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 like to make money on a

wrong. It would like to make money on a nice bull market, but it may not be that easy. Later on, you'll hear more about

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

credit. But for now, let's get into today's interview. joined today by

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 u 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 quue. I mean, we've been saying that it

quue. 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

there. The bull market, remember, has been going on for almost 3 years. I

mean, actually, almost exactly three years. I mean, it began in around

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

metric. I mean, it's the one that obviously policy makers 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

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,

inverted commas. Um, in other words, what we would call not QEQE 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

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

interest rates. And wouldn't you say that that is somewhat uh a form of of easy money?

>> Well, in the sense that that that's true. I mean it changes the the the

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

zero. Uh what you saw were two things happening simultaneously. Uh one was

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

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

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

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 got four phases for markets. rebound, calm,

speculation and turbulence. Where are we now? What does that mean for the

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

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,

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 in speculation. Um the

European markets are probably around about late calm, maybe just moving into the speculations uh phase. Emerging Asia

is maybe a tad behind. That's still in calm. Uh but it's beginning it's it's

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

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

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

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

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

banks. We look at the repo market, uh crossber flows, etc. So this is a a big aggregate. Uh it totals around about

aggregate. Uh it totals around about $190 trillion now. So it's basically something like one and three/4er times world GDP. And you can see that the

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 65month cycle. Um in

other words 5 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

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

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 65mon cycle

in this data. So we're reassured by that and it seems to be uh if you like u panning out that way. Uh the cycle bottomed almost exactly where it should

have done. uh in late 2022. It's been

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

down. This let me stress is the advanced economies. It excludes China and it

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

momentum. Now if we drill into the various subcomponents this is looking at US liquidity again US liquidity seems to follow that

same u 65mon 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,

speculation phase. Here is Eurozone, which again, you know, broadly seems to fit. It may be a little bit more of a

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 Euro zone cycle is maybe a tad longer. Maybe it's nearer 70 months,

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 Euro zone, but again, the bottoms were more or less on track. Here is Asian emerging markets. So I said so this is

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've yet hit the

peak but we're moving somewhere close to that. So this explains why you've had

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 uh which is shown as the dotted line looks to be more or less on track. Uh the red line is the current

on track. Uh the red line is the current cycle. The zero that we put in the

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 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 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 uh October of last year.

>> Mhm.

>> But liquidity leads and the point being is liquidity leads by around about 9 months. So, uh you'd expect things to

months. So, uh you'd expect things to begin to be happening uh and maybe they are already. I mean Bitcoin may well be

are already. I mean Bitcoin may well be the you know the canary in the coal mine there. This is another example. This is

there. This is another example. This is

another measure of liquidity we we track which is looking at market depth uh in financial markets uh as a 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

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

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 now cast of liquidity. So we basically run our

liquidity. So we basically run our systems now every day to create this uh this index and this is showing that 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 senses 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

PBOC. Now to get on to what I was um moving towards which is the asset allocation cycle. So if you think about

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

equities. Okay. And that's been a pretty fair choice in the last two or three years. Around the peak you want to be

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

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

the cycle. So if you look on the right we've got calm speculation turbulence rebound phases. The economic cycle is

rebound phases. The economic cycle is around about one of those segments uh you know u displaced. So in other words the real economy is following. So when

the uh 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 uh 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 s seems to be getting

move. energy s seems 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 uh 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 bare flattening etc. So where are markets generally? Uh this slide basically shows

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

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

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

lights. So just read them as they as the signals say. So you amber you want to

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

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

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

up. You know, risk on is technology. uh

you can start to migrate towards financials midcycle energy commodities late cycle uh you know obviously if I put in here large cap small cap it would

be uh small midcap later in the cycle uh speculation energy commodities and then you want defensive groups uh as you move into the riskoff phase so that seems to

be you know as I say the road map 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 uh against the business cycle. So the orange line here is the world business cycle and the cyclical defensives are MSCI categories

uh within the world market uh of cyclical stocks versus defensive stocks.

This is something that um Stanley Durkiller the you sort of the great investor in the US uh 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 a index from zero to 100. So that makes me think it maybe

to 100. So that makes me think it maybe a PMI. Isn't is the isn't the world

a PMI. Isn't is the 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.

together. This is not the S&P version.

This is a version where we've just indexed u various uh subindexes. So, we

look at the US ISM, we look at the tank in Japan, uh we look at the EPO survey in Germany, the CPI survey in the UK, the INSEAD 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

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

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

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

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

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 dem money and demanding lots of liquidity and that is a good thing for economic growth. That's kind of what's

economic growth. That's kind of what's needed. But it's just that the supply of

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.

Um I mean okay they're borrowing or some of them are borrowing but they're also running down uh their cash balances quite aggressively. Uh and that's

quite aggressively. Uh and that's basically funding for you know other areas of financial of the financial economy. So if uh if they're taking if

economy. So if uh if they're taking if they're running down their treasury deposits uh 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 uh 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 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.

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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

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 the 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 you very hawkish scenario comes to pass what does that mean for for markets the treasury markets and other markets.

>> Well, it's just evidence 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 sofa rates to actually spike higher uh relative to Fed funds targets and the

Federal Reserve was clearly uncomfortable by that. Uh 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

QEQE program as you might like to call it uh the reserve management purchases and that has actually lifted uh liquidity fed liquidity over the last few weeks. Uh and that is you know

few weeks. Uh and that is you know running at a rate of about uh what 40 billion a month. So that it's quite sizable amounts. So you've got to you've

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

markets. it's very difficult for the banking system to actually accept uh 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 uh the sort of par excalance reserve asset or liquidity asset and basically banks need that. So there is some attempt to

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

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

threshold down. So the minimum I reckon uh around Q3 was about 3 and a4 trillion. it's now probably nearer about

trillion. it's now probably nearer about three 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,

threshold. So, you know, at the moment, uh, we got an equilibrium. The repo

markets are back, you know, in some sort of harmony. So, that's one dimension.

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

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

market. Now over that period uh primary dealer capacity on you know depending on the measures one looks at probably haveved. So the capacity of the banking

haveved. 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.

Uh 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 elacrity 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

trade. That basis trade where they own cash treasuries and short treasury futures demands an incredibly large amount of

leverage which is the uh sofur sofur market. We saw the sofa market seize up

market. We saw the sofa 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 basic 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 aboutfaced 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 veg like equilibrium uh right now. uh we saw what happened to the to sofa rates and the repo market late last year when liquidity was tight but you know let

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 sofa 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

reserve reserves significantly as Walsh is talking about. I just think it's a wholly unrealistic. It simply can't

wholly unrealistic. It simply can't happen. I mean, not only can it not

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 elacrity 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

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

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

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

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. Uh I think they matter for the

elements. Uh I think they matter for the mortgage market. Uh I think they

mortgage market. Uh 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' I've mentioned before. It's a sort of gray

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 it pays huge a huge interest bill and that interest bill

represent a transfer payment into the private sector. So if they cut interest

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

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 condrates that I mentioned.

>> Right. And so on this chart, we can actually see that I'm ballparking it, but your global liquidity index uh peaked actually in like 2004, 2003 or

2004. So before uh 2005 and obviously

2004. So before uh 2005 and obviously the the financial crisis caused you know was in 2007 and and 2008. So I 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 some 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 exact exactly

that high. Yeah, I think exact exactly right. Now, you know, another test is

right. Now, you know, another test is looking at this one. Now, this is a bit wonkish 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

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 equality cycle again. uh but what we've done is we've

again. uh but what we've done is we've put on that same chart uh the change in world term premier. Now term premier are the u 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 premier rise and when you get falling liquidity, you tend to find term premier fall. Now,

premier fall. Now, >> which basically is that that uh term premier indicates high term premium means a steeper yield curve. Low term

premium or negative term premier >> indicates you know a flat or perhaps even inverted yield curve.

>> Exactly. And the reason for that is that you know the term premier at the front end of the curve is dimminimous and the term premier at the back end of the curve is very significant. So if you

have u a rising term premier is 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 uh or some proxy for the yield curve. Now what this is basically

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

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

quite easily. There's no tension in markets. But when you see the reverse,

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 premier on a government bond tends to be paired 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 premier 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 is a year-on-year change so it's still true

that the term premier is rising from a year ago but it's starting to inflct downwards and if you extrapolate that we think by the middle of this year, you will start to see that term premier

series probably going negative and that would suggest that you're about to see a 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 the 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 skewered 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

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

turning down. And that's what we've been warning about. I hope we're wrong, but

warning about. I hope we're wrong, but you know, uh, in many ways, it would like 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 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

moved. And what this is showing is liquidity inflows uh into uh 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

curve. Now what we've done is to push on the liquidity index by 9 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 9 months of a pick up in

liquidity and equally you normally get a flattening um 9 months after a inflection in liquidity and that's what we got to think about. So if the yield curve inflects downwards and starts to

flatten, I would say that's definitively a riskoff 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

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

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 uh 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

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 uh most people's um you know uh 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 I think most bank reports are are looking at a a steepener. Very few people are talking about a flattener.

>> Yeah. I mean, we I mean, I come quietly for the next two or three months, but I think by mid year, you want to be changing tag.

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

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 um or 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 the bottom exactly. Uh 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

markets. uh you know start to get more defensive. You don't have to press the

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

in markets. My best guess is that what we're seeing is probably a rangebound market at best this this year. I mean

stress as best 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

tightening. However, there are straws in the wind. I mean Japan has tightened. Uh

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

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 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

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 20089.

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 a 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

got to have the liquidity growth coming through to sustain the high uh equity liquidity ratios. And I don't think it's

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

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

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

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

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

this backdrop. It seems as if yield curves and turn premier are kind of telling the same story. It seems that the real economy is telling the same

story. It seems that industry group

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 got to trim your equity exposure. You got to get out of credits. Stick with

commodities for the time being. Uh maybe

put a toe in the water in terms of getting some bonds. go for mid-uration 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 uh although it can be an esoteric sector uh and start to think about consumer staples that have been pretty much out of favor. So that's I would start to be

of favor. So that's 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.

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 verse other central banks versus the other two things other than

central bank liquidity which is private market liquidity and crossber flows. You

know, I know you know from your work and I believe this is correct that you this all of this um 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

injected. This is showing central bank liquidity injections um going back to year 2000. Again, you can see it's a

year 2000. Again, you can see it's a cycle. You can see the response to the

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 um 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

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

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 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 rangebound 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

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

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 u 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

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

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 u around the back end of last year, which is the uh problem that led to res reserve management purchases. And the red line

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 is 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

the market. And that's what I'm conscious of. So, you know, that's

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

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 let me try and um and try and uh explain this. If you think of liquidity

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

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 um issuing longerdated 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 u stimulus. The orange

and red are uh respectively what I've called not QEQE uh 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 um 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 remitt that I think

Walsh and Bessant 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 proceeds 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 uh are pointing to anyway.

>> And do you so you think that the Treasury uh easing by funding itself with shorter term instruments rather than longerterm instruments? It's looking you're saying

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 Bessant's Bessant's

easing just as much as Yellen's easing is it slightly more or is it slightly less but uh uh you know how does it roughly compare? Well, you look at the

roughly compare? Well, you look at the look at the black area and you can see the the the I mean Yelen uh Yelen 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 crossber border

>> well at the at the macro level u or the general level crossber 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 uh 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 is 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.

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.

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

>> 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

say. And I I think you talked about fixed income volatility being quite important to that. But

>> oh no that that yeah sorry that that let me be clear that the aggregate I'm talking about does not include fixed income volatility. That's a result

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

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 crossber 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

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 uh outflows in fact. Now what I've

illustrated is the total all Asia which is the black line and then I've tried to disagregate the rest in terms of what is Japan and what is China Euro Euro zone

or Europe which is basically uh beginning to see something of some inflows. I I accept at the moment, but

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

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 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. Uh 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

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

assets. And that is the you know that's the reality. So if China gets a bigger

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 riskoff

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

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

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

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

at all. I wouldn't take any credibility from that. I think that um you know

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

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

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

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. Do what do you think

dollar weakness. Do 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,

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, Euro zone and emerging Asia as identified are following in the cycle. And the other one to think about

cycle. And the other one to think about is China. China's a lot earlier and I

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 you we can't dismiss. We've got to accept and they're

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

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

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? 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. 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

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 abonomics come in and as part of the abonomics framework, the Bank of Japan started to buy aggressively Japanese

government bonds. In other words, it was

government bonds. In other words, it was monetizing debt. It was creating

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 uh quite significant fall uh evidenced by the red line uh coming down on the right hand side of the chart. China is about 15 years

the chart. China is about 15 years behind Japan. It has exactly the same

behind Japan. It has exactly the same problems. It has a huge real estate problem. Uh real estate values have

problem. Uh real estate values have fallen. Uh debt is impaired badly. Um

fallen. Uh debt is impaired badly. Um

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 overall refinancing. Therefore,

China is embarking on exactly the same policy. It is printing money and it is

policy. It is printing money and it is trying to get its debt to liquidity ratio down. Now, here is the evidence of

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 got to expect at least another trillion uh dollars equivalent uh coming out of

China. So in other words, you're talking

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 uh the orange line is coming through rising term premium. Investors don't want to hold

premium. Investors don't want to hold bonds. They're moving into risk assets.

bonds. They're moving into risk assets.

Shanghai stock market up 25 uh to 30% over the last 12 months uh outpacing uh Wall Street. Here is the yuan gold

Wall Street. Here is the yuan gold price. Okay, this is what I think

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

buy gold. And that's exactly what they're doing. So, as that money comes

they're doing. So, as that money comes into the system, it's going into risk assets and is 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 is diminished and therefore people buy gold. They hold more gold. Gold price

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

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.

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 Comx 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

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 uh a closed system. Uh 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 which doubled down on banning crypto and

anything any uh uh uh any um type of um of um asset digital asset. uh 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 goldbacked system uh not a gold standard

absolutely not a gold standard but they'll have some u ability to transact in gold for example they could do oil gold swaps uh selectively for the Saudis whoever who may want them to give them

some credibility and then you got on the other side the US dollar system uh which is uh increasingly a digitally based system but I think that is using in uh

US treasuries to back it as it has before but in the form of stable coin uh and that increases the reach of the US dollar and enhances the value of treasuries and I think that is something

we got to think about seriously so you've got these two assets uh if you like treasuries and gold and that's where we 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

important here. China wants the gold price up. Uh America probably wants the

price up. Uh America probably wants the uh value of the tra the uh the the treasury bond up in price terms and he wants the gold price probably lower uh 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

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

gold. And uh you know that's pretty much what happened. We have the gold priced

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

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. uh in other

words don't look at remmbb or yuan US dollar think about um independently uh dollar gold or uh remmbb gold what I think is China is deliberately trying to

do is to is effectively and that they're trying to create a closed monetary system clearly they've got capital controls uh as well but they're printing money domestically and that money is if

you like a sync 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. Uh it's

going into Chinese stocks uh and it's coming out of Chinese uh bond markets and uh 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 uh 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

that. Um, so they're basically printing money. Now, in a normal situation, that

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

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

rate. And rather like Japan in the 1980s, they're really contro 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

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. Uh

it's not going to go up in a straight line. It's going to be cyclical. it's

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

interest rates? I think we got to start thinking about how what you know what what drives the world. Um and

traditionally it was the US uh the US economy was was clearly a giant u US liquidity still is is massively important. Uh world financial market

important. Uh world financial market 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

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 crossber liquidity yet uh it's got a

clearly got a footprint uh but domestically it's huge uh you know Chinese banks uh are still some of the biggest in the world uh 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 self 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 corollery 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 uh you know as a a corollery 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 u 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 uh you know you you haven't got that credibility uh 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

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 rais a very good point u 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

cycle. The black line is the US liquidity cycle. If you go right back to

liquidity cycle. If you go right back to um year 2000 or there or thereabouts um you know around the period where uh

China came into the World Trade Organization WTO uh 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

liquidity. It kept monetary conditions very tight. It strangled, if you like,

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 uh and that created you know that was a tight liquidity

environment. Um what we've seen in the

environment. Um 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 is eased, China

eased. Whenever the US is 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. Uh 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 Euro zone 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 bees which is Bitcoin Ethereum Salana and that's with a waiting of um 603010.

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

well. I mean it's not exact but it's not bad. And what you can say is that the

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. Uh it accounts for about 40 to 45% of variation in the Bitcoin price. Clearly other things go

Bitcoin price. Clearly other things go on as well uh 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 u 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

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 wed

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 got to remember there are cycles we've got to avoid okay?

uh and those are sort of the fast cars you 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

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 uh to buy. Uh you don't want to make

money tomorrow. Well, unlikely. No

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 u 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

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

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 steviation 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 month, 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

barometer. I mean that's how it it's showing up. It's the canary in the coal

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

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. Uh

but as I say, it's the canary in the coal mine. And now what you've seen

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 uh 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 area are are sectors or companies that get a lot of their traction from a strong read 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 u 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% uh 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

anthropics cla 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 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

worldwide. We looked at Japan and we looked at China earlier on. This is the world overall. It's dominated by the US

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

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

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 one 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 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 co 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 refin or the amount of debt coming back including refinancings uh year after year. So that debt maturity wall

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

change. And you can see the very clear bite out of the chart in 2021,223 when zero interest rates encourage a lot of uh borrowers, household and

corporates and governments to term out their debt into the back end of this decade. And that's what you're seeing

decade. And that's what you're seeing coming back in. Uh 25 was a was a sizable year. Uh 26 maybe a yeah tad

sizable year. Uh 26 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 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 26 is a year of title 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.

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 E and it wasn't demanding a lot of a lot of liquidity okay if an economy

picks up. You need more liquidity for uh

picks up. You need more liquidity for uh you know for cash flow for working c for for uh working capital uh 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 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

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 uh every citizen in America is going is going to be doing great financially because data centers are

being built. But, you know, by by no

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

good. Um are based on that, Michael, can you can you say that you expect kind of uh 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.

so much? These earnings are horrible.

>> Yeah, I think 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

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 and a half%. 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

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

that backdrop. Will earnings be good this year? Yes, undoubtedly. Um, is that

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

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 2 is undoubtedly the weakest year. And if

you look at that same analysis for earnings, you find that year 2 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 pick up 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 re 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

my estimation. I mean there's no there's there should be, you know, no also no doubt that the Chinese economy is in a par state. I mean that that's almost

par 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

enormously. So the the economy is in is in a bad situation. But you know, if you go back to some of the wise worlds words again, which I quote from Stanley Ducken

Miller, 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

to goose. And that is what you're seeing in China right now. Uh not only they're trying to goose the economy, they're trying to eliminate the debt burden as well. So you got a a sort of double

well. So you 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

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

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

geographically. Uh Europe I think is you know we're talking about months behind the US. There may be a bit of traction

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-uration 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 are um 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

markets. Um, you know, obviously led by the Fed. Um, I I can't see that

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

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

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 gen would be uh a generally much stronger economy. So uh one central

stronger economy. So uh one central banks tightening to much stronger economy and the meat in the sandwich uh is Wall Street or financial markets

>> and sorry 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

recently. I know a while ago when he wasn't going to be Fed chair, he was talking a big game about selling mortgage back securities and being very active. Now he's talking about Treasury

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 uh 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 a enormous wealth divide which I think is

unacceptable for most you know in most economies. Um and that's something which

economies. Um and that's something which needs to be corrected and I think the administration want to correct that. Um

but um realistically u what does it really mean looking out?

I think that the the best case for the market is that Fed liquidity flat lines 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

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,

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.

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

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

technology. You probably got to shift towards utilities. Uh stay with energy.

towards utilities. Uh stay with energy.

Uh keep uh you know holding resource stocks. Uh hold commodities if you hold

stocks. Uh hold commodities if you hold physical commodities. Start to think

physical commodities. Start to think about mid-guration 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 uh 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. Uh but then I do think of 2022 when

me. Uh 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

now. Um 2027 may be a different question. And you'd expect if the

question. And you'd expect if the economy was strong in 26 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

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

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 Besson 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

it there. People can find you on X at Crossborder Capital. Tell us about the

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

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 uh 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 was 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 podcast or Spotify it really helps the show. Also, subscribe to the Monetary Matters YouTube channel.

Thanks.

>> Great. Thank you.

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