ALERT: Liquidity Has Peaked & That Means Lower Stock Prices Ahead | Michael Howell

What I'm really saying is that the odds of the S&P being at current levels by the year end, I think, are low. I know, in other words, I think the market is going to be lower by the year end. My view is that the assets that are very much out of favor now are the ones that are going to come back into favor. Welcome to Thalpha Money, I'm Thalpha Money Founder in your host, Adam Taggart, welcoming you here for a very special discussion with Mr. liquidity himself, Michael Howell, founder and CEO of Crossporter Capital, which is now rebranded as global liquidity index. Michael, thanks so much for joining us today. Well, great pleasure to be here, Adam. Happy New Year for everybody. Let's hope it's a good one when I feel this challenge is ahead. All right. All right. Well, we'll pick up on that thread immediately. Challenges ahead very quickly. Happy New Year to you. Hope you're staying warm. I see you've got a nice turtle neck on. So hopefully it's not too cold in the UK right now. Yeah, well, it's pretty cold. It's about minus five, which is pretty cold for the UK. Oh, yeah, snow everywhere. So there we go. Okay. Well, all right. Well, hopefully we can generate enough heat with this discussion that we can warm you up. All right. So we're going to get to your latest slides that you kindly prepared for us in just a second, Michael. But as I recall, you have your global liquidity cycles that your firm has identified. And in our previous conversations over the past couple of years, if I remember correctly, you had forecasted the current cycle to kind of peak out at the end of 2025 beginning of 2026. Is that still your expectation or have there been any developments like the Fed kind of returning to QE, you know, they're not calling it QE that might be pushing the duration of the cycle out further. Yeah, all the evidence seems to show that the liquidity cycle is peaking pretty much around the time we said. I mean, we're still getting data coming in for the end of the year, you know, obviously, but it looks as if the peak in liquidity probably occurred sometime around about Q4, maybe early Q4 or all there thereabouts. And that's, you know, despite the fact the Federal Reserve, as you said, has kind of moved back to a more benign liquidity posture that kind of forced to do that because of the tensions in repo markets. But what the Fed is really doing is basically, you know, doing doing the sort of minimum necessary, I would say, they're sort of putting a put under the repo markets. And that's probably enough to keep tensions away there, but it's not really enough to keep the bull market in stocks going through the year. I think the monetary policy of the Fed is operating is probably at best good enough for a range bound market this year may not be even enough for that, but we'll see. So, you know, our view is that the year is going to be challenging liquidity is not the force that it was. Certainly, if you look at the major advanced economies, I think China may be a different story, which we can get into. And, you know, one of the things that we're bringing out very clearly this year is that there is a significant divergence between what's going on in the US liquidity cycle and in the Chinese liquidity cycle, but that's a laser story, I think. Okay, well, I look forward to getting into all of that. I just had a conversation yesterday that I'd love to get your thoughts on in it's about the guidance that US Treasury Secretary Scott Bessent has been giving in terms of the criteria of what the administration is looking for in the next Fed head. And Scott Bessent is kind of leading that search and he is essentially said, you know, we want a Fed that is quick to respond to issues, but one that doesn't give too much persisting stimulus. And he cited, you know, things like the Fed buying mortgage back securities for like, you know, years after they probably should have stopped and housing prices were, you know, zooming to new highs and things like that. Do you take that into consideration at all in your forecasting? 100% I think that's it's a key point and I think Scott Bessent's been very clear, the Federal Reserve has sort of been operating an unguided hose. It's basically pushed liquidity out lots of liquidity out to many pockets, not just in the US economy and US markets, but worldwide. And that really has come at a cost of what you make or the K shaped economy. And I think that's what he wants to get away from. And therefore what we've been arguing over the last 12 months is there's a very distinct shift away from what we can term Fed QE towards Treasury QE. Now Treasury QE is more subtle, but it basically is saying that liquidity is being injected directly into the real economy rather than willing millions of financial markets. It's directive is going into things like government procurement, you know, defense spend, critical minerals, these sorts of areas. And it's been funded at the front end of the curve through the bill market. And that has an effect on liquidity, but it's liquidity, it's creating liquidity, but it's creating liquidity, which is being used in the real economy, not in financial markets. And although the Federal Reserve in our view is unlikely to be tightening through this year, it may considerably, I mean, I doubt that, but it needs possible. The fact is that a strong real economy is going to absorb a lot of liquidity out of financial markets. And the more one looks around the world, the more evidence there is that fiscal policy is a stimulatory that real economy is starting to pick up, you know, after what has been probably two years of monetary stimulus generally. It's about time they did on their beginning to get some traction. And that by itself will absorb a lot of the liquidity that's washing in financial markets. And therefore, even without central bank tightening, the liquidity cycle is going to start to dip down. And that really is the main factor driving our view of the markets. Okay, so it sounds like what you're saying is that the administration, at least here in the US, may kind of start making good on their promise that it's mainstream time over Wall Street. Because what I sort of hear you saying and tell me if this is too simplistic is the liquidity environment is shifting now to basically, instead of assets over paychecks, it's now going to paychecks over assets. And that's the way we see it. It's mainstream terms. Scott Besson has been very clear about that. He keeps saying that, keeps reiterating that. And that's the way that we see it. The US economy in our view is going to be pretty decent next year, this year, apologies this year. And you know, it's being driven by strong cap acts, particularly in AI and persistent government spending. The consumer, you know, may be slightly sort of on the back foot, but generally speaking, two major engines of the US economy, pretty robust. Okay, and so we can pull up your slides here if you like, Michael, but I think it's important to remind people and you can. A pine on this any way you like that the economy in the stock market while we we tend to think of them as being really tightly correlated, they are two different things and you can have a year with a strong economy, but a underperforming stock market. And it sort of sounds like you think that actually might be the tenor of this year. I think it's very much the turner of this year, Adam, strong economies don't always have strong financial markets and that's really the key observation. And I think if we sort of go through some of these slides, maybe start with this one, this is looking at the average gain in the S&P each year of a presidential term. In other words, taking 2025 is year one, year two is 2026, etc. So this is the average performance in each of the four years of a presidential term since 1970. Now, what you can see there is that year one is pretty decent, years three and four are pretty decent, but year two not so good and there's a very clear dip. Now, we get a lot of pushback by disoffering this observation, and clearly it's not set in stone, but it's something that one has to ponder and take into account. We get a lot of pushback because people with several of the economy is going to be really strong, you've got strong earnings, that's going to mean the stock market keeps going up, etc. But then just take a look at that, that's the corresponding slide for earnings per share growth on the S&P index companies, each year in a presidential term. So it's not unusual that the second year is a very strong year, in fact the strongest year for earnings out of the four and still the stock market goes down. So what you typically see in year two of a presidential term, this is clearly what blame an average is here, is you get PE multiple compression. And that's one of the things that we're concerned about because what's driving that is liquidity conditions are likely tightening, and it's not necessarily because the Federal Reserve is tightening, it's much more about the real economy as absorbing liquidity from financial markets. All liquidity, this anywhere must be somewhere, and if it's not in financial markets, it's in the real economy and vice versa, and that's what we're pretty, you know, principally saying. So this is the concern we've generally got, and I think if you sort of, you know, plow on and take a look at this slide, which, you know, I took the pink press counting from Twitter. I can't quite read the source, but it looks given the fact that it's pink, it probably came from the financial times the land, but what that shows is a series of bubbles, and you can pretty much make them out going all the way back to the mid 1970s. The red line that you can see put on top overlaid on top is our liquidity cycle, our global liquidity cycle, and what that principally says is that almost every bubble that you can see there has been inflated by some prior pickup in liquidity conditions. Now, if liquidity conditions are reflecting, then we may have a problem, and that's pretty much as, as we see it, we think that there's an inflection going on. And therefore, of all of these gains that we've seen are likely to, you know, stop or potentially reverse in some cases. And, you know, what I can do is maybe demonstrate this is showing the track of global liquidity. This is weekly data, and it basically goes back or starts in 2022, and you can see on the left hand scale that that is measured in trillions of dollars. So we're sort of touching around 185 trillion dollars of global liquidity. The thin line on there is an estimate that we that we basically put together very quickly, which comes out within a few days after the end of each week. And it's what we call our flash a flash estimate. It's not a full sample estimate. It's the best guess with the data we get, and I just put that on the same chart to kind of show that the full data when it comes out is the solid line. The flash estimate is what we basically report very quickly to our clients, but it pretty much tracks the same thing. And what you can see is that liquidity conditions are flatlining. There may be a little bit of a sort of flicker up in the latest week or so, but generally speaking is plateauing. It's not falling yet. There's no question about that, but it does seem to have lost its upward momentum, and that clearly is something of concern. So that's one of the factors that we put into account when we make an assessment of what the market's doing, liquidity conditions which are a major driver are looking as if they're beginning to slow down. And all our work on global liquidity, particularly the global liquidity cycle is measuring the momentum of this aggregate, this global liquidity total. Now, the other thing to take into account is how liquidity sits relative to asset markets. And one of the best gauges of whether we're in a bubble or not and what the risks are, particularly in equities, is to look at the ratio as we show here between all equity holdings worldwide and that pool of global liquidity. So what you can see is the data going all the way back to 1980. I've tried to make sense of different periods of that where you see, for example, in the first maybe 15 years of the chart, a period of financialization when following the sort of the behindflation era of the 1970s, investors moved back into financial assets. And demographics were clearly leaning behind them as well and that was helping to push more and more people into equities and risk assets. Then you see a sort of period of speculation around Y2K and taking into account the GFC in 2008, 2009. And then you see a period which is more of a flatlining, which I think is very well explained by Mike Green, who's talked about passive accumulation. And the fact that asset allocation is maybe not what it used to be. In other words, there are not the big swings now. A lot of money is basically in it is going into asset classes in 30 fixed or regimented amounts. And you can see that what we're doing right now is breaking out of that channel into a somewhat higher level of if you like equity holdings to liquidity. And that's getting back to previous periods of sort of speculation that we saw back in 2008. And that's clearly worrying by itself. The other thing that one needs to take into account is the risk behavior of investors. Now what I've shown on this slide, which is actually very similar data, is to actually put this together in terms of a portfolio to say how a portfolio allocations are being expressed. And this chart is a measure. It's actually a Z score under the underlying numbers here. But what it's showing is how much people are skewing their portfolios towards risk assets. And that's if you move up to a higher positive number or they're skewing the portfolio towards safer assets like government bonds risk assets of things like equity is corporate debt, emerging markets, etc. Whereas safe assets are cash or G 10 government bonds. And that's pretty much what you see here is we're seeing the cycle of risk appetite, if you like, or risk exposure, which is looks to me as if it's beginning to go down. So in other words, investors becoming a lot less risk seeking. So if you've got two, if you like two parts of a pair of scissors, two blades, which are now starting to move pretty much in the same direction liquidity going down and risk exposure going down, the backdrop for financial markets is going to be problematic to say the least. And that's pretty much how we see the coming year. Okay, and when you say problematic, what is your forecasting telling you? Is that mean more volatile? Does that mean more flat? Or does that mean, you know, prepare for some sort of substantial correction? I think that I always sort of push back against the volatility idea because I always think volatility is a bit of a cop out because, you know, you can, you can be right and you can be right and wrong at the same time with volatility. I know, I think it's going to be, I think the market's going to be lower by the year end. My view is that the assets that are very much out of favor now, other ones that are going to come back into favor, like government bonds and maybe the US dollar. That's very much a contrarian view, but that would be pretty consistent with what we're seeing in terms of the late cycle flavor of what we're detecting here in terms of the data. Bear in mind, we're not looking here at economic indicators. We're looking purely at liquidity flow and we're looking at how investors are positioning their portfolios in terms of asset markets. And it's those factors which are telling us that it's like cycle, but then I'd have to say that if you look back over the last few years, those have actually been pretty good handles on prediction. The real economy has not been a particularly great guy to asset allocation over the last couple of decades. Okay. So, well, you mentioned here that, you know, you actually think that peak might be behind us now. I mean, I'll give you a little more time just in case the data bounces around here, but if indeed we have peaked in Q4 2025, what is your projected or expected length of the down cycle? Well, interesting question. I mean, the fact is that if you look at this chart, this chart is identifying the cycles. This is for the advanced economies, I should stress, it takes China out. The reason we're taking China out is that China is certainly lately has been highly volatile and it's distorted the picture. This is the major advanced economies worldwide ex-China and what you can see is the cycle length has been a pretty standard 65 months over that long period going back to the mid 60s. We think that that is all to do with a debt refinancing cycle that financial markets are very much about refinancing debt rolling over existing debts that not about raising new capital for new for a new greenfield projects, which is what textbooks tell us those days of long gone. It's all about rolling over debt and the refi cycle is basically a five to six year cycle that repeats and we seem to be peaking out now in terms of that cycle. Now, if it's true to form, I mean, you're looking at a downswing, which could easily be lasting. I mean, clearly these things vary, but on average, you could be looking at something like a 35 month or 3035 month downswing. I mean, that's entirely possible. You can see historically that some of those downswings have been rather sudden and therefore it may be over quickly, but that will be a short sharp shop. And all I'm saying is that we've got to be cognizant to these risks. Nothing is certain in liquid as you know in life as we know. It may well be that the current sort of sort of picture we're seeing at the peak is something which is going to persist for several months. It may be that you get a blip up in the next month and blip down the following month. It's quite possible because you can see that pattern historically, but it does seem as if we're seeing this inflection pretty much about when, you know, it was originally, if you like envisioned, which is late 2025, everything seems to be lining up. Now the other thing that I think is worth stressing is that if you look at the average length of the cycle, we seem to be fulfilling that criteria more or less exactly. So this is looking at the average cycle length is 1970 as the dotted line and the latest cycle is sort of put on in context. So it looks more or less as if we're moving down the same track. And then how do we express this in terms of asset allocation with this diagram is the one that we use and what this illustrates is on the left hand side of the diagram. We we we depict various phases of the cycle into a sort of generic names to give some flavor like calm speculation, turbulence rebound. And then on the right hand side of the diagram, we then try and associate that with asset performance and that's done through experience and data and looking at how markets are performed historically. But what you can say from this is that typically the upswing of the liquidity cyclist or risk on phase, it tends to be that you favor equity markets. First of all, particularly during the long up wave commodity markets tend to do well about the peak in the downswing you want to be holding more cash. And then by the time you get to the trough of the cycle, you really want to be loading up heavily with government bonds, longer duration bonds, and then the cycle will restart again and you'll go back to a risk on environment. Now, if you look at this particular cycle and you look at the evolution and we can go on to that in a moment, basically what it's what it's telling us is this isn't this exactly how markets have performed over the last three or four years. Yeah, it's not been about economies at all. It's been about a fairly standard liquidity asset allocation cycle and you know this following chart embroidered that a little bit more by looking at different types of of equities, whether it be cyclical value, cyclical growth, defensive value, defensive growth. And then looking at different phases of the yield curve, which we can come on to in a few moments and that particular articulation seems to be unfolding almost exactly now. This reference slide here is looking at business cycles and what I've done is to look at various various measures. One is a straightforward average of all world business confidence surveys, which is the orange line, the solid solid orange line, which is labeled world business cycle. Things like the US ISM, you know, the purchasing manager's index, it's things like a tancan in Japan, it's things like the EFO survey in Germany, the CPI survey in Britain, et cetera. And those are weighted by GDP and put together as the orange line, the dotted line is the JP Morgan S&P world PMI index that they independently create. The black line is an AI projection, which is using is an algorithm that basically looks at things like commodity prices, currencies of trade sensitive economies, credit spreads, et cetera. And that in first from that data, what the economic tempo is on all three of those measures, which pretty much seem to concur what we've had is a flat lining of best in economies since the end of end of COVID, like it has been no cycle, but still you've had a very pronounced cycle in terms of asset markets and financial liquidity. And that has been, you know, those occurred despite flat lining economies and you've had a very normal progression on this traffic light diagram pretty much confirms that by saying that if you run through those traffic lights assets are on the left industry groups are on the right. What it's telling us is that, you know, in the rebound area, you want to take a little bit of risk. I mean, take these as traffic lights. So Amber means proceed forward with caution green is go ready stop. You wanted in that rebound to have a little bit of positive exposure to markets, you wanted full on equities, full on credits, no commodities, no bond duration. As you moved to calm, you wanted more equities, a little bit less credits, certainly more commodities, no bond duration speculation, where I would say the US market is now. You want to be getting a little bit more cautious on equities, you still want commodities, you're going to put a toe in the water in terms of the bond markets Europe and emerging Asia, we think are in the late calm stage of markets, US is more advanced in speculation. And it may well be that China, which we're going to come onto in a moment is probably in a much earlier phase, potentially in the rebound area, but that's, you know, another question. If you look at the industry groups, interestingly what that says in rebound, you want full on technology, you maybe want a little bit of financials by calm, you want full on technology, full on financials, full on commodities. By speculation, you want to be taking, you want to be out of technology, you want to be, you know, neutral to slightly positive financials, but still full on energy commodities. You know, we've been, we told our clients to move to energy recently, but you know, fortuitously, maybe without without predicting the Venezuela situation, but generally you would expect to see energy beginning to perform at the stage of the cycle. And then you start to get more evidence of defensive groups beginning to perform. So, you know, it looks as if, you know, as they say, if it's, if it's yellow and quacks is a dark, it looks as if this is sort of, you know, at the moment still quacking. So let's, let's listen. So that's the actual. Yeah, these asset charts that you have are, I just find them so helpful, they're such a great service. One, I guess I should say, Michael, you've been kind enough as usual to send me the slides, folks as usual, the slides that we made available to our premium sub stack users. So you can just go to doffelmoney.com/substack if you don't already subscribe to it and subscribe to it there. Michael, could you go back just very quickly to the asset cycle chart that you had? Yeah. So commodities have really caught fire in the past six months. And I'm trying to get a sense for where are we between speculation and turbulence here. How close are we to the, the black line there where you switch from speculation and go into risk off on turbulence. So kind of what I'm asking is, is for those folks that are in commodities right now, how much time do they have to still be long that space before they need to start to lighten up. Oh, I think that they, I think you can stick with commodities for some while yet. I mean, of you, what's happening is the performance is moving away from financial assets, more towards tangible assets. Okay. So add a check in the commodities. Yeah, I think that's, that's the obvious trait for me. I mean, that, that's, we've been, that's one we've been favouring for a few months now. But I think that that's, you know, that's something which is still going to run as far as I can see. And I think the commodity space has still got further, you know, further to push, to push forward. So I'm still optimistic on commodities, not least because we think the real economy is going to keep going. Yeah. So that's, or certainly pick up, accelerate. So I think that, that's, you know, that's a fact. In terms of, you know, quickly on, on what does it mean for returns? I mean, if you look at the liquidity cycle, I mean, I'd stress at the moment, you know, we don't see a negative print on liquidity. Okay. As, as yet, you know, this is our projection of global liquidity as the dotted line. The orange dotted line there going into into 2026. So, you know, we think there's a, there's a slowing down. We're not confident we're going to see a absolute drop yet, but that inflection may be important. And it may be putting a lot of pressure on, on financial assets. The black line is all wealth. It includes precious metals. It includes bonds. It includes equities, liquid assets. It includes residential real estate, et cetera. All these factors are thrown into that portfolio, but he shows how sensitive those asset classes are to changes in the temper of global liquidity, which is what we, we show there. It's all so sensitive are things like crypto currencies. I've shown this before, but this BES dollar symbol is actually Bitcoin Ethereum Solana in a 60, 30, 10% waiting. And this basically shows their movement versus global liquidity. They're very much a short term indicator. And you saw our data to try and, you know, try and manage their portfolios, but this is looking at the performance of that basket in orange. We look here at six week changes in in that basket. And we show that against global liquidity in the dollar amount growth rate. But we've advanced global liquidity here by three months, 13 weeks to show that it does predict forward that that constellation. The other thing that I presume then your outlook for Bitcoin and the script occurrences, not super positive for the next couple of years. Yeah, I think that I think that in my view about, I mean, all these monetary inflation hedges is the generally speaking, I think that they're good because what we've got is an environment where there is plainly monetary inflation going on in the world economy. This is, this is the plain fact that's staring us, you know, in the face, the governments need to spend money. They've basically taxed us out now. There's no, we're on the wrong side of the laffer curve. There's not much more they can do that way. And bond issuance is kind of difficult. So they're going to have to print money. And that's monetary inflation. I think the question is and the hard question is does that come through to Main Street? Or is that just an asset market phenomenon? And you know, my view is probably a little bit of both. But, you know, I'm, I'm tending to turn towards the view that Main Street inflation this year may be more subdued than people think for a variety of reasons. But generally speaking, monetary inflation over the medium term still maintains. So I'd still have these monetary inflation hedges in portfolios. But I think the sort of the fact is you don't want to chase them. And I'd be buying them more on weakness rather than, you know, trying to buy into momentum right now. The reason for that is that if you look at this chart here, which is an attempt to try and measure what I call true US inflation. And I think one of the difficulties is that there's a lot of distortion going on in the Treasury market really because of the nature of funding in the US in the US markets. That's a big skew towards Bill finance, which is actually part of this whole narrative of Treasury queue that I alluded to earlier on. And what the Treasury is doing is funding a lot of the deficit, the short end of the market. Now that has pluses of minuses, the pluses are the, you know, it's probably cheaper. And if they get the right guy in the Fed, they can control that cost. Obviously by keeping rates low. The downside is that it's basically inflationary in the long term. And so we've got to be watchful at that. But generally speaking in the short term, it has a distorting effect. And that distortion is shown in the orange or orange yellow line, which is basically the implied breakeven inflation rate that is evident from the from the fixed income markets. This is the straight, you know, measure that comes from the tips market, the Treasury inflation protected security market. And that shows kind of a flat lining and no inflation problem. The dotted line is a deeper dive into the data that basically says, well, okay, if the Treasury market is distorted, maybe other markets like the MBS market is less distorted. And if we try and get an equivalent gauge of inflation expectations from that, what is that showing? And that gives us a much more pronounced pick up an inflation over the previous two or three years, as you can see from that red dotted line. But even that's coming back. And then the other measure is looking at University of Michigan expects an inflation, which is what consumers are telling. So they as what they what they think inflation is going to be that clearly has been bumping around. And you can see the big spike, you know, over the last 12 months or so. That's two is coming down. So it may well be that in the short term, the need for need for these hedges is not as great as maybe people are thinking. And if you look at this chart, this is another one, maybe the sober people up a little bit. And you know, this is really under the under the label trees don't grow to the sky. And what it's showing is five year average, you US CPI inflation, which is the black line. Now what we've done to be clear here is to get future five year inflation, we've extrapolated the latest rate of inflation forwards. We get a five year, you know, figure. So, you know, there's obviously some bias there. You may want to put that race that black line a tad. But the point being is that it looks as if that's inflecting downwards. And you can see with the orange line, that's basically crypto, the universe of crypto and gold. In other words, monetary inflation hedges relative to the pool of global liquidity. Now what that's trying to say is that when you get a big pass through of liquidity surge into inflation, you want to buy monetary inflation hedges and they perform strongly as that chart says, particularly, you know, evidence in the 1970s. That is going to be evident recently when they they've searched. If you're getting an inflection inflation, are they the best thing to hold? And that's really a question that we've got to start posing. And in my view, this is the thing to start thinking about seriously, which is a very counterintuitive thought. And this kind of goes against most of the consensus view, I think on the street at the moment. Now this is looking at global liquidity. This is getting slightly wonkish in the weeds when we start to introduce concepts called term premier. Now term premier of the way that if you're a fixed income analyst, you'd really analyze government debt. And this is looking at the premium the people are or the investors demand to hold a fixed income security over and above expected interest rates. So it's the if you like the risk premium bid. But the interesting point is that that cycle in term premier, and this is the change in term premier should emphasize matches almost exactly the global liquidity cycle. The two completely different sets of variables global liquidity is a measure of flow, monetary flow. It's a rate of change indicator, whereas if you look at that world term premier is simply a spread that we that we calculate from the term structure around the world. Now what this basically is saying is that when liquidity turns down term premier start to drop now that's a really really important fact. It's completely contrary to what central banks tell us they tell us rather the opposite. But the fact is the plane fact is that when you see declining liquidity, what you tend to find is falling term premier and the reason for that is because in a lower and lower liquidity environment. Deferred risks in the system are heightened and with heightened default risks you want to hold you want to take less credit risk and you want to be holding more safe assets and government debt particularly longer dated government debt is a very good hedge against those credit risk features. So that's where investors tend to go. So as liquidity can just drop the risk of default or credit risk increase and the demand for government bonds tends to increase and that's why term premier appeared lower as you can see here. So the term premier coming down what's going to happen to the bond market and the interesting point to to note to associate is here is the chart for the US which is looking at the average yield curve slope now the reason for doing this is slightly technical. I don't look at a 10 to spread or a 10 1 spread or a 5 1 spread or whatever the reason being is that people different people have different preferences and this is really a catch for saying let's just look at the area under the yield curve which is an average of all those spreads to be completely you know unambiguous and let's chart that against US liquidity and what you can see is a very very close relationship. And you know back in the in the days a long time ago now that I was a Salomon brothers this is what we used to look at very closely to understand yield curve movements and what it shows is during periods of expanding liquidity what you find is the yield curve tends to steepen because term premier are going up and when you start to see an inflection in liquidity you get falling term premier and inflection in the yield curve on the lead time is about nine months. What should be telling us if this is true to form is you should be getting some inflection in the yield curve around the middle of this year and that is a completely non consensual view. We get pushback and people say well of course you've got a strong economy inflation expectations are going to pick up the yield curve is going to keep steepening the fact is that if you look at the data the yield curve normally starts to inflect lower during a period of rising economic activity in other words you tend to find that the peak of the liquidity sorry the peak of the of the yield curve is not far away from the trough in the real economy traditionally. And that's maybe what we're seeing once again so that would tend to suggest that you want to be thinking about bonds on this chart which I'm not going to go into now is a statistical exercise that was done almost 10 years ago which was saying that's the relationship between the yield curve and liquidity it looks robust it was estimated over that period you know that long period we've had at least 10 years out of sample now we're exactly the same thing has happened. So it looks a pretty robust relationship and therefore that saying here is the 10 year treasury yield are you going to get the yield the yield spiking dramatically higher. No I just think it's probably range bound and maybe bonds are not a bad bet in portfolios I probably tend to lean towards the five year buying a five year bullet but you know that that would be I think a fairly prudent position to take in a portfolio with you'll sit here on this year. Okay just to make sure I'm remembering your previous charts correctly while bonds may start performing better later this year. That's probably going to be the path to get to that state is probably going to go through a point where you're going to want to hold cash because we're going to switch to a risk off environment. Yeah I know what I'm saying is I mean a five year bullet a five year bond is you know pretty cash like I mean you've got much duration risk in that you may want to go short to term but I think you know the fact is that we can't predict who is going to be the next Fed chair and it's entirely possible. That the president decides to choose somebody who is going to cut rates more than the market currently thinks I'd be surprised by that but you know never say never. Okay so five year right now now potentially you're back on this program in nine months things go the way that your cycle predicts at that point you might start saying you might want to get some longer duration bonds. Yeah I think that's right but I mean you know there again I mean you've got to you've got to remember that you know investment is all about anticipating what the world looks like in nine months time or so. Yeah not what it looks like now we should be preparing for that period by things that are kind of out of favor right now that's what I'm saying I mean it's a it's a it's a non consensus view it's very contrary but this is the way that we see it we may be completely wrong hands up it's not the first time. And I will say you're not alone out there given the widespread from the folks I interview but you definitely are in a minority with that call. But for all the you know you presented all the reasons in logic why you believe that's the case. Just two assets I want to ask you about real quickly so you showed the chart there of. I think it was the Bitcoin and precious metals index which have been performing very well of late but we're now having an inflection as your chart showed. With inflation expectations gold and gold's done great this year silver is done bonkers this year. You just said you know your jobs to anticipate and you want to kind of buy the things that are out of favor and anticipation of them being in favor. What is your opinion right now on gold has it run so far so fast that this is the time to start taking profits profits in anticipation of the next phase or do you think it has more room to run for. You know more structural reasons. Well I think it has more room to run for structural reasons for sure but I wouldn't be chasing it right now. And I think the same with silver I mean I'm optimistic about these metals in the medium term because I think we're in a world where we've got monetary inflation. I mean my point you know consistently is this is not about financial repression I don't believe in a world of financial repression because government doesn't have agency to actually control things. And if they could control interest rates and GDP growth as people who advocate financial repression say what are they always do that it would be made common sense what they do have agency over is monetary inflation they can print money. And that's what they're doing and they're going to have to do that because as I said we're on the wrong side of the law for taxes and bond markets can't absorb the degree of spending that they are in the government's envision so we're going to have to have monetization. And that means you want these monetary inflation hedges in your portfolio but don't chase them now when there's all the momentum in them you start to wait till they call off and then buy them on dips. And you know as I've said to people in the Bitcoin space or even in gold I mean if you if you're buying these assets you know when they're one standard deviation or so below their trends that's a pretty decent investment strategy as far as I can see. I mean you buy them 20% 25 30% below you know trends but that's what I'd be looking for. Okay all right and that's where I was going to go like you said Bitcoin you you're recommending folks buy that on a weakness sounds like you're saying the same thing with the precious metals. Yeah and then real quick because they are included in some of your metrics of wealth here. I'm just curious how you expect housing to fare during a liquidity cycle downturn. Well I think the I mean the answer is that the in the US it may well be that housing is a is a different question that we've got. We've got downward pressure on house prices I think that seems to be the case and that that may well be something we observe over the next couple of years. If you start to look in Asia particularly look at China you may be seeing exactly the opposite and what I can do if you want like I was going to talk about the risks to to the to debt liquidity or this slide but what I can do is turn if you like to China and maybe try and bring China into this picture. And then there was my next question for you so yeah please let me do that and I'll come back to this chart this is all about the US what's happening in US financial markets. So let's begin with China story let's look at this slide so this is looking at liquidity cycles and what I've got here is the US cycle and the Chinese cycle now. Both that calculate exactly the same way you can see the Chinese cycle is chop here although it does seem to follow a sort of cyclical pattern to some extent. The reason it's it's chop here is that Chinese markets are not so well developed and you tend to get sort of lurches and it is much more difficult to fine tune these things but you can sort of discern a cycle evolving. It's fair to say that if you go further back in time certainly before 2000 but it's also evident in the 2000 to 2005 period there was much greater correlation between the US and the Chinese liquidity cycles. What you're looking at now is almost completely out of step movements they're desynchronized now very much out of step and that's an important consideration because it looks as if the US cycle is peaking and dropping. Whereas the Chinese cycle may be bottoming and so that bottoming up process is something that we need to consider because it may give us a further opportunity in Chinese stocks which you know I've had a pretty decent year if I recall they're up about 2526% over the last year. That's probably best in Wall Street but you know it's not a bad place to be and it could continue now the reason it could continue is explained in this chart. And what I may have to do is just to explain this chart by going back in the slide day to actually earlier one that I was going to show regarding more general or generic points about debt and liquidity so just let me dip back and I'll come back to that chart and what I need to do is to look at this chart. This chart is trying to put in context the problem or the cycle in financial markets worldwide and what it looks at is a metric that we favor which is the debt to liquidity ratio. Now many economists contract wise look at debt to GDP you know I'm selling enough to say you know they do that because they can it's easy to do okay debt and GDP can be measured and so it's a nice ratio but it doesn't tell us anything all it does is trend from bottom left to top right so what you know Japan is 400% or whatever it may be the US is 200% does that tell us anything no what you need to look at is the debt liquidity ratio. Why because debt needs to be refinanced it needs to be rolled over and you need balance sheet capacity and therefore if you look at this chart it's first of all mean reverting it's stable if you like it runs from in a left to right flat lining pretty much but there's a cycle and what you see is periods where the debt liquidity ratio is extended. I've annotated where you get financial crises and the reason you get financial crises is you get refinancing tensions in markets when there's insufficient liquidity to roll the debt over now my claim is rightly wrongly that every financial crisis that we've seen over the last two or three decades as first and foremost been a refinancing crisis and therefore you need to look at this relative ratio between debt and liquidity if you go on the other side of the divide there the dotted line. When there's too much liquidity relative to debt needs you get asset bubbles we just come through the biggest one of those called the everything bubble and that's because you had two things going on simultaneously number one you had policy makers throwing huge amounts of liquidity into their markets after the GFC and after COVID every problem is addressed my more liquidity. I mean even just take the latest episode with the Federal Reserve and the repo problems in the US what are they done more liquidity and the other thing that happened is the interest rates for slash to zero which encourage a lot of borrowers to turn out their debt into the late 2000s and what you're seeing is that debt liquidity ratio rising a because liquidity is slowing down and be because there's a lot of debt coming back into the system to be refinanced. And that's what the red lines are showing now with that start interrupt just super quick question and given the fact that the bubble balloon this time was the biggest in the data series do you expect a correlating largest amount of refinancing tensions to ensue. Well the answer would be naturally yes unless the policy makers are alert to it and they respond by any more liquidity which in my view that have to but it's a question of learning by doing so they're going to make mistakes from root which is why I think that if you start seeing flexion and liquidity we've got to be cautious. But then you know I must admit that I was pleasantly surprised by the aliquity and the size by which the Federal Reserve addressed the repo crisis in the US in the last few weeks was I thought it would take some time to get there they seem to have got there and they've actually done it in decent size so you know I want has to say that maybe they're adapting to events but generally speaking we are we're looking at the world here. Are other policy makers particularly those in Europe really as as adept as the Federal Reserve I don't know I think that's an open question we move to see now with this chart in mind on this relationship let's go back to Asia and look at the problems in Asia now here you see the debt liquidity ratios for Japan and China. I don't worry about the percentage levels that's not important because that really reflects the maturity structure of debt in each economy but look more about the current levels relative to history and if you look at Japan which is the black line. What happened in Japan is the debt liquidity ratio in Japan rocketed higher as you can see on that left hand scale from about 100% to about 300% there was a tripling in the debt liquidity ratio now we might say that what is a decent level for Japan maybe it's certainly not 300 maybe it's 150 or thereabouts they could cope with but basically what you've got is a problem of a too high debt liquidity ratio which is strangling the Japanese economy and causing a lot of problems of the the lost decades as we know what Japan has done in the last 10 to 15 years is address that through the policy of Abonomics which has recently been continued by the new Prime Minister and what they've done is they've tried to monetize debt if you've got a debt liquidity ratio that's too high you can get it down in two ways you can default your debt that's impossible because debt is collateral for the banking system. All what you can do is print more liquidity and the root in a spoiler alert for the root that everybody takes is they print more liquidity and that's managed relation. Look at China and you've got on almost exact copy of the Japanese chart but 15 years later 10 15 years later and China is struggling under this debt burden and that debt burden is clearly big. It's causing it's strangling the economy and China was having to get out of that by basically monetizing debt. Now you could equally say that the US had a similar problem maybe not to the same extent with the real estate problems in the time of the GFC what did the US Treasury and Fed do at the time they printed huge amounts of liquidity and they come out of the problem very very quickly but it did take a week of dollar and a lot of financial market a lot of bubble creation if you like in financial markets but China has got to do the same thing. Japan has done the same thing this is the solution and if you look at this chart it's showing net liquidity injections by China and it's hard to read or to measure the Chinese financial system because there's a lot of different pockets where liquidity can come from but we think we get most of those and what this is showing is the year-on-year change this is actually daily data but we basically illustrate the year-on-year changes in Chinese liquidity injections. This goes back to 2020 and you can see China doesn't do anything during the COVID crisis particularly unlike other central banks but what it's been doing more recently particularly from late 2024 onwards is injecting a lot of liquidity markets. Now what China has done effectively is over the last 12 months it's injected between 7 to 8 trillion yuan into their financial markets that just dishive 1.1 trillion dollars. In my view they've got to do at least the same again this year so I think this is going to continue and therefore I'm encouraged to see I mean this thing clearly cycles that latest uptick so it looks as if they're pushing more liquidity into markets and that clearly is a good thing. Now what is the evidence elsewhere that they're doing that and I would cite this piece of evidence number one this is what's happened to the Chinese bond market. So if you start to see a lot of liquidity being pushed into financial markets in China what you would expect term premier to do you'd expect term premium to start to rise in other words rising liquidity increasing term premier increasing bond yields and that's what we're beginning to see so tick that box it looks as if this is a confirming sign. The other thing is looking at the yuan gold price. Now there's awful lot going on in as regards China's currency but there's also a lot of if you like misunderstanding about what China needs to do. If you were looking at China's trade surplus you'd have to say you know taking your standard economic textbook that were the trillion dollar or in excess of a trillion dollars of trade surplus. The yuan the RMB should be revalued higher okay and that's clearly what the consensus view seems to be saying and all the media are saying China's got to revalue its currency. That's not the answer because if China revalued its currency it would just throw it into a pit of debt deflation it would be the end of the Chinese economy. It would not my view survive that would be mass defaults they can't do that they actually need the opposite they want a weaker currency and that weaker currency is necessary because they've got to devalue debt and they've got to get the paper yuan higher. So in my view you shouldn't be looking at what may be a less a manipulated number which is the yuan US dollar cross rate because that can be manipulated in a number of ways you've got capital controls you've got a lot of intervention potentially by the Chinese authorities you've got state owned banks and large Chinese corporations which are probably told to keep those proceeds in dollars and not convert them back into yuan. There may be out of that buying of gold directly rather than investing in US Treasurer as all these sorts of things. But the thing to look at is if they're devaluing the yuan by printing money the yuan gold price is going to go up okay and we said about 18 months ago that what you'd expect to see what you should expect to see if China is going to scratch the surface on debt devaluation is a yuan gold price of at least $24,000 yuan and that would be the start and we've hit that and we've gone up higher and you can see the chart the direction of the chart. Now I don't know where it's going to but I can extrapolate and I say maybe they're going to at least $35,000 but you get the drift here is if the yuan US dollar cross is not going to change that much for political reasons but the yuan gold price does change then you're looking at a significantly higher dollar gold price and that's why it's still keep a serious toe in the water when it comes to the billion market. Hmm really interesting okay so it's just about to ask you kind of a very general question which is sort of why should the regular western investor care about what's going on here with Chinese liquidity obviously there's implications for gold but I'm sure it's got bigger ones as well like China kind of healing itself obviously will be supportive of the global economy I imagine right. Yeah I mean China needs to heal itself but it needs China's got serious problems I mean I'm skeptical about the ability of the Chinese economy or the current Chinese economic model to actually to actually grow itself but I would create decent GDP growth over the next two or three decades I think is very difficult given the economic policy mix they've got they've got to do something they need much deeper and more robust financial institutions okay there's no further work that Chinese need to do I think they've been spooked by the threat of stablecoin and I think that you know in financial markets there's no unrelated events and I think that you know part of the spur for them to actually expand liquidity and try and get the debt problem solved is they see a big threat from stablecoin to the integrity of the Chinese yuan and the Chinese financial system because the fact is that you know at the moment the Chinese financial system does not have the capacity to absorb all this liquidity they're creating through the trade surplus and it has to they have to rely and lean heavily on the US financial system and that's clearly from a political point of view not what they want to do now that will be even that will be underscored several times if you've got stablecoin because it gives a lot of Chinese exporters a very obvious avenue to go down and you know the alternatives are you either put your money in the western banking system and risk being sanctioned in the event of some kinetic engagement or whatever it may be or you put it back into the domestic financial system and you get sanctioned or whatever by the PRC so you're you're damned if you do and you're damned if you don't so holding the stablecoin seems to be a pretty obvious thing and I'm sure the Chinese authorities are spooked by the idea that they may be losing even greater control over their financial markets and do they have does the Chinese government have any means to try to starch the flow of liquidity in domestic liquidity into stablecoins? far as I know not I mean they'd be you know that to the extent that this is in the hands of the state owned banks or state owned corporations they can clearly have some control but you know I don't think so they may try but you know if those if those dollars are offshore there may be a certain amount of agency on the part of Chinese private companies to actually stock up on stablecoin it wouldn't be surprised this would help you do okay so so in your mind it is a real threat to them I think it's a serious threat yeah I think this is what is it actually spurt them to action in fact alright well look Michael we're coming up on the hour here this is as always just super not only information dense and inside rich but just super fascinating is there anything that's really burning brightly on your radar that I just haven't been smart enough to ask you about yet? I think we've covered pretty much everything but I'd say that you know the point that we're that we're really making is that you know number one you've got an inflection in the global liquidity cycle likely it may have happened or it's about to happen we're pretty much there the the markets are reflecting that because commodities typically perform strongly at the peak and they're doing that equities I would argue are sort of laboring a bit and the early cycle equity areas are becoming more more volatile to do things like technology later cycle areas are beginning to you know to hold to get momentum so that's all corroborating that fact what is what this is being driven by is not fed tightening or central bank tightening it's really a redirection of the hose away from financial markets towards the real economy so this Treasury QE idea is becoming real that is driving the real economy stronger China is doing much the same thing and the PBOC matters more to the world real economy the rate of Chinese financial markets so that's going to I think underpin commodities so generally speaking I think you've got a stronger world economy this year and if that's the case and financial markets get squeezed then you've got an environment where I think lends itself to these contrarian views which says you probably are looking at a yield curve flattening that some states through the year later this year and you're also looking at potentially a stronger dollar or at least a firm dollar and not the weak dollar that many people you know continue to project so I think that we are out of consensus or in a small minority but that's because we look at different things one of those big liquidity? Well you make a super compelling case for those arguments I guess the only other thing I just will ask you to help me clarify here is given all that it sounds like you know a message for the average investor here is if we aren't you going through a down cycle and liquidity there is a certain amount of pain that one would expect to be taken in the financial markets during that down cycle and on average that pain is spread over around three years so kind of mentally gird yourself that it could be that long of a not fun time in the markets now it could be a lot shorter but the trade off there is it's more violent more painful so just again as an investor who's had a really good time over the past three years you know 20 plus percent returns more or less for the past three years in a row you would say hey don't expect that for the next three years yeah that would be my view I mean I'm not going to put my neck on say out and say three years but I think for the foreseeable future I would be cautious and I'm also stressed that I'm not that I'm not always bearish and in fact far from it we've been very bullish since you know late 2022 you know urging people to get into markets despite you know similar sort of contrarian feelings elsewhere and you were really at that point starting to wrap it I mean you were really early and really in a minority then and you were really really right right well that's gratifying to hear yeah I think now we may be wrong of course I mean you know I just say never say never but we've got to follow our methodology and our methodology is saying that there was a cycle and that cycle may be losing momentum right now all right well look again what I really appreciate about your work Michael is not only is it sort of you know educating and helping us track what you think is the true reality of what's going on but it's very prescriptive you know you've got those those asset charts that you showed earlier about what to hold at each phase and what not and so at your point you know you can be optimistic because your your framework basically gives us a play in every cycle of the every part of a cycle here of the liquidity cycle yeah it's it's a cycle I think you know if you come back to investing boom markets are about trends and themes bear markets are about cycles and we've got to be cognizant of that's of that cyclical downturn all right well look Michael can't thank you enough most important question for folks who would like to follow you in your work before your next appearance here on top of money where should they go well I think the easiest way is to look at our subset which is called capital wars I mean we write you know a number of pieces every week about what's development in markets and provide data some data there's an institutional service which is basically available either via cross-border capital dot com or GL index is dot com that's the the new rebranding issue kindly pointed out and there's a lot of data available to people through API feeds or Excel whatever for me one very data intensive all right they are all fantastic resources and as a subscriber to capital wars sub-stack I cannot recommend it highly enough so Michael when I edit this I will put up the URLs to those resources that you just mentioned so folks know exactly where to go folks the links will be in the description below this video as well again a reminder if you want to get access to Michael's charts here just sign up for our sub-stack it's going to be available to the premium members to do that just go to thoughtful money dot com slash newsletter and if you could please folks express your gratitude along with mine for Michael for coming on and just being so generous and all the analysis that he shares with us please show him that by hitting the like button and then clicking on the subscribe button below what was that little bell icon right next to it and if you've really been motivated to take action in your own personal portfolio based upon Michael's work here and you're you'd like to get some professional help in trying to figure out how to position for you know the different types of plays in the cycle that Michael has shared here if you don't already have a good professional financial advisor advising you on how to do that consider talking to one of the ones that thoughtful money endorses these are the firms you see with me on this channel every week to schedule one of those consultations as a reminder they're totally free just go fill out the very short form at thoughtful money dot com and these as I said these are totally free there's no commitments involved here it's just a service these firms offered to help as many people as they can Michael I can't thank you enough I'll give you the last word here as we head into 2026 which again as we just said might be a different kind of year than what folks have been used to for the past three years do you have any kind of parting bits of advice for the average investor who's watching this video I just say what's the cycle is going to be you know strong economy potentially weaker financial markets and that's the difference from what we've seen for the last two years all right well thanks for being so clear and so direct Michael it's so appreciated again I just so value you coming on this channel and your your partnership here best of luck in what I think is going to be a very interesting year great thank you say to you thanks and everybody else thanks so much for watching