Transcription
In my view, uh, this is the driver of the gold market. It's not the West. It's not, um, debasement by Western governments, by Europeans or America. And you can see what happens, uh, immediately after those peaks when the liquidity rug is pulled away. Markets come down with a jolt. In the case of the US, the ratio of equity holdings to US liquidity has way surpassed where we were in year 2000. It would seem as if that liquidity cycle is going to keep going down, uh, probably, uh, bottoming in something like 2027.
Okay, ladies and gentlemen. So, today we have Michael Howell back on the show, who's the founder and CEO of Crosswater Capital, which was recently rebranded to Global Liquidity Index. Michael, thank you so much for being here.
Well, Vlad, it's a great pleasure. There's lots going on in markets as we speak, so lots to talk about. Certainly, Michael, very happy to have you back on. I think it's perfect timing. If we could start by talking about liquidity, so of course, we'll get to various markets, including precious metals, but, you know, if you could tell us, I suppose, first of all, why liquidity matters, um, if we could talk about, you know, liquidity cycles and how they affect various markets.
Okay. Well, I think the starting point is to say that liquidity is the fuel that drives asset markets. Um, asset markets basically go up and down according to the inflows or outflows of liquidity, uh, into markets, and what we do at Crossber Capital, stroke GL Indexes, is track, uh, those money flows. Uh, those money flows tend to be predictive. So they tend to lead financial markets. They lead fixed income markets by around about six to nine months. Equities, maybe a tad longer. Real economies, maybe fifteen to twenty months ahead. And things like Bitcoin is actually a very sensitive, uh, asset, and that tends to be led by liquidity within about a three-month time frame. So you might say that Bitcoin, and Bitcoin's current condition, is a canary in a coal mine. Uh, in other words, it's a barometer of, of tight liquidity conditions. So liquidity is really the key thing that we look at. Liquidity matters. Uh, liquidity is fungible, which means that it flows. And therefore, we've got to look at a concept called global liquidity, which is what we track. Now, I think the key thing to say in all this is that we're really only interested in money that is in financial markets or asset markets, because that's what, uh, we're focused on. We're focused on asset prices. We're not so interested in money in the real economy, although clearly it matters for other things. But you have to say that all money that's anywhere must be somewhere. So, if it's in the real economy, it's not in financial markets, and vice versa. So a strong economy, which is what we're kind of getting right now, particularly if you look at recent US data, would suggest that financial markets are going to be drained of precious liquidity. And that maybe is what we're seeing in front of us, where, uh, there's lots of evidence that, uh, uh, markets are either flatlining or actually finding it difficult to make new highs.
Right. That's very interesting, Michael. And so you would say that we are now right at the top of the liquidity market, and it's downhill from here?
Uh, yes, I think in a word, that's probably right. I mean, clearly, uh, markets never move in straight lines. Uh, but as far as we can see, the, uh, the direction of liquidity is now downwards. Now, let me maybe the best thing to do is if I show you a picture of that, we can, uh, we can sort of drill into that. So I'm going to, uh, try and do that right now. So hopefully that is displayed, and that shows the global liquidity cycle. Okay. Now, that global liquidity cycle is, uh, is shown here in index form. This is measuring the momentum. In other words, the underlying growth rate of liquidity across the world economy. Um, we look at lots of different countries and lots of different forms of liquidity. So we include central bank liquidity, we include what commercial banks are doing, we include shadow banking, we include the repo markets, etc. Cross-border flows, all these elements are part of the whole liquidity picture, and that's encapsulated in this diagram, and we show a normalized index, in fact, of the underlying growth rate across all of those countries and sectors. Now, you can see that it fluctuates. In other words, a cycle is a cycle. And what it shows here is that liquidity is fluctuating with around a sixty-five-month, uh, frequency. Uh, in other words, five to six years. Why five to six years? Well, I'm, I'm not sure I know the full reason for that, but it does actually align with the average maturity of debt in the world economy. In other words, the average term of debt is about five to six years. And therefore, what we're looking at here most probably is a debt refinancing cycle. And we've actually put on top of that cycle a sine wave, uh, which has been derived by Fourier analysis, which actually shows that sixty-five-month wave continuing, and if you look at the more recent two, two or three waves, you'll see that actually they align almost exactly, uh, with that sine wave. So what we saw was the liquidity cycle bottoming in late 2022. That has delivered now three years of strong gains in asset markets. Uh, we're beginning to see an inflection. In fact, liquidity inflected around, uh, Q3 of last year, began to top out and fall back. Uh, as I stressed, that's not an absolute fall in liquidity. Make, make that clear. Uh, it's a slowing of the growth rate, but asset markets are priced at the margins, so this matters quite a lot. And it would seem as if that liquidity cycle is going to keep going down, uh, probably, uh, bottoming in something like 2027. So, in other words, what we've got is a period of, uh, some pressure out there. Now, it isn't necessarily the case that the black line, which is our reading, uh, automatically or necessarily has to touch the floor here, but you can see that the direction is almost certainly downwards.
Yes. And so Michael, if we look at the new Fed chair, Kevin Worsh, uh, how do you think his appointment could affect these cycles, or these things look quite minor, and they don't really influence these big cycles?
Well, I think the short answer is, I wish I knew, and I wish I knew more about, uh, maybe a lot of people wish they knew more about what, um, Kevin Walsh plans. I think the, the difficulty we've got is that traditional levers of monetary policy don't really work very well. And if you look at interest rates, it's entirely unclear, as far as I can see, whether actually cutting interest rates stimulates the economy or not. Uh, in other words, it's a very weak lever, if it's a lever at all. And the reason I say that is that I think it's probably fair to say that if you cut interest rates, the housing market will be stimulated. And it's almost the case, almost certainly the case, that the US dollar will weaken if US rates are cut. But outside of that, I'm not sure. Because one of the things that we've seen, particularly in the last twenty years, is huge growth in government debt. And that, that debt basically pays interest, uh, to the private sector from the government sector. Now, that's income for the priv, for the private sector, it's a transfer payment. So actually, if you cut interest rates, you're actually cutting people's incomes, and that clearly is not a stimulus. That's a, that's a tightening of policy. So I think you've got these gray areas when it comes to interest rates, what they really mean. And then the other question is, what about the balance sheet? Now, I think it was probably fairly clear early on that quantitative easing, um, on paper at least, is a form of stimulus. Okay. Um, and equally, quantitative tightening is a form of, uh, a form of monetary squeeze. But the problem is, is that what we're looking at is a financial system that's actually changed dramatically in the last twenty, twenty-five years. And it's not really an option for the Federal Reserve to change the balance sheet in size or structure very much. And the reason for that is you've got a lot of bank regulations now, which are basically forcing the banks to hold more liquidity, um, on their balance sheets. And one of the results of the Basel Accords that, uh, that you've seen basically used to regulate banks is that the asset par excellence in liquidity terms is central bank reserves. So, in actual fact, the, the banks, high street banks, are demanding a large Fed balance sheet. Now, if the Fed doesn't want to give them that balance sheet, it's actually squeezing the banks in terms of their reserve needs, and that causes problems in repo markets, and then you get dislocations like we saw at the end of last year. So, the fact is that this isn't really an option. The other thing is that you've got to bear in mind that what we've had, uh, you know, since the, uh, since the GFC, is a very significant increase in government debt. Government debt in the US has probably gone up six times, uh, since the GFC. I mean, that's a phenomenal increase. And over that time period, uh, dealer capacity, in other words, dealer capacity at the banks, the ability to trade, or the capacity to trade bonds, has probably halved. So we're looking at a very, very significant drop [clears throat] in the market liquidity of the fixed income markets, and that basically imparts, uh, potential volatility into the market, which is something that a sovereign issuer like the US Treasury just simply doesn't want. So there are real risks in this policy that Walsh is, uh, outlining, where he's arguing that what he would like to do is to trade off a smaller balance sheet, uh, for rate cuts. Uh, it just doesn't work like that. So my best guess is that what we see is rather more of a status quo-like process, uh, than maybe many people are expecting. He may try and cut interest rates, but his ability to get the balance sheet down is, uh, I think, is limited. And even if they push through, uh, significant bank deregulation, which has been mooted, um, I just don't think the banks are still able, they're just too small, uh, in many ways, relative to this huge growth in the debt markets. Debt is, you know, way, way too much of an issue now, too much of a bogey for the markets to cope with on their own. They need the central banks.
Right. So, the risks are certainly increasing. But Michael, um, you know, many people talk about the fact that markets are grossly overvalued. We could have something like, you know, a lost decade. Um, if you look at the big picture, you know, we have the Fed. They try to cure every single illness by increasing money supply, increasing liquidity, trying to save the markets. Of course, that liquidity goes back into these asset classes. So, do you believe over the long term the markets will still likely continue to go up for that exact reason?
Well, the, I mean, the fact is that it's not really a valuation. All valuation tells you is risk. Okay. And I think you can look at, look at liquidity, uh, you know, look at how liquidity, uh, is, uh, is affecting asset prices in terms of the flow of money into the market. So if you've got a situation where markets look stretched against liquidity, and the flow of liquidity is being curtailed, then there's a much, much bigger risk out there. Now, I tend to believe, uh, and certainly evidence is, is sort of supporting this statement, that traditional valuation measures like price to earnings don't really matter at the macro level. They clearly matter at the stock level or the industry group level, but they don't matter at the macro level. U, you know, otherwise, you would have said that European stock markets, which are always on average, on average lower P/Es, would have outperformed, uh, the US market, uh, every year for the last thirty years, and that clearly hasn't happened. So there's something else going on, and I think what you've got to look at is that dynamic. Now, what I can show you as a chart, which hopefully, uh, is a little bit further in this presentation, but it basically illustrates, uh, this point. Now, what we show here is the ratio of all world equity holdings. So, in other words, we're, uh, aggregating institutional holders, retail holders, foreign holders of all assets, of all equity assets, divided by the pool of global liquidity. And what this diagram shows is that ratio. Now, you could say that's like a P multiple, but it's actually, uh, a price to liquidity ratio, if you want a probably, uh, a better definition, but it gives you a more, I think, a more workable, um, um, measure or statistic about how risky markets are. This is how much, you know, how much liquidity is required to support, uh, equity markets, you know, per, per unit of time. And what this is illustrating is that that ratio looks very stretched. Now, we've projected, as you can see on those little dots, uh, what that would look like over the next two and years. So to N26 and to N27, and you can see that even with sort of reasonable assumptions behind liquidity growth, you're still looking at very, very stretched valuation levels. Now, for a long time, uh, through the decade of the 2010s, uh, you saw markets really s moving sideways, and it's only been with this latest liquidity lurch upwards that you've seen this big increase in the ratio, uh, of equity holdings to liquidity, therefore stretching what we think of as liquidity-based valuations. So we're now back to where we were at the time of the 2008 GFC. We're not yet at the heights we saw in Y2K, but that was a real extreme. And you can see what happens, uh, immediately after those peaks. Uh, looking at what happened in 2001, and look, looking at what happened in 2008, when the liquidity rug is pulled away, markets come down with a jolt. So, will it be different this time? I, I don't know. I mean, it's difficult to project. But, you know, if you tell me that liquidity is going to continue, uh, slowing down, then the answer is yes, we're going to see this contraction. Now, if you look at the US market, which is clearly a component of that global picture, it looks even more stretched. So, in the case of the US, the ratio of equity holdings to US liquidity has way surpassed where we were in year 2000. Now, why, why hasn't the market fallen yet? Well, the straightforward answer is because liquidity flows have still been going into it. Okay? But you, the sort of bang for the buck gets smaller and smaller and smaller. So you need more and more liquidity to keep the, to keep markets elevated. And if that liquidity is under pressure, then you've got a lot of, uh, gravity out there, uh, threatening to pull market prices down. And that's the fear, clearly we've got.
Great, great charts, Michael. I absolutely love that, um, illustration. Uh, okay, let's talk about gold. So, you know, it's very topical. Uh, we have very high volatility right now. Some people, you know, they took profits, they're very happy. Others believe that prices should go much higher. What are your thoughts on gold, on gold in relation to, you know, this, um, pretty much everything that we talked so far?
Well, let, let's return to the cycle and try and make some sense as to what this means for asset allocation. So we tend to use the cycle, if you, uh, you know, recall this picture, and then we put it into a framework such as this, and this framework is a guide to asset allocation. Now, this diagram, by definition, uh, will be precisely wrong, but approximately right. So, um, you know, it's a, it's a broad roadmap, if you like, of where we're going. And what it shows is that around the peak of the liquidity cycle, illustrated on the left-hand side, that you've got commodities signaled as the best asset class. In the upswings, it tends to be equities. In the downswings, you tend to want liquid assets, or certainly more defensive investments. And then at the trough of the cycle, you want long-duration government bonds. Um, they tend to be the strongest asset class. So you've got, if you like, two directions: risk on when the cycle is going up, and risk off when the cycle is coming down. We're moving more risk off now. Uh, we think that the US market, in particular, is in the speculative zone, which is the, if you look at the right, the second half of that peak. Um, and European markets are more in the sort of late calm. So they're a little bit, uh, later in the cycle, and probably emerging Asia is at a similar point. I'll come on to say, um, as a sort of a teaser, that China is much earlier in the cycle. China looks around the trough of its cycle, but that's another story. So commodity markets should be moving strongly right now. The interesting point, I mean, clearly they are, but gold has really taken on a, um, uh, strong outperformance. And the question is, is gold telling us something different? Now, the widespread view is that what gold is telling us is that there is wholesale monetary debasement going on there. So a very, very popular narrative in the media has been the fact that gold, uh, is being elevated because central banks, uh, and governments are basically trashing their paper money or credit monies. They're printing money, um, you know, as if it's going out of fashion to fund their deficits. And this is a long-term trend, and therefore, money, paper money, is losing its value. Well, I sort of buy that argument in the long term, but the fact is that's not happening now, because what I've argued is that the liquidity cycle is rolling over. So we're not really in a period where we've got excess liquidity that's driving gold. Uh, clearly, we're at a stage of the cycle where commodities are getting lifted, but commodity markets are getting more of their lift because money is shifting from the real economy into the financial sector. Now, I just want to illustrate that in, um, a chart which is based, sorry, basically here. Now, what this chart here is looking at, and why this is an issue, is this is looking at global liquidity, which is shown as the orange line, versus, uh, the world business cycle, and the world business cycle is just beginning to pick up. Um, this data is trailing a bit, but effectively the argument is that, uh, the black line, which is world business, is likely to get, uh, a strong upward move. And very latest data in the US is actually showing that the US economy, in particular, is getting a lot of traction, and it's quite likely that in the year to end March, uh, of this year, the US economy will probably grow by four and a half percent in real terms, which is quite a fast clip. Now, the point that the chart is trying to make is that strong economies don't have strong financial markets, and that very fact, uh, is explaining the cycle in asset allocation. So when there's lots of liquidity in the system, uh, in other words, when the economy is flat on its back, uh, and central banks are easing, uh, such as we saw during the COVID, uh, emergency, during that phase, you've got, uh, very liquidity-sensitive asset classes like technology, Bitcoin, really outperforming. As you get late in the cycle, um, things like commodities perform, not necessarily because of liquidity per se, but much more because of the position in the liquidity cycle would suggest that the real economy is increasing its demands for commodities. So that's why you've got this commodity boom at the moment. Now, the paradox in this whole question is really why gold has been continuing to go up if you've got this backdrop of, uh, let's say, faltering liquidity, because gold should be one of the early victims. And just to reinforce that point, I'm going to show a chart a little bit later on in this presentation, which is this one. And this is looking again, this is maybe getting a tad wonky, but this is looking at bond term premia. Now, this is looking at daily term premium on the bond markets. And what we've done here is to estimate term premia across the major world bond markets going all the way back to the beginning of, uh, 2025. Remember, this is daily data. And these term premia represent the risk premium that investors demand to hold that national, uh, or that sovereign bond. Uh, in other words, if there is a lot of debasement going on, you would expect, uh, these term premia to be very unstable and more likely trending rapidly upwards, as investors, bond vigilantes, if you like, demand higher and higher premiums or cushions to hold these bonds. Now, that just isn't happening. I mean, maybe at a stretch, you could say it's happening in Japan, which is the black dotted line, but certainly not happening anywhere else. And certainly for the last six months, through the period of this great debasement, uh, argument, um, you've had a flatlining of these term premia. And that, I think, is a serious point to note. Now, if I come back to the reasons why, um, this is happening, let me show you this chart, and this is one I think one needs to focus on and really understand. Crucially, what this is showing is the price of gold in orange, and the black line is PBOC. In other words, Chinese central bank liquidity injections. Now, in my view, uh, this is the driver of the gold market. It's not the West. It's not, um, debasement by Western governments, by Europeans or America. Um, that may happen. I mean, I'm not going to discount that, but it's not happening right now. Uh, what you've got is instead is China is debasing its money, and China is basically printing a lot of liquidity because it has to, because China is facing, uh, first of all, economic domestic economic problems, and also a major debt crisis, uh, which it needs to dig its way out of. And that means it's got to start printing a lot of liquidity. And you can see the dynamic going on here. Now, if I go back and look at the evidence, here is the gold price in yuan, Chinese yuan. Okay. Now, I think they're deliberately targeting the gold price in yuan. And I've said on record many times that, um, I think that their near-term target has been $35,000 yuan per ounce. And we're pretty much dancing around those levels now. And that would, that figure is going some way to devalue the debt, domestic debt in China. Uh, in other words, it's ele, it's devaluing debts and elevating the value of real assets, if gold is a decent benchmark. Now, the point about this, and why this gels with what's happening in markets, is that the Chinese are not allowed to buy cryptocurrencies. They can buy gold, of course. The two most prominent monetary inflation hedges worldwide are Bitcoin and gold. Bitcoin is not going up because, uh, liquidity in the West is under pressure. Bitcoin is sensitive to that. But liquidity in China is going up, and Bitcoin can't respond to that because the Chinese are not allowed to buy Bitcoin. They can buy gold, and hence gold is moving up as a substitute monetary hedge in China for this monetary inflation. And so that is the dynamic that is behind the rise in the gold price, and for that matter, the rise in the silver price. Now, further evidence is, let's look at the Chinese bond market, and you can see, uh, what's been happening in Chinese bonds, certainly since the beginning of 2025. Yields have started to rise, and term premia have been pushing higher. Now, that's an indication that basically Chinese investors don't want to hold government bonds in China because they see an inflation risk coming, and therefore they're moving into riskier assets that basically will act as a monetary inflation hedge. And then, if you look at the Shanghai stock market, uh, it's been on a tear, basically because of these liquidity injections, and you can see there's a very clear upward trend in Shanghai stocks. Now, this is very different to what's happening, uh, obviously elsewhere, but the driver is PBOC liquidity injections, and you can see that particular background here, in terms of this chart, which is illustrating daily injections into the Chinese money markets by the People's Bank of China, and that is going up strongly. And just for the record, this is showing the year-on-year change, uh, rather than the level. So in the last twelve months, China injected something like one, one, 1.1 trillion or thereabouts into Chinese money markets. They're going to have to do the same again this year. So what you're looking at is further long-term support for the gold price. Now, why does China keep having to do this? The reason being is this chart. And what this is showing is the, or the problem that China is facing, in orange, and we compare it to what happened to Japan fifteen years earlier. Japan had a debt problem. Economists talk of debt-to-GDP ratios, but in my view, that's pretty meaningless. Uh, what you need to look at is debt to liquidity, and you need to look at debt to liquidity because liquidity is used to roll over debt. Uh, debt's never paid back, uh, debt is only rolled, and therefore you need balance sheet capacity, in other words, liquidity in the financial sector, to roll your debt over, to refinance your debt. And therefore, the debt-to-liquidity ratio is crucial. If that debt-to-liquidity ratio is low, you're going to get a fin, sorry, too high, I should say. If that debt-to-liquidity ratio is too high, you'll get a financial crisis. If it's too low, you may get an asset bubble, of course, but too high means you get financing tensions. And so what Japan did through the period of Abenomics and the period when the Bank of Japan aggressively bought, uh, JGBs, government Japanese government bonds, monetized and printed money, uh, that debt-to-liquidity ratio came right down. China is in a similar situation, the orange line. It is beginning to try and get its debt-to-liquidity ratio down. That means printing a lot of yuan, and that's what they're doing. And the conclusion, if I go, probably got to go back in this presentation, but the conclusion [clears throat], which is shown, uh, sorry, just here, is that if you look at the liquidity cycles of the US and China, is in orange, black is the US, you'll see that in the early part of the 2000 decade, the US and China were pretty much aligned. In fact, right up to about, uh, 2012, 2013, their liquidity cycles moved pretty much, uh, together. Now, what they're doing is, after a period of sort of flat, flatlining for China, they're moving distinctly apart. And what that means is that as US liquidity starts to falter and tighten, and I stress again, not here because the Fed is tightening yet, but much more because the real economy is absorbing liquidity from the financial sector, as that black line comes down. So what you're getting is the orange line coming up as the PBOC injects more and more liquidity into the system. So you've got to start rotating, um, later cycle in Western markets, and you've got to start moving towards early cycle plays in the Chinese market, which, things, things like monetary inflation hedges like gold, and also things like Chinese technology stocks, are even the Chinese stock market. And that's the story.
Okay. Uh, thank you so much for that, Michael. So liquidity is likely to go down in, in the US, and would that not mean, Michael, that you know, there would be some possible capital rotation event from the US equities into these safer assets, including gold? Because if you look at the tech, from the technical perspective, you know, we have this breakout of gold against S&P 500, and pretty much every single time when this happened, happened in the early 2000s, in the 70s, that meant that the gold bull run was pretty much marked, indicated the beginning of the gold bull market, while for example, in 2011, it was completely opposite. Gold broke down against the US stock market. So do you think that's important for gold, that if US equities do have a certain trouble, that could indicate that capital rotation event from the US stocks into gold?
Well, it's quite possible. Well, I mean, I wouldn't discount that, Vlad, but I think the point here is that what's driving the gold price is not US buyers, it's Chinese buyers. But it, it clearly, you could have, uh, additional, um, impetus coming from US investors that rotate out of stocks. There's no question about that.
Yeah. Uh, okay. And for the US cycle, um, Michael, what would be some of the assets that do well during these periods of time? We, we, of course, already mentioned some of them, but maybe we can mention, mention a few more.
Well, let's look at the asset allocation that we, uh, recommend. I mean, broadly, these traffic lights encompass our view, and what, or the template that, uh, informs our view. What this is showing is that you've got four regimes: calm, speculation, turbulence, rebound. Those four regimes are shown for assets on the left, and industry groups on the right. The traffic lights mean what they say. So green is go, red is stop, amber is proceed with caution. And what this says is that in a rebound phase, uh, which is where we were clearly in early, uh, 2020, sorry, late '22, early '23, I should say, equities and credits were really the main assets to own. And within industry groups, within the market, you wanted technology beyond anything else. As you move to calm, you want to be shifting slightly away from credits and putting bigger exposure into commodity markets. Um, in terms of your industry group selection, you want to be basically moving more towards, uh, financials and some energy commodity stocks. Um, at that phase, as you switch towards speculation, so you pare down your equity exposure, which is what we've been doing, uh, you get out of credits, again, what we've been suggesting, and you start to, or you keep your holdings in commodities. And what you do is begin to take some exposure to the bond markets. Now, again, if you look at industry groups, what you'd expect to do is to shift or rotate, um, through from technology through financials, which have had a very strong performance, uh, certainly last year, into things like energy commodities. Commodities, commodity stocks have clearly done well, but energy has lately been running, and you can probably keep that through the speculation phase, which is where we think the US market is now. We think Europe, as I think I said, is at a slightly earlier stage, maybe a few months behind, uh, in a late calm period, and emerging Asia, uh, is there too. Um, China is much earlier in the cycle. China is in the rebound phase. So you've got to think about equities, credits there. You've got to think about technology stocks. Um, uh, in, in other words, the opposite strategy. Um, and the, the sort of overall point, uh, about asset allocation or stock selection, uh, within the US, is you definitely ought to be moving out of, uh, the cyclicals, much more towards the defensive stocks. That's, that's really the recommendation we have. Now, what I can show as well, and this, by the way, is, uh, illustrating the cycle, how it evolves, uh, as you move through different phases. Um, what you're beginning to see, uh, is a shift towards defensive value. So consumer staples are beginning to move. I don't think utilities have moved yet, but they're probably the next thing to have a look at. And then you can start thinking about later on, probably a bit too early for that, uh, some of the defensive growth areas like food and drug stocks. The other thing that you can see, u, you know, overlaid on this, is views about the yield curve. So normally, what you see is an upswing of the liquidity cycle with a lag of about six to nine months, a steepening yield curve. And equally, what you start to see is a flattening yield curve, uh, when the liquidity cycle goes down. But, you know, we've still got a few months for this to to work out, because the yield curve tends to follow the liquidity cycle, as I say, by about six to nine months. So, you're still looking at probably a flattening occurring from about the middle of this year. So, it's still possible that yields will rise a bit near-term, but then you start to get a flattening. Now, one pointer towards that, um, and by the way, I'm just going to show this. This is the percentage of world markets that are either in a rebound or a calm phase. So remember, this is risk on. So this is saying that basically now, looking across the world, fifty percent of markets are risk on, fifty percent are risk off. Uh, we've come right down from eighty percent, uh, as of, uh, sort of early '25. U, so you can see there's been a, a very dramatic change already, and the direction looks like it's down. Um, one other chart I wanted to show is this one, which is again, maybe a tad wonky, but it does explain almost exactly what's going on. And this is looking at the global liquidity cycle again, which is the orange line. And the black line is the change in the size of world term premia, bond-term premia. Now, what I said earlier on was that bond-term premia are the extra bit, if you like, the cushion that bond investors, uh, demand for holding government debt. So if you've got an environment where, uh, the world looks benign, where central banks are plowing in lots of liquidity, where systemic risks are low, uh, where investors can take risk, they don't want bonds, and so term premia on bonds will be very elevated. In other words, they'll be selling bonds, bond prices will be going down, yields will be rising, and consequently, the term premium will be fat. If you think about, uh, a risk-on, sorry, risk-off environment, where liquidity is very tight, where you get systemic risks, where it's quite possible that you get defaults and financial turbulence, then investors want the safety of government bonds, they demand government bonds, their prices go up, their yields fall, and their term premia fall. So if you look at this chart, what you'd expect to see is a very close correlation between the liquidity cycle and, here, the change over twelve months in the term premium. And you do, okay, I mean, these are completely different, uh, variables. One is an interest rate, a change in an interest rate, uh, and the other is a flow of liquidity, and they do line up remarkably closely. So what this is saying is that the, uh, inflection of what we've seen already in liquidity is having an effect in the fixed income markets, and maybe that's why fixed income is actually performing so much better than anyone has really been predicting. Uh, and that's something I think one has to listen, uh, to the, to the voice of the market here.
Right. Yes. That's very, very interesting, Michael. Um, okay. May I also ask, do you see silver more as a commodity in the current environment, or do you still see it more related to gold? Of course, the price action shows that it is very much related, but at the current liquidity cycle, how would you expect silver to perform?
Well, I think silver is a bit of a bit of both. I mean, you know, arguably, silver's plainly got more industrial uses, and therefore, if the business cycle picks up, you'd expect the silver price to be well underpinned. Uh, but then equally, if you've got strong buying coming out of China for monetary hedging reasons, then it's quite clear that the silver price will also go up. So I think you've got two strong reasons, uh, to buy silver. And then the only point that I would make is that, you know, silver is the most volatile of the precious metals, and, um, you know, it's very easy to be caught out by its very fast moves. Um, gold is probably a more stable and maybe a more conservative asset, but I think you can almost sleep at night with gold, whereas silver, you're always going to be looking at the screens. But certainly, it's worth buying silver when it's very depressed. But after a big run-up, it may be worth just waiting for it to pause and pull back a bit. But I think the trend is definitely upwards, and it's being underpinned both by Chinese buying and by industrial demand in the West. But then I think you, you, if you look the more forward you look, and the more you delve into future technologies, and the more you think about, you know, maybe space and what's going on there. I mean, gold actually starts to then develop quite a lot of industrial uses. So let's not rule gold out either. So I think that both gold and silver have got to be dedicated parts of people's portfolios.
Yes, we've certainly seen enough volatility recently, Michael. Um, h can I also ask you about mining stocks? You know, I talk with a lot of experts who specialize on gold mining, gold and silver mining stocks. And of course, um, if you look from the fundamental perspective at the current commodity price, some of those stocks look quite undervalued, the producers, of course. What are your thoughts on that whole sector?
Well, it's not an area of, of my expertise. Let me, let me say that. I mean, I do personally invest in mining stocks because I think they're leveraged, and I do believe that they're cheap currently. Um, but on the other hand, they've actually been cheap for a long long time without moving. So the valuation argument is, uh, is only useful when they're moving upwards. Um, and I think you can convince yourself that they're cheap. But, you know, clearly they, they are, um, they're excited by more liquidity. Uh, I would strongly recommend people differentiate or distinguish the trend in these stocks from the cycles. Trends are strong and well-embedded, but don't have, you know, don't have, um, all your eggs in one basket here, because, you know, so often we get seduced by trends, upward trends, but we get killed by the down cycle. And if there was a vicious down cycle in liquidity, and let's never say never, I don't think it's going to happen, but, you know, we could have said that in 2007, and the authorities lost control of the system. So, you know, if they're fiddling, uh, at the margin with changing regulations and trying to, uh, shrink the Fed balance sheet by, you know, whatever means, uh, there could be an accident. So in which case, I would, um, you know, I would be conscious that we're in the downswing of the cycle, and the downswing of the cycle, uh, will impair liquidity-sensitive assets like Bitcoin, like gold, and like silver. And just look at what's happened to Bitcoin, um, recently. So that could easily happen to gold and silver.
Okay. And Michael, how much personal liquidity would you hold in the current environment? Of course, some people see gold and silver as very liquid. But if you talk about cash, what would be the approximate percentage that you would be thinking about holding?
Well, I think that that depends very much on the individual and or the institution and what their normal cash holdings would be. But I would have, uh, a full weighting in cash right now. I mean, I wouldn't, I, I wouldn't be speculating or chasing risk in these markets. I'd have, you know, up to my, uh, normal levels of cash, maybe, you know, maybe even, uh, higher than that. But, uh, you know, I'm, by the sound of it, you can see that I'm, I'm not optimistic. And my best case this year is that markets are range-bound. Um, it could be they're worse than that. But we've had three very strong years. And that's, you know, the laws of probability would suggest that this is going on forever. So you're going to have some pullback. And typically, if you look at the track record, the second year of presidential terms normally bad years for stocks.
That's very true. Um, so we covered a lot, Michael. Would there be anything else that maybe you would like to mention that we haven't covered yet?
Well, I think that, um, I would say generally that, you know, people ought not to be seduced by narratives. I think the narratives that are sort of echoing around the moment are this number one, this monetary debasement trade, which I think is a fake one. Uh, I mean, certainly buy gold and silver and Bitcoin for the long term. Uh, make no question about that, because there is, uh, you know, the risk of, uh, monetary debasement over, you know, decades. Uh, I mean, that's is a continuing trend. In fact, uh, we've seen that for a long time already. But the cycle is really what's important. So, um, you know, the, the cycle always skewers investors. So you've got to be conscious of that. And I think the other narrative that's out there right now is the fact that, uh, that the yen carry trade in Japan is likely to unravel because the Japanese bond market is out of control, uh, or so it's said, and, uh, a lot of money is going to be pulled back, uh, from US investments by the Japanese as they start to chase yield domestically. I think that's another fake narrative. Uh, the, uh, yen carry is nothing like as big as it was, uh, two decades ago. Uh, the big flows coming out of Asia are China-based. Uh, pay attention to what China's doing. I mean, don't ignore Japan, clearly. But, you know, I just don't think markets are going to be unraveled by a yen carry, by the demise of a yen carry trade, because I don't think it's that big. Um, and, you know, what's more, if you look at the last week or so, the Japanese bond market since the election has stabilized remarkably, um, and, um, that, you know, that's that. So I would say dismiss that, dismiss that fear. Um, dismiss the, uh, the fear over the great debasement. Um, think about what Kevin Walsh can do or can't do, and he can't do very much. Um, so that would suggest to me, in other words, you can't boost liquidity, you can't cut liquidity very much. And therefore, what that says to me is that a lot of the impediments that people argue were holding back the bond market and why the yield curve would steepen dramatically are no longer in play. And therefore, I think bonds are, you know, not a bad investment. Uh, don't go wholesale into long end, but you could start to dribble money into mid-duration bonds. I think that's not a bad strategy for this year. Hm.
Um, so Michael, great, great points. I really like your charts. Um, and like always, great conversation and thank you so much for your time.
Great, Vlad. Thank you. And if people want to hear more of what we do, uh, Capital Wars on Substack is where we write a lot, or there's an institutional service at crossbercap.com.