The Liquidity Cycle Is Turning Down (Here's How) | Michael Howell

We're in a sort of nervous knife edge like equilibrium right now. Cycles can be crucial, and we've got to understand that cycle. And that cycle looks to me like it's turning down, and that's what we've been warning about. I hope we're wrong. It would be nice to make money on a nice bull market, but it may not be that easy.

Later on, you'll hear more about the Fundrise Income Fund and why sophisticated investors are turning to higher yielding assets like private credit. But for now, let's get into today's interview. Joined today by Michael Howell of the Capital Wars Substack and Global Liquidity Indexes. Michael, great to see you. Welcome back to Monetary Matters.

>> Well, great to be here, Jack. There's a lot going on in markets, as always.

>> There is. What is going on right now, and how does it relate to the work that you're doing on global liquidity? What, what are you seeing in markets?

>> Well, what we're seeing is, uh, is a sort of a peak in the global liquidity cycle. Um, I mean, that's not an absolute fall in liquidity, but it's basically a slowing in the, in the growth momentum. The cycle is turning down pretty much on cue. I mean, we've been saying that it was likely around about the end of 2025, and it's basically turned out to be there. The bull market, remember, has been going on for almost three years. I mean, actually, almost exactly three years. I mean, it began in around October of 2022, and it pretty much stopped around that time last year. So, we've had a peak in liquidity. Liquidity momentum is now slowing down, and that is putting pressure on financial assets, particularly risk markets, and we're beginning to see that, uh, you know, that, that in evidence. Uh, there is a narrative out there which I think is a fake narrative, that basically attributes the surge in gold to a sort of general debasement, the great debasement trade. I just think that's wrong. It's not, that's not what's explaining gold. Uh, gold is being explained by a very specific factor, which is what the Chinese are doing. And I think that particular fact, uh, and the fact that it's not a general debasement, is, uh, something which is particularly relevant right now because it obscures the fact that the global liquidity cycle itself is peaking. China is doing something very different. It's decoupled.

>> Going to get into China and its impact on, on the gold price. But, but first, Michael, what other headwinds are you seeing for asset markets, risk assets broadly, other than the peak in Federal Reserve liquidity as you measure it? Because by a lot of people's metrics, not your metrics, but a lot of people's metrics, you know, Fed look, the Fed, the Fed's balance sheet has been declining for, um, almost four, four years now. Are there other headwinds you see, or is this mostly coming from, from the Fed?

>> Well, Jack, remember that the Fed balance sheet is not the appropriate metric. I mean, it's the one that obviously policymakers want us to focus on, but it's not a measure of the liquidity that the Federal Reserve is putting into markets. What you've got to look is to, you've got to drill down into the balance sheet. You've got to take out elements that are not liquidity creating. And if you focus on the liquidity creating components of the balance sheet, you find the balance sheet has basically been expanding, uh, over much of the last three years, but it now is beginning to roll over. Now, that statement is, uh, you know, slightly problematic because the Fed was forced into another round of QE, uh, in inverted commas. Um, in other words, what we would call not QE, QE, because they would deny it was really QE, with these reserve management purchases at the end of last year when the repo markets began to derail. And what we found is a little pickup in Fed liquidity over the last few weeks, but generally speaking, my view, uh, is that Fed liquidity through this year will at best flatline. It may even decline. So, what you've got as a backdrop which is saying the Fed is, uh, one of the other headwinds I think you've got to start thinking about, um, and there is renewed uncertainty there, really, because of the incoming Fed chair, you know, presumptive chair, Kevin Walsh, is, uh, has been saying he wants to shrink the balance sheet. I, I think, well, not only think he can't do that, but I think it's madness to try and do that because, you know, the Fed has got a big footprint in markets for a very good reason.

>> Right. And, and Michael, you talked about how what drives financial crisis is refinancing, and refinancing not being able to happen. And, and on the opposite side, what drives extremely easy financial conditions is refinancing being extremely available. Wouldn't you say that when interest rates are cut, that that allows corporations, not even allows, but corporations go out and refinance all their debt at lower interest rates? And wouldn't you say that that is somewhat, uh, a form of of easy money?

>> Well, in the sense that, that's true. I mean, it changes the, the, the pattern, if you like, of of issuance. So, there's a lot more refinancing, but that refinancing basically has to keep, has to come back again. There's an echo effect in the data. And you think, if you go back to the example of the COVID crisis, where interest rates were slashed to near zero, uh, what you saw were two things happening simultaneously. Uh, one was that debt increased significantly because debt was really cheap, and people just took the advantage of borrowing because it was virtually free. And what's more, they could roll over existing debts. Uh, so if you had a higher coupon debt, you could basically start to roll that, you could, you could, uh, sorry, turn that out, uh, into the back end of the 2020s. And that's what many people did. Now, you know, I'm not going to sit here and say that lower interest rates, uh, are necessarily a good thing when you start to look at debt. We've got way too much debt. And this is why the financial system is, uh, you know, has become difficult to manage. Uh, and this is why maybe we've got an economy that's struggling under the weight of debt. Uh, now, the US is doing a lot better than many other economies in this regard. But, you know, China, as we'll turn to later on, is really being, uh, overwhelmed by its debt burden, and it has to dig its way out. Uh, Europe is not much better, and Japan, well, we know Japan is, uh, you know, is trying desperately to get out of that debt burden from two decades ago.

>> Michael, what, when you look at where we are in your framework, we've got four phases for markets: rebound, calm, speculation, and turbulence. Where are we now? What does that mean for the different assets, equities, high beta, credit, commodities, bonds, etc.? I might add precious metals and Bitcoin.

>> Yeah. Well, I think what we've seen is, um, a cycle that has unfolded pretty much on track. I mean, this is an extremely normal cycle, despite what many economists would argue. But from an asset allocation and a liquidity perspective, it's a really normal cycle. And what you're seeing now is a peaking of the liquidity cycle. Around the peak, you would typically see, uh, commodity markets, uh, exploding upwards, which they're doing. Uh, resource stocks, energy stocks outperforming, beginning to see some evidence of utilities beginning to outperform, and investors starting to reach towards stable demand, uh, consumer staple stocks. And that seems to be happening. And what you're seeing, uh, are things like technology, which have been the leaders through the bull market, really, really struggling. And that, that's that's quite normal. Um, so, if you, if you start to pinpoint exactly where we are, we would say that, uh, the US markets are in speculation. Um, the European markets are probably around about late calm, maybe just moving into the speculation, uh, phase. Emerging Asia is maybe a tad behind. That's still in calm, uh, but it's beginning, it's, it's, we're getting late in that cycle. Uh, but the interesting one is China, which is really in the rebound, in the early, in the early phase. That, that really is the anomaly. Uh, what I can do is I can turn to some slides and evidence that.

>> Sure. Sure.

>> So, this is looking at the liquidity cycle. Now, let me just, um, emphasize again what this is showing. So, the black line is a measure of the underlying momentum of liquidity, which is passing through world financial markets. This is not M2 or M3 or any monetary aggregate people are familiar with. This is basically a measure of savings and credit flows that are moving through financial markets. And what this is illustrating, uh, is a rate of change. So, it's actually a normalized, uh, index of underlying momentum across many, many different subsectors within each economy. So, we look at what central banks are doing. We look at what shadow banks are doing. We look at what traditional high street banks or main street banks are doing, commercial banks. We look at the repo market, uh, cross-border flows, etc. So, this is a, a big aggregate. Uh, it totals around about $190 trillion now. So, it's basically something like one and three-quarters times world GDP. And you can see that the cycle seems to fluctuate within that, uh, that sort of sine wave that we've put on top, which is a 65-month cycle. Um, in other words, five to six years. Uh, why is it five to six years? Well, my view is because that seems to be the average term of debt, the average maturity of global debt, and this therefore is a debt refinancing cycle. Uh, we've given the data to an independent organization, which is the Foundation for the Study of Cycles. They've done their own independent work using, I'm sure, much more sophisticated algorithms than we use, and they've come out with exactly the same answer. There's a 65-month cycle in this data. So, we're reassured by that, and it seems to be, uh, if you like, uh, panning out that way. Uh, the cycle bottomed almost exactly where it should have done, uh, in late 2022. It's been moving up ever since. It's peaking, uh, around about the same phase that you'd expect, uh, around end of third quarter of last year, and it's been, been moving down. This, let me stress, is the advanced economies. It excludes China, and it excludes China for a good reason, uh, which we'll come on to later. But it looks as if that cycle is now losing momentum. Now, if we drill into the various subcomponents, this is looking at US liquidity again. US liquidity seems to follow that same, uh, 65-month cycle, uh, and you can see where it hits and where it misses, but it's generally not bad, uh, in terms of, uh, how the cycle unfolds. And again, we seem to have peaked and we're coming down. So, the US cycle looks to be in that speculation phase. Here is Eurozone, which again, you know, broadly seems to fit. It may be a little bit more of a mismatch, but generally speaking, that seems to follow a pretty similar cycle. I think the Eurozone cycle is maybe a tad longer. Maybe it's nearer 70 months, but it's around that, that phase. And therefore, you can see right now that we look as if we're making that peak in the Eurozone, but again, the bottoms were more or less on track. Here is Asian emerging markets. So, I said, so this is things like Singapore, um, Korea, Taiwan, etc. And what this is basically showing, uh, is again, uh, that cyclical movement. Uh, you know, it's not, again, there, there are probably a few mismatches there, but generally speaking, uh, this cycle is approximately right. And what it seems to be showing is we have, we have yet hit the peak, but we're moving somewhere close to that. So, this explains why you've had some stunning performance out of Asian, uh, emerging markets of late. Um, the cycle, as you can see here, uh, compared with a normal cycle, which is shown as the dotted line, looks to be more or less on track. Uh, the red line is the current cycle. The zero that we put in the middle of that diagram is the trough of the cycle. So, the black dotted line is the average cycle from 70 to 90 to 2025. Um, and you can see that we're basically exhausting that normal upswing. And so, that chart shows that we've had a noticeable decline in the, the global liquidity cycle for the past six months.

>> Well, a bit. Yeah, maybe a bit less than six months, but you've had the peak was the peak was around about September, October of last year.

>> Mhm.

>> But liquidity leads, and the point being is liquidity leads by around about nine months. So, uh, you'd expect things to begin to be happening, uh, and maybe they are already. I mean, Bitcoin may well be the, you know, the canary in the coal mine there. This is another example. This is another measure of liquidity we track, which is looking at market depth, uh, in financial markets, as an indication of whether underlying liquidity is deteriorating. And this is basically showing a daily track, a daily liquidity track. So, this is really measuring things like, uh, you know, bid-offer spreads, uh, transaction size, etc. And this tends to follow, uh, the liquidity cycle, and you can see that that's happening. We've actually got further evidence of that here, where you've again have got that market liquidity index in orange, and the black line is a new, uh, data series that we've started to produce, uh, which is a daily nowcast of liquidity. So, we basically run our systems now every day to create this, uh, this index, and this is showing how liquidity has declined. So, this is just a daily equivalent of what we were looking at earlier on. Now, we can keep, I'm, I'm going to come on to the asset allocation in a second, but just one other thing, just to emphasize this. This is an interesting addition that we've just, uh, produced for the research, which is again, uh, a daily flash estimate. And what we've looked at here is what the central banks are doing. So, this is daily activity from central banks, and this is shown as an index, but what it's trying to show is what their liquidity operations are doing, and trying to get some sense as to that to get direction. And what you can see is generally, uh, in the last, uh, maybe few weeks, central banks generally have actually been adding a little bit more liquidity. Now, that's partly because the Fed has come back with these reserve management purchases, but it's also because if you look at what China's doing, China is actually also, uh, adding quite a lot of liquidity. And that's a very interesting point to follow up later with the actions of the PBOC. Now, to get on to what I was, um, moving towards, which is the asset allocation cycle. So, if you think about this earlier cycle here, um, or here, or here, what we can do is to put this into a framework for asset allocation, and this is how we have always thought about it. So, happens this time, it's working almost like clockwork, which is unusual, but it seems to be the case. What you've got is, uh, an upswing of the cycle, as you can see on the left-hand side, which associates positions in the cycle with asset allocation choices. And what it's saying is, in the upswing, uh, when the cycle is moving risk-on, um, you want equities. Okay. And that's been a pretty fair choice in the last two or three years. Around the peak, you want to be thinking much more about commodity markets, and that seems to be fulfilled, uh, right now. As the cycle starts to move down, uh, you then start to get more defensive, and you move into cash, uh, which will give you probably potentially the best absolute return. And then around the trough of the cycle, you then switch into long-duration government debt, uh, which then tends to benefit significantly around the trough of the cycle. Now, let me stress, this is the liquidity asset allocation cycle. It is not the real economy cycle. The real economy cycle follows this by around about, uh, something ranging from about 15 to 18 months, or that sort of time frame, which is almost one, uh, half segment of the cycle. So, if you look on the right, we've got calm, speculation, turbulence, rebound phases. The economic cycle is around about one of those segments, uh, you know, uh, displaced. So, in other words, the real economy is following. So, when we're in speculation, uh, we're just, when we're moving into speculation in liquidity, we're moving probably into or out of rebound towards calm in economic, uh, in economic terms. So, think of it in those ways. We've also got pinpointed here what type of sectors, industry groups tend to perform. So, you tend to find in the rebound phase, you want cyclical growth, things like tech, consumer discretionary, financials. Those have all been, um, pretty decent performers, particularly financials in the last, um, 12, 18 months. Uh, then you start to shift towards cyclical value around the peak, uh, which are things like resources, energy, and it looks as if, you know, resources clearly have had a big move. Energy stocks seem to be getting traction now. And then, as the cycle rolls over, you want to be inching towards defensive value, things like consumer staples and maybe utilities. And then at the bottom of the cycle, you then move towards, uh, defensive growth, things like food, drug companies. So, that's how the cycle evolves. And you've also got on there, we show where the yield curve tends to move, bear steepening, bear flattening, etc. So, where are markets generally? Uh, this slide basically shows that the percentage of markets that are in risk-on, which is the rebound or calm phase, and you can see that that is now equally split, 50/50. This is based on liquidity momentum, and it looks as if you extrapolate or eyeball that, it looks like it's going down, not going up. So, that would suggest to us that risks are clearly building, and that's how we see it. The traffic lights are just another way of sort of summarizing that picture. And what it's saying is, left-hand side, asset allocation, right-hand side, industry groups. You want to be, um, you know, in rebound, you want to be taking a little bit of risk. These are traffic lights. So, just read them as they, as the signals say. So, you amber, you want to proceed with caution. Calm is green. Go. Um, uh, speculate, sorry, speculation again, amber. Turbulence, uh, is red. Red is stock, by definition. And then, if you're in the rebound area, it's equities and credits that look good. Um, in calm, you want equities, commodities. In speculation, you want to be trimming equities out of credits, and basically full-on commodities. And then turbulence, it goes towards bond, longer-term bond duration. And then industry groups, I pretty much foreshadowed that already, but it's technology on the way up. You know, risk-on is technology. Uh, you can start to migrate towards financials, mid-cycle energy, commodities, late cycle, uh, you know, obviously, if I put in here large cap, small cap, it would be, uh, small, mid-cap later in the cycle, speculation, energy, commodities, and then you want defensive groups, uh, as you move into the risk-off phase. So, that seems to be, you know, as I say, the roadmap seems to be working pretty much. Now, if you look at this chart that I've just put up, that is looking at the performance of cyclicals versus defensives, against the business cycle. So, the orange line here is the world business cycle, and the cyclical defensives are MSCI categories, within the world market, of cyclical stocks versus defensive stocks. This is something that, um, Stanley Druckenmiller, the, you know, sort of the great investor in the US, you know, calls the internals of the market, and he always claims this is much, much better than economic forecasting, and it looks like it's, it's won out again. So,

>> And what the chart shows is that cyclicals are outperforming defensives in a manner that should indicate that the business cycle around the world is very robust, but you're not seeing that. And the world, uh, business cycle now is picking up, but it is slow. Um, interestingly, I, that's an index from zero to 100. So, that makes me think it maybe a PMI. Isn't, isn't the world business cycle a little bit stronger than, uh, 46 or whatever that is? I mean,

>> Well, this is just an average we put together. This is not the S&P version. This is a version where we've just indexed, uh, various, uh, sub-indexes. So, we look at the US ISM, we look at the Tankan in Japan, uh, we look at the Ifo survey in Germany, the CBI survey in the UK, the INSEE in France, etc., and then just put them together into an index, and that's what this shows. So, it's, it's pretty much the same thing. Uh, there's a little bit more, more, um, uh, cycle or or movement in our index, I think, than the S&P, but generally speaking, you can see this movement. Now, the point that is worth noting is this one, and this is something that is really, or should be focusing the mind right now, and this is saying that strong economies don't have strong financial markets always. Uh, and the reason is that if you look at the, uh, business cycle, and you look at the liquidity cycle, and I've cheated a little bit by pushing the business cycle forward by six months, but you can see generally, uh, what happens is that strong economies tend to absorb liquidity, and weak economies tend to release liquidity. So, it's not all about what the central banks are doing. It's also what is happening, the tempo of the real economy. And you've got to think about these sort of two silos of liquidity, financial sector liquidity and real economy liquidity, as being very separate. Uh, and it's another way of saying, you know, all money that's anywhere must be somewhere. If it's in the real economy, it's not in financial markets, and vice versa. And what we're seeing now is the real economy starting to grab more, hence rising commodity prices. Uh, that's working capital that is demanded, and that working capital will be taken out of financial markets. Um, and that's, I think, what we're seeing. So, it's not the fact that central banks are tightening. I sort of alluded earlier on to saying maybe they, you know, creating a little bit of slack near term, but the real problem is that real economies are beginning to pick up, and they will absorb liquidity.

>> And the real economy is borrowing lots of money and demanding lots of liquidity, and that is a good thing for economic growth. That's kind of what's needed. But it's just that the supply of liquidity is not there to match it. That's your point.

>> Exactly. And it may be that the real, it may be that, you know, what's happening. I mean, evidence, one clear fact. Look at, um, you know, the big AI companies in the US. I mean, okay, they're borrowing, or some of them are borrowing, but they're also running down, uh, their cash balances quite aggressively. And that's basically funding for, you know, other areas of financial, of the financial economy. So, if, uh, if they're taking, if they're running down their treasury deposits, that's a problem. It's, it's causing money to shift from the financial markets into the real economy.

>> And tell us about on the GL, Global Liquidity Index, what exactly the peak means? Because some people think it may mean the peak of actual the level of liquidity, but no, it, it indicates the, the rate of change of liquidity. Right.

>> Absolutely 100%. It's not about the level, it's about the, uh, the momentum, the rate of change. Um, and it's as straightforward as that. You know, markets are priced at the margin, and therefore they, you know, it's, it's small changes, uh, in direction or underlying momentum that really matter, uh, for the pricing of financial assets.

Sophisticated investors don't typically park their cash in high-yield savings accounts. Instead, when they want yield, they turn to one of the fastest-growing asset classes for institutional investors: private credit. These private credit strategies were once reserved exclusively for wealthy institutional investors, but now they're available to investors of all sizes thanks to the Fundrise Income Fund, which has more than $600 million invested and a 7.97% distribution rate. With most traditional savings yields falling, it's no wonder why sophisticated institutional and individual investors are turning to higher-yielding asset classes like private credit. Click the link in the description or visit fundrise.com/mm to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results. Current distribution rate as of 12/31/2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the Income Fund's perspectives at fundrise.com/income. This is a paid advertisement.

Back to the interview. Michael, you've long been saying that interest rates don't matter that much when it comes to liquidity and financial conditions. What really matters is the Fed's balance sheet. Now, you have this guy, Kevin Wars, who's going to be the next Fed chair. I shouldn't say this guy, and he has made comments that are wildly hawkish on the, on the balance sheet, that the Federal Reserve should not be in the, in this business of basically having a large balance sheet at all. And, you know, presumably he's going to be quite dovish and accommodate President Trump's desire for lower interest rates, but on the balance sheet, he's, he's appears to, you know, a decent chance that he's going to be extremely hawkish. How are you assessing the likelihood that he actually is going to be this hawkish, and, you know, is he going to reduce the balance sheet by two trillion, three trillion? Will this be via active sales as opposed to just rolloff, which is kind of what we've had? And if this, uh, very hawkish scenario comes to pass, what does that mean for, for markets, the treasury markets, and other markets?

>> Well, it's just evidence of what happened, uh, at the end of last year, Jack, when there were attempts to actually pull the Fed balance sheet down slightly. Uh, and that was really because of fluctuations in the Treasury General Account. Uh, that's one of the elements that is quite volatile on the Fed balance sheet, and it tends to see, uh, you know, a lot of movement, particularly around fiscal year end and whatever else. And what we saw was the changes in, in the Treasury General Account actually absorbed liquidity from markets, and that drain, uh, caused the repo markets, in other words, SOFR rates, to actually spike higher, uh, relative to Fed funds targets, and the Federal Reserve was clearly uncomfortable by that. They let it run on for a few weeks, but they couldn't do it for much longer. And then they introduced this new QE program, or not QE, QE program, as you might like to call it, the reserve management purchases, and that has actually lifted, uh, liquidity, Fed liquidity over the last few weeks. And that is, you know, running at a rate of about, uh, what, $40 billion a month. So, that's quite sizable amounts. So, you've got to, you've got to think about, you know, that, that fact in relation to what Kevin Walsh is really talking about. Now, the fact is that, you know, there's a whole lot of many, or there's many dimensions that one can actually tackle to argue, uh, why the Fed balance sheet shouldn't be, uh, diminished at all. Um, you know, one of those is this, the evidence from the repo markets. It's very difficult for the banking system to actually accept significantly lower liquidity, lower reserves, and the reason for that is, if you go back to the post-GFC environment with the Basel, uh, regulations, the new round of Basel regulations and liquidity coverage ratios, those, uh, those liquidity ratios basically made, uh, Fed reserves, bank reserves at the Fed, the sort of par excellence reserve asset or liquidity asset, and basically banks need that. So, there is some attempt to get that threshold down by deregulation, but I think they've got to do a lot of deregulation to actually get any sizable shift. So, in other words, what we're stuck with is a level of reserves that I would say probably are where we are now, at about $3 trillion. Um, in other words, what you've seen over the last few weeks is some, uh, some attempt to get the threshold down. So, the minimum I reckon, uh, around Q3 was about $3.25 trillion, it's now probably nearer about $3 trillion with some deregulation. Um, and the Fed has actually stepped up to the plate and pushed reserves back to this threshold. So, you know, at the moment, uh, we've got an equilibrium. The repo markets are back, you know, in some sort of harmony. So, that's one dimension. The other one is that, you know, you've got to look at the, at the treasury market, and, you know, just think how big, uh, the treasury market is now, how much it's increased since the, uh, global financial crisis. I mean, you're looking at something like, uh, if my numbers are correct, something like about a five-fold increase in the size of the treasury market. Now, over that period, uh, primary dealer capacity on, you know, depending on the measures one looks at, probably halved. So, the capacity of the banking system to act as primary dealers is diminished at a time when the treasury market is hugely bigger. So, what that spells is imbalances mean more, more volatility, and what you've got to have is a Fed sitting there in the backdrop, in the background, quite prepared to come in quickly and smooth over any tensions in the sovereign debt market. And believe me, that is their primary goal. You know, we can, we can debate inflation, we can debate employment, but at the end of the day, when push comes to shove, central banks are in the business of maintaining the integrity of their sovereign bond markets. And if there are problems in the treasury market, just watch with the alacrity that the Fed will come in and smooth things over.

>> And in terms of actually trading Treasuries, banks have pulled out massively, and that's been replaced by non-bank players like hedge funds who are involved in the so-called basis trade. That basis trade, where they own cash Treasuries and short Treasury futures, demands an incredibly large amount of leverage, which is the, uh, SOFR, SOFR market. We saw the SOFR market seize up during the fall. It has since eased. What's your outlook on that? And do you think that the, uh, Federal Reserve's actions, actions in in December of basically stopping quantitative tightening are necessary for that to ease that? Or do you think that more stimulus is needed, and the Federal Reserve will eventually get back into the business of quantitative easing, which the next Fed chair, Kevin Worsh, I mean, that would be the most, uh, about-face turn of that anyone has ever done in the, in the history of 180-degree turns to to expand the balance sheet for him?

>> Yeah, I mean, I, I accept all that. I mean, we're in a sort of nervous knife-edge like equilibrium, uh, right now. Uh, we saw what happened to the, to SOFR rates and the repo market late last year when liquidity was tight, but, you know, let's, let's put this into perspective. I mean, you were looking at not a great shortfall in reserves in bank reserves, but you saw some quite sizable blowouts in the, uh, in the SOFR spreads. So, it is a nervous market. The Federal Reserve has to be there, um, you know, essentially backstopping it. Um, and the whole thought about trimming bank res, not just trimming, but actually slashing bank reserves significantly, as Walsh is talking about, I just think it's a wholly unrealistic. It simply can't happen. I mean, not only can it not happen, I mean, it's an imprudent thing to do because the Federal Reserve will have to come back with some alacrity every time there's a crisis, and every time the Fed comes back, it puts its credibility on the line, and that can't be good for central banking. So, I think what they've got to do is they've got to live with the fact that the Fed's footprint in markets is bigger, uh, than it was basically before the GFC. But in a way, if you look at it, that's actually quite, that's quite acceptable. What you would expect because what evaporated at the time of the GFC was the interbank market. And you could really argue that the interbank market, uh, was actually, uh, put back onto the Fed balance sheet. So, you know, by definition, the Fed's balance sheet should be bigger, a lot bigger than it was before the GFC. And so, it is. Now, why are they wanting to shrink it back? Is it nostalgia? I don't know. But it's madness from an economic management or financial management point of view. They simply can't do it. And I think we've seen evidence of that. And if they try, you risk heightened volatility in the Treasury market, which is clearly what nobody wants. So, my view would be is that what they're more likely to do is to allow bank reserves to really chug along or flatline, uh, through this year, round about current levels. And they can talk boldly about, uh, you know, reducing or wanting to reduce the balance sheet size, uh, and they can try and deregulate and actually get the threshold down maybe a tad, but I think they, you know, the fact of the matter is that private sector banks are now way too small in the context of the size of the treasury market, uh, to act by themselves. We need the Fed, which means a big Fed footprint. So, there's no way that he can realistically slash, uh, the balance sheet along the lines he's suggesting. And that may be, you know, that may be a problem for Kevin Walsh simply because he's trying to trade off, uh, a smaller balance sheet, uh, for some Fed funds rate cuts. Now, you, you said right at the beginning that I don't believe that Fed funds rates matter a lot. I think that, you know, they, they matter in certain elements. I think they matter for the mortgage market. I think they probably matter for the currency, but I don't think they're partic, you know, if you cut Fed funds, are you really stimulating the economy? I, I mean, that's really a puzzle that, you know, I've mentioned before. It's a sort of gray area, and, you know, you think when you've got a situation where the federal government is, uh, pays a huge, a huge interest bill, and that interest bill represents a transfer payment into the private sector. So, if they cut interest payments, the size of interest payments, the private sector loses income. Now, that's not, uh, an easing, that's a tightening. So, the whole area is pretty gray, I think, here. And I don't think, uh, interest rate movements have a particularly material effect on the economy outside the two conduits that I mentioned.

>> Right. And so on this chart, we can actually see that I'm ballparking it, but your global liquidity index peaked actually in like 2004, 2003 or 2004. So before, uh, 2005, and obviously the, the financial crisis caused, you know, was in 2007 and, and 2008. So, I, I, and you earlier had a chart of US liquidity showing something very similar. And to me, that indicates that the, you know, someone might look and say, how could, how could Michael say that liquidity in the US was low during 2005, but I guess it was just that it was so high in 2003, and coming out of the, you know, 2001, 2002 recession, and that by 2005, the, the marginal percentage increase just wasn't that high.

>> Yeah, I think, exactly right. Now, you know, another test is looking at this one. Now, this is a bit wonky, and I probably, I'm not going to tread, you know, too much into the weeds here, but this is another way of looking at it. And this is, I mean, I think, you know, I mean, maybe because I, I wear a bond hat often, but I think this is particularly relevant information, uh, or particularly important information. This is looking at the global liquidity cycle again, uh, but what we've done is we've put on that same chart, the change in world term premium. Now, term premium is the, you know, the extra yield that bond investors demand for investing in bonds. So, it's like a risk premium, if you like, for bonds, for taking, uh, interest rate risk over the term of the bond. And what this basically shows is that when you've got abundant liquidity, you tend to find that term premiums rise, and when you get falling liquidity, you tend to find term premiums fall. Now,

>> Which basically is that, that, uh, term premium indicates high term premium means a steeper yield curve. Low term premium, or negative term premium, indicates, you know, a flat or perhaps even inverted yield curve.

>> Exactly. And the reason for that is that, you know, the term premium at the front end of the curve is diminutive, and the term premium at the back end of the curve is very significant. So, if you have, uh, a rising term premium, it's more likely, as you correctly say, Jack, that the yield curve will be steepening. So, you can also think about this as the yield curve, or some proxy for the yield curve. Now, what this is basically showing is a very strong co-movement, uh, between these two factors, and what it's suggesting is that when liquidity expands, there is less systemic risk in the system. In other words, that companies can always find financing, debtors can roll their debts, uh, etc., quite easily. There's no tension in markets. But when you see the reverse, you tend to see tensions. And when you get tensions in financial markets, investors want safe assets. So, they start to shift out of risky stuff into safe government bonds. And as they shift into safe government bonds, so the term premium on a government bond tends to be pared down, as the bond price rises. And that's exactly what you're seeing here. Now, the thing that ought to wake us up, um, if this is correct, but it's certainly a signal that's worth paying attention to, I think, is that if you look at the latest data, what it's showing is it looks as if the term premium data series has peaked and it's coming down. Now, you know, one thing I've got to stress is that if you look at this, it's a year-on-year change. So, it's still true that the term premium is rising from a year ago, but it's starting to inflect downwards. And if you extrapolate that, we think by the middle of this year, you will start to see that term premium series probably going negative. And that would suggest that you're about to see an inflection, uh, in the yield curve. Now, that is not on the cards anywhere. Everyone is still talking about steepening yield curves, and actually even steeper yield curves, uh, through, you know, as far as I can see. I just think that's wrong. And it may well be that the narrative in the very, very long term is that we've got monetary debasement, and that may be an investment theme that carries on over the next two or three decades. But the trouble with these themes is that they ignore cycles, and investors are often skewed by a down cycle, uh, when liquidity turns down, uh, and that spoils, you know, what has been a lot of gains, uh, that you've made through the, uh, through the initial uptrend. So, in other words, trends are important, but cycles can be crucial. And we've got to understand that cycle. And that cycle looks to me like it's turning down. And that's what we've been warning about. I hope we're wrong, but, you know, uh, in many ways, it would be nice to make money on a nice bull market, but it may not be that easy. And if you want sort of further evidence of that, here is the US yield curve, which is basically, uh, here from 1990. I hadn't cheated, uh, because we, this goes all the way back to the 1970s. And it was something, it was a tool we used to use at Salomon Brothers quite often to actually understand how the fixed income markets moved. And what this is showing is liquidity inflows, uh, into, this is US liquidity inflows in orange, and the black line is the slope of the yield curve. Now, what we've done is to push on the liquidity index by nine months, and what you can see here is the movement in the average yield curve slope. So, that's just basically saying, look, we're, we're, um, impartial between whether it's, you know, whether it's the 210, whether it's the 120, whether it's the 35, or whatever it may be, this is the area under the yield curve. And what it's showing is that, uh, you get an increasing slope in the term structure unambiguously, um, within nine months of a pickup in liquidity. And equally, you normally get a flattening, um, nine months after an inflection in liquidity. And that's what we've got to think about. So, if the yield curve inflects downwards and starts to flatten, I would say that's definitively a risk-off period. And everything else we've looked at is telling us that's what's going on.

>> So you expect the yield curve to flatten, uh, as the Federal Reserve is going to continue to cut interest rates. Does that mean, Michael, that you are bullish on bond duration as we approach the, uh, turbulence phase? And that's significant, Michael, because for as long as I've known you, I've never known you to be bullish on bonds. But why is this time different?

>> Well, I think the, the first thing I'm going to pick you up about is you said with the Fed cutting interest rates. Now, has the Federal Reserve got scope to cut interest rates? Clearly, that's what they are saying they want to do. One would, one would imagine that Kevin Walsh may have got the job because he's promised President Trump that's what he's going to do. But I think the, the reality is, if the economy is doing what we think it's doing, the scope for rate cuts is actually quite limited, and you know, they may be able to sneak one or two in, but not really a lot. And I think the point is that if the bond markets, uh, you know, the bond markets face declining liquidity, then they're going to act with their feet and basically, uh, you know, yields will start to come down. So, I think you, I think you could see potentially here, um, you know, the risk of a bullish flattening, if I can put it that way. I think the odds are, you know, not bad for that, but that's completely, you know, off the cards according to most people's, most people's, um, you know, projections.

>> Yeah. I mean, everyone has a steepener. Everyone has a steepener on, whether it's a call or an actual trade on. I'd say the vast majority of institutional investors are, you know, the bank, I, I think most bank reports are looking at a, a steepener. Very few people are talking about a flattener.

>> Yeah. I mean, we, I mean, I'd come quietly for the next two or three months, but I think by mid-year, you want to be changing tack. And so, Michael, where does this leave this just on the stock market and, and talk about timing? Because just because you are seeing, you, your measure of liquidity start to to flag down, just how cautious is that, is that making you, or just how bearish is that, is that making you? Cuz, you know, I, I think a lot, a lot of people watching this, um, and I, I know from experience as well, like selling stocks and nailing the top is actually not good unless you catch the bottom as well, or, or eventually get back in. And, you know, uh, so I think I just, just talk about, yeah, just, just talk about like where you think we are timing-wise and your view on particularly like global equities or US equities.

>> Yeah, I mean, I think we, you were, we were lucky to say that to to catch the the bottom exactly. You know, and I'm, I'm not particularly good at catching tops, so this could clearly be wrong. But I think that what you've got to do, as I, you know, keep stressing in terms of of investment and asset allocation, this is a long-term game, not a short-term tactical game. And I think what you've got to do is to basically plan in that way. So, you know, our argument over the last, uh, few months to our clients is, don't, don't chase markets. Uh, you know, start to get more defensive. You don't have to press the button and jump out immediately and go 100% cash, but basically start to, uh, you know, become more prudent. And I think that's, that's where we see it. You know, I'm not, I'm not saying what that we are definitely going to see a major collapse in markets. My best guess is that what we're seeing is probably a range-bound market at best this this year. I mean, stress, at best, uh, we could be seeing downside. That's possible.

I don't think yet there's a major downside because I don't see the Federal Reserve tightening or other central banks tightening. However, there are straws in the wind. I mean, Japan has tightened. Uh, Reserve Bank of Australia has tightened. Um, I mean, Australia was often a leader in some, in some ways here. So I think that, you know, you've got to be prudent in this regard.

The chart that I've put up is one to think about, and this is another way of sort of thinking about valuation, um, uh, in terms of what the markets are doing. Now, I've been the sort of, uh, you know, maybe foremost in saying you don't use PE multiples to, uh, to assess, uh, markets. In other words, you can look at them for stocks, but at the market level, they're absolutely meaningless. Um, you know, it's been one of the worst, worst guides to asset allocation to basically say, you know, this market's on a low PE, therefore buy it, because you'd have been buying the European stock market every year since 1980, and your performance versus the US would have been miserable. So, you know, that, that just doesn't work.

What you've got to look at is other metrics. And what we look at are liquidity metrics. And what this is basically showing, uh, is the ratio of all equity holdings worldwide to the pool of global liquidity. This is not a bad metric. And what it shows is excesses, where you can see particularly in Y2K and at the time of the, uh, of the, of the, um, crisis in the GFC in 2008-9. You can see where we are now. Um, and that looks extended. We're back to, uh, GFC-like extensions in terms of the ratio of equity holdings to liquidity. Uh, and what that's really saying is a little bit like looking at, I suppose, equivalent to looking at a high PE multiple, saying you've got to have the earnings growth coming through, uh, to sustain those high PEs. Well, here you've got to have the liquidity growth coming through to sustain the high, uh, equity liquidity ratios. And I don't think it's coming in that size. So that's what makes me nervous.

Now, if you start to look at the US market, then deep breath, because that does look extended. And, you know, I mean, I know we could have said any time in the last, uh, probably what, 12, 18 months, that the US market looked extended. And I, you know, I accept that US liquidity was pretty decent. The momentum was strong, and it was holding the market up. Now you've got an inflection in liquidity. Uh, there was a risk of this, uh, of this ratio coming down. Uh, this is another measure which may be a more appropriate one generally, which is looking at, uh, equity holdings to underlying collateral in the financial markets. Uh, this is, you know, another metric, an alternative one. It's not liquidity, but it's the collateral base that drives liquidity. And even that looks stretched. So I think we've got to start to be a little bit prudent here in terms of holdings of risk assets, and that's what I'd say.

So, if you drill back to, you know, where we, uh, where we were in terms of this cycle, I mean, look, um, cycles are cycles. They go up and they come down. Uh, I think we're, we're moving into a downswing. As I hope I'm wrong, but that's what the data is telling us. And, uh, you know, we, we watch the data and led by the data. So, what that's telling us is you've got this backdrop. It seems as if yield curves and term premia are kind of telling the same story. It seems that the real economy is telling the same story. It seems that industry group rotation is telling the same story. So, you know, that ticks a lot of boxes. And therefore, I would start to say that you've got to follow the, uh, the, the asset allocation that we suggest here. Uh, which is basically saying you've got to trim your equity exposure. You've got to get out of credit. Stick with commodities for the time being. Uh, maybe put a toe in the water in terms of getting some bonds. Go for mid-duration bonds. And then in industry groups within the market, I would be out of technology, um, you know, until the next time. Uh, I would be probably beginning to trim some financial holdings on the basis that financials get a lot of their gas from, uh, from steeper yield curves. And so if that's, we're near the end of that, uh, that's something to bear in mind. Energy commodities still look like they're running, uh, energy stocks in particular. Uh, and then I would start to think about defensives. I mentioned already, utilities, which seem to be picking up a bit, although it can be an esoteric sector, and start to think about consumer staples that have been pretty much out of favor. So that's what I would start to be doing in terms of asset allocation.

And then you've got another dynamic, which is the precious metals. What do you do there? That's a whole another story.

>> That is, I'll get into precious metals and commodities in a second. Michael, your reading of global liquidity inflecting lower, roughly, you know, how much of that is Fed liquidity versus other central banks versus the other two things other than central bank liquidity, which is private market liquidity and cross-border flows? You know, I know you know from your work, and I believe this is correct, that you, this all of this, uh, sector dispersion stuff of financials versus technology, that is an output from your process, not an input to your process.

>> Yeah, exactly.

>> Yeah.

>> Here is the evidence of what central banks are doing. This chart is looking at both account in terms of the black dotted line and a volume measure or value of of liquidity injected. This is showing central bank liquidity injections, um, going back to year 2000. Again, you can see it's a cycle. You can see the response to the COVID crisis pretty clear. Um, the black dodgy line is a count of percent, and on the right-hand scale, and you can see 80% of central banks worldwide, and we cover about 100 central banks worldwide, are currently, uh, easing. Okay. Uh, that looks like it's topping out. Um, and, you know, I have evidence that, you know, you've probably got a couple, you've got, uh, Australia and you've got Japan that are beginning to raise rates already. But we're looking here at the liquidity flow, notwithstanding. The orange line is looking at that by value. So it's in other words, size-weighted, and that again seems to be topping out. Uh, it may not be definitively topping out yet, but it's beginning. It seems as if it's not going to make, uh, you know, a further high. Um, and that may be rolling, but it's absolutely definitive that none of these central banks are, are, you know, we're not in a tightening phase yet, which is basically below 50. And, you know, we're, we may be approaching that, but if that, when that starts to happen, I'd be getting a lot more negative. We're not there on that. It's all about the private sector liquidity, which is being absorbed by a stronger real economy.

So, what my best guess is, as I said, is that at best, we see a range-bound market this year, and maybe some downside. I don't think we're in a situation where you can see, uh, bigger gains. And I think that's more or less the message that's coming out of what the Fed is doing. This chart, by the way, is looking at financing demands on US capital markets. So this is looking at what the Treasury is needing and what the private sector, the corporate sector in particular, is needing. And what we've factored in here is some assessment of AI capital spend. So you can see that, you know, there's maybe pronounced demands on capital markets. Um, and the dotted line is just to sort of help the eye. But that's the liquidity cycle, um, you know, inverted. So that basically is trying to illustrate, uh, that you've got greater demand.

What's the Fed doing? Um, let me just illustrate the Fed. This is looking at a concept I call Fed liquidity. Fed liquidity is the active part of the balance sheet. In other words, it's what the Federal Reserve injects into money markets. Um, the, uh, in, if you want the definition or how it's calculated and whatever, uh, I wrote this up in a book called Capital Wars, that I think we mentioned before. And what this is basically illustrating is, um, the red line is looking at Fed liquidity. If you look at the last few weeks, you can see that there's, uh, a sort of dog leg in that chart. And what that chart shows is a big drop, uh, around the back end of last year, which is the, uh, problem that led to reserve management purchases. And the red line has subsequently picked up again. And my expectation is that that's the dotted line is what happens now under, uh, you know, new Fed chair Kevin Walsh, uh, and with the, you know, with the approval of Treasury Secretary Besson, that's what I think they want. They want a kind of flatlining, uh, in Fed liquidity. That's not a dramatic fall, uh, but it's basically, you know, it doesn't change the picture dramatically from where we are now, but it really, it's, it's consistent with a sideways moving market. The risk that you've got is if you eyeball the chart, you will see that periods when Fed liquidity goes down significantly are periods of weakness or volatility in the market. And that's what I'm conscious of. So, you know, that's, that's why I think that we've got a problem.

Now, one of the things that I would argue that Kevin Walsh is, uh, is approving or basically, uh, going along with is this idea that we put here, which is something that we, that we, uh, analyzed about a year ago, really, in the wake of what Janet Yellen had been doing, uh, with the Treasury, with issuing huge amounts of bills. Now, this is slightly straying into the, into the sort of the weeds of wonkishness again, but let me try and, um, and try and, uh, explain this. If you think of liquidity, what liquidity is, liquidity is basically, uh, or liquidity of an asset is the asset size divided by its duration, very approximately. So if you change the average duration of outstanding assets, you change liquidity. So if you shorten duration of the outstanding stock, liquidity must by definition improve. And what this is basically illustrating is that process. The black area is the impact of changes in the average tenor of Treasury issuance. Okay. So the fact that they've gone from, uh, issuing longer-dated debt towards issuing bills means that that black area is positive. And if they issue a lot more bills, uh, then by definition, you get a lot more stimulus coming out, uh, potentially, um, and the reason for that is that who buys the bills tends to be the banks. So if banks buy government debt, what you find is that is called monetization, and monetization is printing money, and it's a direct monetary, uh, stimulus. The orange and red are, uh, respectively what I've called not QE, QE plus, uh, traditional balance sheet expansion by the Fed. So the orange and red are the Fed QE elements, and the black is basically what the, uh, the Treasury is doing. And you can see what happens in 2026 is that the stimulus that there is is dominated by the black area, which is Treasury QE. So I think the whole game here is to say that we're removing, we're taking away the Fed's access to the liquidity hose. We're giving it to the Treasury. The Treasury is much, much better at guiding that into the real economy through critical mineral purchases, through, uh, defense procurement, through strategic stakes, or whatever it may be. The Treasury can do that much more effectively than the Federal Reserve can. Uh, it helps Main Street over Wall Street, which is again, you know, part of the remit that I think Walsh and Besson want. Uh, and as you can see from that little insert chart, uh, which outlines the, um, the, it was the outline of that sort of stimulus, you can see that it basically precedes, precedes the black line, which is the change in the US ISM index. So that should be suggesting that we're getting a stronger economy, uh, through this year, which is what all the indications are, are pointing to anyway.

>> And do you, so you think that the Treasury, uh, easing by funding itself with shorter-term instruments rather than longer-term instruments? It's looking, you're saying it's looking like that has continued with the first year of the Trump administration and it's going to continue in 2026 as well. That's what you're saying.

>> Correct. Absolutely correct. And that, and that's what the, you know, the, uh, the calendar, the scheduled calendar, uh, the quarterly refunding process basically outlines.

>> And, and, and Michael, roughly, is it just as much as is, uh, Besson's, Besson's easing, just as much as Yellen's easing? Is it slightly more, or is it slightly less? But, uh, you know, how does it roughly compare?

>> Well, you look at the, look at the black area and you can see the, the, I mean, Yellen, Yellen in 20, 23, 24, U, that jump, uh, was what Yellen was doing. And what Scott Besson is doing is, um, um, is exactly the same thing, exactly the same comparable size.

>> Right.

>> Um, so, so Michael, so far, you talked, I believe, just through the central bank liquidity channel. What about the other two channels you focus on? So private sector and and cross-border?

>> Well, at the, at the macro level, uh, or the general level, cross-border flows kind of wash out. So we've got to look at that sort of specifically, and I can come on to that in a second. But the, in terms of private sector, I mean, I've sort of alluded to that by saying that, you know, all money that's anywhere must be somewhere. So if it's, uh, if it's going into the real economy, it's being drained out of financial markets, which is saying that the private sector is, uh, private sector liquidity is under a cloud, um, in terms of, you know, what we're seeing, um, in US and general financial markets worldwide. Uh, and that, that's the case. You know, if you're spending money on capex, you're not basically keeping in Treasury, buying, uh, bonds or buying, um, whatever it may be. You're, you're, you're in need. You're issuing corporate debt. You're basically draining the financial sector surplus funds. And that's what's going on.

>> Right. And can you just explain, like, a few of the inputs into that? Just, you know, we, we've done many interviews over the years, I'm lucky to say. And I, I think you talked about fixed income volatility being quite important to that. But

>> Oh, no, that, that, yeah, sorry, that, let me be clear, that the aggregate I'm talking about does not include fixed income volatility. That's a result, that's not a, that's not an input into our, into our models at all. That is an outcome, not an input. The inputs are purely quantitative variables. So what we're looking at are things like, um, you know, deposits of corporations, Treasury holdings, uh, activity in the repo markets. Um, these are the factors that tend to impinge, uh, on on those, on private sector liquidity balances.

>> So, so fixed income volatility is an output, not an input.

>> Oh, yeah, absolutely. There's, there's absolutely no question about that.

>> Got it. That makes sense. And then you're saying that the cross-border flows tend to net out, but tell what huge capital inflows into the US.

>> Yeah. I mean, I mean, this is the other thing I think that one would say is that if you look, and I, I haven't got a chart for the US, but I can, uh, try and illustrate what's happening in terms of Asia. This chart here is looking at, uh, Asian capital outflows. Now, I put this in basically to say, uh, yeah, there, there ain't a problem in Japan. Uh, you're not going to see a sudden halt to the yen carry trade because anything is any like as big as people make out. Uh, and what this is looking at is Asian capital flows, outflows in fact. Now, what I've illustrated is the total, all Asia, which is the black line, and then I've tried to disaggregate the rest in terms of what is Japan and what is China, Euro, Eurozone, or Europe, which is basically, uh, beginning to see something of some inflows. I, I accept at the moment, but they're relatively small. This, uh, this outflow from Asia is really the inflow into the US. You think of it that way. So money is still going into the US. And the whole idea that China is going to turn away forever from US assets is is clearly nonsensical. Uh, the margin, they may be buying less, they may be directing their purchases more at commodities and more at gold, but the whole depth of US financial markets, a reality that we've got to face, and you, the Chinese will still be buying US Treasuries and holding US dollars, and they may not want to, but they've got really no choice. And what this is, what this chart is trying to illustrate is if you go back to the early 1980s, as we show at the beginning of the chart, it was Japanese capital outflows that were huge in terms of percentages of US liquidity. The reason it's a negative is that that's, it's a capital outflow from Asia. So if you want to look at it from the US perspective, change that negative sign to positive. And you can see that the red area for Japan has been eclipsed by China, uh, really from about 2015 onwards. And you've seen huge capital outflows coming from China, largely into dollar assets. And that is the, you know, that's the reality. So if China gets a bigger and bigger trade surplus, um, not necessarily from the US, but from, uh, its all its activities, it is going to have to make a decision about what it does with that, and inevitably, a large part of that is going to go into the dollar. So, you know, I'm not going to say I'm super bullish dollar near-term because I think the administration is trying to talk the dollar lower, but I think the second half year may surprise us in terms of some firmness in the dollar. If you look as we, as we move through this year, I think that the dollar in the near term, you know, may be soft because the administration is trying to talk it down, and I accept that. But as we move through year-end, uh, where you've got, um, uh, the, the risk of, uh, liquidity tightening and us moving into a risk-off environment, uh, then I think the dollar will get a bit again.

>> Michael, you say that as the front page of the Financial Times says fund managers take the most bearish stance on the dollar for a decade. You, so you say that you think that those bets could work out for for six months, but but ultimately they won't. Just flesh out your views a little bit more on the US dollar, but then also Michael, tell us about your view of global equities, non-US equities, what we in the US would call foreign equities versus the US.

>> Well, I think that, okay, I mean, the first thing to say is if it's in the press, it's in the price. Okay, so that's the first thing I think we've got to acknowledge. And I think particularly if it's in the FT, it's definitely in the price. I mean, the FT's track record of, uh, of predicting US financial markets and the dollar is abysmal. Um, and they're, they're always pouring scorn on US markets, but that, that's their stance. So, I wouldn't, I wouldn't believe that at all. I wouldn't take any credibility from that. I think that, um, you know, generally speaking, my view would be that the dollar would, uh, would firm up in the second half year. I mean, partly because I think the scale of flows moving towards the dollar will still be significant. And I think the other thing is is that if we're moving to a risk-off environment, investors will like this comfort of US safe assets. And I think that's, you know, that's the reality. Now, you know, I'll be the first to say, and I have been saying this for some time, that the long-term outlook for government debt is not good. That's true. But we live in a world of cycles as well as trends. And sometimes the cycles come back to skewer you. And I think 2026 is one of those years. And that's why I think one's got to be defensive. And in the international context, the dollar is a defensive asset. And a lot of reporting, not just from the Financial Times, but, you know, uh, the Bank of International Settlements and and other, uh, agencies that have very, very talented researchers, that the hedge ratios of foreign inflows into the US increase. So US foreigners are still pouring money into US financial markets, but on the margin, they are hedging that currency risk a little bit more. And that could be responsible for some of the dollar weakness. What do you think about that?

>> Yeah, entirely plausible. I mean, you know, you, you've got to, these things are sort of quite normal anyway, Jack, aren't they? I mean, late in the cycle, you get diversification. The US is always a leader in financial markets, and as the cycle matures, you start to get diversification into international markets, and lo and behold, that's what we've been seeing. There's nothing unusual about that. I mean, it began this time last year, it's continuing. Uh, you know, Eurozone and emerging Asia as identified are following in the cycle. And the other one to think about is China. China's a lot earlier. And I think the, you know, the reality is that China's got a big trade surplus already. Uh, will it get bigger? Well, I mean, nobody really wants it to get bigger, but the fact is that China has huge, huge problems that we can't, we can't dismiss. We've got to accept, and they're undertaking a policy now to try and dig themselves out of those problems. But that is a monetary stimulus, and that could actually mean, in fact, that the yuan weakens. Uh, question about against what though, and that could mean flows into the dollar.

>> Michael, tell us, tell us your views on gold. It's taken a little bit of a pullback, but the price in dollars, uh, you know, over $5,000, the price in yuan, over 30,000 yuan. What's going on here? What's responsible for this rise? Do you, do you think it could, it is going to continue?

>> Yes. In a word. And if you look at, um, if you look at this chart, this really explains what I think is going on. So what you've got here is the debt liquidity ratios of China and Japan. So this is basically telling us how easy it is for Chinese or Japanese, uh, debt issuance debt issuers to roll over their debt. Now, debt always has a term, and debt is never repaid, it's only ever rolled, and you need liquidity or balance sheet capacity to roll. So I prefer this ratio than debt to GDP. I don't think debt to GDP tells us anything, uh, in particular, uh, but debt to liquidity does. And what you can see with Japan in the early part of the chart is the debt liquidity ratio of Japan rose, and that put huge, huge problems on Japanese financial markets and it caused the economy to struggle. We then saw Abenomics come in, and as part of the Abenomics framework, the Bank of Japan started to buy aggressively Japanese government bonds. In other words, it was monetizing debt. It was creating liquidity, and as a result of that liquidity, the yen has tumbled, um, not surprisingly, and what you have seen is a fall in that ratio, quite significant fall, evidenced by the red line, coming down on the right-hand side of the chart. China is about 15 years behind Japan. It has exactly the same problems. It has a huge real estate problem. Uh, real estate values have fallen. Uh, debt is impaired badly. Uh, China, you know, can probably, uh, you know, provide solvency, uh, for that debt, bail it out, but you still need liquidity to basically diminish the diminish the value of the debt or the burden of the debt and facilitate its rolling over, refinancing. Therefore, China is embarking on exactly the same policy. It is printing money, and it is trying to get its debt to liquidity ratio down. Now, here is the evidence of that, which is looking at daily liquidity injections by the People's Bank of China into its money markets. These are changes on a year ago, and what it tells us is that the People's Bank, uh, basically have injected over the last, last 12 months, about 1.1, 1.2 trillion US dollars into their financial markets. As a benchmark, America did two trillion after the GFC. China will have to do the same or equivalent. And so you've got to expect at least another trillion, uh, dollars equivalent, uh, coming out of China. So, in other words, you're talking about 7 trillion yuan, uh, of of stimulus probably in the next 12 months or so. So that's the scale of it.

Now, what is the evidence that that's happening? Look at the bond market. Bond markets always tell the truth. In an environment of expanding liquidity, you'd expect term premium on bonds, uh, to start rising. The gray line at the bottom is showing that most of the movement in the, in the Chinese government bond, the orange line is coming through rising term premium. Investors don't want to hold bonds. They're moving into risk assets. Shanghai stock market up 25 to 30% over the last 12 months, outpacing, uh, Wall Street. Here is the yuan gold price. Okay, this is what I think they're targeting, and this is what they're driving as they print money. Um, the yuan gold price goes up. Bear in mind that the Chinese are not allowed to buy crypto, things like Bitcoin. They can buy gold. Can't export gold. They can buy gold. And that's exactly what they're doing. So, as that money comes into the system, it's going into risk assets, and it's going into gold as a monetary inflation hedge. So, that line likely is going higher.

Now, many people cite this chart and say, look, something odd went on, uh, around 2024, 2025, where you can see this huge dislocation between the gold price in US dollars in orange, and the black line, which is inverted real interest rates using the US TIPS market. So typically, economists will tell you that the gold price moves inversely to real interest rates. So when real interest rates fall, the opportunity cost of holding gold is diminished, and therefore people buy gold. They hold more gold. Gold price goes up, and similarly, vice versa. That relationship broke down, uh, around 2024, 2025. Okay, that's the evidence. It's clear. Why did it do that? Well, people talk about the great monetary debasement, and that's what was going on in the West. I don't think that's the case. That's the answer here. You've got PBOC liquidity, and you've got the gold price. And it seems to me that is the story. So, what's driving the gold market is China and Asian buying. And that's what we seem to be seeing. The Shanghai Gold Exchange is leading now. Uh, it is maybe smaller in size than Comex or the London Exchange, but it's the marginal pricer. And China is trying to get all the gold it can.

Now, we've written also on this in terms of a broader point about the international monetary system, and we think that the international monetary system is cleaving into two parts. One which is a Chinese yuan-based system, a closed system. There was, uh, further evidence of that in a notice that was issued, I think it was notice number 42, by the PBOC about 10 days ago, that doubled down on banning crypto and anything, any, uh, uh, any, um, type of, um, of, um, asset, digital asset. And what they're really emphasizing, uh, is commodity-based money, if you like, or commodity backing. And effectively, the yuan system, I think, will be a partial gold-backed system, not a gold standard, absolutely not a gold standard, but they'll have some, uh, ability to transact in gold, for example, they could do oil-gold swaps, selectively for the Saudis, whoever who may want them to give them some credibility. And then you've got on the other side, the US dollar system, which is, uh, increasingly a digitally based system, but I think that is using, in, US Treasuries to back it, as it has before, but in the form of stablecoin, and that increases the reach of the US dollar and enhances the value of Treasuries. And I think that is something we've got to think about seriously. So you've got these two assets, if you like, Treasuries and gold, and that's where we've got to start thinking about the world in terms of those two pieces of collateral. But gold is critically important here. China wants the gold price up. Uh, America probably wants the, uh, value of the tre, the, uh, the, the Treasury bond up in price terms, and he wants the gold price probably lower, because that gives it an edge over China.

>> Michael, we've been talking about this since when the, the gold price in yuan was something like 12,000, and you, you said that China looking to devalue the yuan. Maybe it can't do it against the dollar, so it's looking to do it against gold. And, uh, you know, that's pretty much what happened. We have the gold priced in yuan at, you know, 32, 33,000. Do you think that they are intentionally trying to weaken the yuan in order to stimulate its its exports and its manufacturing? Um, or, or is it something else?

>> I think you've got to start thinking about currencies more and more in gold terms, and maybe that's the, the right way of thinking about them, rather than looking at cross rates. In other words, don't look at RMB or yuan US dollar, think about, um, independently, uh, dollar gold, or, uh, RMB gold. What I think is China is deliberately trying to do is to, is effectively, and they're trying to create a closed monetary system. Clearly, they've got capital controls, as well, but they're printing money domestically, and that money is, if you like, a sink which is going into, uh, domestic Chinese assets. So it's going into gold, which can be Chinese citizens can buy and hold, but not export. It's going into Chinese stocks, uh, and it's coming out of Chinese, uh, bond markets. And, you know, at some stage, it's going to lift real estate prices, not right now, but it will take time to drill through. I mean, evidence Japan on that score. It takes some time to get over that, you know, the excess, but that's already the direction, and China has to get real estate prices up ultimately. Um, and this is the only way that can seriously do that. Um, so they're basically printing money. Now, in a normal situation, that would evidence itself in terms of a weaker paper unit against the US dollar or against the euro or sterling or whatever it may be. But that's not happening because China's got capital controls. What's more, if you look at China's trade surplus, a lot of it is denominated in dollars. So they actually have control over a lot of control over the, uh, yuan US dollar cross rate. And rather like Japan in the 1980s, they're really controlling, they're really controlling or dictating it. So they can, uh, you know, it's an easier fix for them. So I think that's a political rate that they don't really want to alter very much. Uh, but they are changing the yuan gold price. Now, under normal arbitrage, if this, you know, it works in this world, then you're going to have a higher dollar gold price too. It's not going to go up in a straight line. It's going to be cyclical. It's going to come back, um, and it will be under pressure of liquidity in the West starts to come down. But notwithstanding the trend is absolutely upwards. No question.

>> Michael, you talked about how gold had been rallying despite real interest rates rising when you'd expect gold to fall during that. So that correlation historically had been breaking. It kind of sounds like if you anticipate the global liquidity cycle to have already peaked and to have, you know, already begun declining, you might expect gold as a liquidity sensitive asset to decline as well. Are you saying that you think that gold's, uh, historical correlation with your liquidity cycle is going to break in the same way that it has broken with the, uh, traditional model of gold's relationship with real interest rates?

>> I think we got to start thinking about how, what, you know, what drives the world. Um, and traditionally, it was the US, the US economy was, was clearly a giant. Uh, US liquidity still is, is massively important. World financial markets still sort of dance to the tune of the dollar. All these things are clearly very relevant. Well, what we've, we've got is a new actor, which is China. And China in liquidity terms, uh, is vast, not in terms of cross-border liquidity yet, it's got a clearly got a footprint, but domestically, it's huge. You know, Chinese banks, uh, are still some of the biggest in the world. You know, we're rivaling what the Japanese banks for, you know, maybe an unfortunate parallel were were doing in the 1980s, but, you know, China, China has got a huge banking system, a huge liquidity pool. Where does that evidence itself? It evidence itself in terms of the commodity markets and the real economy. Because what China's monetary system is already doing is it is changing the cycle, the industrial cycle within China. So, in other words, if the PBOC is injecting lots of liquidity into the system, you would expect, as a natural corollary, that the Chinese economy gets quite a lot of, uh, upward momentum because of that, and it starts to demand more commodities, commodity prices go up. And what's more, gold, you know, as a, a corollary to that, will also benefit. So I think that, you know, the dynamics, uh, maybe for commodity markets, many, maybe people have already realized that the dynamics, uh, for commodities rest increasingly with China because of its huge industrial footprint. And I think you also got that case now in gold, uh, that who is controlling the gold price is China. And if China wants an international monetary system that will rival the US dollar, it has got to have some sort of credible backing. And, you know, it has not got an international bond market like the US Treasury market. You know, you, you haven't got that credibility to think about what Chinese bonds are doing as a, as a source of collateral. So you need another form of collateral, and that accepted collateral must be gold or commodities in general, but I think gold is the obvious one.

>> So gold is decoupling from the US liquidity cycle, but not from the Chinese or Asian liquidity cycle. Does that mean that the Asian liquidity and, you know, and US liquidity, Western liquidity have decoupled? And if so, does it no longer make sense to talk about a global liquidity cycle?

>> Yeah, I think that, I think you, you raise a very good point, uh, that, you know, you are seeing this, this decoupling, and this is showing it, evidenced here in terms of US and China liquidity cycles. Now, the orange line is the Chinese liquidity cycle. The black line is the US liquidity cycle. If you go right back to, um, year 2000 or thereabouts, um, you know, around the period where, uh, China came into the World Trade Organization, WTO, the cycles of US and Chinese liquidity were pretty much running in step. I mean, China was a tad more volatile, okay, but they were trying to control their, their monetary system at the time. Um, and you can see that it's moving remarkably closely to the US right up until about 2012, and then you start to see divergence. And that divergence, uh, was very evident through the period of, you know, maybe the last decade, where China clamped down on liquidity. It kept monetary conditions very tight. It strangled, if you like, the Chinese economy of credit, but it was trying to destroy, uh, what was, what had been a big boom, uh, that it had sort of launched, uh, around the time of the GFC when it stimulated its economy, uh, at that time, and you saw the real estate boom, and so they were trying to clamp down on that, and that created, you know, that was a tight liquidity environment. Uh, what we've seen in the last, what, five, six years are cycles that are evolving between China and the US that are completely out of step. So whenever the US has tightened, China has eased. Whenever the US has eased, China seems to have tightened. And it's happening again. And that may just be coincidence, but the reality is we've got to face up to that as investors. And if you've got an expanding Chinese liquidity cycle, it is going to propel commodities probably further. It is going to underpin the gold market. Um, and, uh, whereas the US liquidity tightening is, okay, taking, it's, is detracting to some extent from gold. Otherwise, if you obviously if US liquidity was going up as well, it would be even better, but that's not the case. Um, uh, but, you know, maybe the US liquidity tightening is not enough to dent significantly or take the shine off the gold market generally. Um, but you've got to be wary about risk assets in the West, because what you see in the US is going to be increasingly copied by Eurozone and emerging Asia, which are the other two big areas.

>> Michael, what about Bitcoin, which is is down about 40% from its highs the last time we spoke in in the fall.

>> That's the canary in the coal mine. Here is, um, this is a very short-term chart, but this looks at, um, six-week changes in global liquidity. Uh, it shows these, which is Bitcoin, Ethereum, Solana, and that's with a weighting of, um, 60, 30, 10. In other words, Bitcoin 60, 60% of this. And what we've done is we've, uh, we've advanced the global liquidity black line by 13 weeks or three months to show that the two line up pretty well. I mean, it's not exact, but it's not bad. And what you can say is that the liquidity cycle is driving Bitcoin. We've done independent research digging deeper into the relationship and shown that, uh, Bitcoin is one of the, is probably the biggest systematic, sorry, liquidity is the biggest systematic influence on Bitcoin. It accounts for about 40 to 45% of variation in the Bitcoin price. Clearly, other things go on as well, such as investor sentiment or whatever it may be, but it's clearly the, the most identifiable factor. And what you can see lately is it seems to have explained quite a lot of the, uh, variation in the Bitcoin price. Now, notwithstanding the fact that you may get, uh, you know, by the time this goes out, a pick up in Bitcoin, it's possible, but I think that the trend in that black line is still downwards, and we're likely to see much smaller peaks in liquidity, and actually, on this is, as I say, on, uh, six-week changes, and actually probably a general, uh, flatlining or slightly negative trend, and that would not be great for Bitcoin, uh, through this period.

Now, um, my, my strategy has been to say to people, look, with these assets, Bitcoin, gold, these long-term monetary inflation hedges, since I'm wedded into the whole thesis that we're in a world, uh, of debt and rolling over debt where you need more and more liquidity, it's a monetary inflation world. We've got to invest accordingly, but we've got to remember there are cycles we've got to avoid, okay? Uh, and those are sort of the fast cars you've got to step out of the way of. And to hold a portfolio strategically in Bitcoin and gold makes sense, but therefore you buy Bitcoin when it's probably something like, uh, you know, one standard deviation or more below its trend, which was on my calculation around about the sort of high 60,000, and that's pretty much where it is now. So, you know, I, I would have no difficulty in buying Bitcoin. Now, I haven't, I haven't gone back in. I came out, but I haven't gone back in, but I mean, these are levels that I would think are pretty reasonable from a long-term standpoint to buy. Uh, you don't want to make money tomorrow. Well, unlikely. No guarantee, obviously, but I think on a medium-term view, you probably will. And the same with gold, but gold hasn't pulled back yet to the sort of levels where I'd be comfortable going back in. Uh, but I will go back in, uh, when you start to see a more meaningful pullback. I mean, that might mean the gold price has to go down to about 48 or thereabouts, but we're talking about those sort of levels.

>> Well, Michael, help me understand that because I thought that you were saying that the liquidity cycle had already peaked and that therefore that, you know, it's quite a bearish indicator. So, why are you saying that, oh, okay, it's okay to go back in at Bitcoin even in the in the 60,000 level if, you know, I mean, we're only like 3% off our off the highs in the S&P 500.

>> Yeah, I think I think you make a, you make a fair point, but I think you've got to, you've got to distinguish, you know, for the, for a core investment. Um, I think you want to be thinking about, you know, when, when do you buy it? And I think you buy core investments, uh, when they're about one standard deviation or more below their trends. And, you know, that takes away timing. I agree. And you can do better than that almost certainly if you try and finesse that even more. But then you may there may be a sudden shot that you don't anticipate on the upside as well of the downside. So you would be, your timing would be, you know, further out. So, all I'm saying is without thinking about the timing aspect or the tacticalness of looking at the liquidity cycle every twist and turn, a pretty good rule of thumb is to buy an asset if you're below one standard deviation or so from its trend. That's all I'm saying. So, um, I'm not suggesting people rush in now, but I'm saying it's not a bad long-term area to buy into. And it may be one of those things that, you know, had you bought gold at 3,000, you'd have been saying, "Well, why didn't I buy more?" Um, you know, we, hindsight's a wonderful thing as we know.

>> Sure. I guess. Well, when you bought in gold and at 3,000, it probably wasn't one standard deviation off its highs. I imagine it was at all, all-time highs. But Michael, I'm saying if we are looking at every twist and turn of liquidity cycle, which you know, you're the guy out of anyone in the world to do it. Uh, what does that indicate for Bitcoin's near-term, 6 months, 12 months, 18 months?

>> Well, I think, I mean, you're putting me on the spot. I mean, I, I don't think it looks, it doesn't look great for sure.

>> Um, but I mean, it, it's a liquidity barometer. I mean, that's how it, it's showing up. It's the canary in the coal mine, but it's warning us about other things. And I think what you've, you know, what we have said in the past is that Bitcoin is probably the most liquidity sensitive asset on the planet. Um, and if you get liquidity trending lower, Bitcoin is clearly going to suffer. And there's no question about that. Okay. Uh, I'm bullish about it long term, but I've got to accept the fact that in the short term, it won't be a great performer. But as I say, it's the canary in the coal mine. And now what you've seen subsequent to Bitcoin, um, underperforming or falling, you're seeing US tech stocks coming under pressure, uh, you're seeing the market generally, uh, you know, failing to make new highs, or it's struggling to make new highs. And you look, you're evidencing very clear rotation from early cycle to late cycle sectors within the market.

>> Right. Why, why is it that fin, you say financials and cyclicals and commodity type stocks, as well as commodities do rally more in the late cycle? Why is that?

>> Well, because I think that it, it comes back to two things. One is duration, and one is, which I suppose is, and the other, which is connected, which is basically where they get their impetus in terms of their earnings kicker from. And a lot of those later cycle areas are, are sectors or companies that get a lot of their traction from a strong real economy. Whereas if you think about the ones at the front end of the cycle being very long duration, like technology, they're not going to be influenced by the business cycle. They're going to be influenced by, uh, by interest rates, uh, or liquidity, because they're basically a very long duration, uh, stock.

>> Michael, you've got a chart of the, uh, maturity wall of of corporate debt ahead of us, as well as the change in that, uh, corporate.

debt by year. It's really interesting and I just was looking at, um, you know, the most recent figures from S&P Global, which is a, a credit rating agency, and Moody's as well. And it's interesting because, you know, these stocks are selling off 25, 30% over the past month, which for them is a lot, on fears that their analytics and data business is going to be disrupted by AI. And in particular, I think, you know, Anthropic's Claude tool, which is interesting. But, you know, just looking at this chart, Michael, it, it appears to me like there's a lot of, uh, guaranteed or semi-semi-guaranteed revenue and operating earnings ahead, just from these companies that are ratings, ratings businesses.

Um, so just in terms of the, the annual stock of debt ahead, what, you know, what are you seeing on this chart here, and what does that mean for assets? And I guess, you know, we can break it down through the investment, you know, the investment grade bonds, the high yield bonds, and then the bank loan market, and then private credit, which I don't know if, uh, is, is, you know, can, can be measured as well.

Yeah. Well, actually, let me just step back to say what the reason for this chart is. This is looking at the debt liquidity ratio worldwide. We looked at Japan and we looked at China earlier on. This is the world overall. It's dominated by the US and by Europe by definition. And what it shows is there is an equilibrium debt to liquidity ratio. There is no equilibrium debt to GDP ratio, contrary to what economists have claimed. But there is a very clear equilibrium, mean-reverting equilibrium between debt and liquidity, because debt has to be rolled over. And what this basically shows is that equilibrium working out. It's cyclical. When you get excessive debt versus liquidity, you get refinancing tensions and you see financial crises, which I've annotated. And equally on the downside, when there is, uh, a lot of excess liquidity, in other words, the debt liquidity ratio is low, uh, in that period, you get asset bubbles, because asset markets tend to be, uh, the vent for that surplus liquidity.

We have been through the most unbelievable, uh, fall in, uh, the debt liquidity ratio, uh, courtesy of central banks responding to every financial crisis by injecting liquidity, by doing QE. This is clearly what Scott Bessant and, uh, Kevin Walsh are railing against. Uh, but the problem is that, uh, as I say, it's not that easy to correct this problem, and, um, also by zero interest rates, which didn't help at all. And what you're now seeing is a recovery or rebound in that ratio. It, uh, you're leaving the everything bubble behind, and it's moving into a regime where liquidity is going to be tighter relative to debt. Now, the reason for that is that debt, uh, in the period from, uh, around COVID, in particular, was termed out later into the decade, and you can see the evidence here. This is looking at the debt maturity wall. In other words, the amount of debt, uh, that needs to be refinanced, or the amount of debt coming back, including refinancings, uh, year after year. So that debt maturity wall starts to climb. So this is the amount of debt, gross debt, that has to be refinanced every year in the world economy, measured in trillions. Sorry, measured in billions. So you're talking here about, uh, by 2030, $45 trillion. So big numbers. And it's more pronounced in this chart, which is the year-on-year change. And you can see the very clear bite out of the chart in 2021, 2022, 2023, when zero interest rates encouraged a lot of, uh, borrowers, households, and corporates, and governments to term out their debt into the back end of this decade. And that's what you're seeing coming back in. Uh, 2025 was a was a sizable year. Uh, 2026, maybe a, yeah, tad less, but you get the idea that you've got a lot of demands out of financial markets coming through. Uh, the difference was that 2025 was actually a year of quite good liquidity, um, and there wasn't a lot of financing demands coming out of industry. But 2026 is a year of tighter liquidity and lot bigger financing demands for capex.

>> That makes sense. And again, for you, this is actually a modest negative for financial assets, right? Because it's requires all of this money from the financial system to be injected towards the real economy. Uh, interesting. I spoke to, you know, some, someone, you know, Andy Johnston, he had a similar view. And, you know, you, you two veterans, uh, both, both who worked at, at Solomon Brothers at different times, though, you know, I'm, you guys know a lot more than I do. But can you explain just, just why is, like, Google or Meta issuing tons of debt that is going to be rated investment grade and bought by pension funds, and then deploying that into building out data centers, which is going to cause GDP to go up, incomes to rise, the construction companies to go up? Why is that bearish short-term? And specifically, why are the bearish outcomes of, uh, you know, it requires liquidity to fund this, why is that greater than the bullish outcomes of incomes are rising and profits are rising and GDP is going to go up because of the spending?

>> Well, it's clearly very bullish for Main Street. There's no question about that. But it's not good for Wall Street, because the money is coming out of Wall Street to fund Main Street. And that, it's that seesaw, which is really important to understand. And that's really what, what I'm saying, I guess, through this presentation, is that that seesaw is now, you know, was tilted very much in favor of Wall Street when the economy was very sluggish. Uh, when economists were talking about or fearing recession, that recession never came. The economy was at a low ebb, and it wasn't demanding a lot of, a lot of liquidity. Okay. If an economy picks up, you need more liquidity for, uh, you know, for cash flow, for working capital, for, for, uh, working capital, for capex, uh, and what we're seeing now is evidence that, uh, you know, a lot of the big AI companies, but and other firms as well, are actually stepping up their capex. I mean, that's clearly a good thing in the context of the US real economy. Um, you know, you would expect that underlying productivity would be favorably impacted by that. Uh, but it does mean that you've got less money in financial markets. Uh, or money that's anywhere must be somewhere. And if it's in Main Street, it's not on Wall Street. It's really as simple as that.

>> And so the fact that this is extremely good for, at least on paper, profits, GDP, etc. I'm not saying that, you know, everyone, every citizen in America is going to be doing great financially because data centers are being built. But, you know, by, by no means am I saying that, but it is going to make the statistics look very, very good. Um, are based on that, Michael, can you, can you say that you expect, kind of, the financial punditry and certain commentators to look at the very high profit growth that we're going to see in the S&P 500, and yet they're going to see the S&P, you know, maybe flat to down, or perhaps up, you know, single digits this year, based on what you're saying? And can we see people being like, I can't believe profits are up so much. How come the S&P isn't up? In the same way, maybe those same people in 2020 or 2021 were saying, why, why is the stock market up so much? These earnings are horrible.

>> Yeah, I think that makes, makes sense. I mean, you, let, make no mistake. I mean, the economy, I think, is in a pretty decent position in the US. Uh, yeah, I wish I could say that about Europe, but we can't. Um, if you look at, um, the year to, uh, end March quarter this year, uh, it's likely the US economy in real terms will grow by about 4.5%, which is a pretty decent rate of growth. And, you know, look at the latest Atlanta Fed GDP Now estimates. I mean, they're, they're up at similar magnitudes. So, you know, the underlying momentum in the economy looks pretty decent, uh, despite what many people say. Uh, it may well be a K-shaped economy, but the fact is that it's an economy that's growing pretty well on average. So, I think you've got that backdrop. Will earnings be good this year? Yes, undoubtedly. Um, is that something that we should be expecting or factoring into the market outlook? Yes. But let me just say this as a, as a fact, and I haven't got a chance to demonstrate that, but I think it's well accepted that in the second year of a presidency, um, the market is generally weakest of the four. So, in other words, take the four years of a presidency. Uh, year one and years three and four are good. Year one, I think, being the best. Um, year two is undoubtedly the weakest year. And if you look at that same analysis for earnings, you find that year two is always the strongest year in a presidency for earnings, reported earnings growth. And that's what we're going to see this year, in all likelihood, and is underpinned by everything we've been saying about the pickup in the economy, increased capex, etc., etc. But in other words, the markets get derated. And that's the, that's the worry. The derating is because liquidity is tightening.

>> Michael, I asked you earlier just about, is there any regions where you're particularly bullish, whether it's China or India or Europe, Japan, elsewhere?

>> China, no question. China looks good on my estimation. I mean, there's no, there's, there should be, you know, no doubt that the Chinese economy is in a parlous state. I mean, that, that's almost goes without saying. It's, you know, over, it's, it's got a huge debt burden, and American tariffs have clearly hurt China enormously. So the, the economy is in, is in a bad situation. But, you know, if you go back to some of the wise words again, which I quote from Stanley Druckenmiller, the best time to invest in the market is when you've got, uh, a sluggish economy that the authorities are trying to goose. And that is what you're seeing in China right now. Uh, not only are they trying to goose the economy, they're trying to eliminate the debt burden as well. So you've got a, a sort of double whammy coming through, and that should be a good recipe. So, you know, the thing to look at are things like Chinese technology stocks. I mean, they, they should be the ones outperforming the early cycle bid. Um, they, that should be moving, and, you know, I think it is. I mean, Chinese, Chinese markets have been pretty strong. So that's what I would be looking at, looking at rotation. Uh, you know, both sector-wise and geographically. Uh, Europe, I think, is, you know, we're talking about months behind the US. There may be a bit of traction left. And again, with emerging Asia, uh, similar sorts of things. Um, but that's what I would be looking at. Uh, but I wouldn't be, you know, chasing stock markets right now. I'd be, you know, keeping a foot in the door in commodities, but I'd be starting to, you know, hold a bit more cash than normal, that's for sure. And, you know, maybe thinking about putting some money into mid-duration bonds.

>> So, in terms of assets you're bullish on, you're bullish on Chinese technology stocks, you're also bullish on gold. It sounds like most every other risk asset you're relatively cautious on. You like cash, which is new for you, and you also like, uh, D, you know, mid-duration, as you say, mid-duration bonds, uh, which is also new for you. So, it sounds like you're, you're, you're quite cautious.

>> Correct. Absolutely correct.

>> Um,

>> The liquidity cycle has turned.

>> What are, what would you have to see in order to change your view, uh, to make you bullish again on those risk assets that you're currently cautious on? What would you have to see, Michael, to accelerate your bearish view and say, "Actually, I'm doubling down. I don't think, you know, I, I'm gonna buy puts on the S&P." Um, likewise, what are you going to be paying attention to?

>> Well, what, what would change my view is there was some event that caused central banks to throw more liquidity into markets. Um, you know, obviously led by the Fed. Um, I, I can't see that happening, particularly given the debate we were having earlier on about what Kevin Walsh wants to do with the balance sheet. So, I, I just don't see that. It's possible, never say never, but that was what would change my mind. What would make me even more negative would be signs that central banks generally are tightening. Uh, if Kevin Walsh went through with his threat of, uh, reducing the balance sheet size significantly. And, you know, I, I would say that, you know, in order to get appointed, he may be using that, uh, you know, that talk in front of Congress. So, you know, that's what he may be playing to the crowd in that regard. But that may be, uh, you know, something to watch out for, because the market might take that quite badly if it sees, uh, you know, WS going back to, uh, a significant QT stance. Um, so that would be one factor. Uh, and the other would be just generally, would be, uh, a generally much stronger economy. So, uh, one, central banks tightening, two, a much stronger economy, and the meat in the sandwich, uh, is Wall Street, or financial markets.

>> And, sorry, a much stronger economy would lead you in which direction?

>> Bearish.

>> Bearish.

>> Because if money is in the real economy, it's not in the financial markets.

>> That is interesting. Um, and so he's, tell, tell us what has Worsh indicated recently. I know a while ago, when he wasn't going to be Fed chair, he was talking a big game about selling mortgage-backed securities and being very active. Now he's talking about Treasury Fed Accord 2.0. Exactly. You know, what does he mean by it, and how does that accord with with your own view?

>> Well, you know, I agree with this. I mean, there has been mission creep by the Fed, and, you know, there's been mission creep across all central banks, and they need to be paired back and disciplined again, in my view. Um, and I think that, you know, I, I fully support what Scott Bessant and Kevin Walsh are, are saying. My only point is that mechanically, it's really difficult, if not impossible, to actually get the Fed balance sheet down. I think what you need to do is to control the Fed as an institution, uh, but basically be realistic about the size of the balance sheet. The balance sheet clearly has had an effect in inflating Wall Street. Uh, and it's had a big effect on the K, uh, the K-shaped economy, uh, because it's led to an enormous wealth divide, which I think is unacceptable for most, you know, in most economies. Um, and that's something which needs to be corrected, and I think the administration wants to correct that. Um, but, um, realistically, uh, what does it really mean looking out? I think that the, the best case for the market is that Fed liquidity flatlines through this year. I just cannot see it going up, and I simply can't see it coming down a lot. So I think the best case is a flatlining, which is basically not the backdrop for a surging bull market in equities. Uh, you know, the best case I could come up with is that the market ranges, but I think it may be drifting lower.

>> Drifting lower, and yet at the same time, you don't sound wildly bearish. You're not predicting a crash, are you?

>> No, because I don't think there's the stretch in the system. Uh, we haven't got to that, you know, if you look at, if you go back to my diagram here, we haven't quite got to the period where you would see on the right-hand side, a particularly elevated debt liquidity ratio. We're clearly getting there. Uh, we're, we're marching in that direction. I mean, that's uncomfortable. And it's possible that we could see, you know, we, we could see a correction, but I think what that would take would be a monetary tightening by the Fed. We're not seeing that yet, but clearly, never say never. And if central banks started to jump on the on the brake pedal, then I'd be a lot, lot more bearish. I mean, just look at that chart. Look at the annotation that you saw, uh, around the Y2K crisis. I mean, that didn't have a particularly big extension in the debt liquidity ratio, but it was the case that central banks were tightening very sharply after the, uh, big liquidity injections that, uh, they, uh, they put in before the Y2K date. Uh, similarly, if you look at the time of the Lehman crisis, uh, back in 2008, there was, you know, a spike up, uh, and then suddenly, uh, they pushed loads of liquidity back into the system very quickly and caused that ratio to come down again. But there was the initial spike, which was a problem.

>> Michael, could you just summarize your, your views, um, for, for us?

>> It's all about rotation. The liquidity cycle is peaking. You've got to start moving asset allocation towards more defensive areas. We're not risk-off yet. We'd go risk-off, uh, significantly, uh, if you saw a situation where central banks were tightening or the real economy is stronger, but we're basically moving in that direction. So our view is, you've got to start pairing down, uh, excessive exposure to risk assets like equities. You probably got to get out of technology. You probably got to shift towards utilities. Uh, stay with energy. Uh, keep, you know, holding resource stocks. Uh, hold commodities if you hold physical commodities. Start to think about mid-duration bonds and start to, uh, you know, put a little bit of money to work in stable growth, uh, consumer stable companies. It's rotation that's key. And China, China will be, uh, you know, the only bull market that I would be convinced of this year.

>> And Michael, the, when you say what would cause you to be even more bearish is a strong economy, that, you know, it does sound very, very counterintuitive to me. Um, but then I do think of 2022, when nominally things were very, very strong. It just was inflationary, and I, that I can wrap my head around. So would you see, you know, a quote unquote strong economy of nominal spending, nominal investment being very robust, but just being caused by, uh, high inflation?

>> Equity markets, financial assets in general, don't like inflation. There's, there's no question about that. There's not an inflation problem in the US right now. Um, 2027 may be a different question. And you'd expect if the economy was strong in 2026, that you would see that, uh, coming through in faster inflation next year. So, I, I think that's possible. And then the Fed, the Fed may well have to act. And I would be surprised, given his, uh, his pedigree, uh, that Kevin Walsh doesn't act in that situation. I think he would have to. And what's more, you know, if the Republicans wanted to, uh, win the subsequent presidential, I think they'd have to, given everything they've said, and particularly what everything Scott Bessant has said in the past, they would have to get their hands around the inflation problem.

>> That makes sense. Michael, we'll leave it there. People can find you on X at Crossborder Capital. Tell us about the work that you do at Capital Wars Substack.

>> Yeah, we, we have two, uh, channels, if you like. What, one is our institutional service, which is pretty much, uh, predominated by data supply and drilling deeply into this liquidity data, uh, through sort of narratives and, uh, and deeper, deeper reports. Uh, Substack is, uh, is something which is, uh, designed more for maybe a lighter read, uh, without the detail, but probably, you know, equivalent narrative. And it's something which is focused very much on people that, you know, want an idea of what's going on in financial markets, how to do some asset allocation. Uh, that goes under the title of Capital Wars. Uh, that is named after a book I wrote about five or six years ago with that same title. And what that book was explaining was the rise of global liquidity and the coming capital wars, particularly between, uh, the US and China. And I'm not a big believer necessarily in trade wars. I think that's just the veneer. I think the real, uh, question is whose capital is dominant? Is it America's or is it China's? And that's what the underlying battle is about. And that's what we tackle in Capital Wars.

>> Both are excellent, and we encourage people to check it out. Thank you, everyone, for listening. Please leave a rating and review for Monetary Matters on Apple Podcasts or Spotify. It really helps the show. Also, subscribe to the Monetary Matters YouTube channel. Thanks.

>> Great. Thank you.

>> Thanks for watching. Interested in the Fundrise Income Fund? Click the link in the description to learn more. Until next time. Thank you. Just close the door.