“Liquidity Is Peaking — This Will Hurt Markets” | Michael Howell on Bitcoin, Gold & Fed Policy

Whenever you get a high debt liquidity ratio, you get refinancing tensions and you get financial crisis.

Other macro experts were looking at these PMI numbers. As you've said in your research though, there is a negative correlation between business activity, which is that, and financial liquidity.

Bull markets are all about themes and trends. Bare markets are about cycles, and we're getting a down cycle. Now, I would be buying gold and crypto on weakness. it means something around the sort of the mid the mid7,000s for Bitcoin. I'd be shifting towards energy. I'd be getting out of technology almost entirely.

How would you think about asset allocation now at this stage in the liquidity cycle?

You know, was a very difficult question.

Is this kind of like the canary in the coal mine for global liquidity that you've been looking for?

So, I think the answer to that question is almost certainly.

Good morning, afternoon or evening and welcome back to another podcast episode here on the coin bureau. Now today our guest is Mr. Michael Howell who is a managing director of crossborder capital. He has over 40 years in global finance experience and is a leading expert on liquidity and capital flows. So, Michael, very warm welcome to the Coin Bureau.

Well, thanks Nick. Good to be here. There's plenty going on in markets right now. There's lots to talk about. I think

so much. We're going to get into all of that right now. Before we do, guys, a quick disclaimer. Nothing in this episode is financial or investment advice. Uh, please consult the disclaimer in the description for more information and consult your financial advisor before making investment decisions.

Now, Michael, as I said in the introduction, you're a global liquidity expert and your GLI index is quoted by numerous market analysts. Now, just to appropriately tee up this conversation for our viewers, can you explain how your liquidity indicators differ from the broader measures out there uh the likes of the M2 and that that most people quote and how do you track this?

Well, that's a it's a it's a big subject, but let me uh let me try and dig into the the key point. What we're looking at is the flow of money through financial markets. Okay, that's what's really driving financial asset prices and that I think is most people would accept. The question is how do you measure that? And it certainly isn't by measuring M2 and the reason it's not M2. M2 for those that don't know is essentially a conventional money supply measure that is broadly speaking the retail deposits of high street banks. Now, if you believe that high street bank deposits, retail deposits are what is driving economies and financial markets, well, you know, I'll come quietly, but the fact is that is I'm not going to say irrelevant, but it's not really the picture. Uh, it's certainly not even part of the p. It's one part, but it's certainly not a major part of the picture. And what we've got to look at is what financial institutions and what money flows into financial markets are really doing. And for that, we have to track a concept we call liquidity. And liquidity is a global uh factor. In other words, that money is fungeible. It moves from market to market, from asset class to asset class. But the other thing is that it's effectively money that is in the financial sector. It is not money that's in the real economy. And the trouble with M2 or those money supply measures is they fudge that difference. All money that is anywhere must be somewhere. So if it's in financial markets, it's not in the real economy. And if it's in the real economy, it's not in financial markets. So we put a lot of work over the years into actually tracking this thing as precisely as we can and we monitor over 90 economies worldwide to get that data. A lot of that data is monthly but actually for a smaller subset of actually the important economies we can now do that uh both weekly and in some cases daily. So there's a lot of granularity now in this data set.

Yeah. And that's very interesting the point you make around the money in the real economy and that in the financial economy and how business cycle will drive the the need for that liquidity and this ties into your current thesis in terms of this year. But can you explain like the movement between the real economy and the financial economy with this liquidity?

Yeah, sure. I mean, I think the the other thing one's got to say is that uh in sort of in sort of understanding how liquidity works, what you've got to do is to think of the financial system in a very different way and not in the way that textbooks tell us. And the problem with textbooks is that what textbooks argue is that capital markets are there to raise money for new investment projects. I mean, that just doesn't happen anymore. Uh or if it does happen, it's really at the margin. Uh what mainly happens is that financial markets are there to roll over debt. So in other words, the uh the flow of money is part of a debt re uh refinancing cycle and you've got to think of it in those terms. So what that really means is that balance sheet capacity is really critical within the financial sphere and that's another way of thinking about uh what we term liquidity. So think of it in those terms. It's really the need for debt refinancing. The capacity of the financial sector and that money uh is used or can be used in many things in finance but if it's used to refinance debt it's not going to be going into financial assets. Equally if you've got a strong real economy that is let's say uh fueling capex spending or it's fueling consumer spending that money is not going to be able to be used in financial asset purchase. So our argument is you've got to be very careful how you define these concepts and what we're looking at very closely is the money that is available to financial asset purchase is really as straightforward as that and if we watch that movement of money uh liquidity or capital flow call it what you like but that flow of funds is really what's driving uh the financial markets as we speak.

Yeah, we'll get on to the debt refinancing cycle in a bit. I'm just curious in terms of just going back to your measures of global liquidity and this concept of global um just very high level in terms of how you actually calculate the index itself. I mean you've obviously got you've got US liquidity and how much of the other components like other countries for example and do you focus on in terms of coming to that measure of global liquidity?

Okay. Well, let me uh let me try and describe what we're doing. We're effectively measuring the momentum of liquidity. I mean we obviously look at the level but what's critical for understanding the cycle is the momentum of liquidity through the system. Okay. And that is an aggregate. It's a global aggregate. It comprises uh as I say 90 countries. The US and China are the dominant components of that. Uh and we split each country into three separate components. We look at the central bank money flow or money uh liquidity injections. We look at what the private sector itself is creating. So this includes both conventional banks and shadow banks. We look at things like repo markets. We look at what corporations are actually uh doing in terms of generating cash. We look at household savings flows. So all these things basically go into a private sector pot. And then we also look thirdly at crossber flows. So the aggregate of all these elements central bank private sector crossber flows are what goes into each national index and then those national indexes are aggregated into a global liquidity measure and that's typically weighted by size. So um in other words the US and China are dominant parts and you know over time the weightings change. So if you look back to when we were creating these these this data in 1990, China was a much smaller component than it is now. Uh China clearly has grown enormously in size in terms of its financial system and it makes a big difference but we can cut and dice this data in many many different ways.

Yeah. But the main point there is that the change of this liquidity measure itself like the momentum with it which it flows is has more impact than an absolute level which is why things like M2 aren't that relevant generally. So coming back to your thesis for 2026 right and you've you know you you elucidated this in a few podcasts recently that you say that we could be peing in terms of global liquidity which of course as you doesn't bode well for risk assets. So can you expand on why it's peaking right now?

Yeah, let me say as well that liquidity is a leading indicator. So we try not to forecast it but clearly ine or or inevitably we have to because that's what everyone likes to see. They like to see, you know, as far into the future as they can. But generally speaking, liquidity is leading. So you don't really need to forecast. You just need to monitor it and see what is currently going on. And the lead times will vary. Now, those lead times can be as long as maybe 15 to 18 months for the real economy. Uh they can be as short as about 3 months for crypto assets. Uh and they can be a sort of medium level of about 6 months to 9 months for fixed income markets and uh and equity markets. So you get that idea of a sequence of uh movements as liquidity uh basically changes. Now liquidity moves on a cycle and one of the things that we're arguing right now this is the chart. Let me just describe what you see here. So you've got two lines. Uh one is the black line which is our index of liquidity momentum. Um that actually is technically uh what people would call a zcore. It's a zcore of underlying momentum uh of uh of liquidity in all these various components. Uh why didn't we use it as a zcore? Very simple reason that when we first started to do this uh decades ago uh nobody understood what a zcore was. Maybe some still don't. So we actually put it into index form but effectively behind that you can see it's it's a robust statistical indicator and that shows fluctuations. Uh as you can see the red line is a sine wave that we basically put on top of that that was estimated if people are wonkish enough by furer analysis uh to show that it has an average uh frequency of 65 months somewhere between 5 and 6 years. Now as a cross check to make sure that we were uh not u you know not uh saying something wrong here. We had this cross-cheed uh independently by the study for the foundation of cycles which is a major um institution worldwide that does a lot of research on cycle work and they came back with exactly the same conclusion. They said their algorithms also came out and found a 65mon cycle in the data. So reassuringly this seems to be what it is. Why is it fluctuating at 65 months? That's an interesting question point to ponder. Uh and the reason that we say is because that's the average maturity of debt in the world economy and therefore this is a debt refinancing cycle. Now why is it peaking right now? Uh it could be a number of reasons obviously uh if I come back to those three drivers it could be that crossber flows in some sense are are deteriorating but given this is a global aggregate that would be uh probably a big ass to say that all global flows were shrinking. The second thing could be the central banks are tightening. Um they're not really. I mean actually in truth they're probably just at the margin of moving towards a slightly tighter stance but they're definitely not tightening yet. And the third thing is to look at what private sector liquidity is doing. And what we uh what we're basically seeing is a significant deterioration going on in private sector liquidity. Now that is coming um broadly because money is leaving financial assets and going into the real economy. You will have seen huge gains recently in commodity markets. Okay, the commodity markets are in the real economy. They are sucking liquidity out uh of financial the financial sector. The US economy has started to go onto a faster growth track. Uh you've seen a big jump in the PMI index in the last few days in the US which suggests the US economy is now getting a lot more traction and with the one big beautiful bill that's out there that's likely to goose the economy even more. So what we've got is a period of strong economic growth which is beginning to suck more and more liquidity out of financial markets which is why you're seeing this uh this black line drop. Now, it so happened that that's almost exactly on Q. And one of the remarkable things that you will see looking at this uh the correlation between the red line and the black line is that clearly it's an approximation. But if you look at the more recent cycles, they've seem to have fluctuated almost exactly on track. So they've peaked and they've troughed in the last two or three waves absolutely on uh uh as expected in line with that sort of theoretical uh sine wave the dotted red line and true to form it looks as if uh global liquidity peaked uh sometime around uh the end of the third quarter of last year now it has a lead time so that lead time is about uh as I said about 3 months for crypto it's about 6 to9 months uh for other conventional financial assets like fixed income uh and uh uh and equities and it has a much longer lead time uh maybe 15 to 18 months for the real economies. So you get the idea that we're looking at this sort of moving train or the sequence of carriages uh moving over a roller coaster and uh what's happening is that financial markets are beginning to see the first signs of this change in uh the liquidity climate.

Yeah, it's very interesting because um many of my other macro experts who like look at have look at liquidity like for example at least in the crypto space many people were looking at these as you mentioned these PMI numbers I think there were the ones on Monday that came in above 50 so showed an expansion in manufacturing so in the real economy uh but as you've said in your research that you there's a negative correlation between business activity which is that and financial liquidity which is moving into the real economy so um and indeed it's been quite precient in the sense that it peaked like 3 four months ago and we've seen this massive sell off in in crypto and rally in metals. So I think that that's that's the most important point there is that many people are like looking at the ISM numbers and they think that this is going to be the like a harbinger of a bull market to come for risk assets like crypto but according to your thesis not so much.

Yeah, I mean if you look at the slide that I've just uh put up on the screen which is a theoretical uh or schematic diagram which looks at asset allocation. I mean what that is is basically trying to show is that there is a cycle uh both in the phases of the liquidity cycle which is on the right hand side and that can be aligned pretty precisely with the performance of different asset classes. Now uh I have to sort of tread through the weeds of the left hand side a little bit. But what that's saying is that uh we think of the liquidity cycle as having four phases that we call calm, speculation, turbulence, rebound. The names are generic and they give some flavor as to what's going on. Uh risk on is when the cycle is moving upwards. Um risk off is when it's moving downwards. And if you look at the correspondence on the left with asset allocation, you can see that equity markets tend to do very well in the upswings, uh that sort of that brown area that we've shaded. Uh then you see commodities around the top of the cycle. Uh that's when they tend to perform very well. So uh that's the phase we're in now as it would happen. And then on the downswing, you tend to find cash being one of the best asset classes. And then at the bottom of the cycle, long duration government bonds come into their own. So then the cycle restarts again and equities pick up. Now the other thing that we've sort of embroidered on top of that is uh movements of equity industry groups. So you can see cyclical growth. So things like technology do well early in the cycle. Cyclical value which are things like materials and energy do well around the peaks. Uh things like defensive value which are things like utilities uh maybe consumer staples do well in the downswing and then around the trough you get growth equities like drugs pharmaceutical stocks uh then excelling so that's how you get the asset allocation shifts now what I'd say is that parch uh what has been a very flat uh real economy worldwide since co it's been a very pronounced investment cycle and that investment cycle has keyed off exactly the liquidity cycle and what you've got is a very uh standard or plain vanilla investment cycle unfolding where almost everything has run to clockwork. So you've seen technology being the leader. You've seen financials come through midcycle. Uh you've seen resource and commodity stocks really zooming now. Energy is now getting a strong bid and we're starting to get some uh pickup in consumer staples as people moving more defensively. Uh and technology clearly is underperforming those uh that that rotation. So it all seems to be very you know very normal. Yield curve steepened. Um large cap stocks have given way to small midcap stocks as you'd expect. Uh and there's more diversification out of the dollar into international markets. So everything you would have expected to see in a normal investment cycle is unfolding before us.

Yeah, that's very interesting. And just going back to particular asset classes, the mo those that are the most sensitive that you've compared a lot to are are crypto obviously with in the sector we operate in and um you actually have a really interesting chart I believe from your slides where you compare crypto to liquidity uh more specifically Bitcoin, Ethereum and Salana index to uh liquidity and how crypto as being the most sensitive is the one that could if I believe one of these. Yeah. where you compare crypto to the liquidity index and how um indeed like I said a bit earlier the fact that crypto is now selling off you know bitcoin's hitting 15-month lows um first of all can you explain the chart and and then my question is is this kind of like the canary in the coal mine for global liquidity that you've been looking for

yes I think the answer to that question is is almost certainly yes now if you look at the chart what the chart is showing is that the orange line is the performance of a basket of cryptocurrencies is bitcoin coin, Ethereum, Salana, and the percentages are 60 3010. So, it's a, you know, a pretty reasonable uh basket or or stab at what the crypto universe uh effectively looks like. The orange line is showing the changes over 6 weeks. Why 6 weeks? Because it gets it gets rid of a lot of the noise in the data. Uh it, you know, it's arbitrary. I accept we could have looked at 12 weeks or 13 weeks or whatever it may be, but six weeks seems to be pretty convenient and that's what we took. The black line is exactly the same uh frequency. It's a six-w week change in our global liquidity aggregate in do in measured in US dollars. So this is an 185 trillion aggregate uh that we monitor weekly and what we're showing here is the uh six week changes and we've advanced that by 13 weeks in other words 3 months. Now what that shows is a very clear um lead time of liquidity on um this universe of Bitcoin, Ethereum, Salana. Um the fluctuations are you know decent. Uh you can eyeball the chart and see that there's a pretty strong correspondence there. But remember it's being it's leading by by 13 weeks. Um what that's really telling us uh as I think as you're referring is that these assets particularly Bitcoin are barometers of liquidity and in actual fact if you look at the sensitivity of of these assets uh compared with say gold or silver or stock markets you find that actually uh bitcoin ethereum salana are the most liquidity sensitive assets on the planet they are very very sensitive to movements in liquidity so you can see that movement here and therefore the conclusion that we come to is that if you're going to get a a renewed bull market in crypto, you've got to pay a lot of attention to liquidity. Now we did a breakdown and an analysis which was uh a sort of deep dive into the statistics of Bitcoin uh and these other currencies and we basically found um using uh what's called a VAR analysis a vector order regression model that something like just over 40% of the variation the systematic variation in Bitcoin came from movements in global liquidity prior movements in global liquidity I should add. There were two other elements that came into that. One of those was investor risk appetite uh which you could take as a a proxy for that as the NASDAQ index. So you'd expect if NASDAQ is selling off also crypto will sell off and if nasdaq is rising strongly then crypto will rise strongly. So I think there's there's that element that's a relatively smaller part maybe uh about 20% or so and then the other elements are related to gold. Now the interesting point about the gold relationship uh which is maybe getting a tan wonkonish but it's what in statistics is called an error feedback mechanism and what it means uh in in sort of uh in plain English is that uh bitcoin let's say bitcoin bitcoin and gold are negatively correlated short-term but very positively correlated long-term. So they trend together, but they cycle apart. And we're seeing more evidence of that right now. And that's one of the things, one of the puzzles that has uh uh that sort of spooked people to say, well, maybe Bitcoin isn't really a monetary inflation hedge because gold is running hugely because of the debasement trade and maybe Bitcoin and Ethereum and whatever are not really that in practice. They're just random movements and it's a it's a bubble. I I would disagree with that. I think that uh that what we're seeing is Bitcoin, Ethereum, Etal basically moving to reflect the fact that we're looking at slowing uh liquidity conditions. Now the interesting question that comes out of that is why is it therefore that uh gold and silver have been racing higher albeit they're sort of coming down a bit now but they've been strong and that's a kind of puzzle and it is very difficult for people that argue that there is a great debasement trade going on as to why uh you've got this discrepancy not just between Bitcoin uh and gold but actually more particularly uh if we look at the next slide between um the bond markets as well. Now, this is getting a bit into the weeds, I admit, but if you just those people that are not into bond maths, uh will probably find this, you know, uh difficult difficult to to pick up. But what this is really saying is this is bond term premier and this is the extra compensation, a measure of the extra compensation that investors require uh to hold bonds of longer duration. And this is looking at 10-year bonds. So what this is saying is that for example the top line there is looking at the implied term premier on French oats. Uh that's French government bonds, 10-year government bonds. And what that principally says is that currently you have to pay uh something like 60 basis points uh extra uh to hold a an OT French government bond uh beyond what people's interest rate expectations are. So it's like a risk premium on top of bonds and you've got those different measures for different countries. Now some are negative uh and that's because they those bonds are uh used for collateral. They're they're they're deemed to be pristine pristine collateral and they're in great demand and so they they will trade at a negative premium. Notwithstanding the fact what I'm trying to make point I'm trying to make here is that if you were looking at a great debasement you would expect to see all those term premier spiking higher and they're simply not. In other words that people would demand even more compensation for holding uh what is u an asset that will uh that will depreciate dramatically in a monetary inflation i.e. bonds. Bond holders will basically get nothing back if there's a great debasement. Therefore, the markets being efficient should price that in and start to give a much much bigger term premium and they're not. So, that would say that what we're what we are not looking at now is a great debasement trade. Something else is going on. Now, that's something else is China. And I can pause on this bit if you've got questions.

I mean, that's fascinating. I was going to get on to that because yeah, I think that um many people had been pointing to this. million dollar is down and you've got many people talking about um all these central banks are now trying to diversify away from uh you know the dollar so dd dollararization I mean I wonder if that's what you're going to mention as well because I know you're going to cover the China I think you've got a slide on China um the UN gold chart um and how Chinese individuals are basically trying to hedge out their risk but um yeah I mean that's the thing it's like the fact that many people are pointing to the gold now as being the great debasement trade whereas you're saying actually no cuz if that was the case, you'd see these longer yield um these premier spiking because people would devour more money, more return for holding for an asset that is debasing.

Yeah, exactly. And you would expect to see Bitcoin going up because it's an asset that you know without getting into the into the debate about uh you know quantum computing and can the codes be broken or whether the protocols be broken. Putting that to one side, Bitcoin is an asset that's got fixed supply that you would expect to see, you expect to be a very good monetary inflation hedge. In actual fact, we've got what near on 15 years of experience now where Bitcoin has been a very good monetary inflation hedge. So why should it suddenly break down? And the argument I would put is that what Bitcoin is reflecting is the movement in global liquidity. In other words, the inflection and the slowdown. And what gold and silver are reflecting is China monetary expansion. And if you look at the chart that I've just put up, this is looking at the liquidity cycles of the US and China. What you can see, China, by the way, is the orange line. The US is in black. And these are indexes. Um and what this shows is that China and the US in the early part of that history 2000 through 200510 were actually very closely correlated. Uh the two cycles moved together. I mean they were fixing exchange rates. Uh they were tending to move synchronously in terms of their economies harmony. What you started to see from the mid 2010s was a breakdown and China was uh doing something very different. It was uh trying to uh clamp down on anti-corruption. It was running its its economic policy in a very different way. It was trying to stabilize or firm the yuan etc. And actually we've got to a stage now where if you look at the two lines they are completely asynchronous uh desynchronized uh you know almost almost 100% here as the US is liquidity is falling and bear in mind this is because of a stronger US economy as the US liquidity cycle is turning lower momentum is slowing uh so China is picking up and what would you expect to see in an environment where Chinese liquidity was picking up expect to see a very strong stock market uh led by technology. Tick that box. I'd expect to see the bond markets uh selling off. And uh if I show you this chart, that's happening. So, if you look at Chinese 10-year government bond yields, you can see there that actually there's a lot more upward momentum in Chinese uh term premier and the bond markets look like they've turned. And that's what you'd expect if they're basically expanding their liquidity. So you've got these factors on top. Now why is China doing this? Why is China operating a policy whereby they're expanding liquidity? The reason comes back to this which uh will actually key into a uh a later chart which is looking at this uh information for the world overall. But this for the moment is looking at China and Japan. And what we show here is the debt to liquidity ratios. Red for Japan, orange for China. Now, looking at debt to liquidity is an unfamiliar statistic because most economists look at debt to GDP. I'm not sure why they look at debt to GDP, but I'm not sure of a lot of the uh statistics that economists look at because it may be more for convenience because they can rather than really what it says. If you're thinking about debt and refinancing debt, what you've got to have is balance sheet capacity to roll it over. Debt needs to be rolled. So what you really need is liquidity in the system so you can refinance your debt. So the critical ratio is not debt to GDP, it's debt to liquidity. And what this shows is the debt to liquidity ratio for China and Japan. Now just as background, just recall what the Japanese debt to GDP ratio is doing. It's going up year after year after year remorselessly. It's currently over 400% for all debt. And you know many economists have said at different phases through the year through the years well when once it gets to you know 150 or 200% there's going to be a big debt uh you know debacle etc. never happens and the reason it never happens is that that's not the right statistic. What you've got to look at is something which is more meaningful which is debt to liquidity. Now, Japan has struggled over the period from the peak in the bubble uh in 1990 uh right through to probably uh about 5 years ago. And what we see through that period is a rising debt liquidity ratio. And what that is doing is putting a huge burden on the economy because Japan is trying to refinance its debt, but there's not enough liquidity in the system to do that. And Japan was running a tight monetary policy through much of those years. Uh viz the very strong yen US dollar cross rate. Now after we got abonomics uh abonomics was all about deregulating the economy to get faster growth and also about the boj buying uh lots of government debt to basically monetize the debt and inject liquidity into the system. So there are two ways you can get your debt liquidity ratio down. Number one is you can default the debt, but in a credit money system that is ruled out because you need old debts uh to use as collateral for new credit. So that's ruled out. So the only way you can actually get your debt liquidity ratio down is to expand liquidity. And that's what they've been doing. And so what you see is the renaissance, if that's the right way of putting it, of the Japanese economy has come through that decline in the debt liquidity ratio as they've got lots of liquidity into the economy. And the projection we show is sort of a flatlining or you know continual stability. China is 15 years behind. We all know that China's got a huge debt problem. Um that is burdening the economy. They're in the same position Japan was and actually uh equally the US was after the great financial crisis and the only way out is to print money. So what they've got to do is to devalue the yuan. Now my view is that people are looking at the wrong benchmark when they're looking at the yuan or remmbb US dollar cross rate because that is basically a politically manipulated rate. Uh what you've got to look at is something else and you've got to start looking at currency markets uh more broadly including gold. First evidence to show is what is happening to net liquidity injections by the people's bank of China. And what this is illustrating here is the injections of liquidity uh starting in 2020. This is daily uh daily observations and this is how much they inject into their money markets. And what you can see is that since the beginning of 2025, there's been a quite a significant uplift. They have injected uh $1.1 trillion into their financial markets. I think they're going to have to do the same again uh this year. So you're looking at more liquidity in prospect. And what effect that has had has been to basically elevate the yuan very significantly. This is the yuan gold price in yuan. Sorry, the this is the ch the gold price in yuan I should say. And what we've tried to show is that this is being deliberately targeted and you know we think that the Chinese authorities basically try and uh you know hit various targets with the yuan gold price and there is a deliberate devaluation going on. Uh Chinese residents can buy gold. They can't export gold. Uh bear in mind they can't buy cryptocurrencies but they can use gold as the vent for monetary inflation and that's what they're doing. Uh on top of that uh as you rightly say the Chinese themsel the Chinese government itself is buying gold uh to back the currency in some way to give it a little bit more uh you know backing other countries as well uh deciding that the margin to put money into gold rather than into US dollar treasuries. So all these things help grists of the mill but the point being here is that what we're looking at is a rising yuan gold price. Now many people site uh this change in the gold market uh around 2024 or there about there or thereabouts 23 24 that sort of period and you can see here on the chart the US dollar gold price against real interest rates. Now uh I've never thought real interest rates are a particularly great indicator of the gold price but you know I'll come quietly and say that there is a correlation historically which shows that real interest rates here uh illustrated on the black line shown inverted uh this is US tips 10-year and what it shows is when interest rates rise in other words that black line falls it's uh an o higher opportunity cost of holding gold and so the gold price comes down and then when real interest rates fall which means the black line goes up on this chart uh then you should get an elevated gold price. And what you can see is there's a big disconnect. And that disconnect is what people have called the great debasement trade. But in actual fact, if you look at it, it's actually not a great debasement. It's the China debasement. And this is looking at Chinese liquidity injections against the gold price. And you can see there uh that there there seems to be a fairly decent relationship going on.

Fascinating. Yes. and and this is likely to continue like you say about at least 1.5 or 1 trillion into the economy or into the monetary system this year. Um and I think that's because that like you say there's just so much debt in the Chinese economy. Um I believe as well in terms of the real economy it is struggling. Uh I think they had PMI numbers uh recently that dipped below 50 and I guess does this kind of prove that the PBOC's money taps aren't necessarily reaching the real economy because they've been swallowed by this debt wall?

Correct. Absolutely correct. Which means the only they've only got one choice which is to do more. Run harder, run faster, just try and get out of this problem. And it's a little bit like I mean you're just running through mud. Uh which is not a great analogy, but that's pretty much what they're doing. And they've just got to uh put more more effort into it and and and uh print money faster. I mean, that's the only solution. Uh I mean, all this stuff about revaluing the yuan higher is just fog. Uh it's it's not uh it's not reality. Um they yeah they will accept they may be forced to do that politically but behind the scenes the real driver is what's happening here is to devalue debt within the domestic economy. Uh and they can they've got capital control so they can control uh and they've got a big trade surplus which is largely denominated in dollars. So they've got enormous control over the cross rate with the US currency. Uh and that's what they're doing. That's what's being manipulated. Uh but underneath it's gold which is really reflecting the true nature of uh everything.

And where do you think this ends? I mean I mean obviously they're going to continue to refinance this debt but if it's struggling to reach the real economy. I mean do you have a view long term in terms of what happens to China in terms of economic growth etc.?

Well I mean I'm I'm cynical enough to suggest that uh I don't think the Chinese economic model is a particularly good one. Um and you know notwithstanding the fact that they've made huge huge achievements u you know we we're looking at you know the fastest and most successful economic development ever uh and hats off to them for that. The problem is that they're very they're very dependent on the rest of the world to buy their buy their goods by definition and that can only work for so long. Uh and it's starting to fail now. And the economy clearly is being hit by uh number one the huge debt take up uh which is you know saddling the economy and and causing growth to uh uh to slow down dramatically. But on top of that you've got the tariff hit now which is another shock. So I think they're going to have to find new avenues for growth and it may well be that they try and uh I mean they could they could double down on the belt and road initiative. That's something which is quite possible. Uh or they could try and uh make consumer spending grow faster. I think the former is more likely uh but you know clearly they have big economic problems but they've got to they've got to dig themselves out of this hole which ultimately needs means them printing more money. Uh the risk that you've got in China with that I mean I'm not you know it's not an easy not an easy process. I mean, there's this famous Irish joke, isn't there, about uh the lost travelers asking uh you know, how do you get to Dublin? And the the the wit says, "Well, uh if you're traveling to Dublin, I wouldn't be starting from here." And uh you know, this is the fact with China. I mean, I wouldn't be starting from here if I was trying to run an economic policy, but the fact is they've got it. And if they keep printing money, they're going to create an inflation problem. And the last time they had a serious inflation problem led to Tianaan Square, uh the the riots there. So, I think that, you know, they're they're in a very very difficult position, but I think all they can do in the near term is try and print money, and we're seeing that vent in the gold price. Uh, we're not seeing the vent in Bitcoin for obvious reasons, they can't buy Bitcoin. Uh, and we're also seeing it in the Shanghai stock market. So, you know, what I would be doing is not selling my gold and buying Chinese technology stocks.

Fascinating. So just moving back to the US now because there's been a lot of change well quite a few changes recently in terms of the monetary plumbing and the uh men overseeing this monetary plumbing. Uh more specifically we've had the announcement that Kevin Walsh is going to be the new Fed chair and this ties into the way you've tried to dissect the different types of liquidity provided by uh the Fed and the Treasury. Uh because everyone focuses on the Fed, they focus on interest rates, but you've famously said that you know interest rates can be deceptive and also what the the Treasury is now doing more specifically on the short end with bill issuance and how that impacts on liquidity and you've got Scott Bessent of course who's an ex hedge fun manager so he knows the stuff as well and and Walsh also worked with him to a degree over at Draeniller's um shop. So essentially I'm just curious in terms of like what you see right now on the US liquidity picture and how this uh dynamic works between the Fed and the Treasury QE.

Yeah. Okay. Let's let's dig into that. There's a there's a there's a lot going on there which I think is is good to unpack. I mean the what I'd say right at the outset is we're in a world of monetary inflation and everyone's got to invest accordingly and that means that portfolios do have to have gold and Bitcoin in them long term. Uh what we're really saying now is the the shorter term dynamics which are a different question. So I think you've got to differentiate the tactical from the strategic but the strategic says buy these monetary inflation hedges on weakness. There ain't no weakness in the gold market now but there is weakness in Bitcoin. So I'd be you know cautiously picking up uh at these sort of levels because I think that would make sense longer term. Now let's drill into the short term. If you look at the slide that I put up, this is looking at uh problems in the US repo markets and what this is showing is financing troubles. The repo market is the most important funding market certainly in the US and arguably worldwide. And the repo market is based around collateral. So effectively what would happen is that uh a borrower would post collateral with a a dealer bank or a lender let's say and they would be they would be lent money um after a haircut that you give on the collateral. So you might give a 5% haircut. So effectively somebody could borrow 90 95% uh against that collateral. Now the point about this market is that this market as I said is big. It's very liquid. it's very active and if you get imbalances uh shortages of liquidity or shortages of good collateral what you will find is you get spikes uh in this rate relative to what the Federal Reserve wants interest rates to be and what I've tried to show on this chart is a normal zone which is that gray area uh between what's called sofa rates which is the the main repo rate and uh interest and overnight reserve balances is and that's what the Federal Reserve will give banks. So what you see around um well I suppose broadly speaking through 2025 particularly through the second half of 25 is a big elevation or jump uh in that or spike let's say in those repo rates repo spreads and that's something that was uh causing the Fed angst uh and the reason being is that that was demonstrating that the repo markets were breaking down they were they were running short of liquidity and this may be something that we see a lot more of over the coming months and coming quarters. And what the Federal Reserve was forced to do was to go back to another QE uh which they labeled uh you know they labeled uh um they they labeled that reserve management purchases R&P but it clearly is a is a type of QE process. Now what what is this mechanism? Why is this so important? And if I just go back to this slide, this slide describes what's going on. And this is really describing what the modern financial system is. And this is not something you would see in the textbooks. This is something that is the reality of how financial markets currently work. And what this is showing is that the heart of the system is a liquidity debt nexus. And what that really says is that uh this is the paradox in modern finance is that debt needs liquidity for refinancing but liquidity needs debt uh as collateral. So if you look at the top left it says 77% which is a world bank figure of all global lending is now collateral backed and that collateral tends to be old debts uh particularly uh you know US government debts uh but existing treasuries or boons uh in the system now and actually by the way increasingly Chinese government bonds are being used as collaterals. So you can see that China is getting its uh foot in the door here. Now that liquidity debt nexus uh basically involves collateral which is then turned into liquidity and then from that liquidity you use that to refinance debt and hopefully

You can do that uh smoothly and the measures as we show on the uh on the right hand side. Something like 70 to 80% of transactions in financial markets are now debt refinancing transactions. And you will monitor those by looking at things like the term premium on the government debt markets, or you look at credit spreads in the uh in the private corporate markets. And that would give you an idea of the health.

On the left hand side, the uh the which measures the switch from debt into liquidity, the collateral move in the repo collateral markets. You look at things like the MOVE index, which is a measure of uh volatility in the bond markets to understand the haircut size. And you look at the SOFR spread, which is the collateral measuring the collateral liquidity imbalance. Now, those are the key things. So, debt liquidity is the key thing.

This chart is really the key to understanding it. And what this says is that here is the ratio between debt and liquidity. We saw the example earlier for Japan and China for their debt liquidity ratios. Look how different this one is. uh And this is looking at the uh at the advanced economies worldwide. It does include Japan but obviously excludes China.

Now, what you see there is that ratio. That ratio mean reverts. Okay, it's not an upward trending line like debt to GDP. This is an equilibrating mechanism. And what it says is that whenever you get a high debt liquidity ratio, you get refinancing tensions uh in financial markets. It's difficult to roll the debt. Okay. So you get liquidity problems, you get inability to to roll over debt, you get refinancing tensions, and you get financial crisis. And central banks are forced to come back in and inject liquidity to, if you like, write the ship again, to uh put the put the market back on to mix my metaphors, put the market back on its rails.

If you then look at the other side of that dotted line, the lower part, when the debt liquidity ratio is very low, there's lots of liquidity. There's excess liquidity, which tends to find its vent in asset market bubbles. So, the annotations pretty much show you almost all financial crises historically have been refinancing crises, and all uh asset bubbles have come through because the debt liquidity ratio is low. Well, what we've just seen is the everything bubble, and we're still probably in the last phases of that. But you can see that orange line is now going from uh the bottom of the chart towards the top. And that's for two reasons. One is that liquidity is slowing down, and the other is debt is coming back into the system. We've refinanced. Now, that is really symmetry which is offsetting the big dip we saw during the everything bubble.

And the everything bubble largely occurred first because policymakers injecting liquidity into markets whenever there was a problem. So there's lots of liquidity around. And secondly, what they did is they slashed interest rates to near zero because they thought that was uh the sensible thing to do when you had uh very low inflation. uh They misread that, by the way. And you know, as I've said many times before, uh when I was at worked at uh the US investment bank Salomon Brothers, Salomon were were you the sort of deans of the fixed income markets for for decades. But there was a book that we were schooled on called The History of Interest Rates by uh former head of research at Salomon, Sydney Homer. And that book looked at uh four or 5,000 years of history, and nowhere in those pages was there any reference to zero interest rates. So, what we've just seen in the last five years is completely new.

And the reason it's important is that it forced investors to take on more debt just when you don't want them to. uh And what's more, they had to they were able to term out their debt into later years. So, if you look at this following chart, this is something we call the debt maturity wall. And this is looking at what has happened because of the terming out of debt that was due in maybe '22, '23, '24. uh That debt was pushed out uh maybe five or so years later into the back end of the 2020s. You can see it more obviously if you look at the changes in that debt maturity wall. And you can observe there the big bite out of the data that we saw in '21, '22, the COVID years, and how that's been planted in the back end of the chart, the darker red bars. So that's the financing demands that have got to come.

So, what I'm saying here is that we're in a situation where uh liquidity, we know is important. The amount of liquidity that is being absorbed by a rising real economy is clearly picking up. But on top of that, you've got to add this debt maturity wall. So central banks are going to have to uh, you know, pedal faster just to keep this thing, this show on the road. And unfortunately, um, the new Fed chair, uh Walsh, is talking about shrinking the Fed's balance sheet even more. Impossible task. They simply can't do that. uh It would be a disaster if they did, and you would get, you can see on this chart that the demands on US capital markets this year, which is the orange line, jump significantly. And that's broadly speaking, not including the debt maturity wall. This is just new borrowings from the federal deficit, and because the corporate sector is going into deficit itself because of this big AI spend. So, you can see the problems are really mounting up. We're going to get more of this, which is uh collateral liquidity imbalances and repo market spikes.

And so what you've got to have is a Federal Reserve that starts to inject liquidity. This chart is looking at the growth rate of Fed liquidity. uh This is the liquidity creating parts of the Fed balance sheet. It's not the overall balance sheet. uh That's not the right statistic to look at. This is the liquidity generating parts. You can see where you get air pockets in this, as I've illustrated, which represent Fed tightening. The markets come off quite smartly. And what the Federal Reserve has done uh recently is this RRP program, which has given a slight lift. But you can see that Fed liquidity is slated to slow down again, uh as we move later through 2026. And that's, you know, part of the problem. And if uh if Kevin Walsh wants to slow even or um, you know, if he has the bit between his teeth and he's trying to swap lower interest rates for a smaller balance sheet, you're going to run into big, big problems.

And you can see, you know, maybe in context, this is what happens to bank reserves uh as a result of all that. But it basically says that bank reserves, you know, could just get above uh the minimum level that um that red dotted line, but you're not looking at any dramatic growth uh in liquidity. And, you know, this chart really says it all. What it's saying is red line, Fed liquidity injections, orange line, S&P 500. You know, it's not a perfect match, but it's not bad. uh We've basically advanced Fed liquidity by 25 weeks. So that's 6 months. So that's the lead time for liquidity on the market here. And what it shows is broadly a correspondence that when you see Fed liquidity uh slowing down significantly, you tend to get market corrections, and when you see Fed liquidity boosted, you get big jumps uh in the stock market. And where we are now is the best you could describe it as is a sort of sideways ranging market. uh And that's what I think we're getting, and that's what the indexes seem to be showing.

Yeah, it's very interesting, especially given that you say that Walsh will, you know, shrink the balance sheet. It's not an option. And I especially with how it interplays with what the the Treasury is doing, right? Because I think they recently announced a refinancing of like $125 billion or something recently, the refunding. And especially if the RRP has been drained in terms of liquidity, uh there's going to be a drain on general liquidity in the markets. And I think that for to shrink the balance sheet anymore, you know, this uh, you know, there's nothing it can't really be done, right?

>> Yeah, exactly. I mean, if they if he, I mean, the watchword is that if he, he is intent as he says on shrinking the balance sheet, and these are just not sort of, you know, words uh to sort of to attract um, you know, certain areas of the of the political constituency after his appointment. If he genuinely is going to do that, then, you know, we've all got to sell our risk assets because it, it would be terrible. Um, what I think they're doing is they're basically flatlining this. So I think they're they're trying to give the market some support uh without sort of pulling the rug aggressively.

Now, this chart is showing the other side of what they're doing, which is Treasury QE. And my reading of what Walsh is basically saying, but it's my reading, is that he's basically endorsing the Bessant view, which is to say that the Fed has already, you know, run out of road here. uh You know, it's got emission creep and many other things, but it basically has been uh pushing liquidity into the system willy-nilly without any direction and basically causing asset bubbles wherever you look. And what they want is a much more focused injection, which they're using the Treasury to do. So, what I, how I've described this is a switch from Fed QE towards Treasury QE, which is what this diagram uh tries to show.

Treasury QE involves the Treasury issuing a lot of very short-term debt, such as Treasury bills, uh into the markets. And because the banks buy most of that very short-term debt, uh effectively the banks are funding the government through printing money. They're expanding their balance sheets, and they are funding the government. And that liquidity goes directly into the real economy, not into financial markets. And that's the difference. That's what I call Treasury QE. The black area on this chart is my attempt to uh quantify that in liquidity terms, uh against Fed QE, which is shown as the orange and red areas.

Now, what this is basically uh trying to trying to show is that the red area is traditional QE, so balance sheet expansion. Uh, the orange area is what I've labeled mischievously "Not QE, QE," which is basically anything Sula Tabler they do. uh Such as running down the, I mean, the wonky stuff like running down the RRP, um, and doing things like the reverse repo programs and various other things, other support measures, the latest RRP, etc. And those elements are shown in orange. So, if you add together the red and the orange, that's Fed QE in the broadest sense. The black is the Treasury. And you can see looking into 2026, that all the stimulus that's coming out of the government sector is really dominated by that black area. So, it's really the Treasury that's doing most things.

Now, what does that mean? Does it mean you're going to get a stronger economy? Yes. If you look at the top insert, what it shows is the outline of that uh of that stimulus. The the orange line is the outline of what they're doing. And the black line on that little insert is the year-on-year change in in the US PMI index. And you can see there that that seems to be running pretty closely with a lag of about 6 months or so, uh with that stimulus. So, it looks like the US economy is definitively going to be picking up. But that's coming at the cost of Fed QE.

>> And just in terms of putting it, um, thinking about our viewers when they think about asset allocation right now. So, you say generally in terms of back to your chart with the asset allocation now, we're going from the stage of now commodities are performing because we're at the tip of the the uh liquidity cycle. And they should now be considering a move into, yes, I think, yeah, how would you think about asset allocation now at this stage in the liquidity cycle?

>> Okay, well, I think if you, if you run through these uh these um traffic lights, so this is a way of summarizing the asset allocation. So the left-hand side is looking at assets. The right-hand side is looking at industry groups. We divide each of those phases into uh or each of those um areas into four columns, four phases of the liquidity cycle: Rebound, Calm, Speculation, Turbulence. The traffic lights are what they say. So orange means proceed with caution. Green means go. Red means stop.

In terms of the first of those, beta risk on, that's saying, do you want to be taking risk? And uh the traffic lights measure accordingly. For reference, the US market in is in speculation. European markets are in calm, probably late calm, I should say. And if you look at China, it's probably in the rebound area. Japan is more late calm too. So, most of the advanced economies are in that late calm, speculation area. Emerging markets, but predominantly China, is in the rebound. um Some of the other uh advanced more advanced emerging markets, if I'm not mixing my terminology, uh like Korea, uh for example, maybe Singapore, are more like uh Japan in this in sort of later in the cycle.

Rebound: you want equities, credits. You don't want commodities, you don't want bond duration. Calm: you want to be switching your uh your credits or trimming them, putting money into commodities. Speculation: you basically want to be out of credits, you want to be trimming equities, keeping with commodities. And then when you get to turbulence, uh, which is not here yet, one's got to say, but it's upcoming. Uh, you, my view is that we may be getting a lot closer by the middle of the year, but we're not there yet. Uh, but we've got to see how the land lies. Uh, you want to be sticking a toe in the water of bonds and taking some bond duration. I think yield curves are going to flatten uh sometime starting about the middle of the year, and you want to be taking money out of commodities.

If you look at industry groups, same idea on the right. uh Cyclicals in the upswing, defensives in the downswing. Technology is always the leader through rebound and calm. Financials come into their own sort of mid-cycle. Uh, you then find energy, commodities uh at the back end of the cycle through calm, speculation, which is what's running now. And you're starting to see some pick up in areas like consumer staples, uh, you know, the big sort of consumer brand names, which are pretty defensive areas.

So, what I would be doing, um, you know, is basically trimming my equity exposure. I'd be still focusing on resources and commodities for now, but I'd be out of I'd be getting out of technology, uh, you know, almost entirely. I mean, apart from a core holding, I'm talking tactically here. Uh, I'd be shifting towards energy as a a late cycle runner. Uh, I'd be putting some money to work uh, you know, at the margin in things like uh consumer staples. Uh, I'd be putting a toe in the water in bonds. It's a little bit too early yet for longer duration, but maybe you could look at about five-year, uh somewhere around that sort of uh mid-duration area. And I would be buying gold and crypto on weakness. And I've said that, you know, what is weakness? You know, it's a very difficult question, but I, you know, I would think you you've got to buy these things something like uh, you know, about one standard deviation below their trend. And if you look at what does that mean? It means something around the sort of the mid the mid-7,000s for Bitcoin. Uh, gold, you'd have to wait a bit longer. I mean, gold will have to come back probably to, I would guess, without knowing uh the the true number, something about 48 or there or thereabouts, uh 4,800. But the the fact of the matter is, I think we're in long-term bull markets for these assets. But the problem is is that, you know, bull markets are all about themes and trends. Bear markets are about cycles. And we're getting a down cycle now.

>> Yeah, indeed. And just to point out, Michael, I don't know if you checked the Bitcoin chart more recently, but we we just broke below 70K. So, it's probably be a good accumulation stage right now if you guys if you guys wanted to, in terms of according to Mike's thesis around the one standard deviation. But uh, yeah, I think that it's really interesting to and especially when you pointed out that the most in crypto now think that, oh, the debasement narrative is dead because it's basically diverged. But over the long term, I think that's the most important thing. That's how I think most people should think about investing in Bitcoin. Um, yeah, but um, thanks a lot, Michael. It's been a really enjoy this conversation. Um, it's provided much-needed clarity in a generally amorphous and opaque subject, you know, global liquidity. Um, we'll definitely have to get you on again soon at some point. Um, where else can people follow your thinking and uh your research? I know that we'll leave a link to your website, Cross um Cross Tower Capital and all that, but where else can people follow your, we'll leave your Twitter as well. Is there any other links we should?

>> There's a Twitter handle, which is @crosstowercap for the occasional tweets, but the main, the main vehicle is Capital Wars, which is a Substack. uh And we basically post on that uh two or three times at least a week, writing updates, narratives, and providing data. Uh, there's the website, as you said, or if you want to get into the weeds of this, there was a book I wrote about four or five years ago called Capital Wars, uh, which is basically all about the rise of global liquidity. That's published by McMillan, and it's, it's still relevant. I mean, I wrote it before the COVID crisis, so you can see how well it stacks up, but um, badly it stacks up, but um, anyway, that that's out there.

>> Okay, we'll leave that all below and thanks again, Michael, for coming on. We definitely have to do it again soon. Appreciate it.

>> Great. Thank you. Thank you.