If You Don't Get Global Liquidity, You Don't Get The Everything Bubble | Michael Howell

You're going to get a financial crisis. Over the last five to eight years is something will be everything bubble. And what are the major contributing factors that are moving in that direction? Policy makers throw liquidity at every problem. You think they're trying to fight this liquidity cycle and is it even possible for them to do so? Warren Buffett always says, "The liquidity tide goes out. You see you've been swimming naked." The way that we had this tension between the financial markets and the real economy, because I would think that that would be kind of the sweet spot for Bitcoin. Well, I'm going to show you two charts and give you some sense as to when Bitcoin will rally. All right, good morning, Michael. Thank you so much for joining me. It's a genuinely very exciting to have this conversation because in preparation, I started digging into everything that I thought could contribute to global liquidity one way or another. And very quickly realized I have no idea what's pulling us in which direction. So just to rattle off a few, we had the Fed just confirmed that it stepped into the yen market on behalf of the Treasury. France and Germany have crisis error-wide bond spreads. We've got private credit cracking with multi-year highs. We've got China on its 23rd month of straight gold buys, but it's always sit around 41. And Bitcoin, our little liquidity sponges quietly floated its way back up to the 80s. So honestly, I have no idea how to sort through all this. Right now, in your view, is global liquidity expanding or contracting? Well, I mean, the fact is that a lot of things are pointing in different directions, but I mean, that's not surprising given we're late in the cycle. The fact is the global liquidity in absolute terms is probably still rising. Okay, it's inching higher. But the fact is that in terms of momentum and underlying growth is clearly slowing down quite rapidly. And at the margin, markets tend to price growth or the growth rate of declining growth. And so you suddenly see these tensions emerging. I mean, the fact that the bond markets have been terrible in the last few weeks is pretty, you know, a clear sign that liquidity is coming under pressure. The fact to look at the Russell 2000 is pretty much in a bare market. I mean, that's more or less telling you as well that liquidity conditions are cracking. I mean, Bitcoin is clearly sending us something else, but I think it's kind of difficult to take too much from Bitcoin because there's a powerful trend there, which is kind of, you know, laying on top of what is probably a cycle as well. So Bitcoin may be a little bit different. It may not be the true barometer for the cycle that we may be expect. But, you know, basically a lot of other indicators are telling us very clearly that liquidity is rolling over. It's a late cycle. The credit markets, as you point out, are further indicators. So there we go. And if you look at the chart I've just put up of global liquidity, this is for the advanced economies. Well, pretty much the world, more or less. And what this is telling us is that the black line is looking at the growth rate, the underlying growth rate of liquidity. It's a momentum indicator. And what that shows is the cycle peaked in late 2025. And we've been moving down through this year. As I emphasize, it doesn't mean that liquidity in absolute terms is falling, but the growth rate clearly is slowing and the growth rate matters. And that's why you're seeing these emerging tensions. And the cycle as such is more or less fulfilling the pattern of recent years, which is a 65 month or five to six year cycle. - My lord, okay. So taking a look at this cycle here, when would you expect it then the kind of bottom if it continues the trend? And also what's driving this continuous pattern? Is it just a credit expansion until it basically is unsustainable and then kind of pulling itself back? Or what's going on here? - Well, I think that's a great question. My answer would be is that if you look at the frequency of the cycle, which is basically, as we say here, between five to six years, why five to six years? Well, the one factor that is of that sort of length is the average maturity of global debt. So what this is really telling us is that this is a debt refinancing cycle. And I think you've got to step back and say, well, what are financial markets really doing right now? And the fact is the textbooks tell us that financial markets are there to raise money for new capex, but actually most of the time these days, they're rolling over existing debt. And we've got a lot of debt. So something like 80% of all primary transactions in financial markets are basically debt refinancing transactions. And that's what this cycle is really representing. - Interesting, yeah, and I believe I saw a post from you not too long ago on Twitter that was highlighting the maturity wall that we have coming up here. That would be another factor than contributing. He'd tell me maybe about that and what's going on, what you kind of perceive in the future. - So what you can see on this chart is the debt maturity wall. And let me just explain what the debt maturity wall is. It basically refers to debt existing debt that needs to be rolled over. Now, this is not new debt. New debt comes on top of this. This is the old debt that basically is matured and needs to be rolled. Now, the reason that you've got this increase shown by the darker red bars is that during COVID, you'll see there's a big bite out of the chart when you get negative readings. And that's showing the negative increment in debt rollovers. The reason that occurred is that when we got COVID, policymakers came up with a brilliant idea of slashing interest rates to near zero, encouraging people to take on even more debt and further encouraging existing debtors to term out their debt into the late 2020s. And that debt clearly has a maturity date and that fixed maturity date is coming due, which is why you've got this extra debt coming back into the system. And that's going to put an even bigger load onto financial markets. Now, that is important because we've got to put this into context and I'm going to go back to another slide, which is basically showing the issue, which is this one of looking at the debt liquidity ratio, which is the key metric for understanding the stability of the financial system. Now, what this ratio is basically telling us is that in periods where there's lots of debt relative to liquidity, you get financial crises. Why is that? Because debt has to be rolled over and you need balance sheet capacity to do the role. And if the balance sheet capacity is not there, that's broadly liquidity. There'll be refinancing tensions. And the threshold that we show on the chart where you've got some sort of stability is around two times, 200% on the chart. Now, anywhere below that line, contrawise is saying there's excessive liquidity. Excessive liquidity finds its vent in asset price bubbles. And you can see what I've annotated on the chart over the last five to eight years is something called the everything bubble where we've basically enjoyed bumper liquidity because policymakers throw liquidity at every problem and debt has been turned out. So there's been basically a very favorable debt liquidity ratio that's changing partly because the liquidity cycle itself is falling down, is slowing down. And partly because you've got this debt maturity will coming back into the system. And that would suggest that the next few years are going to be a lot more difficult in terms of financial market investing. When you're having difficulty refinancing or difficulties in financial markets, is that money flowing somewhere else? And kind of what I'm thinking about, you made a comment earlier about CAPEX. And I would think that with everything going on with AI, data center building, all that sort of, all that hype right now, that we'd actually see expanding liquidity from CAPEX pouring into those ventures. Am I missing something or making a mistake somewhere along the way? - You're not missing anything. The fact is that all money that's anywhere must be somewhere, that's really the point. And you've got to think about there being two pools of money, one for financial assets, and a separate one for real economy activity. And if money is in the financial sector, it's not in the real economy, and if it's in the real economy, it's not in the financial sector. So what you've got now is you've got a transition where money is shifted from financial markets into new CAPEX spending for AI data centers or whatever it may be. That's using money that was previously sitting in treasury. I mean, just think of a lot of these companies, Google or whatever, used to sit on large, large treasury holdings. In other words, money in their treasuries. And that money has been paired down now to basically, to wheel out for this CAPEX spend. So you can say that money is shifted out of the financial sector, very clearly into the real economy. The other thing that's going on is that we've ended FedQE. In other words, the straight expansion of the Fed balance sheet where it was pouring money into the financial sector. And what it's been replaced with is something that I call treasuryQE, which is a subtle, but important, different conduit, which is basically the time the treasury is now spending money through procurement, whether it's defense procurement, whether it's purchasing strategic stakes, the critical minerals, these sorts of things. And what is happening is that is spending in the real economy, but it's being funded by bill issuance. So you'll notice that one of the things that Scott Besson Treasury Secretary has done has shifted the maturity profile of US debt issuance away from the long end towards the short end, the bill market. There's been a big increase in bill issuance. And the fact is that, although this is a one-kish point, is that the people who tend to buy those bills are banks or credit providers. If banks and credit providers are buying the bills, they're expanding their balance sheets, they're effectively monetizing the deficit. And that's the key point to make here. Is that that's another source of liquidity, it's primarily. going into the real economy. So if I shift on through these slides and I show you another chart a little bit later on, you'll see maybe this in action. Now, this particular diagram is looking at the global liquidity cycle. And what this is showing is the liquidity cycle as such, the one that we measure in red, global liquidity we saw the data earlier on. And the yellow one is what is notionally happening to the real economy. Now, you notice those cycles are out of step. The liquidity cycle proceeds to the real economy cycle. So if you've got an abundance of liquidity in the financial sector, it will ultimately spill over and drive growth. And then the momentum of growth will start to pull liquidity out of finance or more into the real economy. But you'll also notice that if you look at the period where the liquidity cycle is falling right now, that coincides with periods of economic strength. So you've almost got anticyclical movements between the financial sector and the real economy, which is why many people finally baffling to understand the simple fact that strong economies don't always have strong financial markets and similarly vice versa. You know, the best time for the stop market or the bond market is when the economy is near recession. And the worst time is when you're in a boom, and that seems difficult to understand. But this is the reason why you're getting that movement. If you look at the hard data, this is the hard data that is behind that. And this is showing, in black, the world business cycle. This is just an index of all major business surveys worldwide, the US ISM, the Tancan in Japan, the EFO in Germany, etc. And aggregated together to show the black line showing a recovery in the world economy at last. And the orange line is basically showing what the liquidity cycle is doing. And you can see that it's almost exactly out of step. So the reason that liquidity is going down, and the reason that a lot of financial assets are finding difficult right now, from bond markets through small cap to whatever, is the fact that the real economy is taking that cash that they've really been driving them over the last two to three years. Now I was going to ask that. It seemed like almost counterintuitive. I think ISM has been above 50 for the last nine months. And my initial kind of interpretation or thought would have been that I thought that would have maybe increased liquidity as these businesses are then going out there and creating new loans. But I guess it's they're they're drawing it away from the financial sector. Yeah, it's being spent in the real economy. I mean, there will be some, you know, feedback. So, in other words, if profits are high and those profits are not spent or if households savings are high, money will flow back into finance. But the margin, the key change is that the cash that was formally in the financial sector is now being spent in the real economy. Interesting. I'm curious how you view basically the recent actions with worst raising 25 bips in September, which was a just came out in the meeting that was a 12 to zero decision. But it looks like October, there's not going to be one from checking out the CME futures. And then we've got percent repeatedly coming in with these treasury buybacks. It I'm almost interpreting it now is like, do you think they're trying to fight this liquidity cycle? And is it even possible for them to do so? Well, the short answer is yes. I think you nailed it. I mean, that the currency is so important in the system that they basically need to manage it. And we live in a world that has changed radically from pre 2008, the GFC to now. And broadly speaking, collateral is critical in terms of backing any form of credit, something like 80% of all lending worldwide. And this is a world bank figure. So you can take it as almost an official statement is now collateral back 80% collateral back, which is a huge, huge number. And that collateral tends to be not just home mortgages, things like US treasury's German buns, maybe to some extent stocks. And these things are important. Now, therefore, what policymakers have got to do is to make sure that collateral is stable. And therefore, looking at something like the so-called move index, which is an index of bond volatility across the US curve is already critical to understand. Because if you start to get heightened volatility in collateral, that collateral is obviously going to be less effective. And dealer banks who will lend against collateral will basically give a bigger haircut to it. So if you see a big jump in, let me give you an example, if you see volatility in the in the treasury bond jump, which Klee has done recently, the move index has gone from in the 60s, around the 60s to recently as high as 110, 115 on the index, which is almost a doubling of volatility. That particular process would have meant that haircuts on collateral would have increased significantly. Now, that in practice would mean that if you take a treasury bond to a dealer bank and try and borrow against it, the dealer bank may well have said, okay, previously in just giving you rough figures, we'll lend 98% against that bond. So we'll take 2% haircut. If you get heightened volatility, they might stretch that out to, you know, 4% or even 5%. And what that means is, therefore, you're the collateral multiplier, the ability to lever up, collateral diminishes hugely. So one of the things that Scott Besson is doing, in my view, I mean, I don't know for sure, but my feeling is that what they're doing is trying to reduce volatility in the treasury market to maintain some stability. And therefore, what he's doing is doing buybacks. Now, buybacks, and this is getting into the weeds of the bond market, but buybacks basically take out what are called off-the-run treasuries. So if you have a 30-year bond issue today, in a year's time, it's a 29-year bond, which is not very liquid. Nobody really likes 29-year bonds or a 28-year bond. So they basically tend to fall in price relative to the shiny new issued 30-year treasury when it's issued. So what Besson is doing is basically buying these off-the-run treasuries. I mean, he's often doing it at 60 cents in the dollar, so it's great for the US taxpayer. But the media have completely muddled this up. And I think he's trying to sort of kink a nude like, you know, push yields down. That's not what he's trying to do. He's trying to control volatility. And that's the key thing. The other thing that's going on is that if you look at what the Federal Reserve is up to, the Federal Reserve is very keenly managing repo spreads. I said earlier on that we live in a collateral-based world, the repo collateral market is absolutely key to understand here. This is the, you know, the dominant feature of the financial system is stability in the repo collateral market. These repo markets are huge. They're the marginal source of financing for, you know, of wholesale money or wholesale entities. And then they need liquidity. And what the Federal Reserve is doing, you know, outside of the Fed funds rate, which is not, I mean, I don't really understand Fed funds anymore to be truthful what it really does. But in terms of what they're seeking to do is they're basically controlling the volume of liquidity. They're giving the banks. So they're targeting a level of bank reserves and making sure they didn't fall too low. In other words, if they did, there would be a problem in the financial system. So taking a look, I want to, if you can't, I get you to expand a little bit on what the repo markets are. Just for anyone who might not be in an even I store all these things at times. And I remember back we like the 2019 repo spike and kind of crisis there. Are we seeing any stress, signs of stress in the repo markets, in the repurchase markets? And then additionally, I was looking earlier, I think at the spread between sofa and the interest on bank reserves. And I think that's slightly negative at the moment. I was going to see if there was any sort of volatility. But as far as I can tell surface level, I didn't see any. Yeah, I mean, they're good questions. I mean, I'll, I'll take them. If you look at this chart that I've put up here, this is looking at the debt liquidity cycle. And what it basically says is that at the heart of the financial system now, the modern financial system, you've got debt and you've got liquidity. And the point is that debt needs to be refinanced. So this is a refinancing model. In other words, the system is all about refinancing. And if you don't get the refinancing, you've got a financial crisis. And every financial crisis in my estimation in the last 20 years has basically been a debt refinancing crisis. Now, if you look at that diagram, what it's saying is that debt needs liquidity for refinancing, in other words, balance sheet capacity. But then equally, liquidity needs debt because liquidity, in other words, credit is collateral based. And so you need good quality debt to use to post at your bank or dealer bank to actually get liquidity and get the borrow. So there's a sort of vicious or virtuous cycle depending which way it moves between these two elements. There's a nexus. And what you can see on the diagram is if you start to see problems in turning debt into liquidity, what you'll see is problems in the repo collateral side. In other words, the move index could spike higher or sofa spreads, what you've just mentioned, spread between sofa rates and interest and overnight reserve balances will tend to spike. Equally on the other side, if you get problems in turning liquidity into debt, you're going to start to see problems in terms of bond term premier. So government bond term premier will start to compress or credit spreads will blow out. Now, if you start to look at these indicators, what you're starting to see is some signs of tension emerging in certain areas. The move is spiked, sofa spreads are still compressed, term premier are starting to inch lower, credit spreads are finally beginning to blow out a bit. So you're starting to see some tensions [BLANK_AUDIO] emerging. And the Federal Reserve has got to be pretty alert to what's going on to make sure that there's not a crisis. Now, if we go on to what's happening in the repo markets, the sliner of this put up is looking at the sofa spread against interest on overnight reserve balances. And that is always, as you point out, slightly negative. I mean, that's just a feature of the trade because of the different nature of these securities. So for normally trades that are slight discount to interest on overnight reserve balances. But what you can see is a normal zone on the chart and a danger point, danger line, when that threshold is broken, you get big attentions. That threshold was broken last at the end of 2025, when the Federal Reserve made a wrong decision, wrong step. And they were talking boldly, as you probably recall, about shrinking the size of Fed balance sheet significantly. That was a foolish move because they clearly can't do this in this kind of world. They tried to do it, but repo rates blew out. And what they had to do was to correct it quite quickly. And if you look at this chart, which is maybe again, getting in the weeds a bit, this is looking at excess reserves of banks, which is shown as the orange line. And that same sofa spread is shown in black inverted. And basically what it's saying is that there was the decision they took last year to reduce bank reserves significantly to shrink the balance sheet. And what that calls directly, as you can see from the data, is this big spike in repo. And now what they've done is they changed the policy. They've introduced a new acronym called Reserve Management Purchases. And those extra, there's another form of QE, but that's another injection of liquidity back into the system to make sure the bank reserve stay flat. So behind, you know, the scenes of Fed funds going up 25 basis points, what you're actually looking at here is a very managed environment in the repo collateral markets. 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But for the most part, the bulk of collateral that is that is posted tends to be what's called pristine collateral. So it tends to be US treasuries. It can be bills. It can be notes or bonds and it can be German buns as well. Those tend to be popular areas. And it's much more about the volatility of those instruments. I mean, that's a key factor. And so if you've got a very volatile bond, you don't know what the price is going to be, you know, in three months time or whatever it may be. And therefore, you've got to give a bigger haircut as a cushion against that uncertain price. And that's what he was going on. The reserve management purchases remind to me, like when you said a new acronym, it seems like every time there's a problem like we have, we have the tools, we have it all under control and then something will pop up and we need a new tool. There's something else that we have to add there and talked about this financial crisis, always being kind of a debt refinancing crisis. I'm curious with everything that you're looking at expecting the liquidity side, the liquidity cycle to kind of shift here, are you anticipating that we're going to see some sort of a crisis somewhere pop up in the financial markets? Well, you could never say never Warren Buffett always says that when the liquidity tide goes out, you see who's been swimming naked. And that's always that's always a good analogy to think of. I'd have to say that compared with 2008, there's not the same leverage in the system. And what's more policy makers are much more alert to what the issues are. So I don't, I mean, I think what they're doing now is that deliberately managing liquidity and collateral in the system. And therefore, they're trying to maintain integrity in the markets. So I don't think there'll be an accident, per se, or deliberate forced accident of whatever you'd like to call it. But what you may, what you're still seeing is tightening by the wash fed. And I think that's an important point to make. What I'm going to do is just shift on to another chart, which hopefully explains what's going on in this regard. So if you can see this chart, this is looking at two-year yields and sofa rates. So sofa rates are the overnight rate in the repo market, which is really the sort of the central rate, which more or less everything really prices off. And the orange line is the two-year US Treasury note yield. Now, as long as I've been in this business, which has been a long time, the two-year note has been a very, very good predictor of short-term money rates. It tends to lead both on the upside and on the downside, as you can see here. Sofa didn't exist in the history that I've shown. So I've spliced it with euro dollars, but you get the same message. And sofa, of course, was a replacement for the euro dollar market. So it's quite a legitimate thing to do. What you can see recently is that two-year Treasury note yields have jumped relative to sofa rates. That would suggest the rates are going to rise. The market is expecting that. And that's what the market is really pushing the Fed to do. In many cases, the Federal Reserve is following the markets here. It's not leading. And there's a sort of great misunderstanding that Federal Reserve sneezes and everyone else sort of catches a cold. It's much more the other way around. The Federal Reserve is reactive, really, to the markets in many cases. Now, if you look at this follow-up chart, what it's showing is the spread between sofa and two-year yields. In other words, it's just taking two-year yields away from that sofa rate. And the black line on the chart is looking at the previous tightening under chair power. And this is really the, it starts to gather momentum around the end of 2021 and reaches sort of peak tightening or the trough on this chart peak tightening sometime around about the first quarter of 2022. And between that period that I've indicated there, Wall Street saw a very significant sell-off, a 25 percent sell-off. And then you started to see liquidity conditions improve indicated by that black line improving, gaining, gaining height around the back end of 2022 when the bull market restarted. So that V shape is pronounced. And where are we in comparison to that? The orange line is basically saying as far as I can see, we're proceeding at a half pace. So Chair Walsh is tightening. There's no question, but he's not doing anything like as aggressively as Powell did. Would you anticipate then that interest rates are going to continue to rise from here and does that cause, does the cause major problems at some point in time? Like I'm wondering, if the two years suggesting that the Fed is going to follow it upwards and we have the 30 year hit like over 5.7, I think the 10 year was at like 5.3. I think even about, but maybe the, it goes back to that real economy versus the financial economy. Like if mortgage rates on a 30 year mortgage are hitting like 8 percent, I feel like that's going to be a wrecking bolt some point in time. But perhaps the like the broader credit markets in the year and a little market are so large that the American consumer doesn't really matter as much. Yeah, I think that look, I've just changed. into chart, and I put up a chart of U.S. rights. I mean, this is a long-term history going back to the 50s. And what it shows is nominal GDP growth. So NGDP, a four-year rolling average of that. So it's giving you the underlying trend in the momentum of the economy, obviously, including inflation and real growth. And the orange line on that chart is basically, it says risk-adjusted treasury yields. That's a bit of a wonky statement, but what that really means is that that's the underlying average of policy rates over the term of the bond over the 10 years. So it takes out any term premium compensation for uncertainty. And it's just saying this is what the market is assuming. Average interest rates policy rates are going to be over that term. Now, you can see that there's a pretty tight correlation there between those two series. There wasn't in the very early 50s, but that was when the Federal Reserve had its hands tied by the treasury, and it was not independent. And then I've just marked where the treasury Fed accord in '51 came out when the Federal Reserve was able to run an independent policy. But you can see through that period, basically, Fed policy has largely matched the underlying tempo of the economy. Now, it looks to me that what you've got is, I mean, this is, we're always outdated by events, but risk-adjusted yields have jumped up again in the last couple of weeks. So we're getting pretty close to that black line now. That's sort of 6% threshold bearing in mind that term premier or my estimate is slightly negative. So yeah, that's more or less saying that yields, the dotted line there, is saying that yields will probably get up to about, you know, five and a half, five and three quarter percent, although they're abouts effectively. So that's really the backdrop. So we're getting very close to the top. And as you rightly say, you know, this environment is one where high mortgage rates, high treasurer yields, heightened bond volatility are not great for the economy, factoring that oil prices or more particularly diesel prices are sky high, diesel are at the equivalent oil price of about $165 a barrel. So, you know, you've got a lot of pressures. So it would be crazy to assume that the economy continues at this pace. It's got to attenuate. And in my estimation, you're gonna see slower growth in 27. It won't be a recession, but it will be an inflection downwards in the economy. And that is gonna be good news for the bond markets. - I'm just gonna double tap on oil for a second there. 'Cause I'm curious. So I don't know how much it necessarily contributes to our actual liquidity. And again, more kind of credit creation in the system. But if I understand correctly, things like commodities and oils on tankers can be used as collateral for loans. And so when we have events like the Street of Hormuz, where there's just less of it flowing, I imagine that has a negative impact on liquidity as well. - Correct. - Correct. - And particularly if you get high oil prices and this inability to collateralize some cargos, that's a big negative, yeah. - Interesting. Is it significant enough to really kind of show up in your broader global liquidity measurements or is it more just like a-- - It is, it is. - I mean, absolutely. Oil is a very, very big user of liquidity. For sure, there's no question. I mean, think of the inventory that's held, et cetera. The size of the trade world, why is huge? Unquestionably important. - Beautiful. I want to drill down a little bit more on what's going on kind of in Europe and in private credit, but even kind of before getting there, we have the six to five year kind of run. What is it that you would be looking for to note when we're maybe at the bottom of the liquidity cycle and kind of expected to start to pick up again? What are those signals or indicators? What are we looking for things to change? And the reason I'm thinking about even just in the Bitcoin perspective is, my understanding is a lot of people kind of view Bitcoin as the liquidity sponge. If there's excess liquidity, it tends to go on a little bit of a run. So if I'm interested in holding Bitcoin, that'd be something I'd want to pay attention to. But maybe you even disagree with that framework of how Bitcoin behaves. - No, I think Bitcoin is a liquidity sponge. I think that's for sure. And I think that, you know, one of the interesting questions is basically, where are we in the fixed income cycle? I'm going to show you, you know, two charts, which may well relate to that and give you some sense as to when Bitcoin will rally. I'm a bull of Bitcoin. I think the Bitcoin will do extremely well over the medium term. I'm not so convinced it's going to do well over the next three months. That may be, I may be wrong on that. But I just think I can see further tightening and I think that's going to be a way, that's going to weigh heavily on the price. Now, the chart that I put up in front of you is looking at the cycle of world central bank liquidity, which is the orange lines and index, showing the online growth rate of what central banks are doing. And the black line is well, the world business cycle inverted upside down, but advanced forward by 12 months. So what that more or less is telling us is that policymakers react to the temper of the economy with a lag. Now, if they start to see strong economies as that chart is inferring because the black line is falling down, the inverted black line is falling, that would say that there's going to be more tightening coming through. And that's more or less what we're suggesting. And that's clearly an environment where it's not great for ultimately for economies because that will be the seeds of ultimately decline. It won't be great for equities. And as I said, I think if you look at the credit markets and maybe the small count markets, they're already beginning to feel this pressure. The other thing, which is to note, is looking at the other side of this, is to look at what's happening to the yield curve. And this is focusing on the US Treasury curve. And the black line here is the average slope of the Treasury curve estimated by looking at the average or the area rather under the term structure. And the orange line is our index of US liquidity momentum advanced by nine months. Now, this chart starts in 1990. It actually, there's a much longer history which goes right back to the '70s. This was one of the first examples I used of how important liquidity is, well, I'm as a Solomon Brothers. And it was used to understand the fixed income markets and trade the fixed income markets. And what this is basically saying is that as the liquidity cycle expands, the yield curve steepens. And as the liquidity cycle contracts, the yield curve tends to flatten. Now, what you're likely to see is a continual yield curve flattening, despite the sort of the pickup in the last week or so. But you'll see a further yield curve flattening. And that flattening will turn from a bearish flattening with longer yields going up to a bullish flattening with longer yields coming down. And then the curve will then start to steepen again, which will be very clearly a risk on move. Now, what I would say is that I would like to see, or should be 100% convinced of another big bull market in Bitcoin is to see that black line start to pick up definitively. In other words, it needs to form a bottom and then start rising again. I think you might be able to get in earlier because I think the phase of the market where you start to see a bullish flattening of the curve. In other words, the later stages of this run could still be very profitable. And I think the thing to start thinking about is what is the sensitivity of Bitcoin to the bond market, which is something that people haven't really looked at in detail. But I think it's a key question to answer. And in my view, Bitcoin is a very long duration investment, which means that if you start to see yields coming down, it could move significantly. - Okay, I want to parse out a few things there to make sure I got my head around it correctly. When we say the bullish steepening, that's because there's bullish for bonds, right? Not necessarily bullish for equities. - Oh, yeah, yeah, yeah, yeah, absolutely. - And then is that basically reflecting lower growth expectations? Is that why we're getting that shift? - Well, it's much more, you could argue that. That could be an argument, but it's basically because liquidity is coming down. The technical reason why that's happening is that term "premier" are basically compressing. Now, I'm going to get into the weeds here, but broadly speaking, if you look at a bond, a bond has two components, two moving parts. One is rate expectations. And I'll always what the Federal Reserve is going to do over the term of the bond. And the other is an uncertainty element, which is the term "premier." And the term "premier" is the compensation that investors get for holding a bond through that uncertain period, okay? Now, essentially, that term "premier" reflects supply and demand factors. And it's much more important that the longer end of the market than the front end. The front end of the curve tends to be all rate expectations. The back end is dominated by term "premier." Now, if I show you this chart, which is looking at world term "premier" and world policy rates, what you can see from that is that the driver of bond markets over the last, this is daily data since 2025, but the main driver of yields going up has been that policy rates, the black line, have been basically moving higher. So that's explained something like, well, a well over a hundred basis points of the increase in world interest rates were bond yields over the last 18 months. The orange line is looking at term "premier" and throughout the turmoil of the last few weeks or months or whatever, with turmoil in the oats market in France, in the British guilt market, concerns over the treasury market, what the JGB market's done, actually term "premier" globally been remarkably stable. And that would suggest if we go into the color of that, which you can see in the following. chart. And you start to pick out the various bond markets, the US Treasury market, which is the bright red line at the bottom, has been remarkably stable. So all these people that pour scorn on the Treasury, saying it's, you know, lost its safe haven status or the dollar as toast, are completely offside here. They've got no idea what they're talking about. Basically, the US Treasury market is rock solid. It's the, you know, the main safe asset in the system. It hasn't seen the deterioration in its quality. And if anything, if you look at that chart, you'll see term premier are beginning to fall, which is a very bullish sign for the bond market over the next six to twelve months. Yeah, I wanted to expand upon that one kind of going into the Euro dollar market a little bit, because then things just get like beyond my scope in the sense that. So what I'm thinking about you mentioned the gilts. And I remember we had the Liz Trust moment back in 20, Jesus, was it 2022? I completely lost the timeline. Yeah, the Liz Trust moment, where the UK gilts were at 5%, or now up at 6% and things are still kind of chugging along. Now, like I highlighted in the intro, I'm looking at it right now, at least this figure I have in front of me, the difference between the 10 year German and 10 year France spread is 139 bips. So Odesbunds, gilts, I'm wondering if we can have the implications would be it seems like Europe is not in the position that America is. The economy is not doing as well as America. You've got the added stress of the Russia Ukraine more and what's going on the Middle East and problems with energy getting in there. And I'm almost wondering if you would expect to see flight from Europe and foreign buyers, foreign holders into the treasury market kind of having Europe yields go up and treasury yields come down. Well, I mean, okay, let me unpack that. If you look at this chart, it's showing bond term premium across the world. Okay, you've got a core group of markets, which is shown at the bottom of that, which is the Chinese market, the US treasury market and the German Bun Market, which have the lowest term premium worldwide. And you could say those are sort of core collateral because basically government debt seems to be high integrity there. Then you've got a spread above that where you've got the British guilt market, which is the black line. You've got the Japanese JGB market, which is the broken black line. And then you've got two other markets, the Swedish government bond market, red, and you've got in orange, the oat market in France. Those other markets are premiums, term premiums, to the other three, basically because of their fiscal risks. And you rightly noted that the Oat Bund spread is widening and you can pretty much see the reason for that on the chart because you've seen this secular increase in French term premium relative to German term premium, which of anything of falling, not rising. Now, what does that tell us about the world? It tells us that you know, want to be taking a lot of fiscal risk in these in these economies, in those in the upper and the upper four, they've got funding problems clearly. With the exception of maybe France, they're not really reserve currencies anymore. The dollar has clearly got that status. But the key thing when you start unpack the Eurozone is that it's an unstable system. The more that people or the quicker people realize this, the better. There's no safe asset in the Euro system. This is the problem they've got. So when the sort of proverbial shit hits the fan, what happens? Everyone goes into the goes into the German Bund, right? Which is not a euro asset per se. It's a national German asset. And so what happens is that Bund yields go down and all the other peripheral yields go up. Now, what draggy the former ECB chair concluded or announced some years ago was some a statement called whatever it takes. And draggy said, we're going to do whatever it takes to basically make sure these spreads don't widen. And what whatever it takes means is printing money. So that's the solution. So every time there's a crisis in the Eurozone, the Bund will benefit. People will go into Boons and there'll be money printing. So the euro will devalue and look, what's happening right now? It's an unstable system. Yeah, I'll say Dix here. I think I last to look this up at like 101 right now. How much does the, because it's it's again, so much of this is hard for me to try it on packed and like follow at times. But the added complexity of their issuing debt between different countries and a currency that they don't control as compared to the Treasury. Yeah. I guess. Yeah. I agree. But you're not you're not going to get there's no political consensus, but basically having European, European Y dead. And the reason is that A doesn't trust B and B doesn't trust C. And you've got the, you know, the sort of the ten, the point of tension is that if you look at public debt, France is public debt to GDP ratio is way way above Germany's. So, you know, that's, that's just an inconsistency that just can't go on. The Germans, the Germans are ultimately going to have to pay for it, but they're going to realize that some stage, this is not a great deal. I don't think the, the Eurozone is long for this world. I don't think the EU can hold together, particularly with immigration problems. I feel like the Eastern European countries and then Germany getting pissed off the constantly flipping the bill. I don't know why it would. Yeah. Well, I think that's right. I mean, I think, I mean, in many ways, my view, NATO is the glue that holds the EU together. And if there is questions over the integrity of NATO going forward, you've got big problems for the Eurozone. Completely agree. Bitcoin well, you know them. You love them. Long time supporter of the channel. 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What are your thoughts on what's going on specifically with the Japanese yen in that market? Well, I think there are a number of things to say. I mean, one is that you've got to understand maybe where I mean, maybe I can shift to another slide to try and show what's what's going on in Japan as a couple of things. Whoops. First slide is this one, which is what we've got to try and understand in terms of the Japanese economy. The orange line is that same metric that we looked up before, which is the risk adjusted 10 year bond yields. And otherwise, it's policy rates in Japan over 10 years without the term premiering. And the black line is four year rolling average of nominal GDP growth. Now, this is the astonishing on stark fact, is that Japanese nominal GDP growth is testing 5%, whereas if you go back through the decade of the 2000s, it was negative. That's a big, big change for a big economy. And consequently, asset prices have to reprise. The bond yields have to go up. Now, that should mean that Japanese policy makers force interest rates up, and that's pretty much what's going on, but they're doing it a re-slow pace. So they're behind the curve deliberately, I would argue, they're deliberately behind the curve, they're behind the curve. And so, what is the, where is that tension expressed? It's expressed in a week a year. And that's some people's going on. So you've got that process. Now, is it, is the Japanese economy in a good or a bad state? I think that's another question, a separate question. And my view is in a fairly good place, because I think if you start to move on to, I'm going to show you this chart, if I can get it, get it there. So, okay. So what I've put up here is a chart that looks at the debt liquidity ratios between China and Japan. The debt liquidity ratio is the key ratio for every economy to manage, because if you don't have the liquidity, you can't refinance your debt. And most of these economies have taken on huge amounts of debt, not least Japan. And actually, the other country on that chart is China. So we got to think about China. Japan had a rising debt liquidity ratio and that has really saddled the economy and it basically caused Japan to have this lost decade. What you can see on the chart is that around 2012, that debt liquidity ratio started to collapse and it's fallen back to levels which are well below historic levels. So in all words, Japan has got good liquidity and it's got through most of its debt problems, devalue its debt effectively. So there's no big debt problem in Japan anymore. How did they do that? They did that with Abonomic restructuring of the economy and they did it through the Bank of Japan buying Japanese government bonds aggressively, expanding its balance sheet, printing money and by that route devaluing the yen. And so what you can see there is the process of devaluation of debt through a much weaker yen. And that is a solution that has been applied through history to debt crises. Think of the US in the 1930s did exactly the same thing. Look at what the Scandinavians did in the 1990s, exactly the same thing. Every debt crisis is ended by devaluation of paper money because you cannot default debt in a credit money world. So you have to devaluate. And that's what Japan has done very successfully. Now that would mean that Japan's economy is actually quite a good place. In my view, as long as being, don't think so much about MAGA, make America great again because Japan is going to be made great again first because it's really the bulwark against China. So I think the Japanese economy is not a bad place to think about structurally investing in. The interesting corollary to that is then what about China? Because if you look at that orange line, China is basically Japan 10 years later. And we know that China is struggling under a huge debt burden. It displays all the characteristics of an economy that's suffering debt deflation. I'm going to show you a chart here, which is emphasizing that. This is the 10 year US government yield in black. Well, we know what that's done. It's basically broken five and it's testing five and a half as we speak. And if you look at the orange line, that is the Chinese equivalent 10 year government bond. Now that is a huge gap, which I depict on the next slide to show the gap between US and Chinese 10 year treasury yields. That is reflecting the fact that the US economy is growing significantly faster than the Chinese economy because we know 10 year bond yields from earlier charts match the underlying level of nominal GDP. So if this is correct, the Chinese economy ain't growing at the figure they say, which is four to five percent real. It's more likely growing at something like about one percent real. So the Chinese economy is really suffering and it's suffering under that debt burden. So they are facing a lost decade like Japan did. I would imagine given China's geopolitical aspirations, they can afford to do that. So they're going to have to get rid of that debt burden. And why not go the same route as Japan as this slide shows and devalue your debt. If you devalue debt, how do you do it? You've got to print money. So we've got to watch for the Chinese printing money. And this chart is showing you in the black line, the people's bank of China's balance sheet, what it's done. And you can see between 2022 and now it's virtually doubled. That's a huge monetary stimulus. There's obviously cost to that. And what is the cost? Look at the other line on the chart, which is the price of gold. The Chinese are buying gold with alacrity, retail investors in particular. The Chinese government is buying gold every single month. This is the process that is being triggered by a monetary inflation in China. It is not affecting the cross rate between the dollar yet. For the simple reason they've got this barrier, which is capital controls, huge foreign exchange reserves and compliant state banks, which is really allowing them to have a dual circulation system. But the fact is that if China prints more money, what you're going to see is increasing the increasing price of gold over the medium term. If I understand correctly, China's accumulating a whole bunch of gold and then they're going to devalue their currency against the order to deal with the giant amount of debt that they have there on hand. Well, I think what you can say to be accurate, as best I can be accurate on this, is that trying to engineer an internal devaluation of the yuan, trying to get domestic prices and wages up. So the real value of debt diminishes significantly. That's the policy. Will that affect the exchange rate? Well, we would have said, in normal circumstances, yes, the exchange rate should tumble under that policy because capital flows would basically shift accordingly. But you've got capital controls in China, as the China is basically cut off from the rest of the world in that regard. And they've got cushions through four ex reserves and what the state banks do. So it's quite possible they can have their cake and eat it at least for a long time. And they can maintain the dollar yuan cross for geopolitical reasons because clearly that's a very, very sensitive cross rate. And at the same time have domestic inflation. And I believe they've defended that the USD yuan rate for quite a while here as well. To at least remember, maybe months ago, looking at it, it looked like that was a PBOC was actively defending the yuan price. Yeah, I mean, they are, I mean, they're clearly manipulating it. That's for sure. But in my view, I mean, it's not a consensus for you by any threshold of the imagination. But I think that if you took off capital controls, the yuan would devalue significantly. And that's really, you know, all you need to know, it's a currency that should fall, not rise in value. They're engineering it to stay up. Very interesting. I want to take us in a bit of a weird direction because it kind of reminded me something as well too. Do you ever think that you would see something similar in the US market where you'd almost have like a domestic dollar versus an international or offshore dollar as well? And what I'm thinking about is like how stable coins come into play with all this, right? This friend of the show, Dr. Jeff, I was talking to you and you mentioned even the idea of stable coin buyers having a different interest rate, a lower interest rate than say normal treasury buyers in order to help deal the debt situation. But I wonder if you could see almost like an American stable coin and then an international one and having kind of different, different prices for each? Well, I mean, in the sense, you know, maybe that is the way the world is evolving because under, under the genius act as I, as I recall, the original legislation that stable coin cannot pay interest in the US, but they can pay interest offshore. And, you know, I suppose one can dance on the hand of a pin say there are various ways around that through rebates or whatever it may be. But ultimately, the legislation is saying that there is an ability to pay interest offshore and not on shore. So maybe de facto, you have what you already have this situation. You already kind of have it laid out. Jeez, it's just incredible. So then I'm curious as we're kind of going forward here, one of the other things that was pointed out to me again from wonderful Dr. Jeff Ross was this idea. He's got this kind of framework in terms of three burners is how he sets it up in terms of Bitcoin's kind of price action. He's looking at global liquidity and your name directly came up as where he's getting his read on global liquidity. He's looking at manufacturing and he's looking at speculation in kind of the space. And what I'm wondering from this psycho perspective, the way that we had this tension between the financial markets and the real economy, is there a position on the cycle where you have basically manufacturing would still be high, but liquidity is again starting to rise again off the bottom, because I would think that that would be kind of the sweet spot for Bitcoin. Yeah, I think there are, well, let me sort of try and explain how I see it. Okay. And I think what, I mean, hands up here, we're sort of treading new grounds. So it's very difficult to be definitive because Bitcoin clearly is a new asset. And it hasn't had, it hasn't really been stress tested through many episodes. Now, what we tend to look at is to go back to the liquidity cycle. The liquidity cycle isn't a downswing. And that should, by definition, be damaging the value of monetary inflation hedges. And I would class Bitcoin and gold among those among those assets. So a downswing of the liquidity cycle should not be particularly helpful, although I recognize quite fully that there is a strong trend here. If you like an S-shaped growth curve where people are actually putting more Bitcoin and more crypto into their into their portfolios. And that will, you know, mean and rising trend. So that may dampen the downward swing of the cycle. Now, one of the, or the two other points that are worth mentioning in this is number one, if you look at what happens in China, the PBOC is expanding liquidity. And most of that liquidity, as I indicated, is going into gold. Now, Chinese investors are forbidden or legally banned from crypto. And therefore you would expect that the PBOC liquidity expansion has very limited effect or no effect on Bitcoin prices, but I did do a test having made the statement that there was little effect. I thought, well, I better cross-check this. And actually, what you do find is that Bitcoin benefits, I don't know how, but it benefits from expanding Chinese liquidity. Now, whether that tells you there's a capital outflow, which is not recorded, or whether the Chinese managed to sneak money into Bitcoin or whatever, I don't know. But the fact is, if the PBOC eases, it does have a positive effect on Bitcoin. The other factor, which I've also debated with investors in crypto, is that the move from FedQE to TreasuryQE in theory should be a negative factor for Bitcoin, because money is coming directly out of the financial sector and going into the real economy. Now, I tested that data as well. And actually, what you do find is this move to TreasuryQE, in other words, the monetization of government spending seems to have a positive effect on the Bitcoin price. Now, whether that's because Bitcoin investors are benefiting directly from that government procurement, I don't know, whether it's because they're factoring in a faster inflation rate longer term, I don't know, but there is a positive effect. So, I think what you've got here is a number of different seeds or acorns of expanding liquidity that could actually mean that Bitcoin does quite well in 2027. Very cool. Very interesting. It's funny. The first thing that came to mind, and I have no data on what's still going on there, is if you remember back in the 2021 or 2020, we had the China mining ban, where they were banning Bitcoin mining. Now, I imagine that some is still going on there. But my interpretation of that is that was basically a roundabout way of getting capital around the capital controls in other country. I can't buy Bitcoin, but I can take my yuan by a bunch of electricity, throw it through the miners, and now I can support that wherever I need in the world. And I wonder if it's still being used some roundabout way, maybe in the same sort of people are kind of mining under the radar as a way of funneling capital out of China. It could well be. The private sector, as we know, is innovative. So I'm questioning whether I'll try something. Beautiful. Michael, was there anything else that we need to hit on or that we didn't cover today? It's really important for the audience to be aware of. We didn't really get to it, but any thoughts, maybe even on AI or private credit, or is there something else that's worth flagging? Well, I think on both of those things, I think on the AI question, I mean, there's absolutely no no issue about whether AI is going to be important in the future economy, clearly it is. I think the question or the uncertainties, what is the profitability of the companies that are delivering it? And that matters more for the investor, more than from the user in the real economy. So there'll be huge economic benefits, but would you be able to make money out of the investments? I'm always reminded of the fiber optic story of 20 years ago in global crossing, where global crossing was sort of the darling of the market, it was a new issue, it came a big new issue at the time. And within five years, global crossing was in chapter 11, margins are claps by 80%. fiber optic is still there and still doing a great, great job. Everyone's benefiting, but the company doesn't exist. And I think that's a sort of sanitary lesson to think about in AI, because you may will get price deflation, but the price deflation really hits the supplier. That's the main question. On private, on private credit, there's a lot of, I mean, by definition, we don't really know. I sense that there's not a great deal of leverage in that space, but I don't know for certain. I don't think it's quite, it's not going to be as catastrophic as what happened in 2008. And as I said before, I think the difference between now in 2008 is the fed is basically over, looking over the financial system with a lot, lot more detail and clarity than I had then. And so there's not going to be, let's say an unforeseen accident in the way there was in 2008. Final thought is, you know, what do you got to do in terms of investing? My view is you've got to start pairing down risk. You've got to start thinking about maybe more fixed income in portfolios. You've got to be positioning as well, looking into the future for the next upturn in the cycle. But while I would be looking at pretty closely, some of the indicators I've looked at here, even if you can't get liquidity data, you know, as we do, or you don't want to buy it from us, what you can do is look at things like the soap, the yield curve, that may be a trailing indicator, but it's a decent indicator. Look at sofa spreads, look at the moving necks, look at credit spreads and look at term premiere. Those are all warning signs of what could be going wrong, or ultimately what could be going right. Beautiful. Absolutely. Love it, Michael. Thank you so much. Tell me where can everybody go to follow you, your work, find all that good stuff, find these charts. Best way to get to us is sub stack, capital wars, it's called. And that is named after a book I wrote about five years ago, about capital wars. Or if you want the institutional service, go to our website, which is GLindexes.com, where we supply data. If you enjoyed this episode with Michael, how please do hit that like button and check out last week's episode with the rational root on Bitcoin on chain data, I know you're going to love it.