Cayman Island Hedge Funds Hold Most Of U.S. Treasuries Precious Metals Move Another Late Cycle Signal Risk Taking Can Turn To Panic Within Hours "What makes me worried today is I don't know where the next bubble is because when this bubble bursts, you're going to have government debt and central bank credit discredited, I believe. You're going to have markets questioning if policymakers can reflate anymore, and if you have that type of dynamic unfold, I think that's the ending of this long super-cycle that's been unfolding over thirty-some years. That's my concern today." — Doug Noland * * * Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany and our guest today, Doug Noland. I was just thinking, what if we actually listened to Doug Noland toward the end of the tech bubble back in the '90s, and then maybe listened to Doug Noland about 2006, 2007 during the mortgage bubble where that bubble had shifted. And then maybe listened to Doug Noland—oh, I don't know—when the government bubble replaced it. And that's where we're at right now. And Doug has repeatedly said he really doesn't know where the next bubble can go because the government bubble may be the biggest in history. What are your thoughts? David: Well, I think of finance, I think of asset management, as a domain that is so pragmatic, and it is absolutely imperative to have different narratives than the one that you're currently on just to bring balance. And there's a point where you can agree, you can disagree. Pragmatically, people may choose to continue to take risk and set aside cautionary words against scenarios which may not play out as well as you want them to or hope them to. This is, again, I think, where it's important from a pragmatic standpoint that people do fully engage and don't fall in love with their assets and the way they have things allocated at a particular point in time because things do change, and change is slow until it happens very quickly. Kevin: Yeah. And we have encouraged our listeners for years to read the Credit Bubble Bulletin. Doug has put that out for decades, and it's a no-miss kind of publication. * * * David: Doug Noland, you've spent many decades analyzing the markets, chronicling bubble dynamics, trading these markets on a daily basis. For folks that aren't familiar with you, what makes you tick? Doug: Oh, dear, where do I begin? As far as the markets, I fell in love with the markets and macro analysis sitting on the Treasury desk at the Toyota US headquarters back in 1986, '87. I just was hooked. Not only was it the wild market instability in the summer of '87, and it crashed in October, you had this bubble inflating that they were very concerned about at Toyota, and Japan. So I just was fascinated with it all. And I guess, David, I'm just a geek and I'm the type of person, when I get focused on something, I'm happy to come in and work on it every day and I'll work on it every day for, how many?, thirty-some years, since '87. So I followed these dynamics so closely, and I'll also throw out what makes me tick. I got my lucky break back in 1990. I was asked if I wanted to join Gordy Ringon's hedge fund out in San Francisco. I was a treasury analyst at B.F Goodrich in Ohio after my MBA school. And I just jumped at the opportunity to be involved with the markets. It was just a great opportunity. And I went out, and Gordy had been a very successful hedge fund manager focused on the short side. My first year with him, we were up 63% back in 1990, and I would sit at my desk and I would think, "I'm just a small town working class kid. What's it going to be like to be rich? What's it going to be like to be rich?" Well, it didn't turn out that way. Greenspan came in, started reflating the system after the bursting of the late '80s bubble, and I spent the '90s— A lot of people spent the '90s making money. I spent in the '90s just obsessed, trying to understand how a system that was so fragile and in such trouble in the early '90s morphed into this incredible bull market. So I just became very, very focused on non-bank finance, Wall Street finance, derivatives, hedge funds. And to me, it's the most fascinating analysis imaginable, and I believe that as much today as I did 30 years ago. So I'm just kind of living my dream here. It is not fun having the markets go against me when I'm trying to manage money for folks and provide a hedge. But it sure is fascinating, and it almost gets more fascinating every week. David: Anybody who has managed their own money or done so professionally for others, nothing focuses the attention like a loss. And what I've noticed in the years that we've worked together is that your focus on system dynamics, on nuanced changes with particular aspects in the financial markets, the various indicators that you look at every day and all throughout the day, they inform this view, but it's driven by something. It's a problem-solving curiosity that just doesn't seem to have an end, and I appreciate that about you. The details matter, all the details matter because there's a signal in them. And taken together, the mosaic, as you often refer to it, the mosaic of indicators, one detail is important. Altogether, they're telling you something, and you've got to listen. Doug: My thought on this is, I've watched, monitored, closely monitored multiple major bubbles. That's going back to the late '80s and then the '90s tech bubble. I referred to the global government finance bubble, monitored that daily, daily, and wrote about it weekly. Each of these bubbles, when they burst, you have this reflationary response from the government. And basically what I've missed, it just makes the next bubble bigger. I've never seen policymakers resolve any problem. They just reflate their way out of it, and that's going to lead to the next bigger bubble of the next bigger problem. And so I kind of anticipate what's going to unfold at some point from a top-down, really macro, perspective. And then I get down to the nitty-gritty, the little indicators saying: Are financial conditions tightening or loosening? Is the marketplace embracing risk? Is it turning more risk-averse? And I've always looked—and this goes back to 1990 working in the hedge fund industry, the hedge fund leveraged speculation. They're kind of the marginal buyers or sellers, the marginal source of liquidity for the markets. They're the marginal players that either make financial conditions looser or tighter, depending. Are they adding leverage? Are they risk embracing or are they turning against risk? Are they de-risking/de-leveraging? And that has a profound impact on financial conditions. So I am monitoring every day just to get a sense for that dynamic, and I know it's so important. So it's habit-forming to come in every day to do the micro, really detailed analysis of financial conditions, knowing that you've got this big issue out there of these bubbles that only get bigger and only more problematic, if that helps clarify my thinking. David: I have dozens of questions for you, but let's dive in right there. Speaking of hedge funds and what is a crazy position in US Treasuries? Talk to us about the largest holder of Treasuries today, bigger than Japan, bigger than China, and I think it'll surprise our listeners. Doug: Yeah, David. And you're referencing a Federal Reserve report that just came out a couple of weeks ago, and what their economists, they dug into the detail to try to figure out the size of hedge fund holdings in the Cayman Islands. And that's a place, an offshore domicile where the hedge funds like to operate. They can do a lot of things there that you can't do when you're here in the US. Well, what the Fed Report said was that there were $1.9 trillion worth of hedge fund holdings now in the Cayman Islands. Well, actually that was at the end of 2024. I'm sure it's much larger even today. They also said that that position had doubled in size just from 2022. So now the Cayman Islands, they are the largest holder of US Treasuries. They own more Treasuries than China or Japan or the UK, and it's clearly hedge funds. And we know what the hedge funds do when they buy these Treasuries. They borrow in the repo market, the repurchase agreement market, which is just the money markets. It's this pool of liquidity, and they just borrow in the money markets to take these highly leveraged positions in these Treasuries that they hold in the Cayman Islands and elsewhere. And in some cases they're leveraged 75 times or even more. It's really probably the biggest leveraged speculation in history. It's egregious, but what they do is they own Treasuries, and then to hedge themselves they also short futures contracts, and that's why it's called a basis trade. It gets kind of complicated, but they think they can have this huge amount of leverage, and then they make just a few basis points on that difference between a yield on a cash bond and the rate on a futures contract. And it's basically free money as long as it doesn't blow up. Well, it almost blew up. It was blowing up back in March of 2020, and that was one of the reasons that the Federal Reserve had to come in and add trillions of dollars worth of liquidity to reverse what was going to be a deleveraging that could have brought—was bringing the financial system to its knees. And it's kind of like the best kept secret out there that the hedge funds have this trade on. David: So you borrow in the repo market. We had some dysfunction in the repo market in the fall of 2019. There's some growing concerns with the repo market today. Is that a warning, if you will, the repo market telling you that something's not quite so functional? Doug: Yes, absolutely. The repo market is seeing something's not right. There's a lot of pressure, especially at month end, at quarter end,