Michael Howell: Global Liquidity Is Peaking and 2026 Is the Risk Year

Ultimately, you're looking at this bifurcated system in the world monetary system. Uh, now, you know, I would argue that, um, you know, I mean, clearly I want the US to win, but, um, this is a long-term fight or long-term battle, and stablecoin at the moment are giving the US a huge leg up because, you know, the Chinese, well, certainly the Europeans are scared by stablecoin, but so are the Chinese. I mean, they definitely should be.

Now, this cycle is about 34, 35 months old. Um, it's coming to the end of its life, and we've got to be very cognizant of that of that risk. Now, what does it mean in terms of asset allocation? Well, let me just shift on. I think I've got it here. Here we go. In terms of asset allocation. What that means is that if you look at the left-hand side of that slide, the schematic, it's telling us that there are four liquidity regimes that we identify. If you, the liquidity cycle is expanding through what we call rebound and calm, it's a risk phenomenon. If you're decreasing through speculation and turbulence, you want to be taking risk off the table. As I said, we think we're peaking uh in the cycle. And if you look on the right-hand side, there's the asset allocation implications which say you want equities on the way up, you want commodities around the peak, you want cash on the way down, and you want bonds, government long-duration bonds around the trough.

Good day. Today we have a special guest, Michael Howell. He is from Crossber Capital and author of Capital Wars. Uh, today we're unpacking global liquidity, financial cycles, capital risks, and, you know, Michael tracks liquidity flows and market plumbing, and he's here to break down what investors need to know for 2026. Michael, uh, it's an honor to have you here.

>> Well, Steve, great to be here. There's a lot of things going on in markets we need to talk about.

>> There is. Uh, well, Michael, I want to start, uh, you've been clear. Uh, liquidity moves markets more than rates. Are we heading into a liquidity expansion or contraction? And what does that mean for markets in 2026?

>> Well, I think the, the bottom line is we've been in a strong up cycle really since, um, late 2022. So, uh, it's now 3 years old. Um, and basically, we're coming to around the peak of the liquidity cycle. Um, that liquidity cycle is likely to move lower in 2026. Um, it's probably going to prove increasingly difficult for financial assets. But I think the corollary of that is that, um, all money that is anywhere must be somewhere. So if it's not in financial markets, where is it? It's going to be in the real economy. And so I think the corollary here is the real economy is strong, and that's why we're seeing strong commodity markets right now, and that is likely to be a theme of 2026 as well. So I think that momentum in commodities keeps going, uh, backed by a strong real economy.

Michael, where are you seeing real growth? Uh, I mean, it feels like things are on the verge of breaking. Uh, do you feel that, do you share the same sentiment, and where do you see growth right now?

>> Well, I think if you look at the US, I mean, we've just come off a quarter where, um, it looks, looks like it was a pretty strong quarter. Uh, the Atlanta GDP now was, uh, signaling somewhere just below 4% for, uh, Q3 US GDP. So, uh, I think that that looks pretty healthy. And if you look into next year, what you've got is the combination of the, uh, uh, Build Back Better bill coming through, um, and you've also got, which is a lot of fiscal spending, and you've also got this AI capex boom, which is, uh, going to start, um, you know, sort of feeding into the economy in '26. So I think you've got a lot of backdrop which is suggesting that the economy is probably pulling up, not pulling downwards.

Michael, you've been a proponent of thinking about economics differently, about liquidity. Uh, could you break that down for us?

>> Well, I can give you a taster of why, why we look at what we do. I mean, we take a, a flow of funds view of markets. So basically, the whole idea is to try and ask where, what are the sources of liquidity in, uh, in a financial or economic system, and we track those sources of liquidity and, uh, you know, as I said, uh, maybe a few sentences ago, all money that is anywhere must be somewhere, and it's really a question of actually tracking those flows going through the financial and economic systems. So that's why we're different. So we're not looking at traditional macroeconomics in the sense of, uh, you know, a Keynesian model or whatever you like to say. Uh, we don't believe that interest rates are the main motive force. Uh, we think that what, you know, what is really important is just tracking these flows of liquidity. After all, if you give people money, they generally spend it, and that's, you know, that's the, the sort of the, the bottom line really.

So by focusing on rates instead of liquidity, how is the Fed shaping systemic risk today? I mean, is that, is that, I feel like they're, they're looking at lagging indicators. Do you not feel that's the case? And, uh, what's the problem with that?

>> Yeah, I, I think that's very much the case, and I think that there's clearly inertia in the system, and I would, you know, say the raise the question or pose the question, if the Federal Reserve is either raising interest rates or cutting interest rates, what do they really think they're doing? And you've got maybe two approaches or two rabbit holes to go down here. The first is to say, is if you've got huge amounts of public debt, uh, which need to be serviced, and the, the government is paying large interest payments from the government to the private sector. If you cut interest rates, surely you're reducing the income flow to the private sector. So lower interest rates aren't necessarily, um, a stimulus to the economy. They're actually taking income away. So it's not, uh, you know, such a straightforward move arguing that lower interest rates are stimulating an economy and higher interest rates are actually slowing an economy. So it's, it's very different from that. And I think the other thing to say is that if you come back to the big, to the bigger picture, what are capital markets really there for? What are they doing? And, you know, we pick up an economics textbook and it tells us, well, you know, what a capital market is, is raising new money, uh, for capital investment projects, greenfield capital investment projects, and the interest rate is basically the cost of that capital. Well, if that was still the case, that money was raised for new capital projects, I'd come quietly and say that maybe interest rates matter. But that's not what's happening in financial markets now. Something like 80% of all primary transactions in capital markets, uh, are about debt rollovers. They're refinancing existing debt. And if you're refinancing, whether it's existing debt or a home mortgage or whatever you like to think about, it's not the interest rate which is really the primary consideration. It's the ability to get the roll. So if you've got a home mortgage, you're refinancing. I mean, okay, you're going to pay attention to the mortgage rate, that's for sure, without a question. But you need to get the roll. You need to get the bank to lend to you. Otherwise, if they don't lend, you're going to default on that mortgage and you're homeless. So that's the primary consideration. If a corporate doesn't get the roll, they default on the debt. So what you need to have is balance sheet capacity in the system that will facilitate the roll. Now, I would argue that almost every financial crisis that we can consider in the last 20, 30 years has really been a refinancing crisis. There's been insufficient liquidity, uh, there for debt to be rolled over, and consequently, you see these refinancing tensions emerge. And we'd had a little bit of a taster, uh, recently with the repo problems in the US, and that's why the Fed has come in with some alacrity to actually smooth the system by introducing yet another acronym, reserve management purchases. And what they're doing is they're basically doing a QE, but they're not calling it QE.

>> It's another way of doing QE but getting away with it and not freaking everybody out.

>> Well, it's quantitative. It's easing, but it's not QE. So, they can call it what they like. They've decided to call it RMP. Um, but basically, it fulfills all the criteria. It's increasing Fed liquidity. It's increasing money market liquidity. It's increasing bank reserves. So, on my, my agenda, it's, it's straightforward QE. Uh, it certainly isn't buying coupon debt, but if that's the restrictive definition they hold for QE, well, good luck. But it's definitely putting liquidity into the system.

>> So, the Federal Reserve, uh, market plumbing again, uh, you know, I thought the Federal Reserve was there to be, quote unquote, the lender of last resort. Is that the role they're playing? And how are they affecting the markets being that they're looking at lagging indicators? And are we really in a healthy market, or do you see cracks in the system somewhere?

>> Well, they, they are lender of last resort. I mean, in the sense that I think that since the global financial crisis, what we ought to be saying is, are they dealer of the last resort? Because they're operating in the repo markets as well as, uh, operating in in traditional banking markets. So, you know, lender of last resort is thinking about the discount window. The discount window is not really used that much anymore. I mean, what you've got to start thinking about are things like the standing repo facility, and you've got to now think about this new acronym, uh, RMP. Um, and, you know, these are the things you've got that really constitute Fed policy. So, it, it's much broader than using the discount window, because not all entities that the Fed considers, uh, important in the financial system have access to the discount window, but a lot more have access to the Fed in terms of these repo operations. So I think you've got to, you've got to think of the Fed's remittance as being somewhat broader now. But, I mean, the answer is that it is fulfilling its typical mandate, and at the end of the day, if you're cynical, maybe like me, u, what the Federal Reserve is, is primarily doing is maintaining the sovereignty, uh, of the of the Treasury market, of the of US financial debt, and that's what it's there for. After all, I mean, you can throw in these subsidiary mandates, which is controlling inflation or trying to raise employment. Like it, fine, but I think when push comes to shove, what really matters is the integrity of the of the Treasury market. And that's what they're trying to do. They're at the moment, they're trying to reduce volatility at the front end of the curve, uh, with the hope that by doing that, they then get volatility spreading along the curve into longer-dated coupon treasuries. Uh, and that, I think, is the, is their main goal.

>> So markets mostly refinancing debt is kind of the idea. Do you see a point where, I mean, we're like, what, trillions of dollars coming due? I mean, how are repos, treasuries, and credit holding up?

>> Well, I mean, the, I mean, what I've got to say that the Fed's done a pretty good job in the last few days. I mean, I, I was expecting the Fed would act. I didn't quite expect the Fed to act, um, you know, in the size that it has done. I mean, I, I was, I mean, the, as you probably know, I mean, the the press are telling us that the first month, the the Fed is going to put in about 40 billion US of liquidity into the market through buying Treasury bills. Uh, my expectation was about half that. Uh, they've also sort of created a sort of a, an open-ended tanch in a way. I mean, they've said to us that it's likely that 40 billion will be pared down over coming months. Uh, it's quite likely, but I would argue that actually rather the opposite. I mean, if this is genuinely, as they maintain, a plumbing problem, then if they require 80 billion or 100 billion in coming months, well, surely they're going to do that. Uh, I mean, what they're saying now is that effectively, uh, they're, they're targeting the the repo market and they're targeting the SOFR rate rather than Fed Funds. And so they're going to do whatever it takes to actually keep, re, keep repo rates, SOFR rates, uh, in line with their targets. Uh, and if that takes 80 billion, it takes 80 billion. If it takes 40 or 20, so be it. But that's what they're doing. They're effectively, uh, you know, extending their put to the repo markets.

Michael, you described a capital war between the United States and and China. How does this dual system affect commodities, currencies, and investment strategies for you?

>> Well, I mean, the, the answer to that question, I mean, broadly speaking, this is a, a, a much bigger topic, but this is really saying that if you start to look, uh, longer term, there's really a struggle in the world economy for the dominance of, uh, of a currency, uh, and a, and, uh, a capital system or financial system. And that's either going to be the Chinese yuan or RMB system, or it's going to be the US, uh, and the US dollar. And what I've argued in some of our writings is that if you look at what the US seems to be doing, the seems the US appears to be, uh, creating a system, a dollar-backed system where it's using digital collateral, uh, for example, stablecoin, uh, to back the US dollar system. And if you look at what China's doing, China is using, um, probably principally gold as collateral, physical collateral for its monetary system. So you've got a polarization of these two systems. Now, what that doesn't mean is that China is going for a gold standard. That clearly is not what's happening. There's still a fiat monetary system in China and a fiat monetary system in the US. But it's just the emphasis of different types of collateral that are important. So it's very much in the US interest, one would say, if this is a war, to destabilize the gold price, and it's very much in China's interest to destabilize, um, the, the digital money. Uh, and whether that means you're using quantum computing to try and, you know, crack, uh, some of these protocols, I don't know, but that's really the direction things are going in. So that's the rivalry.

And ultimately, you're looking at this bifurcated system in the world monetary system. Uh, now, you know, I would argue that, um, you know, I mean, clearly I want the US to win, but, um, this is a long-term fight or long-term battle, and stablecoin at the moment are giving the US a huge leg up because, you know, the Chinese, well, certainly the Europeans are scared by stablecoin, but so are the Chinese. I mean, they definitely should be because you've got something like a trillion dollars currently of the current run rate of Chinese trade surplus, and that money basically has to go somewhere. Now, if you're a Chinese exporter, you've got the unattractive, um, prospect of either putting it into a western banking system and facing the threat of sequestration if there's another Russia-like situation, um, or you can put it back into your domestic banking system and risk risk sequestration by the authorities by the Communist Party if you fall foul, if you do a Jack Ma. So I think the, the attractions for a Chinese exporter would be something like stablecoin, and I think that is something that the Chinese authorities must be particularly spooked by. So at the moment, I think the US has the cards, the trump cards, uh, excuse the pun, but it has the, it has the, it has a dominant position. Um, China clearly is trying to accumulate as much gold as it can to actually try and back its system. But I think if you start to look at how this is unwinding, uh, I would argue that over the medium term, you're likely to see a much, much stronger, uh, yuan gold price. I mean, that's how it's going to evolve. Now, we can go on and explore that, but I think that, you know, maybe the thing to do if you want to look at some detail of what's happening is to look at maybe some diagrams or charts on how the monetary system is evolving, maybe where we are in the liquidity cycle, uh, what that means for commodity markets, and then ultimately how China is likely to evolve. So if I can put some charts up, maybe if that's appropriate, I'll do that.

>> I'm a visual guy, so that'll help me.

>> Okay. Okay. Well, let me just swing into this, uh, and see. Right. Okay. Uh, this, by the way, actually, what this wasn't one I was going to talk about, but I am going to talk about it because it's actually quite relevant. Uh, this is looking, if you can see this chart, this is looking at the average gain in the S&P in each year of a presidential term. And I think this is a pretty, you know, pretty good stepping off point for saying, you know, what's the outlook for '26 now? Year 1 of, uh, the presidency, the current presidency, was this year, 2025. Year 2 is '26, obviously, year 3, '27, etc. Now, if you look at the average gain, uh, in each of those terms, this is the average from only '70 to '24. You find that it's nearly 10% in year 1. Okay, we bested that a bit, but, you know, we got the same sort of magnitude. Uh, year two, big drop, uh, year three, spikes up again, and year four, pretty good. So you average out just under 10%. But you get the idea that it's year two that's always the weakest year. Now, I get a little

>> Can you, can I interrupt?

>> Yeah, go for it.

>> Why, why is that? What's your rationale for why you see a dip in year two and a rise in year three?

>> Well, I think it could be the fact that what you've got is, uh, you've basically got a number of things going on. One is you might say that, um, in, let's say, year, start with year three. Year three is when, uh, people's minds are focused increasingly on the upcoming, uh, next election, and so monetary stimulus starts to come through significantly, and that monetary stimulus, uh, basically carries over into year four. So you've got this long, if you like, long tail of, uh, of stimulus ready for an election. So the election clearly is at the end of year four. So you've had a good window, and then as you go into the first year of the new presidency, there's still a hangover effect, uh, you know, from that momentum, and then by the time we get to late year 1, early year 2, there may be inflation problems emerging, and those inflation problems basically cause the Federal Reserve to tighten, or there's problems with, uh, the midterms or whatever it may be, and you start to see, uh, the incumbent president losing power or whatever, whatever it may be. So you get the idea that the market tends to be a little bit more spooked in year two. That would be my rationale. Now, uh, if you then, uh, look at this chart, one of the pushbacks that I get is that people say, well, of course, famous words, is different this time, isn't it? Because actually, we got very strong earnings momentum coming into '26, and that's likely to keep the market going. Well, then I show them this chart, which is saying, well, okay, uh, point taken, but every year, uh, of the second year of a presidential term, that's always the strongest year for earnings. Um, and that's over the 1970-24 period. So, in other words, what you see in the second year is a big multiple contraction, uh, in markets, and that's something to bear in mind, because what could cause that, and clearly what could cause that is liquidity coming down. So let me just shift on to, sorry, the liquidity story.

>> Yeah.

>> This chart here is something I, uh, I snipped from the internet. The pink chart, uh, the red line that you can see on top of that is what's been laid over, over the top by me. Um, the pink chart, I don't know what the original source was. It's difficult to read there, but may well have been the Financial Times, given the pink color. But what that's showing is a series of asset bubbles, starting with gold, going through Japanese equities, US housing, tech in, uh, Y2K, biotech in, um, uh, 2015, uh, and then the latest one, which is labeled disruptors. And you can see that with the red line I've overlaid on the top, all of those asset bubbles seem to be, uh, both created and ended by fluctuations in the liquidity cycle. So the question we've got to ask is, where are we in the cycle now? And you kind of get the hint that we're just seeing that sort of blip down. And I'm going to go on and, uh, I'll come back to these other charts in a second. But if we start to look at the cycle, which is just coming up, hopefully here. This is looking at the global liquidity cycle, and this is the momentum of money that is flowing through the world economy. Now, um, that has a tempo of about 5 to 6 years. The reason it has a 5 to 6 year cycle is that is the refinancing cycle, if you like, in the world economy. The average maturity of debt out there is about 5 to 6 years. So that's my explanation as to why this fluctuates with that, uh, frequency. Um, the cycle bottomed last time in late '22. Uh, it was always slated to peak in the second half of '25. It looks like it's doing that. Uh, although it's hard to say, tend to get volatility at the top, but that's really what we got to be watching for. Now, if you look at this next chart, what that shows is the current cycle in red, and the average cycle since 1970, um, to 2025, as the black dotted line, with the low point being in the middle of the chart at zero, and then you count months before and months after the trough to the left and to the right. Now, this cycle is about 34, 35 months old. Um, it's coming to the end of its life, and we've got to be very cognizant of that of that risk.

Now, what does it mean in terms of asset allocation? Well, let me just shift on. I think I've got it here. Here we go. In terms of asset allocation. What that means is that if you look at the left-hand side of that slide, the schematic, it's telling us that there are four liquidity regimes that we identify. If you, the liquidity cycle is expanding through what we call rebound and calm, it's a risk phenomenon.

>> If you're decreasing through speculation and turbulence, you want to be taking risk off the table. As I said, we think we're peaking, uh, in the cycle. And if you look on the right-hand side, there's the asset allocation implications which say you want equities on the way up, you want commodities around the peak, you want cash on the way down, and you want bonds, government long-duration bonds around the trough.

Okay. Now, that would suggest that you, that commodities are a pretty decent asset. But we can go a little bit further than that and say, well, okay, if we take a look at this traffic light system, does this give us any further, uh, granularity about asset allocation? And what it's broadly saying is that again, you've got these four regimes that we identify: rebound, calm, speculation, turbulence. Asset classes are shown on the left, industry groups are shown on the right. If you take, if you read these as traffic lights, amber means proceed forward with caution. Green is go, red is stop. So pretty straightforward. So if you're in the rebound phase, which began in, um, October of '22, you want to take some risk. You want to be focused on equities and credits. You do not want commodities or bond duration. As you move to calm, and calm is about 18 months old now, you wanted to be in equities. Uh, you wanted to take more risk generally. You want to be pairing back your credits, moving into commodities. Uh, as you move to speculation, and by the way, the US market is now in the speculation phase in our reckoning. Um, Europe and Asia are in the latter or later stages of calm. Um, in speculation, you want to be pairing back your equities. You want to be out, probably out of credits. You want to be continuing with commodities, and you want to be putting a toe in the water in terms of taking some bond risk. Um, then if you look at industry groups, uh, on the right, uh, same idea. In the upswing, you want cyclicals. In the downswing, you want defensive stocks. Uh, in the upswing, the leaders of technology, uh, always early cycle, always moving through both calm and rebound. Uh, financials do very well about mid-cycle, about calm. We've had a bumper 18 months from financials, but I would venture that next year is probably not going to be quite so good for financials. Um, so we're saying speculation, start to take some money out of that. Uh, energy commodities look pretty good. Uh, as you go through calm, speculation, and then if you're in the speculation phase, you want to be starting to put some money to work in defensive areas. Um, so that may be things like, uh, consumer staples, for example. So that's how the cycle tends to work. Okay. And that's what we envision is currently going on, and that maybe explains why you've got strength, uh, in the commodity markets, and why that will probably, uh, you know, continue into next year.

U, this chart, which I'll just mention, is an indication of the strength of the world economy. Uh, this is an AI-based model, and what does that really mean? What it means, it takes a lot of data on, uh, commodity markets, on credit markets, on currencies of trade-sensitive economies, and it basically puts them into the hopper and comes out with a metric that says, what is the implied level of economic growth in the world economy at any one time. Uh, you can see that this year has been not bad. There was a clearly a big dip around the time of the, uh, tariff, uh, tantrum, if you like, uh, around March, but economies and markets have rebounded since then, and it looks as if we're going for, you know, going into '26 at a fairly decent rate of momentum. So that's the economic story.

[snorts] Now, what I can also do is then go down sort of two further rabbit holes. What are the risks, uh, in terms of, um, uh, refinancing risks, and all this debt that's out there? And secondly, on the, on the China question. Let me deal with the China question first, because I think that's probably one of the more interesting bits, and I'll just flick through these. Now, this is, oh, I tell you what I'm going to do. So I'm going to backtrack because I need to explain this diagram first elsewhere. So let me just go back to the risk first, and then I'm going to finish with China. That's probably a better way of doing it. So, let me just spin through these charts.

This is, um, to go back to the, the problem in, um, in markets. This diagram is looking at the debt liquidity cycle, and the debt liquidity cycle is focused on the, is in the centerpiece of this, uh, of this diagram. What it says is that global financial markets today are all about debt refinancing. Something like 70 to 80% of all transactions in primary transactions in global financial markets are debt refinancing transactions. Okay? So, it's about rolling over debt. If you take out debt, and debt is a five-year instrument, you've got to refinance that debt or pay it back within five years. Spoiler alert, debt is never repaid. It's only rolled over. So, basically, you're talking about rolling that debt. And 70 to 80% of transactions are about refinancing. Uh, whereas economic textbooks tell us it's 100%, uh, is new capital raising. Well, that's not true. Okay, it's markets now all about debt refinancing. If you get problems with debt refinancing on the right-hand side, term premia in the bond markets, uh, are going to start to narrow sharply, and credit spreads will blow out. If you look at the, um, left-hand side, that's about repo collateral markets. Now, why is that important? Because debt needs liquidity for refinancing, but liquidity needs debt, because most liquidity or most credit is collateralized now. And as that left-hand side says, using World Bank figures, 77% of all global lending now is collateral-based. So, you need collateral. And that collateral is, you know, in the case of a home mortgage, it's your real estate. In the case of a financial loan or security loan-based loan, it's likely to be a US government bond or a German bund. Those are the sort of pristine collateral in the system. Now, if you get a problem with turning debt into liquidity, you're going to see problems in with the MOVE index, which is a measure of volatility in bond markets, or you're going to get SOFR spreads blowing out. And lo and behold, that's what we just saw in the US, but the Fed has just calmed down.

Now, this chart is saying, well, if there is an equilibrium between debt and liquidity, what does it look like? It looks like this. This is the long-term track of the debt liquidity ratio. Why don't I look at the debt-to-GDP ratio like everyone else? Because I don't think the debt-to-GDP ratio tells us anything. It just trends upwards without any particular benchmark to look at. This is a stable series. It's mean-reverting. It tends to, um, converge on about 200%. And if you're significantly above that 200%, uh, like 220 or 230, you tend to find that there are refinancing crises that emerge that end up as being major financial problems, uh, like Continental Illinois back in, uh, the early 1980s, like the emerging market crisis in 1997, like the Lehman crisis, or, you know, the, um, um, GFC, Eurozone banking crisis, etc. If you go the other side, where you get a very low debt liquidity ratio, in other words, there's lots of liquidity relative to debt, the vent is asset market bubbles. Those are the lists of them. We've just come through the everything bubble. Everything's gone up. Why? Two reasons. One is that every problem that the policymakers face, they address with small liquidity by throwing lots of liquidity into the financial system. Y2K, COVID, you name it. That's what they do. Even you could say, small example with this latest repo crisis. What has the Fed done? Thrown more money at the system. I mean, that's how they solve these problems. And this is all about refinancing tensions. The other factor is that cutting interest rates or slashing interest rates, one would say, to zero during the COVID period, caused a lot of borrowers to refinance and term out their debt into the latter years of this decade, which means it's coming back to haunt us. And the reason that you've got that big dip which, uh, shapes the everything bubble and now this spike upwards in that orange line is that that is the debt that came out and is now coming back and is going to cause a refinancing problem. And this is the data which shows the debt maturity wall, which is basically indicating that debt that needs to be refinanced. Now, that's not all government debt. About one-third of that is government debt. About one-third of its emerging market debt, and about one-third of it is, uh, private sector corporate and household debt. So it's pretty evenly, uh, you know, spread, but nonetheless, it's a big figure to refinance. The orange are the actuals. The, uh, '21, '22, '23 dip or the bite out of that chart is the zero interest rate, uh, period when debt was refinanced, and it's been pushed back into those dark red bars in the back end of the decade. So that's the problem that we've got upcoming. If you get imbalances between debt and liquidity, you get, uh, refinancing problems. And that is the example of what we've been seeing in the US markets. And that is latest data up to, um, uh, up to actually yesterday. So that's Monday's data as well. And, you know, the Fed has done its job and tried to smooth this down, but it's still remaining quite elevated, uh, as you can see. And this is daily data going all the way back to, uh, 2021. And it's showing the spread between SOFR rates and a Fed administered rate, which is the interest rate on overnight reserve balances of banks. Now, what is happening here is the banks are short of liquidity, and they're basically having to go out into the money markets and try to find them finance themselves. And you can see that that that spread is actually, uh, of a fairly decent size now. So, what it's telling us is there are still tensions out there. And that's because of a shortage of liquidity or a debt liquidity imbalance. Uh, what is the Fed doing about that? It's injecting liquidity into the banks. This chart shows their latest operations. The orange line is bank reserves. The red dotted line is what I think banks need. Um, and that's taken from the repo markets, an estimate. The orange dotted line is the projection of what bank reserves will do under this new policy, uh, guideline of RMP, reserve, uh, management purchases, uh, going on at 40 billion a month, and that, you know, is a decent figure. It takes bank reserves back above that threshold. So that's pretty good. That should quieten down the repo markets. The problem is, is that if you look at this chart, it's showing Fed liquidity, which is the driver of those flows, the red line, the liquidity creating part of the Fed balance sheet against the S&P 500. The S&P has been lagged here by 6 months, um, to show that liquidity can lead. And if you eyeball that chart, you'll see that whenever Fed liquidity drops, the market tends to become more volatile or even fall back. And when Fed liquidity expands rapidly, you tend to find the market going up. Now, what the Fed has done, uh, with this new program is it's basically caused, uh, the red line prospectively to rebound, but it only goes back to the level that we were at at the beginning of 2025. It's not, if you like, reinstating the trend upwards. So, as far as I can see, this is a policy for at best a range-bound market, not a policy to continue the bull market indefinitely. And that's what I think the Fed is trying to do. Now, within their policy mix, my reading is that what they're doing is subtly shifting from what I've called Fed QE generally to Treasury QE. Now, that may be a slight wonkish thought, but broadly speaking, what's happening in terms of a narrative is that the administration is very concerned that if they are applying stimulus via the Fed, the Fed is sort of holding a hose, and that hose is unguided, and they're sort of spraying it everywhere. Asset prices are going up, but actually Main Street's not getting very wet. And so the benefits of the liquidity stimulus are all asset markets, but not the real economy. So, what the Treasury is saying is, we're going to take over that liquidity injection process, but we're going to do it in a much more focused way, because we're going to do it through fiscal spending, but we're going to fund that fiscal spending through the bill markets, and we're going to get the banks to buy the debt. And so, if you look at what's going on here, what I've tried to show loosely is, um, the red and orange parts are the Federal Reserve actions. What is direct QE? Coupon purchases, not QEQE, which is every other form of liquidity stimulus the Fed, Fed does but refuses to acknowledge it, but it's still QE. And the black is what the Treasury is doing through the bill market. Next year, the bulk of the stimulus is coming through from Treasury QE. So there's this change, uh, changing of the guard where liquidity is shifting, um, from, uh, or the source of liquidity is shifting from the Fed to the Treasury. Now, why is that important? Because the Treasury is going to drive the real economy. Uh, it's going to fund things like the One, One Big Beautiful Bill. It's going to fund defense spending. It's going to fund critical mineral procurement, etc. All these types of, uh, you know, factors which are important for the cold war with China, uh, basically get funded via, via the Treasury and via the Treasury QE. The problem is that that's going to be inflationary.

[snorts] It's good for the economy, as that little window suggests. That's the change in the PMI, uh, on a year before against that stimulus. But if you look at what's going on, this is the monetization, uh, of the debt, and it's showing public securities in the US. In other words, agencies and treasuries, uh, as a percentage of US M2. In other words, the amount that's held by the banks, uh, as a percentage of M2. So bank balance sheets are getting increasingly filled up with government securities. That's monetizing the deficit. We know that never ends well. Um, and that's really the problem. And, you know, what's more, it's a global phenomenon. So this is the same data for the world economy. So this is China, Japan, Europe, Britain, uh, plus America. And you can see there that the trend since, uh, the GFC has been upwards. Now, as I said, we know that never ends. Well, monetization basically means faster inflation. And you can see on this metric, which is comparing the orange line, which is break-even inflation, stripped, stripping out of the, the US bond markets using the TIPS market as your benchmark. This is what implied break-even inflation is there in orange, and the black line is University of Michigan expected inflation, print. That's what consumers currently believe, um, underlying inflation is. We're near a 4%. So, you know, uh, the Fed may be thinking of 2%, but it's certainly not acting that way. And that's the problem. So, we're in a monetary inflation world. You need monetary inflation hedges. That's why commodities look good. We're at the stage of the cycle where commodities look good. The gold price is going up. Uh, silver clearly is, you know, as we speak, soaring, but it's, you want precious metals and you want effectively monetary inflation hedges. Now, there's one more shoe that we've got to that's going to drop here that we need to explore. So, unless you've got a question here, Steve, I'll go straight on to the China thing, because I think that's really important to understand.

>> Yeah, I do have a question. So in terms of going from Fed QE to Treasury QE, uh, and your cycle, uh, you know, so it seems to indicate that commodities, you're looking at like, I don't know, a two and a half year window, maybe, I mean, based off the, the cycle and wave, am I understanding that correctly? And then you got, and then, uh, more imminently, you're looking at moving toward bonds. Are there sectors that you like, sectors that you don't like? And am I understanding the kind of the flow of the commodity cycle from your liquidity diagram?

>> Yeah. Well, I mean, I, we can't really finesse in, uh, that much to say what type of commodities look good or bad. I mean, I think that's, that's almost in the nature of how the economy responds to more liquidity. But I think we're at the stage of the cycle of the liquidity cycle or investment cycle where commodities and real assets should do pretty well. Uh, now, clearly, there are anomalies in certain areas. I mean, one might make a case for saying, well, okay, the US housing market is very speculative and overblown. It may well be that house prices go down. I mean, I'm not an expert on US housing, so it's difficult to argue that. But what I'm saying is, in principle, what you've got is a stage of the cycle where real assets should get, uh, uh, you know, should be facing a wind behind them now because the real economy is picking up. Monetary inflation is there as a driver, and that those are normally the asset classes that tend to perform. So you've got, not only have you got the, uh, if I go back to my diagram of the, of the economy, sorry, I've gone the wrong way, um, um, sorry, this one here, if you look at the asset allocation cycle, uh, I think we're at that phase which favors commodities, okay? U, the next stage after that is going to be cash. So when you start to, uh, you know, move out of commodities is when the liquidity cycle starts to go down much more dramatically. Uh, we're not that stage yet, on any score, but that's clearly a consideration. And, um, uh, for the moment, you've got, um, you've got the liquidity cycle supporting commodities, and you've got the trend, uh, you know, which is coming from, uh, factors like, um, um, when I get it here, monetization, and these are factors which are driving, uh, commodities longer term. There's another one, and the other one is China, and I think we've got to think about China, uh, in a different way. Uh, and I, I'll do that in terms of, uh, again, if I just, let me flip through these charts. But if we come on to the onto the China factor, which is just here now, this is looking at the debt liquidity ratio of China, and it compares it with Japan.

[clears throat] And you remember the previous chart or an earlier chart where I showed the debt liquidity ratio for advanced economies, and those advanced economies principally dominated by America and Europe. Uh, and they were at a very different stage. So you saw a very depressed debt liquidity ratio at the moment for the advanced economies, um, and we accepted that was basically because of the policies that have been run. Now, if you look at, take Japan first, Japan had a major debt problem, and it was tightening liquidity through much of that period, uh, as it was building up that debt, and that caused debt to liquidity to really spike up, and that caused the Japanese economy real problems in terms of refinancing. If you put that in context, um, let's think about that Japan's, uh, asset bubble and the real estate bust that sort of came through. And you can think about a lot of those problems as really being tied up with the fact that the banks in Japan, uh, suffered a major collateral hit, um, because of depressed land and real estate values. They couldn't lend. Liquidity was depressed. There was a lot of debt to service or roll over, and there wasn't the liquidity in the financial system. So what the Japanese had to do was basically after thinking about it for a long time, of course, 20 years or so, they suddenly realized that what they needed to do was to start printing money to get the yield curve steeper, to try and, uh, requalify or recapitalize the banks, uh, allow the yen to devalue, and by that mechanism, you could get liquidity up, and you could get the debt liquidity ratio falling. So, Japan has done that. Uh, it's in a pretty good position now. Um, Abenomics seemingly continues under the new prime minister, and it would seem as if Japan is now in a much more robust situation. A very similar thing, of course, happened in the US after the GFC. There was a, a housing bust. Banks got a collateral hit. They suffered. Um, the US was very, very quick to try and recapitalize the banks, uh, through a steeper yield curve by having a very easy Fed policy, and initially allowing the dollar to devalue, and that clearly helped. Um, what you face now is an exactly the same situation with China. China has a debt problem. It has a high debt to liquidity ratio. It's kept, uh, liquidity tight because it's been trying to match the yuan US dollar cross rate, manage that. So they've basically kept a tight liquidity policy, but debt has clearly accumulated. This is now unsustainable. Um, behind that debt is real estate values that have collapsed, and that's causing a collateral problem for the banks. And so what China needs to do is exactly the same thing that Japan did and what America did, and that is to requalify its financial system, to start printing money, to allow the yuan to go down, to allow yield curves to steepen, and to get the banking system lending again. And that's exactly the same, uh, process. So this is the third of three big recapitalizations of banking systems, are the Chinese easing. Uh, this is Chinese net liquidity injections into markets. This is the year-on-year change. This is daily data, which we compiled from the PBOC, People's Bank of China. This is their all their announced programs day by day by day. So you can see that it's volatile, but I've put a trend line through that to stabilize and get

out the noise. And you can see that that generally is trending upwards. So there's more stimulus going in. The Chinese have put a trillion dollars equivalent into their money markets in the last 12 months. My view is they're going to have to do that the same again next year. So I think there's a lot more liquidity coming.

Are they devaluing the yuan? Yep, they are. But you got to think about that not against the US dollar. You've got to think about that against gold. And this is the yuan gold price. Uh I think that goes a lot higher. I think that they've been secretly targeting that. um we they need gold as well for their financial system. I said that was what the financial system was collateralized on uh this bifocated world system and basically uh they are accumulating gold at the same time as they're printing money which basically is a recipe for the yuan gold price to keep going up and you know that's what I've put there you know what's the next target 35,000 I mean it just keeps going up and if the gold price goes up commodity prices go up this is Chinese liquidity the orange line is our index of Chinese policy liquidity uh month by month since 2004 and the black line is the CRB uh commodity price index uh and it shows that there's actually quite a decent correlation there uh between uh Chinese liquidity advanced by about 6 months and commodity prices and it would seem as if you're going to get another uplift on commodities and it may be that actually my projections of Chinese liquidity there are too conservative but that's the story. It looks pretty good for commodity prices until it doesn't. And what causes the rug to be pulled is probably inflation and central banks trying to tighten policy. That may be later in 26, but it's not now.

>> So, Michael, got a couple questions. One, uh you mentioned collateral, the Chinese currency, gold, the US currency stable coin. uh and you said that it's not the case that China is looking to uh return to a gold standard but yet collateral gold. So is is it a derivative of some kind a certain percentage if you can explain that and then >> regarding the regarding the US US side stable coin uh is the dollar uh going to be tied to gold in some way or is it just what does the stable coin actually solve?

Well, okay, let's let's take those in reverse order. I mean, what does a stable coin uh what does it do? I think the the attraction of a stable coin is that uh it is probably two or three things. I mean, one is that it it's a more straightforward or maybe easier way of actually purchasing a store of value. And that store of value is US treasuries. And maybe this is less obvious for a US resident, but if you're a non- US resident in Turkey or Brazil, uh or in China, um actually having a dollar instrument is very valuable, uh because you don't trust your own monetary system. Um it's easier in many cases to open um a digital account, digital wallet to hold stable coin than it is to open a bank account. Um and what's more, you've got some anonymity uh in terms of that holding and you maybe think it's more secure uh holding it there against your local uh your national authorities. So I think that there's a certain attraction in doing that and you know that's why US stable coin have actually taken off uh already um so you know in international jurisdictions. So I think that that's there and that that can I would venture that can only get bigger not smaller. So it may not be purchases by US residents that is already the key to this game. It's actually purchases by international clients of US stable coin and that will that will basically being bring in a lot more holders of dollars um into the system and I gave the example later on about Chinese exporters. I think that that's something that could b they could benefit significantly uh from the stable coin market. So that that that would be my answer to the uh to the US digital collateral point.

The gold point for China and this is true for both the US and for China. These are still fiat monetary systems. They're not tied to a gold standard. Uh or China's definitely not tied to a gold standard. Far from it. They need to print uh fiat currency. In other words, they need to monetize. So there's no way that they're going to a gold standard would keep the yuan fixed to gold. Uh what we've said is that actually it's going it's rocketing upwards. Okay, this is the antithesis of a gold standard. Um uh it may be you know there may be a backing for gold but what does that really mean? I mean, that's like a little bit like saying if you go back to the [laughter] Breton Woods and you think about what happened pre uh Richard Nixon uh in 71, uh basically there was a there was gold back into the dollar. What did that really mean? What it meant was if you were a central bank um you could basically get gold at 35 bucks an ounce, okay, uh from the US Treasury until they closed the gold window, okay? Uh but if you were you or I, we could we didn't have that luxury. So, it wasn't an open market of free marketing gold. It was for selected buyers. And I think if you look at China, what China's [clears throat] trying to do is to say, well, okay, we're going to back the yuan uh with gold. If you've got, you know, a tame uh trade partner like the Saudis, for example, uh the Saudis may want to do an oil uh gold deal uh with us, and we will exchange oil for gold. We're not going to do too much of this, bear in mind, only a token amount. And that will actually give the yuan some uh physical collateral backing or identify it with physical collateral. So you can actually argue legitimately that the currency is gold is goldbacked in some there's some collateral there. Now you know we could argue long into the night about is this realistic or not? But I think that's their policy and the more that they accumulate gold the uh the more credibility perhaps the paper yuan will have.

So two more questions come to mind. uh one uh going back to the uh your your graphed chart about you know requefquifying and the the I think you mentioned COVID uh what came out of as a result of that was the essentially what you call the refinancial crisis and uh so how does that affect let's say the housing market where are we in that cycle and then moving forward uh you like gold uh you know if you can tell me about some commodities or even sectors that you like uh dislike that you would be drawn to and maybe some that you wouldn't touch at this time.

>> Well, I think you're referring to this that basically what um you know we we're clearly going in a different direction but um in terms of that of that liquidity and refinancing problem. So I'm arguing that the liquidity cycle is being challenged and that's broadly you know what we're seeing in terms of all the evidence um that uh you know we pointed to. So if you look at where I'm going to say my liquidity cycle uh the liquidity cycle is rolling over now you've got to start thinking about asset allocation in these terms which is broadly saying commodities do well at the peak. Well, we're we're sort of around the peak in the cycle right now. And what that is indicating is that you should be uh you know, holding commodities still. I mean, maybe it's it's more better to look at that uh that diagram there that you're looking at to these traffic lights. So, what that's really saying is you want commodities in the calm speculative phase, which is where we are both for Europe and for the US right now. And then when you come on to industry groups, you should be thinking much more about uh energy and uh you know mining stocks etc etc. Now what type of commodities would do well? Well you know I I'm uh you know I can just you know venture some areas but you know my view would be industrial metals because that's where the economy is going to is going to expand. uh you probably do want to start thinking about oil because oil has been on the back burner for a long time and it may well be that people argue there's a glut of energy. That may be the case, but I think you've also got to add into the fact that the Sauders have kept the oil price down for a long time, but they need funding too and it may be in their interest to allow the oil price to go upwards. Plus the fact if China is starting to uh goose its economy and get faster growth out of China, then it's quite likely that the energy balance starts to change. So it may well be that this is again a late cycle area. So I'd be looking there. But I think the obvious candidates have got to be things like copper, uh things like gold as I argued, uh oil, uh industrial metals generally and then I suppose one I mean one obviously has to say critical minerals because that's where uh a lot of money is being spent.

>> Is there anything you're avoiding right now?

Well, I would be uh I would be very wary about um things that are at the at the beginning of the liquidity cycle. So that would actually also in that would include technology. And I think that if you've got the prospect uh which is actually not on anyone's agenda as far as I can see of a flattening yield curve at some stage through next year um and with the possible if liquidity starts to come off souring of a lot of debt particularly loans that have been made to private equity then I think you've got to start shifting away from financials. I mean we are in a situation one would one we no one really knows this. it's a black hole uh or black box. But you know if you look at what happened uh ahead of the GFC um basically commercial banks were lending a lot to shadow banks uh and they thought the shadow banks were great risks but the shadow banks were lending to uh you know fairly dodgy areas uh which came out badly and the banks ended up losing because they lost uh money when they lent to the shadow banks. So the shadows banks are an intermediary. I now you've got other entities that are coming uh coming in between the banks and the end borrower. Uh and that's things like private equity funds. Um and we know that the banks have lent a lot to that area. Um they may well have recourse loans to these companies. And the issue is is that you know if those loans start to sour uh banks are going to start, you know, entering those businesses and cleaning them out and selling them off as rapidly as possible. And that is not great I would think in the environment that we're looking at uh of a tighter liquidity uh situation. So I think things go wrong and therefore I would say financials I'd be more and more wary about as the cycle turns down.

>> Michael if you can tell us a bit about Crossber Capital where people can find you and follow your material.

Yeah, you can follow us um uh at uh well the website is crossbercap.com. Uh you'll see from the logo that we've um rebranded the research site called global liquidity indexes. So um that is uh effectively the re the research side of the business. And if you want to find out more, either go to the website or if you want to read our Substack. The Substack is called Capital Wars, uh, named after the book I wrote about 5 years ago on that very theme.

>> Well, Michael, thank you for your time. For our listeners, we will put your Substack, your website and information into show notes. Uh, everyone, I'm just Steve Yang learning with you from people smarter than me. And Michael, thank you for your time and for giving us your knowledge here.

>> Thank you, Steve. I enjoyed it very much. Thank you.