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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 means we are in for a bigger crash and deeper dislocation when it all comes to an end and the man who has made a career out of being the first to correctly call market bubbles 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 renowned short seller, having worked with Gordon Ringoen and Bill Fleckenstein among others, but he is perhaps best known for his ability to spot market bubbles, way 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 a special Masterclass 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.”

Real Vision TV is financial television for smart investors, featuring in-depth interviews with many of the worlds most respected investors, analysts, investment strategists and geopolitical analysts. Try it free for 7 days.

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NOW WATCH: The richest village in China is one of the most mysterious places on earth

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First Data, the largest US processor, announced Q3 2016 results early Monday. In the quarter, the firm posted a modest 3% revenue increase on a constant currency basis, and made a "180 degree" turn in earnings, according to Motley Fool.

That growth comes as the firm makes important progress in key segments, which could point to more success in the coming quarters.  

The firm posted “tangible improvements” in its North American segment, which had been on the decline.

• For the third consecutive quarter, First Data’s transactions in the North American segment grew 7%. This quarter, that figure helped propel the firm to 1% revenue growth year-over-year (YoY) on a constant currency basis. And though that’s a very modest increase, it’s an important one — in the past two quarters, the segment's revenue had declined about 2% YoY despite transaction growth.   
• This could indicate improved performance in key areas. In previous quarters, First Data CEO Frank Bisignano noted that the firm’s North American declines reflected attrition and lingering underperformance in the firm’s US small business portfolio. It’s plausible that strong small business initiatives, like improvements to Clover, the firm’s mobile point-of-sale (mPOS) reader, that resolve pain points, could have been a driver of that growth, especially if the firm is able to sustain it through the next several quarters.

And ongoing investments in other high-growth areas could help propel First Data in the coming quarters. The firm has recently made strides in areas that could expand its addressable volume and therefore grow key segments overall.

• Alipay partnership: First Data recently partnered with Chinese mobile wallet Alipay, in a move that will allow Chinese tourists in North America to use Alipay to make purchases at retailers using Clover. Chinese tourists are expected to spend $40 billion in the US in 2017 — additional funds that are now part of the firm’s potential addressable volume. This could help Clover merchants attract business and grow their volume, therefore boosting small businesses and bringing in gains for the US segment. 
• SVB expanded partnership: In the summer, First Data expanded its relationship with Silicon Valley Bank to become the primary digital and cross-border processor for the bank’s clients. That could help the firm capitalize on both gains in e-commerce and increased cross-border popularity, which might bring about ongoing needed growth.

Evan Bakker and John Heggestuen, analysts at BI Intelligence, have compiled a detailed report on the payments ecosystem that drills into the industry to explain how a broad range of transactions are processed, including prepaid and store cards, as well as revealing which types of companies are in the best and worst position to capitalize on the latest industry trends.

Here are some key takeaways from the report:

• 2016 will be a watershed year for the payments industry. Payments companies are improving security, expanding their mobile offerings, and building commerce capabilities that will give consumers a more compelling reason to make purchases using digital devices.
• Payments is an extremely complex industry. To understand the next big digital opportunity lies, it's critical to understand how the traditional credit- and debit-processing chain works and what roles acquirers, processors, issuing banks, card networks, independent sales organizations, gateways, and software and hardware providers play.
• Alternative technologies could disrupt the processing ecosystem. Devices ranging from refrigerators to smartwatches now feature payment capabilities, which will spur changes in consumer payment behaviors. Likewise, blockchain technology, the protocol that underlies Bitcoin, could one day change how consumer card payments are verified.

In full, the report:

• Uncovers the key themes and trends affecting the payments industry in 2016 and beyond.
• Gives a detailed description of the stakeholders involved in a payment transaction, along with hardware and software providers.
• Offers diagrams and infographics explaining how card transactions are processed and which players are involved in each step.
• Provides charts on our latest forecasts, key company growth, survey results, and more.
• Analyzes the alternative technologies, including blockchain, which could further disrupt the ecosystem.

To get your copy of this invaluable guide, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
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The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of the payments ecosystem.

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