizations and Wall Street finance, so short exposure had to be managed differently. For me, it has been a constant learning experience over the years, just trying to do the job better, try to manage risk better, try to understand the environment. So, it is always a learning process, it is a challenge, but also, I’m excited about it every morning when I wake up. It doesn’t get more interesting, this type of work.

David: Would you say that your experience with mutual funds, the primary issue in that 15-16 year period, was having a mandate that kind of left you hog-tied. There are only certain things you can do according to a mutual fund mandate, and it might not be flexible enough to avoid getting run over by the market.

Doug: Right. When I went to work in the mutual fund industry I certainly made some changes. We needed to be highly liquid because you have inflows and outflows. That was a big change in the nature of managing short exposure – the hedge fund – at first we didn’t concern ourselves very much with liquidity. We didn’t have those daily inflows and outflows. So I had to refine that part of the strategy significantly, working for a mutual fund, where we had the flows. Yes, we had some flexibility, but certainly not the type of flexibility you need when you have these enormous moves in the market and where you just need to get out of the way. And that is something we are certainly going to do differently now with our new tactical short product.

David: In a crisis, all kinds of actions are acceptable. We talked about 1991, Federal Reserve lowering rates, reflating the system, and in spite of an impaired banking system at the time, they were going to hold things together. Today, we have the genie which has somewhat gotten out of the bottle, we have unconventional monetary policies which seem like they’re here to stay. Does that present a problem for a short strategy? What you are telling me is that the Federal Reserve has been sort of a backstop, what became known as the Greenspan put through the late 1990s and early 2000s. This has been around as a problem, continually reflating an impaired banking system. Can you have a successful short strategy in an era of unconventional monetary policy?

Doug: Well, you certainly cannot ignore policy-making, and I learned in 1991, do not ignore central bank efforts to reflate the system. In a way, it creates opportunities, it creates challenges. We had a very good run on the short side in 2000, 2001, 2002, and even 2007, 2008, and those opportunities were created from their reflation from the tech bubble. And this reflation we have seen over the last nine years now has created opportunities unlike anything I’ve ever seen in my career. I actually thought the biggest opportunity of my career was going to be the bursting of the mortgage finance bubble.

Back in April of 2009 I started warning in my blog about the inflation of the global government finance bubble, the granddaddy of all bubbles. I never imagined it would go nine years, and central banks would have QE of 10-12 trillion, and that interest rates would basically be at zero for nine years. But the excesses and the distortions in the marketplace were unprecedented. So, yes, daily challenges, navigating around these types of policy responses, but it also creates extraordinary opportunities on the short side.

David: Speaking of central banks, I spoke with a British central banker, Charles Goodhart on the Weekly Commentary a while back, and it was kind of a dismissive comment. I was talking about the growth in central bank balance sheets, and he seemed to think that the techniques like sterilization were sufficient to prevent inflation, even in the context of rapidly expanding bank balance sheets – ever-loosening credit. What are your thoughts?

Doug: I think sterilization is part of the way things used to work. Now, central bank balance sheets grow, they add liquidity, and there is no shrinking of that balance sheet. And once the liquidity is out there it just rolls around in the system. We have seen tremendous inflation and this gets back to Dr. Richebacher, who always said, “Find the credit growth, and then try to determine where the inflation is.” It may be in consumer prices, it may be in trade deficits, or it may be in asset prices or corporate profits. There are many places where you can have an inflation.

What central banks have specifically done since 2009 is to reflate, add liquidity, and direct it into the securities market. So, they certainly have done nothing to reverse debt inflation, so they haven’t sterilized anything. I do think their challenge going forward will be different in that now we have inflation pointing up globally here in the U.S., China, Europe. It has been pointing down for a number of years, so that is going to make their decisions to add more QE and to backstop the market more difficult. We’ll just have to see how it develops.

David: We think we understand what normal is. Bill Gross, a few years ago, started talking about a new normal, and sort of a redefinition of normal. I think QE, globally, is still fairly robust. Is that a factor that stays, or do financial markets normalize in the future around more traditional supply and demand dynamics? We’ve had the central bank community, as a whole, as the buyer of last resort. Again, do we go back to the old world, what we consider to be normal, where you have investors who represent supply and demand?

Doug: I remember when PIMCO came out with the new normal analysis, and I titled one of my bulletins, “The Newest Abnormal.” To me, it was just another bubble. I think we doubled mortgage credit in just over six years and then we doubled federal debt in four, and we’ve doubled it since. The history of monetary inflations – you can add money, or whatever you want to call it today – liquidity, credit – you inflate price levels, and then good luck trying to remove that monetary inflation without deflating prices levels, and that’s the dilemma.

We’re basically at peak QE today. We still have 80-85 billion a month from the ECB currently. We still have probably that much, perhaps even more, coming this year from the Bank of Japan. This isn’t QE, but China had half a trillion – and that is in U.S. dollars – of credit growth for the month of January. So to me, those are the three main sources of monetary inflation.

We have decent credit growth here in the U.S., but you have these enormous amounts of QE globally, and you have Chinese credit. We know enormous amounts of money are fleeing China. Money is coming out of Europe. Money is coming out of Japan. It’s going into King Dollar. So, we don’t need QE here in the U.S. because of all the liquidity coming globally from QE. I don’t think it normalizes. I don’t think you can just turn the taps. We’ve seen central bankers try to do this. They called it the taper tantrum. I think it was in 2013, they started talking about reducing QE and the markets had a flash crash.

And then Chairman Bernanke comes out and uses his terminology that the Fed will push back against any tightening of liquidity of financial conditions. Well, any tightening of financial conditions – that means any de-leveraging, de-risking in the marketplace. So he basically said, “We won’t allow a bear market, we won’t allow liquidations in the market,” and that is where they are kind of trapped right now. Right now we see a parabolic in the stock market and last year we saw a parabolic in the bond market, and that just increases the probability of a challenging market reversal, so good luck trying to normalize it at this point.

David: It doesn’t end differently, the periods of asset price inflation. The consequence of normalization is to lower asset prices, which, intrinsically, is to say, we would have a de-leveraging event, and that is why central banks don’t want to see normalization. I just feel like they have a rabbit breeding program and they keep on pulling new rabbits out of the hat, unexpectedly, and it goes further and further and further than anyone anticipated. When does it end? This is like musical chairs. It ends when the music stops. We just keep on playing – we play, we play, we play, and we hope for a chair? Timing seems to be one of those very challenging things because you’re dealing with market psychology and it doesn’t necessarily have to be ruled by reason, which means that it could end in the next two minutes, or the next 24 months, somewhere in between, perhaps.

Doug: I think a theme for 2017 is that the markets – and these are speculative markets, very speculative, are vulnerable to an unexpected tightening of monetary conditions globally, and from that I think the ECB is going to be forced to pull back on QE and the Bank of Japan also, and I think China has to reign in their credit excesses. It is completely out of control. And I don’t think the markets are really prepared for this right now. We’re starting to see signs in the European bond market, we’re certainly seeing a pickup in inflation. Meanwhile, the markets are ignoring these fundamental dynamics, this fundamental deterioration.

But I remember, the markets ignored problems – the markets rallied to all-time highs right before the Russian collapse and the LTCM debacle in 1998. You had this melt-up in technology stocks in early 2000 in the face of rapidly deteriorating industry profits. And then let’s not forget, we had the markets rally to all-time highs later on in 2007, even after the sub-prime collapse. So, this is not unusual that over-liquefied speculative markets do this last run right when fundamentals are starting to change.

David: So, on the issue of inflation, we’ve spent nearly a decade flirting with deflationary collapse. Certainly, that has been the central bank community’s primary fixation – the pivot toward inflation, or at least a shift in the marketplace in inflationary expectations may be here. What are the implications in a highly leveraged world? And can we assume that inflation brings with it higher interest rates?

Doug: A key part of my analytical framework is the importance of leveraged speculation in securities markets. When you have a lot of leverage, you are creating liquidity. You basically create liquidity out of thin air through borrowing to hold speculative positions in securities markets. I am convinced that there are enormous amounts of leverage in fixed income, globally. And if we do have this inflation dynamic unfold where you have central bankers cautious now, raising interest rates, not as willing to come quickly with more QE, then I think you start a de-leveraging within fixed income, and that’s global. We had the speculative melt-up in bonds last year in global bond markets, and you’ve had an important reversal. We already see Italian yields and French yields up 40 basis points so far this year. It hasn’t been problematic because we still have these enormous amounts of QE globally, so this new QE kind of accommodates the early part of de-leveraging. But all of a sudden, if you take away that QE, you have a whole different environment where there is a lot of pressure on those leveraged players to de-risk and de-leverage because they will be worried about future liquidity issues. So, I think we are only an announcement from the ECB, or some caution from what is a very risky strategy from the Bank of Japan to a lot of leveraged players saying, “Wait a minute, we have to manage our risk a lot differently.” And that totally changes the game because de-risking, de-leveraging, that is self-reinforcing.

David: You mentioned something a moment ago – peak QE – and it makes me think of peak debt where you find where the pressure is when you begin to see interest rates rise, and you’ve increased a mass amount of debt in the system. If inflation is a real issue on the horizon, what can be said about the massive quantities of debt issued in recent years by corporations and sovereigns? Generally, the idea of inflation, for the indebted, is not bad – you’re paying off debt with cheaper and cheaper currency units. But if you think about the structure of that debt – short durations and roll-over risk – it seems like those are relevant factors in terms of the integrity of the debt markets.

Doug: Absolutely. Part of the credit bubble thesis is, if you continue to expand credit, the next year you need to expand more credit to kind of validate that pyramid of credit that you’re creating. And all of a sudden, if you don’t create enough credit, then you have debt issues, and it is self-reinforcing, like we saw back in 2008-2009. In the marketplace, as long as you’re adding leverage, you’re increasing the amount of speculation in the market, those prices continue to go up. That could be homes in 2006, or it could be bonds in 2016.

The problem is, to keep this game going, global central banks took interest rates even negative. How much further negative can they go? They took QE to two trillion annualized, and we’re numb to that. But these numbers are so incredible that I really think that was kind of the final desperate measure, that they were trying to hold the system together, and now what they have done is they have created highly speculative bubbles in the securities markets, and inflation dynamics have turned. So, now what do they do? I think they’re going to turn more cautious and again, that is part of the 2017 major inflection thesis.

David: It is really interesting to me to see the dialogue shift, 2015-2016. As we moved toward negative rates, all of a sudden, part-way through 2016 you start seeing the popularization of the idea of going cashless, moving toward an entirely debit and credit system where currency is no longer needed. It is interesting to me because, classically, when you get into a real financial pickle you can inflate away the problem, you can default on your obligations. In some instances, you will see governments get desperate and start stealing assets, nationalization of properties and things. But in this case, financial repression came to the fore, and the smartest guys at the Ivy League schools started writing about how, if we’re going to carry forward this theme of financial repression we’re going to have to get rid of cash.

It wasn’t a coincidence. We’re in a negative rate environment, and your opt-out, as an investor, is to get out of the financial system and literally put stuff in the mattress. I saw a couple of hedge fund managers in late 2015 to early 2016 say, “You know what? Because we’re in a negative rate environment, it makes more sense for me to have pallets of high-denomination euros and rent a space, a public storage unit, and just store it there and have an armed guard watch it, and have an insurance policy with Lloyd’s on it. All of my expenses – it’s better – I’ll come out ahead financially rather than engage in this repression.”

I guess why I bring that up is because, again, we’re talking about rabbits, and unconventional monetary policy. Maybe we see unconventional fiscal policy. To what extent does government sort of have their interest tied to Wall Street in sort of a continuity plan where – and I know this is sort of outside of your realm of expertise, but I’d like you to speculate on, does the world look more free, or less free, as governments try to keep the status quo in play?

Doug: Well, clearly it’s less free, and you touched on the experiment with negative interest rates and all the distortions that was causing, or is causing, and I think central bankers realize that. And they also realize that negative rates are not good for the financial sector, and they have to protect the financial sector. So, I don’t think rates will continue to go negative. We’re seeing a lot of changes. Social and political instability is part of this shift away from inflating securities prices and creating liquidity and inflating markets.

To now, the shift is, “We need to inflate the earnings of our workers. We need to return industry to the U.S.” That, in itself, is a major inflection point with consequences for inflation. We’re going to import less cheap goods from China and Asia. We’re going to manufacture things more here. There will be taxes, probably, on a lot of imports. And that changes the inflation dynamic. It will be interesting because I don’t think central bankers are excited about this change. I think they liked it before where they kind of controlled inflation dynamics and they focused on the markets and they kind of mastered the art of stabilizing or inflating markets and back-stopping markets, and they thought that they could control economic output through the markets. And all of a sudden they have these politicians that have very different ideas as far as how they want inflation to go.

So we will see now if central banks become more cautious and if they are willing to accommodate these more aggressive fiscal policies and deficits, especially in an environment of rising inflation. It is too early to tell, but my instincts tell me that the central bank is going to be more cautious with QE going forward. And it is not just the liquidity, it’s that promise, that commitment to adding liquidity if the markets need it. And as long as the markets are comfortable that QE is there on demand, then they will leverage. They will take risk. And if they question that back-stop, then all of a sudden they’re not going to take as much leverage. They’re going to be more risk-averse.

David: So, two points. One, it sounds to me like you are saying the Fed may be a different organization under the Trump administration. I guess, as complement to that, a second point – what are your expectations of the new Treasury Secretary?

Doug: It is fascinating. Our president talked a lot about the bubble during his campaign. I think he and his staff are sympathetic to this type of bubble analysis. I think they understand, they recognize, that central banks experimented with money printing, and that that inflated markets and created a lot of distortions and a lot of the problems that they now want to reverse. So I don’t think the Trump administration is going to get along that well with the Federal Reserve. And at this point, our president likes to note that the stock market is at record highs, and he will play that game right now, but his motivation is not higher stock prices. He wants to change the economic structure. And I don’t think that major change will suit the markets that well, or central bankers.

David: So, the confusion, then, on the new Treasure Secretary, because on the one hand you have a Goldman guy who may be sympathetic to the old way of doing things, the Fed accommodating asset price inflation, general market stability providing a liquidity back-stop. But you have also, the man in the Oval Office, talking to the new Treasury Secretary saying, “We’re going to re-engineer the economy. Is he capable of doing that? Can you have one man with two agendas? “Yes sir, I’ll do that, sir,” and then make sure that you take care of your old Rolodex and your old employer.

Doug: My guess is, they’re determined to really change the economic structure, and whether it is the new Secretary of the Treasury, or the President, I think that they believe the system we have been on for years now is unsustainable. And I think that they believe that this was heading for some type of a crisis, a potential financial collapse, or at least a crisis. So, as they unfold their agenda, I think they will be willing to take a risk with the markets.

They seem very determined to me. They don’t like King Dollar. They don’t like these big trade deficits. I don’t think that they like QE and the manipulation of markets that is going on in Europe and Japan. They look suspect at China. So, I think there are major, major changes coming, and this will all unfold over years, but again, I think it is an inflection point. The nature of inflation, the nature of economic structure, and the nature of finance will be evolving over time.

David: So, we have two potential tells in the marketplace. What are commodity prices in the first quarter of 2017 telling you? What are the credit markets signaling, whether that is corporate credit or European sovereign debt? What do you see in these pockets that might be foretelling where the rest of 2017 goes?

Doug: I think there will be enormous pressure on the ECB to wind down QE. The Germans were opposed to this policy. They have been opposed for years now. I think they probably made an agreement last year that this is the last shot at QE to get things turned around. So, I think European QE will wind down at the end of this year. We are already seeing signs of this, I think, because we have seen, really, a blowout in spreads in the European periphery. I always look at the periphery – that’s the canary in the mine.

So, the periphery is saying they expect waning liquidity in Europe, so you’re seeing significantly higher yields, wider spreads in Italy. The spread between France and Germany – the sovereign spread is, I think, the widest in five or six years now. So, to me, that is an early indication that the market senses, not only is there political instability, there is a real risk in ECB policy making. So that is key.

I think we are seeing now, a lot of confusion in Chinese policy making circles as far as what they do to rein in their credit bubble. I think they are going to have to tighten significantly this year so I think that will be a major development. And I think the Japanese, especially now with rising global yields, are going to have to admit that they cannot peg their ten-year yield down near zero. That would lead to enormous inflation of their central bank balance sheet and all types of distortions in the marketplace.

David: So shifting to your work-a-day life, if establishing a short position is not defined by calling the market top, what types of internal market metrics help you when you are deciding to put on a position?

Doug: I want to see some waning – I’ll call it risk embracement – I want to see some nervousness. I want to see small signs of less risk-taking, of some de-risking and de-leveraging. So I look at a lot of liquidity indicators, I’m watching a lot of credit spreads, a lot of CDS pricing. So far we’re seeing some under-performance in the small cap stocks, for example. That’s an early indication. That’s another one of these indicators at the periphery.

We’re also seeing somewhat of a narrowing. Right now you see very speculative markets in technology, biotech, some of the NASDAQ financials, etc. That can kind of be a sign, also, that you’re getting close to the end when you get more of a crowding into the really hot sectors. So I’m looking for under-performance. I’m comfortable shorting, even if the general market is flat to mildly rising, as long as I see some under-performance in some key sectors, certainly some key stocks.

David: You designed the McAlvany Wealth Management tactical short for institutions. Is it an offering that only has relevance for an institution or pension fund?

Doug: No. Certainly, we think there is a place for it with institutions. They have these broad portfolios of risk assets and we would like to be a component of that to reduce the overall portfolio volatility and provide some downside protection. We think that is really critical today for the institutional investor, but also there are individuals that we can work with that have a need for some downside protection, have a need for a non-correlating asset in their portfolio to help hedge against not only stock prices, but they may be long in an equity portfolio, they may be long corporate debt, all types of risk assets, because right now everything is highly correlated. So we’re happy to work with individuals that are qualified for our type of investment strategy.

David: Managing them in separately managed accounts, as opposed to in a fund, which is a little bit more opaque in terms of the positioning, and a little bit more distance in terms of liquidity, what other flexibilities do you see gained from that kind of a structure as opposed to a fund? And on the other side of that, do you foresee offering some kind of a strategy like this as a mutual fund at some point, not a hedge fund, but a mutual fund where Mr. Joe Six-Pack can own $5000, $10,000 of it if he wanted to, down the line?

Doug: First, on the separately managed accounts, we chose to begin with the strategy, we really like the flexibility that this provides our investors, and I’ll tell you, when we sat down and conceptualized this product, it was never a case of, “What product can we introduce and make a lot of money from?” It was always driven by, “What product would make the most sense, be the most advantageous, for investors?” So it is very important, we want our investors to be in a short product that is liquid, that is transparent, that has lower fees, because we want to build a long-term business. We’re looking for long-term relationships. We think we can be part of a portfolio for years. And as we have a proven track record and grow our assets, then we’ll do quite nicely.

But we like this product because we think it is a very appealing product for investors, especially in this environment. Yes, down the road we would love to have a product that would cater more to someone that has a smaller portfolio, but still wants to protect themselves. I’ve always been committed to trying to provide a product to help people, especially during these bubble periods, where so many people get blindsided and they have nowhere to turn. They’ve been convinced that the markets always go up and all of a sudden they just see their wealth disappear, and they lose so much money in the markets again. So, we would like to have different products suitable for investors through the whole spectrum.

David: We talked about a short position, and really not being as important to call a market top. But how would you grade the timing of the launch of the MWM Tactical Short? Is this a timeframe that makes more sense than another? Why now versus five years ago, ten years ago? Why don’t we wait just a couple of years and see how this plays out?

Doug: (laughs) Yes, I think the timing is fortunate. I’ve been on, we’ll call it a sabbatical for the last couple of years, continuing to follow the markets closely and writing, but knowing that this was not an environment where I wanted to start a new short product. I think now is a great time. Again, we’re seeing major inflection points unfold here in some fundamentals, and I don’t think it will be too awfully long until the markets have to come to terms with the changing environment.

David: We’ve planned a conference call just around the corner, March 30th. If people are interested in learning more about the MWM Tactical Short that you are managing, what do they need to do? What do you hope to cover in that timeframe?

Doug: I hope people take an interest and jump on the call. We’ll have the information on our website to give the details, and just sign up and then call in. My plan is, I will start with an overview of the product. It is very important to provide information on the investment philosophy, go somewhat granular in the investment process. I want to talk a bit about the environment and why I think this is a very good time to start thinking about hedging some market risk, getting some protection. And what we want to do also is address questions. We know this is a unique offering, a unique environment. We know people have questions and we’re hoping people will write them down and email them in. I plan on going down the list and answering as many as possible, and if we don’t have time to answer all of them, then we’ll get answers one way or the other.

David: Doug, I have a number of mentors (laughs). There are a bunch of them that have been dead for 600-700 years. It is their books that give me access to ideas and valuable insights. I have a real, live, free market mentor. To some degree, over the last decade, you have been my credit market mentor. And as I have read the Credit Bubble Bulletin week in and week out over the last decade, there was this idea that I would love to work with Doug Noland, at some point, someway, somehow.

And so, here we are with a convergence in our interests in the market, and I think this is an exceptional opportunity from a timing standpoint. But even more than that, the exceptional opportunity is that we have the ideas, and the people, and the capital, all lining up at the same time, and I’m very excited about the tactical short. I’m very excited about the next 10-20 years of getting to work with you and in building something that is value-added for investors and institutions all over the world. So, thanks for joining the team, and thanks for joining the conversation today.

Doug: David, thank you so much. I want to repeat, I’m the luckiest guy in the world, and thanks so much for working with me on this. This is awesome.

By | 2017-03-31T12:49:38+00:00 March 31st, 2017|Transcripts|