#243 Michael Howell - The Gold market follows this....

Welcome to the Stay The Markets podcast. I'm Paul Rodriguez of ThinkTrading.com. I'm Tim Price of PriceValuePartners.com. And our very special guest is Michael Howell. Michael Howell, welcome to the show. Thank you. It's great to have you, so tell us a bit about yourself. Well, how do I start? I mean, I run a company now called GL Indexes. That formerly was known as Crossbow to Capital. We'd been around for, well, more than 30 years. My previous life was working at Salomon Brothers, the US Investment Bank. And from that point, or when I was there, I developed the whole concept of looking at tracking liquidity flows and trying to understand the movements of money around the world and using a concept called global liquidity is really the lever. And that is probably a pretty good summary of what we do. And I publish a subset called Capital Wars. And I also that evolved from a book, which was of the same name, Capital Wars, about five years ago. When you were at Salomon, did your paths cross with Michael Lewis, for any chance? Well, briefly, in the sense that he was an intern, what I was there in back in the late '80s. So it fetched you coffee then? No, no, no, no, he was on a trading desk. It wasn't, it wasn't quite like that, but he was, you know, he was obviously destined for bigger and different things. But he was certainly there, yeah. So what was it about the liquidity flows that you realized weren't working and you had to find a different method because we see the markets going up and down. We see people who can predict it using various techniques, maybe technical analysis, maybe economic theory. We know a lot of economics is nonsense, but there are some people that use it the correct way. Why did you feel that there was something missing and what did you find? Well, I think the first thing to ask is, what do you say that economics works when it's done properly? I'd quite like to hear what do you properly really means because as far as I can see, modern economics doesn't work in any way, shape or form when it comes to looking at financial markets. So I think it's always just being polite. Okay. I think the, yeah, maybe that's right. I think the, I think the fact is is that, you know, it's clearly a missing element. Or there is a clear, a major missing element in trying to understand how finance works. It's nothing we need to do with modern economics, what moves markets is what moves markets in every sphere. It's the flow of money trying to understand supply and demand and that backdrop. And unfortunately, modern economics doesn't give you any tools to do that. Certainly, it's a drift from what the markets are really saying. So what we, what we do is, it's track money flows and the origin of that whole approach probably came from. When I'm what it certainly did come from one of its settlement brothers because someone was basically had a philosophy or maybe better to put it an organization, which meant that the trading floor was really central to what the firm did. It was obviously a trading firm by definition, but if you have a big trading floor, you sort of, I suppose, establish the old adage of some of brothers, which is in financial markets, there's no one related event. And what you can see physically moving, almost physically moving, tangibly around the around these desks are the movement of money. So you can see effectively one activity arosing, let's say the US, on the US Treasury desk, you can see whether there was a relationship to JGB, Japanese government bonds, UK guilds. You can see whether sterling forex markets were affected, you can see whether that started to shift into US equities or global equities. So you can see activity sort of visibly moving around the floor. And so, you know, one area got excited, people were wondering why that happened. You've got news releases, you've got evidence of investors moving money. There was no one related event. And that was, I think, key to realizing that it was really all about understanding money flows and trying to track those money flows. And if you understand where that money is and where that money is moving, you've got a pretty good idea about how markets will ultimately shift. And that's pretty much the philosophy. It's as easy as that. To what extent is capital flows, transparency, you can track them through a given organization these days, because surely a lot of it's anonymized or dark or otherwise not so easy to track. Well, I mean, the fact that something is difficult doesn't mean that you shouldn't do it. And that's, you know, one of the things that I think destroys a lot of modern economics is that basically economists look at the most importance on the data that is most easily obtained. You know, for example, balanced payments, data or trade data, relatively easy to pick up. And so, economics sort of, you know, puts huge weight on those numbers. Well, in actual fact, they probably don't mean very much, where you've got to look behind what's really happening. And I think it's the same with money flows. If you look at money flows, they're clearly critical. They're difficult to get hold of, which is why not many people do it. I mean, we've been doing it tracking these things for 30, 40 years. So we've got a pretty good idea where to look. And as you say, it's not transparent. In actual fact, a lot of it is transparent. A lot of that data is in the public domain. It's just a question of looking knowing what to look and actually getting that in a time, sort of time for any manner. We do not, that all know electronically. We used to originally by telephone call, you know, a borrow pen and maybe a fax. That was more difficult clearly to make a lot of phone calls, but now it's sort of, it's automated, dear thanks to technology. But the data's transparency is available. A lot of it is part of the, what is called the IMF reporting system, which every country, finance ministry, central bank is required to do for financial stability reasons. And we basically gather that data. So circling back to the subject of economics, I mean, my comment on that was because there are people who are successful, who use their own kind of version of economics. I'm a technical, of a technical background. And actually what you're talking about speaks very much to what I was doing when I was an analyst and a trader within the investment banks that I work for. Whereas many traders would just watch the market that they're focusing on. If you're a spot trader, you'll be looking at Eurodollar or whatever that might be. Whereas I was looking at everything from UK equities to the Brazilian stock market, to gold to see what would actually affect and move those markets ahead of these other markets. And the only way to do it is to sit and watch them all day long. So I was watching it from a price perspective, just how the prices were moving. And it reminds me of, I remember Bloomberg around the 2000s. It might have been, we're talking about this new index called the money flow index. Now I wonder whether that has got anything to do with your system. I never took it up, I'll never used it. But I remember there was this big emphasis on where the money flow was. And it was equivalent to people who know technical, some form of like an RSI oscillator or something that would tell you where the money was flowing. But it's never quite that simple. Yeah, I mean, I think there's a lot of people who tried different techniques to try and, you know, to establish, not identify money flow. Southern brothers, way back long before I joined, I actually had their own money flow analysis, which for the US market, which was basically devised by something called Leslo Barini. And Leslo looked at how volumes would affect different stocks. And so what he would look at is whether volume was going along a lap tick or a down tick and through various calculations, he could then ascertain where the money was net flowing into a stock or coming out of the stock. That was a pretty useful exercise. You could only really do that for the US exchanges. It was very difficult to do for London or whatever, we did try for some time. But the volume data wasn't good enough to use. So it was that was really a US fastest. So I think maybe the Bloomberg thing is a derivative of that particular approach. You know, what we're doing is very different. We're looking at the origin of money, if you like. So we're looking at the creation of credit, you know, going right deeply into what the central banks are doing and what the repo markets are doing. Well, you get that liquidity creation near the flow of money through dealer banks. It's effectively a wholesale money measure, and we're not really interested in aggregates like N1RM2, which are much more retail money. And that's telling you more about what's happening in the real economy. So for example, if you look right now at the US, you find that actually wholesale money measures. Some of these things at the repo market, for example, are slowing down quite noticeably. Whereas the retail money measures things like N1N2 bank deposits are really starting to accelerate quite noticeably. And that's telling us that activity is shifting from the financial markets to the real economy, which is after what the administration is really wanting to happen anyway. They want a stronger economy and they don't want such a sort of point of Wall Street because it's too awkward in terms of wealth distribution and whatever within the economy. So it's main streets turn and Wall Street is starting to trade water. So the money flow is telling us that already. Could that also mean that more? money's coming out of stocks and going into cash, is that another way of reading those numbers? - Well, I think that's, yeah, I mean, I think they're going into, they're coming out of stocks and they're going into transactions on the read economy. I think that's a fair point. I mean, all money that is anywhere must be somewhere. So if it's in financial markets, it's not a read economy. And if it's in the read economy, it's not in financial markets. You've got to think of these two things very separately. But the way that we process, do our analysis and process the data is basically to say that if you look at liquidity creation, it tends to move in a sequential fashion. And it's looking rather like you said with technical analysis of many different areas, you know, really establishing the idea that there was no one related event. What you've got to look is for the footprint of that money flow through markets. So we basically tend to find that when liquidity expands, you tend to find the Forex markets moving very early, there may be giving you the first signal. So something like gold will be a not a bad indicator. Then you will find it will move into the fixed income markets. So the indications for the curve, then we look at how the yield curve is changing. It's dead slope. That's another fact. So looking at turn premium removing within fixed income. Then you expect corporate, the corporate debt market to begin to move. A high yield will be very responsive to more liquidity. Then you'll find equity markets start to get a bit et cetera. Then it will move through different sectors. So you know, interest rate sensitive stocks will be moved first. Things like tech very early on. Then it will migrate through different industry groups. You'll find commodity markets starting to get a bit sort of later in the sea in this cycle. Around the time the real economy is just beginning to bottom out. And the sort of the whole paradox in this, which is very relevant right now, is the strong economy. It's don't always have strong financial markets. So in actual fact, the paradox of this is that equity market gains normally at their fullest or the strongest. At the time when the world economy or the US economy is actually the very low-ed. That's the paradox. Many people can never pick up. But that's simply because money, if it's in the real economy, is not in financial markets and vice versa. So if you've got a very slow real economy, financial markets are getting a lot of cash to use. - Unless you say it's almost the best kept secret in the finance, which is the presumption that economic growth equates to stock market performance. But as we know, there can be completely unrelated and China's been a great performing economy, but allows you stock market for the last 30 years. - Exactly, yeah. So they've directed a lot of that money into the real economy, as you rightly so. - Do you have a pecking order for, let's say the purity or the clarity or the forward-looking aspect of the data? So because I'm thinking, if you're watching money flow and basically giving a real-time comment on where capital's going, that sounds akin to looking out the window, seeing what the weather's doing, but it's not the same as a weather forecast. - Well, it's funny if they're absolutely true, but I mean, the fact is you don't really have to predict liquidity, because liquidity itself is a leading indicator. - And you've referred already to a hierarchy of potential investment classes. So FX followed by debt, followed by maybe equity or whatever it might be. Do you have a preference for some of these as leading indicators as opposed to coincident ones? - Yeah, I mean, if you look at, I mean, the most sensitive asset classes by far, or what you would call monetary inflation, hedges, things like gold and Bitcoin, silver, et cetera, those tend to be very early. So if you look at the lead times between liquidity, our measures of liquidity, and they say Bitcoin, that are pretty clear three month lead time. So if liquidity goes up, Bitcoin will move within three months. It starts to move a little bit earlier, but the peak movement is around up here. It comes about three months later. Similarly, with gold, maybe a tad earlier with gold, but it's that sort of period around three months. And then the yield curve tends to move around about, you know, mid-point a bit, about six months afterwards. Six months after the initial liquidity pick up. So you see what you're. So if you look at the markets right now, let's give an example. So let's take three asset classes, let's say gold, Bitcoin, and bond markets with the yield curve. So what you've seen with Bitcoin, is that Bitcoin clearly is taking a bath. It's a clear bear market. And you know, our view, why is that happening? It's because mainly you, mainly you ask the quality, which tends to be the main driver of Bitcoin is actually going down quite, or slowing down, I should say, not falling absolutely, but it's slowing down quite markedly. Now, why is that? Well, I mean, partly it's the fact that the Fed is sort of sitting on its hands or beginning to, I mean, it's sort of owing or aring a bit, but generally sitting on its hands, it's not really creating a lot of liquidity growth right now. And against that background, you've had a very strong read economy. And you know, our view is that looking at all the data, despite what economists say about, you know, impending recession that they've been saying there for sort of three, four years now. If you look at the data, liquidity dates are showing a very, very strong pickup in the US economy. NGDP, normal GDP growth is on a tear. Looking at bank deposit growth, which is retail bank deposit growth. I mean, recently it's been annualizing it most 10%. So there's telling you that there's a lot of spending power going through the US economy. And that isn't necessarily good from a financial liquidity standpoint, because money is clearly shifting from financial markets into the read economy. Hence, Bitcoin is sort of taking a bath here. And then you look at gold, and you can say, well, actually it's similar phenomenon. Although gold tends to be driven by it to a much greater extent by China on the people's bank. Now, if you look at what the people's bank has been doing, rather mysteriously after three years of very, very strong liquidity inflows in China. And my view is they have to do this to devalue the debt they've got, so they're trying to print money. But on March 2nd, they hit the brakes very hard. The PBOC basically could tell all liquidity injections. They strengthen balance sheet. And they've been shrinking their balance sheet right up until the day after the MOU with between America and Iran. And since that point, China has been expanding liquidity again recently aggressively. And so what is going on? And that seems that there is some tacit agreement between China and maybe the US, that China has to slowly economy down to reduce oil imports. And they were doing that certainly through that whole period. And now they've changed. That we think was a major factor in weakening the gold market. It was China has been such a major Chinese retail has been such a major buyer. So we're seeing what happens in the next few months and how much China injects back. But those are key factors to watch. And then you've got the yield curve where you would say that if liquidity is going down, including we've got evidence from PBOC and the Fed that liquidity or generally US markets that liquidity is tightening, therefore you'd expect to see the yield curve flattening. The consensus trade at the beginning of this year from most economists, or all economists, I should say, was that the yield curve was going to steep and unambiguously through this year. They certainly happened, they flattened dramatically. And that's telling you that liquidity is slowing. So it's very important to look at these unrelated events and to try and spot the footprint of liquidity moving through markets. The way that liquidity moves through markets and the way you describe the way it goes through the asset classes, how consistent is that? Does it always go in that order or are there times when assets are swapped? - Yeah, I mean, very good question. I mean, the answer is nothing is ever smooth. You've always got to be alert to something else. You might get a mania in a particular area where money is funneled in that area. You may find an area which has been hugely out of fashion for maybe the opposite reasons. And that might be an early winner from liquidity injection. So you've got to be alert that it's not always the same as time, but generally speaking, this is how it moves. So we've got to try and look for what we think is the normal script and try and work accordingly. So in terms of our asset allocation, we're looking for the sequence and we're looking for consistency in the sequence. Now, if you look at what's happened through this ball market beginning in late 2022, and this is an absolute plain vanilla ball market, everything has gone like clockwork until the one thing that's been, I mean, we've got wrong this year is that we were not as upbeat on tech earlier on this year as we maybe should have been. And tech has come through very late unusually. It's had a second wind. We got it right on the way up sort of the first stages. We're very bullish on tech. And then we've called off thinking that resources would be better commodities. And actually, tech has kind of overtaken everything with a second wind. And now whether that's a bubble or not, I mean, we've got to judge with hindsight that it looks that way to us. Yeah, I certainly have sympathy for that view because I thought pretty much the same thing. The AI story was quite getting quite mature and then everyone started to get really excited, which is usually a sign that you're near the top. But as we know, like bubbles can grow. I mean, I think it is potentially, well, it's got to be a bubble of some kind because the number of-- It's a bubble when it's a ball market that you're not invested in. We can't do that. We're very, very good definition of us river them. The thing with bubbles, as George Soros says, when I see the signs of a bubble, I start to buy it because there's usually quite a long way to go before it-- pops. And with regard to bubbles popping and perhaps a bear market that might be soon or it might be a few years away, how does the unwinding of this liquidity flow in your system and in the way that you track it? Does it reverse in exactly the same way that it comes together or is there a different pattern? Yeah, when I mean reverses, I mean it tends to, you know, the old sort of saying in markets is that, you know, market was it markets go up the stairs and down the elevator, so you find that the progress up is slower, the way down is often faster. And, you know, that's what we got a spot. Now, what tends to trigger financial crises is basically the inability to refinance debt and, you know, where a lot of the current thinking is we think generally incorrect is that if you pick up, for example, an economic sort of finance textbook, they tell you the capital markets are there to raise money for new investment. They're not clearly because that doesn't happen really in very few cases does that occur? It's really not in the UK at the moment. Yeah, I mean, that's right. But I mean, generally, I mean, okay, you might say, well, okay, this AI thing is maybe a small, a small sort of stepped side on that. I'll come quietly, but generally speaking, 80% of all transactions in financial markets are debt rollovers. They're refinancing, so there are existing debt positions. And what capital markets are are just huge debt refinancing mechanisms. So basically, what does debt need to be refinanced? And this is not saying anything about the new debt, of course, this is existing debt is coming up to the maturity and rolling over. What you need is balance sheet capacity among the in the financial sector. And that is what that's how we pretty much how we define liquidity. And you can think about it, you know, generically, as the capacity of lenders. And if there's not that capacity in the system, then you're going to get debt default or an inability to roll debt over financial tensions and a financial crisis. And who governments that liquidity ultimately are the central banks. And if the central banks are basically not ejecting enough liquidity into the system, you'll find there is a debt refinancing tension and a crisis. And if you look back over the last 10, 20, 30 years, I would venture that every financial crisis that we've seen has started out as a debt refinancing crisis. And central banks are being forced to come in and re-liquify. So if you look to where we are today, and looking at the change in the structure of financial markets since the GFC, everything is now sort of focused on the repo collateral markets, particularly in the US. And so if you want to find evidence of tensions emerging, you've got to look very closely at the repo markets and the collateral markets. And in particular, the two things that we think are critical in that in that analysis. A number one, looking at sofa spreads, a number two, looking at the stability of the bond market or the collateral markets, which is looking at something about the move index. So rather than, you know, picking up fix and trying to, you know, judge fix, which is equally invested, sort of favorite, risk indicator, jump that. Look at the move index. That's a much, much better guide. Because that's telling you how credit conditions are going to change. And if you've got leverage in this system, which we have, of course, that's the first test of whether leverage continues or whether it crashes. And that's what we monitor in particular as sort of guides to stability. And the Federal Reserve and the Treasury, as an aside, are looking pretty closely at these things because they're messy, massaging them hard. We, in my business, we use systematic trend following funds or CTAs as they've been known in the States. And I'm, I continually cite the example of a meeting we had a little round table discussion, probably 10 years ago now, that had some high frequency traders around the table. And one of these guys was asked, what's the longest duration you've held a position for? And when that batting night, he said three and a half seconds. Are you seeing the trading cycle and the capital rotation cycle speeding up as a result of the hot money in the system now? Yeah, there's no question about that. That's happening. But I mean, that's been with us for several years already. But I think that, you know, it doesn't mean to say that some of these indicators that I just cited are a relevant or not valid. They're clearly very valid because actually the system is becoming wrestling more and more on this collateral base. You know, collateral values change. You're going to get huge disruption in markets. And that's why looking at volatility, which is maybe what you're saying, looking at volatility is so important. You need, you need stability, not necessarily in the end market. So in the equity markets, you need them in the sort of the primary markets, the collateral markets, which is why bond volatility in the US Treasury market are really so critical here. And if you look at what the, I mean, this evidence, what the US Treasury is doing, they're engaging in a buyback program, which you'll, I'm sure you're familiar with. So the Treasury will go in and buy off the run treasuries, illiquid off the run treasuries and replace those with shiny new, you know, by swapping a secondhand car for a shiny new car, the replacement as with shiny new bonds, the liquidity and the volatility of those new bonds is lower. That helps to maintain the system. But the activity, the buyback activity of the Treasury is very, very much going geared to a prior volatility. So volatility picks up in the bond markets. They're going to start doing a lot more buybacks. And that's what they do. So they're trying to keep a lid on this thing because I know how important it is. And similarly, if you look at what's happening in the sofa in the repo markets, the sofa spread, which is the sort of replacement for live or now, sofa is being manipulated by the, I'm not in a malicious way, but it's been manipulated by the Fed, trying to keep sufficient liquidity in the system. So sofa spreads don't blow out against Fed funds or interest and overnight reserve bonuses. So the system is being very, very carefully massaged. And as I, you know, say to our clients, look, you're either reassured by that fact, we are more worried that cracks are appearing. And that's what we've got to be called. So we've got more of the cracks. Make sure it doesn't come in earthquake. And I suppose one factor behind, in opposition to that speeding up process is the rate at which large organizations change their mind on things. I just, before we started the pod, I saw a note from Ronny Sturfly who I imagine someone you know, one of the team that incremented the old, specialist, syndicianstein. And he makes a point, I think UBS, just, UBS family offices have just released the latest research and it suggests that given what's happening in the gold market at a sort of like a longer to macro level, their response to basically the sort of the depreciation of fear of currency has been to raise gold allocations from 2% to 3%, which is kind of meaningless in the greatest scheme of things. So on the one hand, you have mockers doing what they're doing on the other hand, you've got large organizations who are glacially slow at responding to these changes in trends. Yeah, back in the 1970s, a lot of these Swiss family offices had 15% in gold minimum. So things have changed a lot. So looking at your liquidity measures at the moment, are there any charts that you could share? So is there anything that they're telling you about the direction of the markets at the moment? Will the US equities, for example, potentially go higher from here? Or is it as most people think, a lot of people think, not everyone, that the markets are overvalued and heading for a bigger fall? Well, I think the answer is yes, yes and yes. I mean, let me just put some slides up and you can brilliant. So for people who are just listening, we will, would it be possible to actually get a link to these so we could share that. Fantastic. Thank you. Yeah, okay. Well, let me just focus on three or four charts. I'm going to come back to it. Right. Okay. So the first one that we put up, and this is answering the question. I mean, basically look, we think we're at the end of a cycle. I mean, the cycle currently hasn't ended yet, but we're in that sort of gray zone where things are beginning to look a little bit more tense. As our allocation isn't really binary, although many people choose it that way, you've got to think about it as an evolutionary process. And what this is basically saying is that the chart that you can see is shows a black line, which is the underlying momentum of liquidity through world financial markets that goes right back to the middle 1960s. And what that is illustrating is, as I said, the underlying growth rate of liquidity that you can see, it shows an index from the average of 50. That's the trend line. The red line, the red sign way, if we put on top of that, is a recurring cycle. That is a 65 months cycle. Why 65 months? Well, I'm not sure why. That's what the data tells us. My sort of justification of that is that if you look at what this is referencing, it's really looking at debt refinancing cycle, liquidity providing that debt, that's an average maturity between five and six years, which is almost exactly 65 months. And so that probably justifies why this cycle is of this particular frequency. We estimated that sign wave back 25 years ago in the year 2000 using Fourier analysis. We haven't changed its sense. We've just made it real long. So what you see is what you get. You can see whether the accuracy is there or not. But it seems to actually matched that 65 month cycle. The trough of the cycle peets exactly where you'd expect in September of 2022, the peak has occurred as of Q4 last year, 2025. We're now in a downswing. Okay, we're probably just a tad below trend growth of liquidity. That is saying that things are beginning more tense. As I stress, liquidity is not necessarily falling yet, but it's clearly going down. The trough is going to be sometime in 2027, maybe late 27, whatever, so we've got quite a long way to go on a normal count. The way that we interpret that is shown on the previous chart, which I've just put up, and that is looking at the no-shot asset allocation cycle. What we argue is that there is a sequence, as I said, this is not set in stone. This clearly one has to interpret this, but this is the normal sequence of a work event, so you'd expect to see in the upswing of the liquidity cycle, as liquidity is fueling financial markets, the equities do best. That key assets in the upswing, commodities do very well around the peak of the liquidity cycle, which is really what was going on now, and then you start to get an inflection, which is identified initially by bear flattening in yield curves, and then a change in leadership within the equity market, typically from things like cyclical value resources energy, much more towards defensive value type names, and then ultimately defensive growth stocks, so we've yet to see that, but that's the downswing. The trough of the cycle, bond markets, government bonds, just only straight bullets tend to be the best performing asset class. Only a 10-year bond would be an ideal situation around that time, and then the cycle starts again. We think we're at the beginning of this downswing, so we think we're in what we describe as a speculation zone, as you can see on that chart on the right, and that is the phase that we think characterizes markets, so returns can still be positive, but you've got very high volatility to cope with, and so the quality of your returns comes down relative to the previous calm phase, and then Tobian and something name suggests you want to be out, but we're approaching that. Now, some of the evidence for that, maybe I can evidence what it's going on, and if I sorry to start on too far, if you look at this chart, this is looking at US liquidity versus the yield curve, and the original US liquidity in thoughts by nine months, I've been using this analysis pretty much as cyber as a cyber brothers in the 1980s, and it works yet for me almost way, pretty much every cycle, and what this is showing is, as the liquidity cycle expands, you want to start to move towards a steeply in curve, as the liquidity cycle inflects a lower, you want to be starting to shift towards a flattening curve, this is exactly what we've got going on right now, and if I show you on the next slide, this is my interpretation of what happens, and this is sort of deeply theoretical, I suppose, but maybe a bit wonky should be not in bonds, but this is basically saying what you'd expect the yield curve to do, and the reason for showing that is, that we've come out of a phase, which is the top right, which is the calm phase, which is when equity markets were doing really well uninterrupted, you've had during that phase, signs of economic recovery, yield curves were steepening, they were seeing a bare steepening, so in actual fact, the long end of the market was selling off, and now we're in what we call a speculation zone, that's sort of because the economy has seen much longer growth, clickling in the US, that's a bare flattening of the curve, which means that the long end goes up, yields rise, but the short end is rising faster because there is anticipation of the Fed or others actually hiking interest rates, but it's the next phase you've got to be wary of, and that's the phase that we call turbulence, and all I'm pointing out here is that so far we're moving in a sequence that seems to be pretty normal, and therefore I'd be concerned, or looking for signs that we may be flipping from one regime to the other, don't think we're there yet, but clearly that's an important factor, and the other thing I wanted to show was to go back in the presentation, is to look at what's happening in the gold market, because I think that's probably instrumental of maybe many people's interest, this is looking at PBOC liquidity injections, people's bank of China, this is the change on a year ago, we're showing this year of year change because this huge seasonality in Chinese data, which is kind of difficult to extract easily, so a year and year change is not a bad way of trying to judge what they're doing, and this is showing the huge expansion on liquidity from early 2023 until March the second of this year, and this bear in mind is the change on a year before, so up at about six to six trillion yuan is about a trillion US dollars, so these are not small amounts, these are big amounts of cash going in, and you can see what they've done through this year, they've just hit the break, and that's extraordinary, but it basically attests, so you can see it in more detail here, on the second chart, it's basically because in my estimation, this is all connected with the gold crisis, and they wanted to call the economy, is there precedent for that? Yes, they did it in 2008 ahead of the Beijing Olympics, they hit the brakes then to call the economy, so pollution was not something that could interfere with the showcase event, and then they restarted the economy again, and they seem to have done that again in March, Chinese data we know for the last few weeks to be pretty dire in terms of economic performance, but hopefully that will be picking up or stabilizing again, and the reason that's important is that if you look at the gold market, look how the gold market has broken, and this chart is maybe a few days out of date, but you get the idea, and this is looking at gold in yuan, now why on earth do I look at gold in yuan on the US dollars, because China is controlling the gold price, and what they're doing is they're monetizing their debt, so they're trying to devalue the yuan internally while maintaining the façade of let's say an external strong yuan, I'm not in the count that says the yuan has to revalue, it's undervalued, let's just don't believe it is, because I think common sense will tell you that if they took their capital controls off, the yuan would collapse, a lot of Chinese would get their money out as fast as they could, and what they're doing is cementing those capital controls, they're adding to them in the sense that crypto has been banned in China, investors can buy gold, but they can't export gold, and what they are doing is they've been buying gold, and you can see that this chart is moving up at almost 5,000 yuan steps, until the break has occurred, now that break has been triggered by PBOC liquidity, this chart is just showing you the correlation between the yuan gold price in orange and PBOC liquidity, this wasn't the great debatement trade that everyone figured, that's still yet to come, that's in the long term, it's definitely happening in a great debatement, it's happening at a much, much slower pace than many commentators argued, but what is going on is that China has been trying to debase its currency more hurriedly, and that's where he was exercise the gold market in the short term, and you can see gold here in orange has moved almost exactly in line with PBOC liquidity, and it's come up and it's gone down as the PBOC is yet it breaks. So I mean the incredible amount of data there, that's fantastic, so what to ask a simple question about what we've just seen here, does that suggest that we need to wait for more liquidity to be pumped into the system by the Chinese to see the gold price up or can it move up for different reasons? Well it could of course move up for different reasons, but I think the main driver of gold has been the Chinese, they're trying to do two things at once, which was very difficult, maybe impossible, they're trying to devalue the yuan internally to get through their debt problems, and this is the only solution they've got they can take, I mean to be realistic, I mean look at what Japan did, look at what the US did after the GFC, look at what Scandinavians did in the 1990s, these are the only solutions one got to sort of huge step overloads, you've got to devalue your currency, and the Chinese can do internally because they've got these capital controls on, and that means creating domestic inflation, which means that basically prices wages, asset prices have to rise relative to their debt burden, and that is what they're trying to engineer, now they're doing that property money or they have been doing that, I think that the recent hitting the brakes has been for geopolitical reasons, but hey let's see, I'm not nourished on this, I'm just trying to guess, and they're a charge of gold, on the other side the PBOC is continuing to buy gold, but the authorities are encouraging domestic investments to buy gold, so China's importing into huge amount, the PBOC is buying officially, they're telling us some of their purchases, I'm sure they're not telling us all of them, And I'm sure Russia has been something a lot of gold of late because it's sort of done situation and I'm sure the Chinese are accumulating it. But what they're trying to do at the same time as this is to give some stability to the external value of the U.R. but basically effectively putting or building it up a sort of quasi-brett and woods arrangement around the Chinese currency. So they've got a gold exchange standard. They're effectively there and some of their acolytes are basically holy gold rather than U.S. dollars. I mean they're clearly big big dollar holders still. There's no question about that. But at the margin gold is becoming more important to the Chinese system. So they're building a ride for international currency to the U.S. dollar. This one will be a monthly saved back by gold that will have gold at some sort of support level. So that in itself would just suggest that the trajectory has to be to the upside because clearly they haven't finished with that operation. They would want to buy more and continue to. Yeah. I mean look the fact that the fact is that we've got the bottom line is that we've got way way too much debt in the system and debt has to be refinanced or it has to be devalued in some way. But ultimately it's got to be refinanced. And China's debt burden is just enormous. Okay. I mean this is Japan in historically the U.S. after cheated the GFC. I mean it's piles into insignificance relative to what China's doing. What China's accumulated. You know masses of empty cities or whatever. They've got to devalue that debt and the only thing they can't default it because in modern financial systems you can't default for the simple reason that you're thinking about this repo collateral system. New lending is built on the foundations of good quality old debt. So if you kick away the old debt devalued the debt you're destroying the foundations of the financial system. You simply can't do that in the modern economy. So what you've got to do is basically devalue the debt which is by printing money creating domestic inflation and that's what they're doing. So if you're creating this and you've got huge potential buyers of gold in China in a billion or so of them the gold market's got to go up. I mean this is not a tomorrow event. This is a long term. You know since year 2000 the amount of U.S. debt, federal debt has gone up I think about 10 times or close to 10 times. Gold has gone up 12 times. The S&P has gone up 6. So the S&P has actually laid although it's been a very good performance. Length of the devaluation of money. And we've now got you know U.S. debt problems you know but problems that the U.S. has got everyone citing are really future problems for the U.S. for Europe for the Britain and whatever because there's so much potential debt to issue to basically fund these social welfare programs. You know pensions or whatever it may be. I mean it's our own mortuary amount but that's a future debt problem. So there is a great debatement coming but it's coming at as much slower pace than people think. China's already got a historic debt problem. It needs to get out of one top. So you add all these things together. There's got to be a massive debatement of paper money of debts and people say well okay you know that's impossible. It's never going to happen. Well okay then what was the real value of a dollar or a pound sterling in today versus you know 1900. I mean there's been massive devaluation. We're just kicking in the candle the same road. Given what you've said about inflation and debt and the currency depreciation why I'm not with anybody who's got the choice would they be owning nominal assets rather than real ones now. Not quite good. I think you've got to restructure portfolios with that in mind but this is a long term view and you know often you know cycles don't have any respect for trends and so we've got to understand there are cycles out there as well and you know if the Federal Reserve decides it's going to tighten a lot of these monetary inflation hedges will clearly suffer. Now my view is that's a great opportunity to buy more but we've got to be realistic the you know things that are moving to strike markets. Sure. The first chart that you showed us could I could we just quickly go back to that because I just wanted to ask a question about the amplitude of the 65 month cycle so if we look at the 2013 2015 2017 highs there we can see that the amplitude hit around 65 is supposed to the general peaks hitting 90 does that tell you something as well about what's going on with liquidity. Yes because all this data is normalized so it's basically what people want to say as a c-score or a z-school so it's a norm I say so it actually fact yes it tells you a lot about the the amplitude is important here in other words put it another way 20 units is one standard deviation on the index. Right so given that the amount of money in the system for example is at record highs that's not necessarily shown up on the peak that we've seen in 2026 on your chart that peak is lower but how do I'm just trying to work at work at how that works. This is a great great novel. I'll write right right I see that would make perfect sense then yeah okay and are you managing money how do you monetize all this amazing information that you've got. Well the answer is that we we advise funds and we use to run I mean across what a capital used to run money in a sense there's a big fixed income manager GL index is more an index company so what we're doing is providing data but institutions predominantly we also write research and then personally I have a subset called capital laws which gives you know a synopsis of much of the stuff is going on so that's how it's monetized. Great stuff so do you personally invest when you see things looking like all the stars are aligning and everything's going towards a really high probability trade or do you do basically yes but I'm not always right but yes. Well you can be and and also in terms of being all right it's a question of timing isn't it really you might be wrong for a while and then right and we can see how you know things are moved in in say for example with Tim's fund and looking at the investments in the silver and gold miners that were unloved and undervalued for a very long time paying great dividends but nobody wanted them and then all of a sudden boom they came into focus so it's quite a love now again. Well yeah it's it we got a lot of excitement didn't we in terms of quite quickly quite quickly which is which is usually a sign that the short term investors have jumped in and and a short term country signal but it does look like the paths from different perspectives are still looking positive in that regard but it's this is absolutely fascinating research I know you've got a hard cut at 11 o'clock so I don't want to overrun that at all but for people that sorry before before we sort of move to close Tim was there any final questions that you want to ask Michael I guess my question for Michael would simply be what what are your favorite trades right now. Well I think the favorite damage I suppose it burns on the time horizon I think that if you look at I mean my view is there's a lot more inflation in the system than bolster makers are fessing up to I think the young line momentum of economy is greater particularly the U.S. economy and I think that you know the favorite trades are hard to say but I would be you know I'd still be pretty downbeat on the bond markets in the sense I think yields are probably going to have to rise I think the underlying yield based on the U.S. market should be near a 6% for or a half so I think that you've got you know potentially bad news coming out of fixed income that's not going to be a great environment for equities I think if you buy U.S. tips and I think that's not a bad longer term investment having settled that because at least you're going to get inflation protection it's very difficult to get more than 2% in real terms from financial assets anyway but you can get that you know go to the U.S. government at the moment so that's not a bad trade I still like precious metals I think they look good I'm not going to say they're going to perform strongly near term but I certainly be buying them on weakness or giving them said I think commodity markets look very undervalued against the backdrop of of a strong economy so I think those look good but they've clearly had a very good run so I'd be sort of positioned there I mean my the question I've got is the extent to which the Federal Reserve is moving more hawkishly and I think it's difficult to tell that at the moment but you know the the jury is out on Kevin Wars so I don't want to be too aggressive on risk assets until it's fairly clear you know it's clearer what they're doing liquidity is telling you to be cautious so I'm not going to sit my neck up there but I think in terms of a long term view you know I'd be you know happy with those you know three asset classes I said I'd be buying you know gold commodities holding commodities and I'd be thinking about ticks as a long term investment what do you think about trueflations read of the economy where I think it's showing inflation on a on a one handle whereas the official figures are closer to three or or much higher as an end- -We can't believe that for a start, I think, let me show you a chart, that might be, sorry, I've gone the wrong way. Let me show you this chart. This is a good example of maybe what's going on. This is looking at the TIPS market, which is the orange line. This is five year TIPS, break even inflation in the US, which is saying about two and a half per second. That wasn't really flickered, but higher or lower over the last few years, apart from the post-coded spike. But if you look at the dot in line, that's a roly four year average of the overall US GDP price deflator. There's a whopping great disconnect going on there. My money is on the broken line, because I think that's clearly, you know, definitionally, telling us that there's a lot more inflation on the system than they're facing up to. So I think that that's true. I mean, anecdotally, I was in the US 10 days ago, and I tell you, first of all, the economy is booming, and secondly, there's a lot of inflation there without any question. Yeah, it's just so surprising that an independent index would be saying that. You'd expect it to be the other way round, but I'm not sure why that's true, but it strikes me that I mean, anecdotally, a lot of Americans would agree this inflation system. Well, that's what you expect. That's what we feel here as well. So it does make more sense that way. Michael, thank you so much for coming on the show. For people that would like to find out more about you and your services, where do they find you? I think two places. One is a website, which is glindexis.com, or the other is basically sub-stake, which is called Capital Wars. Absolutely, fantastic. Do you do the exit all of you got any handles? Oh, no, there's a yes or a yes, I shouldn't say that. It's across the order cap. Fantastic stuff. Really interesting stuff. Thank you. Good. Well, thank you. Thank you. Thanks, everybody. This podcast is for entertainment purposes only. Please do your own research or contact professional advisor. [Music] [Music] [Music] [Music] [Music] [Music] [Music] [Music] [Music] [Music]