Transcription
Is J Pal that important in the Fed? No, he's not. Is the FOMC critical? No, it's not really.
We've seen equities basically do nothing in the US. We've seen crypto fall off a cliff. But you're saying that it's a little different story than that.
Absolutely it is. In my view, global liquidity is going to be under pressure this year for all the reasons I've said. At the end of the day, what really matters to the markets, uh, is according to Michael Howell, crypto didn't stall because adoption failed or narratives broke. Markets move on liquidity first and when that fuel peaks, risk assets feed it immediately.
My view is that Bitcoin is an asset that everyone ought to own or have in their portfolio because it clearly is.
About 87% of the people that are watching aren't subscribed. If you choose to subscribe, we are able to be getting better guests and to do more in-person conversations. It doesn't cost you anything. It helps us enormously. Become part of the New Era Finance podcast community. Thank you very much, Michael. Thank you very much for being on the show. It's a true honor to have you here. Uh, and there's a lot of stuff that we need to dive into with the markets currently. Um, and we try to not talk about Trump, I would say, but uh, today is the day that the Bank of Japan or at least the Japanese yields have been going up enormously and there were some expectations that the Bank of Japan was going to intervene in the market. How do you digest what they have said today and the yields in Japan in general?
Okay. Well, thanks for the invitation. It's very great pleasure to be here. Uh, there is lots going on in markets and uh, I don't know if I'm I'm going to succeed in not talking about Trump because he's everywhere. Um, the probably one of the most important things at the moment is to try and understand the dynamics around gold and what's happening in Asian currencies, maybe China as well. And I think it's uh, it's clearly an important day with gold uh testing $5,000 an ounce. And I think it's probably going to go a lot further than this. Notwithstanding the um, the the the Bank of Japan uh is in a really difficult position and I think that there's a lot of uh, maybe misunderstanding uh going on about what is actually happening in the bond market. Uh, I mean, this is not uh, in any way like uh, what happened in the UK with the Liz Truss moment when the British guilt market, the bond, the sovereign bond market sold off. Uh, there was a lot of uh, hidden leverage in the market in the UK because of some technicality called LDI investment, uh, which meant that the uh, a lot of the pension funds had very leveraged positions to British guilts, British sovereign bonds and that caused a major spike in bond yields. What's going on in Japan is rather different. Uh, I'm not suggesting for a moment they haven't got problems. They clearly have, but I think one's got to put that into perspective. And one of the reasons that you're seeing this sort of headline about the Japanese bond market selling off is that the sell-off is really principally concentrated at the very long end of the market. And we're talking here of sort of 30-year, 40-year uh, Japanese government bonds. Now, that's a very thinly traded area of the market. Uh, there's not a lot of issuance in the market out there. And that particular sell-off is much more an indication in my view of investors shunning bonds and moving towards equities. It's more of a relative trade because they perceive with maybe a recovery in the Japanese economy and faster inflation, you don't want bond investment, you want equity investment. So it's a relative switch. It is not a loss of confidence in Japanese sovereign bonds per se. So it's a very different situation to what was occurring in the UK. The only thing is is that because of all the uh, the hikes that the Japanese bank has been doing over the past few years to change the dynamics has resulted into a negative impact into the market. And now we see the Japanese bonds or the yields going up enormously.
For crypto investors, there seems to be a rumor that these two are linked to each other and the impact on the market seems to be net negative. What are what is the social media sentiment or people missing in this entire story?
Well, I think there's there's a number of factors to think about. I mean, one is that when one talks about Japan, uh, the the discussion always comes back to uh, a concept called the yen carry trade. Mhm.
The yen carry trade is basically uh, investors borrowing in yen because it's a cheap currency and then using that to leverage other investments and it might be crypto and it might be gold, it might be US equities or whatever it may be and if you start to get hikes in Japanese interest rates uh, then that carry trade uh, becomes less attractive because the cost of borrowing is higher. Now, I think you can argue this a number of ways. Uh, the first thing point I'd make is that the carry trade has been vastly exaggerated in terms of its size. Uh, it used to be very big and I'm talking here about 10, 15 years ago. It's nothing like as important as it was certainly for financial markets and what's more Japan is a much, much smaller player than Japan was two, two decades ago. So I think we've got to get that into perspective. So I'm not saying it's unimportant, but I'm saying it's not anything like as important as people are suggesting. So I think that's, you know, that that's one important point to say. The other thing that you know, I'd point out is that the yen is not a strong currency. Uh, and the yen is weakening. And part of the reason the yen is weakening is actually the bank of Japan is pretty much unable to tighten monetary policy much more than they're sort of currently suggesting. And maybe that even that's a lot. And the reason they can't do that is that Japan is in a sort of fiscal interest rate trap uh, like a lot of economies, let's say. And the reason for that is that interest payments on government debt because government debt is so large as a percentage of the economy uh, that interest bill is skyrocketing all the time as debt accumulates, they've got to pay more out in interest. Now, if they're funding that deficit or that debt at the very short end of the market and the Bank of Japan starts to raise interest rates, the debt cost starts to go up dramatically. And it's not inconceivable that at the moment Japan is paying probably about uh, I think it's 1 and a.5% uh, of uh, of of uh, in debt interest. Uh, that could easily skyrocket to 10% uh, if interest rates start to go up. So you're looking at a massive increase uh, if the Bank of Japan comes through with the sort of interest rates that maybe some people are suggesting. So the fact is that the Bank of Japan can't do much more tightening. They're going to have to sort of suck it up in many ways. And what that will mean is that the yen is likely to be uh, a weak currency. Now, if you've got a weak currency, surely that's an incentive for people to borrow. So, I think this whole thing sort of plays both ways. And I wouldn't uh, I wouldn't get hung up on the yen carry trade because, you know, you could argue both sides. Either it's going to reduce in size or it's going to increase in size, but I don't think it's it's particularly big anyway. So, I, I would discount that. I think uh, that's interesting because uh, as I said, many crypto investors uh, are getting familiar or at least start to understand the basic dynamics of the microeconomics but have hardly any knowledge in this particular topic. So it's very hard for them to digest everything that's been happening in the market right now. The other topic, you mentioned it already, is gold has been going up enormously and from my understanding of what you're saying that is way more important than Japan. Am I correct on that? And what is why is gold going up so much?
Yeah, it's a, it's, it's a really important point and I think that one's got to look at gold in context and you know, look at the relationship between gold and crypto. Uh, and we've done a lot of work actually trying to identify the linkages and the the fact of the matter is that you get a very unusual um, relationship between gold and and Bitcoin, let's say. I've done a lot of work on Bitcoin and gold in particular and what you find is in the long term, not surprisingly, gold and Bitcoin are very positively correlated. So if gold goes up uh, and we're talking here of, let's take a perspective of maybe 6, 12, 18 months, so over the long term, if gold goes up, Bitcoin will follow. But in the short term, it tends to be negatively correlated. So if gold surges, you tend to find Bitcoin falling, and if Bitcoin surges, you tend to find gold falling. And that suggests there's sort of an immediate substitutional bandwagon effect that if people uh, who are speculators see one asset class moving, they're going to shift out of the other one and jump on the bandwagon. And that happens. And I think that part of the reason that Bitcoin is sort of languishing now is that the gold market is very short term, very strong. So I think the the point being is that the two will come back into line ultimately or they should. Now, you can dig deeper into this argument and you can say, well, okay, there's some anomalies you'd have to say in the markets right now. I mean, to say the least. Uh, one of those is that gold and silver are actually behaving really well. They're they're moving up strongly. Uh, Bitcoin and other crypto are not. They're languishing and maybe the explanation I've given is a decent one. But the other point is that if you look at bond markets and PCE, what's going on in Japan, uh, and I'm not suggesting that you know, uh, Japan is unimportant, but uh, I'm simply saying let's take a much, much broader view here and look at the US Treasury market, the the Chinese government bond market, the bund market, the OT market, the British guilt market, all the big bond markets. And if you look at them, actually yields have been remarkably well behaved. And if you look at, again, this is getting into the weeds of a wonkish concept. But the way that you understand bonds uh, technically is to look at something called term premier. And term premier are the risk premier that investors in bonds demand uh, above what you would expect short-term interest rates to do. So it's something it compensates for what's called duration risk or interest rate risk because uh, if interest rates go up, the value of the bond is going to change and you need some compensation for that. So in other words, term premier are a very good way of judging the expectations of bond investors in the market. Now, if you look at term premier uh, and you'll have to take my word for this, but we've done the the math of extracting these numbers. What it shows is that bond term premier across all the major markets are generally speaking remarkably stable. Uh, in other words, just take another another dimension. Look at the US Treasury market and despite everything that's been thrown at the US Treasury market, including Trump, and I mentioned the name, but if you look at if you look at what Trump has been doing, the, you know, the, the eccentric uh, you know, speeches and whatever he does, the bond market has been remarkably stable. Volatility in the US Treasury market has collapsed um, you know, in the car in the course of the last 6 months. Uh, and that's something I think to bear in mind. Now, what you've got here is a number of really, really uh, curious anomalies and the fact that the bond markets, the biggest markets in the world are not seemingly paying attention to what the gold market is doing is something that is remarkable and out there. There is something which is widely called the great debasement trade, which is a view that people are buying gold and silver because central banks or governments are trashing their currencies and as a result of that, people have got to get these monetary inflation hedges to protect themselves against future and high inflation. Now, I sort of buy that argument. I think it's there in the background and it's sort of humming away, but this is a very, very long-term trade and it's not what's propelling the gold market right now. I'm not saying that people shouldn't own gold. That's far from it. We think that people should have gold in their portfolios and they should have cryptocurrencies in their portfolios as structural features, but it's not what's causing the gold market to spike now. And that anomaly is pretty much saying that there is something very peculiar going on. And my answer is that peculiarity is not Trump, but it's China. Uh, and what's going on in China is something that we ought to pay a lot of attention to. Now, why is it that you've got Bitcoin and other cryptocurrencies flatlining and you've got term premier in the bond markets or let's say generally bond prices flatlining. And that would suggest to me that you've got a situation where liquidity conditions in the world economy, and I can come back to dive into what we mean by liquidity. Let's say liquidity, the fuel that drives markets, is beginning to peak out. And Bitcoin is the world's most sensitive asset on the or the most sensitive asset on the planet, let's say, uh, to liquidity. It's very, very sensitive. So if you start to see inflections or slowdowns in the growth of liquidity, you would expect Bitcoin to uh, trade sideways or even down. And that's pretty much what's been going on. So it seems as if it fulfills that criterion of actually judging liquidity. The bond markets equally, if term premium are flatlining, you'd expect liquidity conditions to be uh, again, lackluster and that seems to be the case. So what's driving gold? I think it's a specific Chinese phenomenon and I think what's going on and in fact, I know what's going on because you can see the data is that the people of Bank of China is basically printing a lot of money. They are monetizing uh, they are pumping money into their economy. Chinese liquidity is picking up quite fast. You can see that in the stock market. Uh, Chinese stocks are rising fast. They're up over 25%. They've beaten Wall Street in the last 12 months. Tech in China is soaring. That's leading the market. You'd expect that in the early stages of a bull market. You're also starting to see Chinese government bond yields rising. Uh, that's again a feature of expanding liquidity and term premier in China uh, uniquely really across most of these markets are starting to spike higher suggesting that investors don't want Chinese government bonds. They now want uh, equities or something sexier. And that's broadly what's going on. So this is a China phenomenon and it's not a global phenomenon. And that explains why you've got the gold price going up because China controls the gold price principally through the Shanghai um, gold exchange. Um, uh, they're both buying gold and they're printing money at the same time, which means that the yuan gold price is going up and the yuan gold price is driving the dollar gold price.
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Um, the question then becomes and that's quite often being used as gold is the risk off trade and equities and crypto are the risk on trade. But you're saying that it's a diff a little different story than that.
Completely different. And I mean, gold is not uh, I mean, I think it's a, it's a misunderstanding to say that gold is uh, a riskoff trade. Um, and it certainly wasn't in the 2008 financial crisis because gold plunged. Um, so it's uh, it's an alternative trade. Uh, that's for sure. And gold is definitely a a monetary inflation hedge. And I think we've got to look at it in those terms. It's an alternative asset that clearly doesn't work very well if you've got a monetary deflation or a high streak deflation going on. Uh, which is what we've we had or we had a high street in deflation courtesy of China uh, through much of the last 20 years when cheap Chinese goods were dumped and that you know, caused the gold market amongst any other things not to perform terribly well. But gold has picked up significantly in the last few years uh, principally because there's been ongoing monetary inflation which has driven uh, asset prices up. So it's a monetary inflation hedge and I think you've got to think about it in those terms. But then so is Bitcoin and therefore the question to ask is why are you getting this big deviation between Bitcoin and gold? Uh, I can give you, you know, part of the reason which is an unsatisfactory one is that history does show that they diverge in the short term. But I think there's something more fundamental going on and I would label that a China effect and the fact is that the Chinese don't really buy Bitcoin. I mean, they're not allowed to for a start. There could be some money which seeps out via Hong Kong or whatever and goes into those assets. But the fact is that got that the Chinese are allowed to buy gold domestically. They can't export it um, you know, under sort of probably pain of death or whatever it may be, but they can certainly hold it. And the fact is that that's what they're doing. And not only are Chinese residents buying gold, but the Chinese government is buying gold, they're stockpiling gold and other resources. And therefore, what you're getting is this pickup. So I think you've got that phenomenon to to to add in. The other thing I'd say which you got to embroider on the top of this is that there is of course, as well as a China, there's also the rest of the world which is which is going through a normal very normal liquidity cycle and around the peak of the cycle, which I've said we're at, you normally see commodity prices outperforming and gold is one of those commodities. So I think you've also got to think about it in those terms as well. So it's not unusual to see gold uh, at this stage of the market strong. Uh, but what I've said is that what's unusual is to see gold uh, you know, gold doing this and maybe crypto not. Uh, uh, but I think that it fits in with the narrative of China is doing something different.
How do you see um, I mean, it's clear that that gold has been going up based on this this uh, particular topic from China, but how do you see the short term going ahead for the commodity markets as it is, it's basically going vertical? I don't know how much sigma the event actually is, but it is an outlier in general market circumstances, which then tells me that if there are people lining up to buy gold in Singapore in in physical stores, we get to the end stage of maybe this part of the cycle for gold. But on the other hand, if you value gold against the S&P for instance, it's still starting up a new bull cycle. How do you see that?
Well, I think we've got to remember that, you know, markets never move up in straight lines. Uh, they move in cycles and it's a question of understanding those cycles. Uh, the problem is that in a bull market, people never see the cycles. Uh, they only see the themes. So bull markets always tend to be theme driven and so you get this sort of narrative like the mag seven or you get the narrative like the great debasement trade or whatever it may be, whatever is flavor of the month. Uh, but once you get a cycle, people get skewered uh, in a cycle by the downswing and particularly the downswing of liquidity and we've got to be conscious of that because as I said, markets move in very clear cycles of about 5 to six years. Now, what we where we are at the moment is we're at the peak of a liquidity cycle and you got to remember that the trough of that cycle was way back at the end of 2022 and we've had a strong bull market in liquidity ever since or ever since that point. Uh, you know, that has launched uh, you know, strong asset gains right across the world in a number of asset classes. Gold is the latest feature of that. Uh, but you could generally speaking to call that the everything bubble. Everything has kind of gone up during this phase courtesy of liquidity. But liquidity is inflecting now. And one of the reasons that you're starting to see liquidity inflecting is not because central banks are tightening. It's much more because the real economy is strong. And as the real economy strengthens, it will suck liquidity out of the financial sector to feed um, a rapacious real economy. And that evidence is there in the commodity markets. So around the peak of the liquidity cycle, just as you get that inflection, as money starts to move into the real economy, commodity prices normally pick up very strongly. And that's what we're seeing now. Uh, that's not going to go on forever, but I do believe that the commodity markets are going to keep going up uh, you know, over the course of maybe the o over the course of this year. So, you've got potentially strong commodity markets, but the watchword is or the the thing to remember is that strong economies don't always have strong financial markets and weak economies don't always have weak financial markets. They often go in the opposite direction. And if you've got very strong economies, I'd be very cautious about plowing a lot of money into financial assets this year.
Is that what the recent data about the GDP in the US is telling us?
Absolutely. Absolutely it is. And you know, one of the things that you've seen is that economists generally uh, you know, without disparaging u, you know, the the profession, have got the cycle completely wrong. I mean, they economies generally have flatlined through uh, the period since the end of co. There's been no noticeable cycle to speak of, but there's been an absolutely clear and plain liquidity and investment cycle. Uh, and it's been very, very normal. You just got to look through the performance of uh, different sectors of markets. I mean, markets began with technology stocks. They always do. They migrate into financial stocks. They've been strong outperformers for the last 18 months. They start to then uh, shift into resources and commodity related stocks. That's what's going up. They tend to shift from large cap at the beginning towards small to midcap towards the end. That's going on. They begin with the US, they then migrate out to other markets like Europe or Asia. That's been going on. It's been an absolutely plain vanilla investment cycle. But economists have missed it or actually rather the opposite. They've denied it by keep saying that economies are moving into recession or whatever that their story is. So I think that you've got to start taking a view that maybe economics is not driving uh, the financial sector. There's a very clear liquidity cycle which is something else that people have got to look at and that's what we focus on. That's what's you know, helped our clients enormously in the last few years to look at liquidity, not to try and pour over economic data which may anyway be, you know, suspect in terms of its quality.
Is there um, you mentioned uh, investors going from large caps into small caps, but there's also the gold and copper correlation of the copper and gold valuation in which gold is currently coming up. Copper is following the Russell is breaking out into new all-time highs, which then often leads into uh, what crypto people are saying, more money is going to be allocated into crypto. Do you see that um, there's already a change of path coming in now that gold is going vertical that the money is likely going to flow into other particular segments of the markets?
I think look, I think it's I think it's possible. I think you've got uh, I think you've got to start to uh, differentiate within the crypto space. And I'm, you know, hands up, I'm not a crypto expert. I mean, I look at crypto, but I certainly can't do a deep dive into the different nuances of different crypto uh, currencies. But what I would say is that you've got probably a very clear divide between Bitcoin, which is purely a store of value as far as I can see. So that's more likely to behave like gold and something like Ethereum, where there's clearly, you know, there there's it it facilitates work uh, you know, work on the blockchain or whatever. And therefore, if you've got a strong economy, it's more likely that Bitcoin will outperform, sorry, Ethereum will outperform Bitcoin. Uh, I can, I can buy into that, that's for sure. But I think generally speaking, the whole crypto universe is much more likely uh, overall influenced by the liquidity cycle. And if the liquidity cycle turns down, I, you know, I'm not going to put my hand up and say that I think that Bitcoin or crypto are going to be strong performers this year because I don't think they will be. My view is uh, which you know, I've said many times over recent months, is I think that this year is a year of accumulation for people. Uh, I would be buying these units on weakness. And it's a little bit like saying, you know, go back over the last 20 years. Uh, what has the gold price done? The gold price has done since year 2000. It's probably up, well, I'm going to be out of date now, but it's probably up about 12 times um, since that point. And you know, over that period, US government debt increased by a very similar figure. It was up by about 12, 12fold. So, you know, what you're looking at is gold as a very clear monetary inflation hedge. And crypto is exactly the same thing. Now, at any stage in that 20-year period, uh, we could have had a a a debate about whether it was the right time to buy gold or not or whatever. And you know, we could have fine-tuned it maybe or got it completely wrong. But the trend was dominant. And what I'm trying to say is that look over the next 20 years, the trend will be dominant. And what you've got to own is not gold and not just Bitcoin. You've got to own a basket of these monetary inflation hedges. You sometimes Bitcoin will outperform, sometimes gold will outperform, but they're monetary inflation hedges. And we are in a world where central banks and governments, the only choice they've got is to print money because these social welfare systems are simply incapable uh, of funding themselves uh, through taxation or whatever it may be. Government or bond issuance. Governments have got to print money. And that's what we're seeing worldwide. The big theme since the global financial crisis is that monetization of government debt has trended higher year after year after year. And that's what we got to recognize.
Um, I want to uh, to uh, to ask you like how is it for you to go onto social media and see all the narratives that are being created by people and you're like, "Yeah, that's just wrong." And one of those is probably the four-year cycle that some Bitcoin people have created out of the supply and demand of Bitcoin. But it's probably more correlated to the liquidity cycle rather than the four years cycle of Bitcoin alone.
Yeah, I think there's a number of things going on. I mean, you know, one is that you've got um, you know, like every technology um, and let's think of Bitcoin or crypto in that space, you've got an S-shaped growth curve of of take up. So, in other words, like a washing machine, like a television set, like a mobile phone or or electric car. They start off small. They then grow rapidly as you get um, a more extensive distribution of those products among the populace and then they start to tail off. So, I think you've got to first question to ask is where is Bitcoin or crypto on that S-shaped growth curve? And I would I would suggest it's really towards the bottom because there's so many people who just have don't have any uh, Bitcoin or cryptocurrency in their investment portfolios at all. So, I think that's that's point number one. You've got to look at that. I think the other thing then to say is to try and understand uh, you know, what is driving the supply and demand balance at any one time between these uh, between the uh, uh, the these particular currencies and if you look at Bitcoin, the four-year cycle was saying that there's a 4-year cycle in supply or h havinging cycle that we got to pay attention to. Now, you know, back maybe 10 years ago, that was really important because it had a very significant effect on price because supply was a a large element uh, in the market. But now you're looking at, you know, very small increments in the supply of Bitcoin every time you get a hing. So, I think the point that I'd make is that, you know, it may well have been the case that a 4-year cycle was important historically, but I don't think it's important going forward. Where the dominant feature is already a demand cycle, and that demand cycle is in the case of Bitcoin, a demand for a monetary inflation hedge. What's driving your demand for monetary inflation hedge? First of all, a long-term trend because you've got monetary debasement. I'm not denying that that's happening. But you've also got a cycle on top of that. And the cycle can be uh, you know, dominant certainly as I think it will be this year because I think the debt cycle is going to go out downwards. So you've got to take into account these factors. So I think it's demand that is now the key factor that's driving Bitcoin and other crypto.
How do you see um, the impact of the ETFs on assets like Bitcoin and Ethereum? Quite clearly the dynamic has shifted since the ETF went live and you can see it in the markets and the direction of the markets. But on the other hand, there's still a very positive coloration to liquidity until October. Um, there's still the correlation with gold. Do you see that there is a difference in terms of flow when the ETF was launched on Bitcoin or since the ETF?
Yeah, I think there I mean, it's it's not unimportant, but I think that one's got to get a perspective in the sense that I think there's a there's a sort of generational um, you know, element here. I mean, sort of old-timers like me are more likely to invest in Bitcoin. Uh, and probably you're more likely to look at something like Coinbase or a wallet. Uh, and I think that you've got that that distinction to make. Uh, and probably the ultimate, I mean, the the purist will go for wallets and uh, do it that way. Uh, and maybe if you've got a pension fund um, you and you're able to do it, you can put you can use an ETF. So I think that it's it's really horses for courses, but I, you know, it's it's clearly important and we can see the ETF market I mean exploding in traditional investments anyway. Uh, you know, I think it's you're getting a lot more uh, let's say ETF allocation now than you've got than you having may maybe previous asset or even stock uh, allocation. So people tending to look at these vehicles because they're very convenient. So I think that it's not unimportant, but I think you've got to look at the generational dimension.
Um, you mentioned before that there is if gold moves first then Bitcoin follows through there is a thesis that says if gold is going to stall, there's going to be that big rotation into digital gold. U but historically we've also seen that in 2016 and in 2020 gold was peaking and after that there was a good window for crypto to do well. But now looking ahead in 2026, you mentioned that it's probably going to be a good year for the economy and probably a weaker year or accumulation year for Bitcoin. So where can we put this all into if gold is going to have its standard correction of like 20 to 30% or at least the liquidity sucking out of gold itself. Where should we place the liquidity going forward or what are you expecting for the correlation between Bitcoin and gold in that sense?
Okay. Well, let let's let's take this in in in different stages. I think that uh, I'm going to answer gold second. I'm going to start with Bitcoin.
So, if you look at if you look at Bitcoin, um, my view is that Bitcoin is an asset that everyone ought to own or have in their portfolios. Okay. Or in some form, some form of crypto because it clearly is an estab it's becoming an established asset uh, and we know from experience in the last 10, 15 years, it is a very good monetary inflation hedge. Now, the caveat clearly here is it still remains uh, its integrity is maintained and I'm sedaining there that you know, it's clearly possible that governments will try and stop it. I mean, I think it's probably too late in practice or it may be the case that the protocols are challenged uh, by quantum computing. I don't know. I'm not an expert, but clearly those are sort of wealth warnings that hang uh, you over these investments, but generally speaking, my view is that you've got to have those in them in your portfolio. If you look at the investment landscape going forwards, my view is that this this year 2026 will not be a strong year uh, for Bitcoin because I see liquidity conditions, which is the main driver on our analysis, something like 40 to 45% of the f systematic factors that go into Bitcoin are global liquidity factors and in my view, global liquidity is going to be under pressure this year for all the reasons I've said. So I don't think it's going to be a great year. On the other hand, the long-term trend is very clearly upwards because global liquidity is ultimately going to expand. It has to simply because of this huge debt accumulation we've got. Effectively, that debt pile has to be monetized and therefore liquidity is going to go up. Therefore, investment strategy is to buy these assets when they're below their trend. And the good uh, rule is to buy below one standard deviation uh, lower below that trend, which is probably 20, 25% below uh, the the prevailing trend. So if you can pick Bitcoin up uh, in the sort of region of the 80,000s, uh, I would think that that's not a bad 80,000s, that's not a bad place to be buying it. If you can get it cheaper, great, but I think you'll make money on a two, three-year view. That would be my sense. Okay, gold is a slightly different question and it's really in the realm or the lap of what's happening in China. Now, my view is that China is no different really from any other economy in many cases. Uh, it has debt problems. Um, those debt problems are serious. It is not dissimilar from what Japan went through or has gone through over the last two to three decades. Japan is struggling under this debt burden. Japan managed to get out of its debt burden by printing money or it's progressively doing that. It took a long time for Japan to wake up to that idea. America after the global financial crisis in 2008, 9 with their big real estate problem uh, got out of very quickly by printing money. So the Federal Reserve came in and did huge quantitative easing and that basically initially devalued the dollar, but it basically uh, left uh, it devalued debt. It put a lot of liquidity in the in the US economy and it forced down the debt liquidity ratio of the US economy significantly sufficient to cause a bull market in general financial assets. China has to do exactly the same thing. Japan has succeeded probably in doing that same exercise over the last 10 years. Um, China is about 15 years behind Japan in terms of its debt bubble. So what China has to do is to get its debt liquidity ratio down. There are two ways you can do that. One is an unattractive way is you default debt. But that's practically impossible because you would destroy the financial system because debt is collateral. So you can't destroy collateral. What you have to do therefore is to increase liquidity. And so what I would be looking at is the Chinese to expand liquidity further. In the last 12 months, the People's Bank of China injected about $1.1 trillion US dollars into their financial markets. They're going to have to do at least the same again this year in my view. So I'd be watching that pretty closely. And as they do that, what you will see is the yuan gold price go up. Now, they probably don't want a speculative market and they've already put uh, you know, controls of increased controls to stop the Shanghai stock market, you know, bubbling up further. I would suggest that if they were not thinking of injecting more liquidity in there, why would you put those safeguards in place? Because if they were thinking of tightening, there wouldn't be any need. So, they're obviously thinking about uh, the risk of a more speculative market and therefore I think that you're going to get the the yuan gold price going up higher. What does that mean in terms of a dollar gold price? It means it probably goes higher. Now, as I said right at the beginning, markets never go in a straight line. I'm cautious and I wouldn't want to be chasing gold. On the other hand, I wouldn't want to be selling my position out right now because I think it's got further to go. But, you know, at some stage, this is clearly a bubble that's got to be addressed. But, the Chinese have a problem they've got to solve, and that problem is the real estate problem. The only way they get out of it is by printing money, and that's what they're doing. Interesting question is why isn't the dollar yuan uh, price or exchange rate altering and I think because the Chinese have got that under control. It's a political exchange rate and I think they're controlling that pretty tightly.
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It's interesting because you mentioned that the Japanese currency is getting weaker. The Chinese currency in a sense is also getting weaker. And then we have the US um having an enormous debt problem with Paul being in place not feeling generous about cutting rates even more. Um, and there's Trump influencing Paul in a way that he wants to lower the interest rates to get the dollar weaker to lower the pricing on uh, oil for instance, to stimulate the economy. In all that madness, what's happening? What is the story behind the Fed and and Trump trying to influence that?
Well, I mean, we we've gone on to the Trump subject, so.
I had to. I think the look, I think the issue is that I think it's partly that Trump wants interest rates lower uh, because it would help stimulate the mortgage market and clearly the housing market in the US has been under pressure. The remitt uh, of Trump 2 is basically to get Main Street uh, revived. Uh, Wall Street's had its day um, in terms of their view. It's it's benefited hugely from Trump policies. Now, it's Main Street's turn and everything you see that the administration is doing is trying to get the US real economy um, you know, thriving again. Um, and you know, I've used a term which I call treasury QE, which is basically the policy that Scott Bessant, the US Treasury Secretary is undertaking whereby US government spending is being funded directly in the bill market by issuing very short-dated government bills. I'm talking three, six month paper uh, into the markets, which is effectively printing money because it's the banks, the banking sector that buys that stuff up and expands its balance sheet. So what you're looking at is a very clear policy at the at to monetize uh, debt in the US economy and more directly to monetize the deficit and under that framework, it's also quite useful to have low interest rates at the front end because if you're funding treasury bills at 50 basis points lower than you are uh, you currently are, that's actually a benefit for your interest bill. So I think you've got you've got that feature there. And I think the third thing that they're thinking about is that if you get the uh, the interest rate down, then you're going to help to get the dollar down. And that's another thing they probably is on their wish list. Now, I think it's pretty hard for them to get the dollar down, but that's another story. But generally speaking, that's what they're doing. Now, is JPAL that important in the Fed? No, he's not. Is the, you know, is the FOMC critical? No, it's not really. I mean, at the end of the day, what really matters to the markets, uh, is the balance sheet and the amount of liquidity that the Federal Reserve is putting into the system. I mean, I, you know, I'm cynical enough and having done this for so long that I just don't believe that the Federal Reserve, uh, you know, sets interest rates. I think the market sets interest rates. I think the Federal Reserve is pretty much following what the market is doing. And if you want to know what interest rates are going to do, just look at the term structure. Uh, the term structure of interest rates is pretty clear. And you know, my view is that you may get you possibly may get a small cut in US rates, but I don't think it's going to be meaningful. Generally speaking, the economy is so strong in the US right now that they can't really afford to cut very much. So uh, you know, at the end of the day, I shrug my shoulders and say this is really a pantomime and um, you know, ultimately what we've got to look at is the composition of the Fed balance sheet and what the Federal Reserve has been doing over the last few months, particularly given the uh, hiatus in the repo markets, which is a much more interesting discussion point than J Pal. Look at what the repo markets have been doing. Uh, they've been up to now very tight, but the Federal Reserve has introduced a new tranch of liquidity uh, which is this uh, reserve management purchase, uh, which has basically alleviated that.
It's another hidden QE episode. Now I think that that is decent, uh, it's backing the markets, uh, but it's probably not sufficiently large to propel Wall Street to new highs or significantly higher highs. I think it's sufficient for a rangebound market. Uh, the Fed is not tightening, but it's basically put a put, you know, under the markets, and I think that's reassuring. Uh, but I would say my best guess is that Wall Street sort of goes sideways this year. Um, possibly down, but more likely sideways. But that's really what's going on at the Fed.
If we talk about those repos, um, one thing that I try to understand as an investor, as a trader in this market, and we are running our own liquid fund here. Um, you see the M2 supply is going up. But on the other hand, we have the Fed balance sheet that has been reduced over the past three years, and that is now at the start of this year. You have the overnight repos that are being issued and some sort of liquidity being injected into the economic system. What is the misunderstanding about the treasury QE that you mentioned, um, in the sense that it's not really injecting that much liquidity and not pushing the markets upwards a lot? As because every time when there is something being done, you see the posts on social media coming in like, "Now it's bull market again," blah, blah, blah. It's not as a fact as big as it is, but what does it actually do?
Well, it's a, it's a very good point. I mean, maybe I wasn't clear enough before. So, it's thanks for that, for that, um, opportunity to clarify. I think you've got to differentiate, um, sources of liquidity. I'm thinking of those as sort of two, two pipes or two conduits. One is, uh, what I've called treasury QE, which is basically, uh, direct spending on things like procurement, defense spending, uh, investment in critical minerals, uh, what the federal government is doing. And that is being funded at the very short end of the market by bills. Okay. Uh, those bills are being bought by private banks because this is a sort of security that private banks love. So they're buying these short-term bills, and because of that, they're expanding their balance sheet, uh, to do that, to accommodate that, and that basically is monetization of debt. So, in other words, what's happening is the deficit is being financed directly by the banks. That's monetization, printing money, right?
The Federal Reserve is the other conduit, and that's what we previously had as a way of getting liquidity into the system. The problem with the Federal Reserve is it has to go first through the financial markets, whereas treasury QE is going directly into the real economy. Um, so Fed QE, the problem with that is it's undirected. Uh, in other words, it can just spray everywhere, and everybody gets soaked by liquidity, and all asset prices go up. And this is what Trump and Bessant have argued against because they say it's terribly unfair this process because Main Street, uh, people who don't benefit from, uh, owning lots of assets, are not, are not gaining from this wealth effect. It's basically the sort of the, you know, the, the rich Democrats on Wall Street are the ones that are that are getting all the all the extra, uh, all the extra juice. So what they're saying is that let's cut down the Fed QE. Let's stop the Federal Reserve expanding its balance sheet, uh, etc. Now, that's a great aspiration, but the problem is that the banking system needs Fed liquidity progressively. And if you turn the Fed money tap off, what you do is you screw the banks and you create problems in the repo markets. And the problems in the repo markets are, uh, uh, evidence the fact that the banks are scrambling for liquidity, uh, in the short-term money markets. So what the Federal Reserve has to do is rather than slamming the tap off, is to basically allow it to keep dripping a bit so at least you keep the, uh, the bank moist, if you like, with a bit more liquidity. And that's what they're doing. So they're basically trying to fine-tune this to find the level, the minimum level they've got to do to, uh, satisfy the banks, and they've achieved that. I mean, you look at the, the repo markets are really quietened down, uh, in the last two to three weeks.
What, what should, what type of metrics or data points should change this entire direction that we're getting into? Is it a higher unemployment rate? Is it a bank failure? Is it, what can change the entire direction of the Fed?
Well, I mean, the answer, the short answer is the bond market because at the end of the day, despite what, um, uh, you know, the stated remit of the Fed is to target inflation, uh, or employment, uh, the real remit of every central bank worldwide is the integrity of the sovereign bond market. And you just got to look for evidence recently of the Bank of England, who were undertaking a QT policy, and with some alacrity overnight, they shifted to QE to protect the the British gilt market. So make no mistake, uh, if push comes to shove, central banks will come in and change their, change their, their views. And you can see that, you know, in in small measure in the US, uh, with, you know, concerns over the repo trade, the central bank came in very, very quickly. And the reason they were doing that is that, in the case of the US, there is a huge, um, um, what's called a basis trade, which uses the repo markets to fund, uh, hedge fund buying of treasuries. And if the repo market becomes, uh, derailed in any way, the bond market could sell off furiously. Uh, you know, the hedge funds allegedly got positions of one and a half trillion, um, you know, in, uh, in US government bonds, or they've been net buyers of that amount in the last 12 months. So that would suggest that it's a big problem, and that's why central banks, uh, act with some alacrity when it comes to problems in their debt markets, repo markets, or whatever. Uh, so that's the, that's the key thing. If you get a problem with bond volatility. So, in other words, you know, let's not dismiss the Japanese threat. Uh, I'm not saying that rising bond yields are a good thing, but if you start to get a more meaningful sell-off in the Japanese bond market, and you get heightened volatility in bonds worldwide, and the US Treasury market, uh, you know, catches a cold because of that, then the Federal Reserve may well act more seriously. If you get a bank failure, it's quite probable they will do something. Although I'm sure they're monitoring things, you know, behind the scenes where they would make sure that wouldn't happen. Uh, but they, you know, they'd find ways of actually doing that. Um, and, you know, I, I think that, you know, all the, all these things are relevant. Um, I, I don't believe that the Federal, I mean, if you got a recession, you know, God forbid, in America, I mean, the Federal Reserve would likely act, but, uh, generally speaking, I think it comes back to bond markets.
If we talk about the Fed and the amount of debt that the US has, of course, there are different numbers, but, um, there needs to be the debt needs to be rolled over. It's going to happen because of COVID. Five years ago, there's a large amount of debt that still needs to be rolled over in 2026. I've seen figures of like 8 to 9 trillion. I'm not sure how much it is, probably you do. Um, is that going to have an impact into the markets in the sense that to reduce the interest rates, you probably are favoring the rollover, or it's favoring some parties there?
Yeah, the, the roll, the so-called debt maturity wall is significant, and it's, uh, I mean, I don't know if your figure was just the US, but, uh, I mean, it sounded like it was, but I mean, globally, you're talking about a much, much bigger figure. You're talking about somewhere between 30 and 30 and $40 trillion of rollover every year. And the point that, you know, is often missed is that, you know, if you issue a debt, that debt is not forever unless it's a perpetual bond, which there's very few. Most debts have terms, and the average term is about five years. So if you issue a bond, uh, you've got to roll that bond again in five years' time. Um, and that roll requires liquidity. You need liquidity in the system. And this is why looking at the debt liquidity ratio is so important in economies. And if you look at, uh, where you get financial crisis, financial crisis always occur when the debt liquidity ratio of an economy is extended. Uh, and I gave the example of China and the previous example of Japan. Uh, those crises or debt crises occurred, uh, when you had extended debt liquidity ratio. So you need to keep that ratio down. Um, this is one of the problems we've got upcoming because if you look at the track of the debt liquidity ratio for the advanced economies, what we've just come, come through over the last 10 years is the most depressed, uh, or low level of the debt liquidity ratio that we've recorded, uh, you know, in the last 40 or 50 years. So that explains why there's been surplus liquidity in the system, which has fueled these asset bubbles. And that is really, really been courtesy of two features. One feature is that every single problem that you get, uh, be it COVID, be it GFC problems, central banks come in and print money. Look at what the US did in the repo crisis at the end of last year. They printed money. They added more liquidity to the system. Uh, whenever the ECB finds a problem in the Eurozone, what do they do? They print money. You know, as as Draghi said, we'll do whatever it takes. That means printing money. So what you've got is abundant liquidity in the system because you've got these, these effects, these debt problems. And the more debt that is out there, um, the more the, the bigger the problem you get. And we know that debt is escalating fast because of aging societies and the welfare spend that is going on in these countries.
Now, um, the policy that has been, uh, that, you know, many, many governments decided they would take, and this is what is unraveling before our eyes, is that because of the bad demographics in the West, in Europe and America, the decision was taken that we need, uh, to have mass immigration. And that is now unraveling as part of this whole policy, which I think, uh, you, you know, part, you know, one's views about Trump, but, you know, I think he's, he's articulating. So I think these are some of the problems.
If you look forward over the next, um, five years, a lot of the debt that was termed out during the COVID crisis, and remember that interest rates during COVID were slashed to zero or negative rates, okay, by policymakers. When I was, um, at a firm called Salomon Brothers, which was the big bond firm in America, uh, in the 1990s, there was a book that we were schooled on, which was called "A History of Interest Rates" by Sydney Homer, which looks at five millennia of a history of interest rates. Nowhere in those pages is there zero or negative interest rates. That is the anomaly that we went through in the last five years with COVID. And because of that, debt was termed out. In other words, people refinanced their debt at zero interest rates, but they termed the debt out to the back end of the 2020s. 2026, 27, 28, 29 is when that debt comes back. So if you look at the debt liquidity ratio for the advanced economies, what you see is a very significant J-shape or J-curve where it's depressed significantly in the near term, or was depressed. It's now starting to shift up significantly, and you get this sort of dog leg effect of a strong rise in the debt liquidity ratio, which is going to put a lot of pressure on financial markets. And that will mean ultimately the central banks have to print money in the future. No, there's no way out. They're going to have to do that, which is why we keep saying you've got to have these monetary inflation hedges like Bitcoin and gold, and buy them on weakness because bad stuff is coming.
That's, I wanted to touch upon that. Um, I mean, you, you phrase the "everything bubble." Everyone that has some logic way of thinking and looks at all the charts, you can see that everything is quite inflated at this point. Um, in the bigger scheme of things, where do you see us in the entire financial cycle? Um, some people are referencing to it might be anywhere close to 1929. It might be close to the 2000s. The NASDAQ is still 1% away from a new all-time high. Where do you put us in that entire picture?
Well, I don't think, and look, I, I think that if you go back to, um, these crises, you look at 1929, you look at, um, the GFC in 2008, you look at the Asian financial crisis in 1997. Uh, I mean, all these different episodes are basically problems about refinancing debt. Okay, this is what the ultimate issue is. In each of those, uh, examples, you had a lot of leverage and you had an inability to roll the debt over. Okay, so in other words, what I'm saying is the debt liquidity ratios in each of those examples proved to be very extended. We are moving into a situation where the debt liquidity ratio in the advanced economies are now moving up to sky-high levels. China and Japan have just been in those same frames. Uh, Japan has got out of that by printing money. But what has happened to the yen? It's collapsed, right? Uh, China is in that same frame. Uh, and it's printing money. And what's happening to the yuan gold price? It's soaring upwards. Now, China has the benefit of a 1.1 trillion, uh, trade surplus. So, it's got huge amounts of dollars. So, it's actually in their, uh, in their gift to actually control the dollar gold price. They, sorry, the dollar yen currency cross rate. They can do that for a certain amount of time. So what I would be looking at is the evidence that when you get money printing and big debt problems, what you find is that currencies lose their value. That's called monetary inflation. Okay? In those situations of monetary inflation, you want a solid store of value that will protect you. Hence, the Chinese are buying gold, uh, as if it's going out of fashion, which it probably is. Um, and, um, effectively, uh, you want to be buying Bitcoin and gold if you're a Western investor for what is coming, the coming storm.
Mhm. Why would people continue to just have a job when, uh, inflation is going up even more because the central banks keep on printing?
What is a job?
Yeah, because the wages are just not going up.
People don't own assets.
95, 90, 95% are basically sitting there with, uh, you know, largely impoverished and only depend on their wages. That's all they can do.
So your advice would be to, to basically start buying those assets you've been mentioning in this episode.
I think so. That, that's my view because, you know, history is history. Just look at this financial markets move in cycles.
What would be the impact of, uh, of AI onto everything in your opinion?
Uh, well, I think that's a, that's a, that's a whole episode again. Yeah, look, I think the, the fact is that AI is going to disguise a lot of these trends. And I think we, you've got to remember here that if you're looking at inflation, uh, the question to ask is what do people really mean by inflation? Um, and it means different things to different people. My definition would be to say, look, what you've got out there is you've got Main Street or high street inflation, okay? But that is, that's what we all experience when we go shopping. But that high street inflation or Main Street inflation is made up of two inputs. It's made up of monetary inflation. In other words, the, uh, the trashing of your paper money. So, in other words, if you're in Turkey or, uh, you were in Argentina historically, uh, the central bank would be printing so much money that you get hyperinflation. Okay, those have been episodes that we've witnessed in the past. Clearly, Weimar Germany was another example. Uh, but then you've got another input into high street prices, which is called cost inflation or deflation. And that is things like productivity gains, uh, cheap goods that are dumped maybe from China. Uh, it's things like higher oil prices. It's things like taxes. So what you've got are those two elements that go into high street prices. You can see a situation where central banks are printing money to finance their budget deficit. So you're getting monetary inflation, but at the same time, you're getting cost deflation. And that cost deflation is basically meaning that Main Street prices are not going up the way that monetary inflation is suggesting. And what we've just been through is a period where China has basically created a lot of cost deflation in the West because they've come in with very low unit labor costs. They've managed to undermine the pricing of Western firms, and they've dumped goods, and that has basically meant our high street prices have been depressed. Okay, it may be that AI does exactly the same thing. So what you may see is limited high street or Main Street inflation. It's contained, but you still got this humming sound in the background, this buzzing, which is monetary inflation going on at the same time.
What does gold, what does gold respond to? Gold does not respond to high street inflation. Gold responds to monetary inflation. Most assets respond to monetary inflation in different degrees. Okay. Bonds are the worst hedge against monetary inflation. Uh, equities are a decent hedge. NASDAQ is a good hedge. Uh, residential real estate is a good hedge. Gold is an excellent hedge. And Bitcoin has proved in the last few years, uh, par excellence, uh, hedge. So, you know, that's what you got to start thinking about. Now, clearly, if that liquidity cycle goes down, and I'm saying it's cyclical as well as trending, you're going to suffer on those more leveraged or more sensitive assets like Bitcoin, and that's what I'm saying. But it doesn't detract from the fact that you've got a big trend there, and when you dip below trend, start to buy these things.
If someone wants to get a clear understanding of liquidity or, uh, the financial markets as a whole, where would you direct them to at the beginning of this year?
Well, I think that the, I mean, it's a difficult question. I think the, I mean, the fact is that not many people look at the world in the same way that we do. Okay. So, so got to make that, that caveat. Uh, I wrote a book a few years ago about this whole, this whole, uh, issue of global liquidity and whatever, called "Capital Wars," which is a McMillan publication. It's about five years old now, so maybe it's getting slightly out of date, but we've got a Substack called Capital Wars, same name, where we basically write about these things, uh, you know, two or three times a week and provide data. But, uh, you know, essentially, uh, you know, we're, we're providing research into the markets on these same phenomena. And, uh, you know, it's all about understanding global liquidity, and that's really the important thing for financial assets. Financial assets are moved by money. Okay, money in the financial sector, which is what we think about as global liquidity. Uh, and that money moves, it's fungible. So, you know, you can get shifts across currencies. Uh, but ultimately, you've got to think about this thing as a global pool. Uh, what China does, uh, will affect all of us in some measure. Uh, it may go through different conduits. Uh, if the Chinese print money, it tends to, uh, appear in gold or it tends to appear in commodity prices. Uh, if the Federal Reserve prints money, it tends to appear much more in terms of Bitcoin, and then maybe laterally, uh, Wall Street and gold, but you've got different conduits. Uh, but they're all important at the end of the day.
Well, um, I would like to thank you for the time that you've spent with us to explain everything in the markets. Um, I've been enjoying the reads. I've been, well, I've been reading the book, but I haven't gone through it all. I still need to finish it, but I've started reading, uh, reading the book. Um, it's super, super interesting to get a clear understanding of what liquidity is. Um, so I would give anyone the advice to follow you and to listen to you because it's so, so impressive. Um, thank you very much for joining us today, and I would love to do another one in about a year's time. It's going to be a rocky year, I suppose, uh, with Trump being in, uh, in the White House, but we'll see where we get to.
It's going to be interesting. Thank you for the time. I enjoyed it. Thank you very much.