Washington, DC -- (ReleaseWire) -- 12/22/2015 --DAWN BENNETT: Doug Noland is a former hedge fund analyst and now is the publisher of the 'Credit Bubble Bulletin', which began publishing in the '90s. Recently Doug wrote an article titled 'The Precipice' where he writes about how the global markets have again found themselves at the precipice, where he went on to say 'My sense is that everyone's numb – literally dazed and confused from prolonged Monetary Disorder and the resulting perverted market backdrop'. Doug, welcome to Financial Myth Busting.

DOUG NOLAND: Hi, thanks for having me on. Great to be here.

BENNETT: The Global economic contraction is gathering pace, and part of the evidence is that the U.S. ISM manufacturing survey broke decisively below the 50 recession level last week; it came in at 48.6. And other countries with manufacturing PMIs were below the 50 level, like China and South Korea and Indonesia and Switzerland and Norway and Brazil and South Africa and Greece and Taiwan. So many other countries have manufacturing PMIs that are actually perched barely above the 50 recession level, and probably are going to end up going below the 50 in the next few months. My question to you is, are we actually in a recession already, or are we approaching one?

NOLAND: The U.S. economy-- my analysis is it's just highly unbalanced. It's not a healthy economy. Part of the economy is booming - you know, Silicon Valley, the financial centers - and then a lot of the economy-- the majority of the economy is just very stagnant. So to me it's a very difficult economy for the Fed to manage, because zero rates are completely inappropriate for what's going on in Silicon Valley, for example, and commercial real estate in other areas, but it's also very unfortunate that the Fed now will have to tighten into what, as you mentioned, is a slowing economy. And just as a little background, when I started my blog in the late '90s before they were even called a blog, I was convinced that finance had changed and we had this new finance, market-driven finance that was creating this bubble. Well, I thought the bubble burst in 2000, and in 2002 I started warning, 'Wait a minute; the Federal Reserve has created a new bubble,' and I called it the mortgage finance bubble, and I chronicled it about every week, until it blew up in 2008. Again, I thought the bubble had blown up, but then in 2009, I started to have to warn again, because the Fed and global central bankers were reinflating another bubble that I've been calling for the last seven years almost the global government finance bubble. And I believe the bubble has burst in commodity markets, in the emerging markets, in China, and that's what's leading to this global slowdown, especially in the manufacturing sector, that has made it to the U.S., has made it to the oil patch, has made it to commodities, et cetera. So that's kind of the broad picture of how I see this unfolding today.

BENNETT: If you look at the press clips out there, Bloomberg on December 1st said, 'Manufacturing in the U.S. unexpectedly shrinks more, most since June of 2009,' and then Reuters came out and said, 'UK manufacturing outlook darkens. Output orders actually hit six year low,' and then, 'The S&P downgrades--' and this was in the Financial Times this past week, 'The S&P downgrades rafts of US banks.' That was another headline. And then, 'U.S. corporate debt downgrades reach a trillion. The stock markets missing the warning from the jump on markets.' All this is going on, but it just seems like the investment world remains stuck with this long biased investment strategy, which seems to me to be the wrong approach in a global bear market. Why do they want to be trapped in their own demise?

NOLAND: You know, there's completely different ways to look at the world. I think the majority believe 2008 was the hundred year flood and, 'God, it's great to have that over with. We don't have to worry about that for the rest of our careers.' And these bear markets have been so short. Even in '08, '09, the Fed quickly reflated the system. So I think they believe the world is generally healthy, except for these little bouts of financial instability. I, and a few others, look at this as a series of bubbles, going back basically to the late '80s, and each bubble gets bigger and each bust is more devastating. And to me, I hate to sound silly about it, but I've called it the granddaddy of all bubbles, because it is global. It's in multi-asset classes; it's in bonds, stocks, it's in commercial real estate, and it's been global. Yet everybody says, 'Doug, where's the overvaluation? Where's the bubble?' and I'm basically looking at these markets, and unfortunately I see it as systemic.

BENNETT: You write a lot about market mispricing, which you say is systemic and global. This comes from the result of the Fed's constant tinkering with the markets, I think, and that's putting it nicely. Where are the distortions now the greatest? Are there any particular commodities or assets that are particularly distorted because of the Fed's constant tinkering, and is it because of the Fed's constant tinkering that these long biased investment strategies are still in place for hedge funds and for mutual fund managers?

NOLAND: Right, and this is where the analysis unfortunately gets very complex, very difficult to follow, to understand. I never talk about valuation. That's not really part of my framework for bubble analysis. But I'm looking for kind of self-reinforcing flows of credit, money, finance that inflate things; they can inflate the stock market, they can inflate incomes, they can inflate corporate profits. What I would argue: basically the Fed created $3.5 trillion of so-called new money. Because of what the Fed was doing, hedge funds went out and put on a lot of leverage; they would borrow to buy securities. And that also created liquidity in the economy. So I see the actual fundamentals have been inflated. Incomes have been inflated by all this newly created money, all this new liquidity. Corporate profits have been grossly inflated. You've had corporations adding a ton of debt, the Federal government has added a ton of debt. There's been this myth that we've been in this healthy deleveraging. Unfortunately, as an analyst of credit, the data tells you since the crisis the Federal government has doubled its debt, basically. Corporations have added enormous amounts of debt. Globally, it's been unprecedented growth in debt. I look at China and what's happened in their banking system, in their credit system, in their so-called shadow banking system, and as a credit analyst, I'm in awe. So globally I have no doubt that this is a big credit bubble, and as long as you're expanding credit, things look fine. You know, you have new purchasing power, people spend money, corporate profits look good, asset prices, security prices, home prices go up. It doesn't work in reverse; when credit starts to contract, asset prices start to go down. It wasn't that long ago that we saw how things worked in 2009 with home prices and corporate prices and stock prices. It's just difficult for me to believe that we've forgotten all of that and aren't more attuned to the risks out there of all this credit and speculation.

BENNETT: There's another interesting factoid out there that U.S. household net worth has actually declined in the third quarter, which is, in my book, a harbinger of recession. Does this signal a decline in housing prices, and does it also signal less savings for Americans?

NOLAND: Well, what has happened, and I wrote about this, going back again to 2002. After the bursting of the technology-- we'll call it the technology bubble, the Fed specifically targeted mortgage credit and housing to reflate the economy. So that went on for years and went out of control and was a bubble that collapsed. This time around, what the Fed did is they targeted security markets. So they wanted stock prices to go up, bond prices to go up, and this took on a life of its own also. And what we saw in the third quarter were the first hints. The stock market went down in the third quarter; we had another so-called flash crash in August. So when stock prices declined, then all of a sudden households feel less wealthy. I think I used the number for 15 quarters, on average, household net worth went up at a rate of almost $2 trillion a quarter, so households are feeling better and spending money. But again, it doesn't work in reverse; when the stock market goes down, like it did in the third quarter, they feel less wealthy, they spend less. That is translated in their weaker profits, again, weaker stock prices, and then you start to see the downside of the credit and the financial cycle.

BENNETT: It's also happening a lot to the middle class. At one point my understanding is the middle class households took home about 62 percent of all the income in America, and now that number's actually dropped to just 43 percent. More Americans are living in poverty today than ever before, and therefore that means there's more dependence on the U.S. government; it's just exploded to unprecedented levels.

NOLAND: This is such an important issue. And the public, even analysts, policy makers, I don't think they understand the dynamic here. Throughout history, great economic thinkers spent a lot of time understanding money and credit, and they understood that sound money and credit led to a sound economy. If you have a bubble in your economy, if you create money and credit out of thin air, it really distorts the real economy, it certainly redistributes wealth. And importantly, in these bubbles it's the middle class that always gets hurt the most. They have assets at risk, they take on more debt. The super wealthy find ways to protect themselves. Unfortunately, the poorer people don't have money to participate in this bubble. So you find your society starting to be destabilized by a shrinking and less secure, less happy, less content middle class. And I certainly think that that dynamic explains a lot of what's going on in the US, and actually it explains a lot of what's going on globally, of this rising discontent.

BENNETT: If the middle class is now a minority in this country, does that mean the American dream is dying? And what will it take for people to wake up, for our own government to wake up and start taking the appropriate action? Not just a Band-Aid; the appropriate action to fix it.

NOLAND: Well, I'm actually an optimistic person. I wake up in the morning and I'm happy. I love to analyze, I've got a great family and everything. But I am pessimistic as far as how this is unfolding. Again, I've been chronicling this for a long time, and from my standpoint of focusing on money and credit and this bubble that went global, this has been the worst case scenario unfold. And there's been a debate going back over 150 years, as far as monetary policy, managing finance and your economy; do you want it rule-based or do you want it discretion? And way back, years ago, they understood that if you have discretionary money management, it's very difficult monetary policy, because one mistake leads to a bigger mistake. Unfortunately, I don't see the Fed riding this ship. I don't see global central bankers all of a sudden saying, 'Okay, we want to have sound money and credit.' They're trapped right now in this bubble, and unfortunately I think we have more QE coming, and only the-- a change in policy in the crisis environment-- you know, they're not going to allow this bubble to burst without throwing more monetary ammunition at it, I fear.

BENNETT: Do you have any ideas on how the listeners of Financial Myth Busting, the investors, can position themselves to succeed?

NOLAND: This is an extremely difficult environment. I think it's time to rein in risk. I certainly don't recommend individual investors short stocks. It's too risky, especially in these kind of uncertain times and volatile markets. So I kind of take a bigger picture. It's time to try to pay down as much debt as possible. It's time to really limit risk in risk assets, get our spending down, try to build our savings the best we can. I'm certainly a fan, a proponent of gold for a long term store of value. It's been under tremendous pressure, along with the commodities. I think we're set now for it to be a better store of value. I always look at the valuation of gold. It's kind of the inverse in confidence in financial assets and central bankers, and I think we're starting to see that confidence wane. So hunker down, have a component of precious metals, and get ready to weather the storm, I think.

BENNETT: Is weathering the storm also going to include silver? Because there is a lot of shortage out there, and at the same time, there seems to be a lot of demand, which is slowly but surely moving up the silver price as well.

NOLAND: Right. I like silver; My family has some silver here, as a store of value. I traditionally look at it as a bit of a more industrial metal than gold, but I'm happy to have some diversification in these precious metals, again, as a store of value, if the financial back-drop is as fragile as I fear it is. And I hope I'm wrong, and I hope listeners down the road think back on what I'm saying and can giggle and think that I was way too dire in my prognosis.

BENNETT: Right, and overdoing it. A lot of people think that correction is coming this month. Do you agree with that?

NOLAND: Well, we have a Fed meeting coming up, we have year-end. A lot of times the market somehow holds together through year-end. But I think the crisis of confidence in Draghi from a week ago, Thursday, was an inflection point.

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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.