Speaker 1Hello. On behalf of IRF, welcome to this IRF podcast. I'm David Osman, and with me today is Michael Howell, the founder and CEO of Global Liquidity Indexes. Our title for this podcast, Implications of Collapsing Global Liquidity. IRF promotes a broad range of top quality independent research and alternative data providers from across the world, both macro and micro. Some are global, some are country specific, some are sector specific, many are stock pickers, and all are investment related. Michael Howell is the widely recognized pioneer of the concept of global liquidity, and he's also the founder and CEO of Global Liquidity Indexes, and author of the influential book, Capital Wars, The Rise of Global Liquidity, which was published in 2020. GL Indexes tracks global capital flows, assessing their impact on markets and economies. The philosophy underlying GLI's research was informed by Michael Howell and his team's long association with US investment bank Salomon Brothers and its trailblazing work in understanding and trading fixed income and forex markets. GL Indexes provides asset allocation and risk management services. Many of the key global investment managers and multi-asset funds, central banks, and several sovereign wealth funds use GLI's research and data. Michael, welcome. Let's begin with a brief introduction to the service that GLI's research and data services provide to your various clients. Well, thank you, David.
Speaker 2Thrilled to be here. GL Indexes basically came out of cross-border capital that people may be more familiar with. GL Indexes focuses very much on research and data, and that's really the defining difference. We put a lot of work into gathering data on liquidity across 90 countries worldwide. That's now a deeply systematic process, so much so that we've actually devised in the last 18 months after several years of research a daily now-casting system where we can basically track our latest releases from around the world to give us a real-time measure of what is happening on liquidity. We write narrative descriptions of what's going on in the data, in their implications, and the service basically is either a pure data only, so we can give clients access to data feeds through API, for example, and or we provide what was traditionally written research, but research you can download on what is happening and how we think that affects global liquidity. We also have a monthly webinar that we explain data development. So that's really the package. You can slice and dice it in whichever way you want, really.
Speaker 1Michael, let's start with your analysis of the global liquidity cycle and the reasons why you see it moving down in the near term.
Speaker 2Okay. I mean, that's really the crucial point, I think, right now for asset allocation. The movement of liquidity is cyclical. Let's be clear about that. It tends to move in a five to six-year cycle. That cycle is pretty much a debt refinancing cycle, and that explains the frequency of five to six years. It's had a very, very good run upwards. The low of the cycle was in third quarter of 2022, and it's been rising strongly through until the fourth quarter of 2025 when it began to inflect. That inflection reflects slowing growth, as of now, the absolute level of liquidity in dollar terms has not fallen, but it's really sort of flatlining. But principally, the growth rate has really slowed quite markedly, and that's important for asset pricing. So we think that that cycle is likely to keep going down. It's been moving down for nine months now. There are some signs, maybe tentative signs, that we're getting near to a bottom, but that bottom is yet to be defined. And essentially, the downswing is now affecting asset markets in pretty much every way. So I think that's a good point. That's pretty much the way that you would normally expect. For example, gold and precious metals peaked at the beginning of the year. Bitcoin peaked around very late 2025. You've seen a lot of damage done in small cap. Mining stocks have clearly performed badly. There's been a lot of rotation recently into defensive areas, such as healthcare, consumer staples, through that period. And the yield curve has basically flattened through this year. So those are all things that we would associate with a declining liquidity environment.
Speaker 1So let's explore in more detail, what are the implications of a downturn in the global liquidity cycle for the world economy in 2027?
Speaker 2I think I'd say this in terms of sort of broad outline, that liquidity tends to lead financial markets by around about six to nine months, but it tends to lead economies by about 15 to 18 months. So a slightly longer lead time for the real economies. What you'd expect is since that inflection point in late 2025, you'd expect to see a little bit of a downturn in the global liquidity cycle. You'd expect that 2027 would see a year of sharply slowing world economic growth. And therefore, that's what we envision upcoming. So we believe that you're going to see the slowdown and the inevitable consequences for bond markets and equities.
Speaker 1And how would you describe the relationship between global liquidity, interest rates and
Speaker 2bond yields? Well, it's complex, and it's certainly not as straightforward as many people would infer. We tend to think that we're going to have a global liquidity cycle, and we're going to have a global liquidity cycle. So we think that interest rates are more the sort of derivative of the process rather than the starting point. Liquidity is really the engine that starts everything going. That isn't necessarily solely in the gift of central banks. The financial system itself can create liquidity or even destroy liquidity. But effectively, the transmission is that global liquidity tends to affect term premium in markets, first of all. The reason for that is that basically, if you've got a very liquid financial system, the risks of default are very low. And therefore, if you've got a very liquid financial system, the risks of default are very low. And investors are more prepared to take risks, and they move away from safe assets like government bonds. And therefore, term premium basically, in that environment, tend to widen, putting upward pressure on the long end of the market. That process will then affect the momentum of the economy. And that may well have an impact on policy interest rates further down the line. But effectively, what we do is we think of the transmission process as being number one via term premium, and number two, via the real economy on the tempo of the market. And that's what we're going to do. We're going to look at how the long end of the market or the yield term structure basically moves. So
Speaker 1what do you expect the Fed to do in these circumstances?
Speaker 2Well, I think that's a very interesting question, because we would argue that the whole nature of Fed policy has changed. There's been an evolving change over the last few years. But the focus of the Federal Reserve is certainly not on policy interest rates anymore. That's really the pantomime that goes on the FOMC. And that's really the pantomime that goes on the FOMC. You know, every six to eight weeks or whatever, the real policy directive seems to be aimed very much at stabilizing the Treasury market. If you look at what the Federal Reserve is doing on a daily or weekly basis, it's really managing the level of money market liquidity. Repo stability, repo collateral stability has really been foremost. What they want is to maintain the integrity of the Treasury market at all costs, given its bigger role here in funding the US government, including with a whopping great deficit that's vital. So if you look at the actions of the Federal Reserve, it's really managing the level of money market liquidity that the Treasury is doing. So if you look at the actions of the Federal Reserve, this is a Federal Reserve that is reluctant to tighten. I mean, that's patently obvious. They've missed their inflation target for between five and six years now. They may well raise policy rates again, but I wouldn't put, you know, huge weight on there being a major tightening through rates. The main thing is they want to achieve stability. And it's really money market liquidity that is really the key metric to monitor. And I think alongside that, as we've said before, you've got to embrace what the Treasury is doing as another, pillar of the monetary authority. And the US Treasury, given its actions in terms of issuing very short dated debt in the US, in other words, bills, that is a form of quantitative easing by itself. And it's something that we label Treasury QE. And that has been a very important element in terms of the whole liquidity picture. But the short answer is it's complicated aid interest rates. And it's much more about money market liquidity.
Speaker 1Turning to the currency markets, do you expect the US dollar to strengthen against the other major currencies, like the euro, pound, Chinese renminbi, and Japanese yen in the next 12 months or so? Yes,
Speaker 2100%. And a
Speaker 1significant strengthening?
Speaker 2Well, I think, yes, I think a noticeable strength. I think the point is that if you've got tightening liquidity, and you've got economies that are likely being compromised, in terms of weaker growth, there'll be certainly a move away from corporate debt, people will try and downsize, pay back their debts, there'll be a demand for dollars as there normally is late in the cycle. And, you know, I'd rather be owning dollars in this environment than I would yen or even the euro and certainly sterling. I mean, those are not, I mean, sterling may be okay. But I think that generally, if you've got a tightening liquidity background, you'd like to see a lot more cracks evolving. I don't believe that the Japanese yen is a fundamentally strong currency. And I think the euro is certainly questionable, given the debt problems that are rife in Europe. And the problems they have in, you know, in agreeing any sort of Europe wide solution to fiscal problems. So I think that the dollar, it may be the cleanest shirt in the laundry, but it's still the cleanest one.
Speaker 1And given the outlook for the world economy, which commodities look most attractive and least attractive on a one-year
Speaker 2view? Well, I think the answer is they all look pretty unattractive. I mean, I would sort of qualify that by saying that maybe gold and silver are worth looking at because they are likely to get a lot of impetus, either from easing coming out of the Western economies, in other words, the Federal Reserve easing at some stage next year. That may put some floor under gold and push it up. I mean, I'm encouraged by the fact that gold seems to be holding the $4,000 level. I think that's reassuring. The next upside will be significant for gold. I'm a long-term gold bull because I'm a bearer about debt accumulation, which is clearly exponential. And that has to support gold in the long term. I think the other thing that needs discussion, and it may well be the 27. is the year when this blows up, is Chinese debt. And the Chinese debt mountain is enormous eye-watering. And in my view, China has already been the major driver of gold bullion prices over the last three years by the expansion in People's Bank balance sheet. That has stalled this year, which is probably coincident with the sideways track of gold. But it has to increase in the longer term because China needs to get rid of its debt problem. And it has to follow what other central banks and monetary authorities are doing. And basically, devaluing. They must devalue their currency, at least internally. In other words, get domestic wages and prices up relative to debt. You mentioned Bitcoin earlier.
Speaker 1Do you find that and other cryptocurrencies attractive?
Speaker 2Well, I'm not an expert on crypto, David. And therefore, the other coins, Ethereum, Solana and whatever, it's very difficult to make a judgment on the altcoin universe. But I think as regards Bitcoin, I think Bitcoin has demonstrated very clearly that it is a good monetary inflation hedge. Admittedly, we've only got 10 years of history, of true history. But it does show a strong correlation with liquidity. In actual fact, the multiplier on liquidity is large. So it's a very sensitive asset. Gold and silver, on the other hand, have a much longer track record, counted in sort of 5,000 years or whatever. But nonetheless, I think you need those in a portfolio. And I think the key point about Bitcoin is that because of its great sensitivity to liquidity, it's well worth monitoring, even if you don't own it. But I think it's worth owning simply because it is connected with liquidity and it has such impetus if the liquidity cycle picks up. I mean, after all, Bitcoin evolved in the wake of the GFC when policymakers were intent on devaluing paper money. And they're going to have to do that again and again and again. And therefore, Bitcoin and precious metals have got to be an integral part of any long-term portfolio.
Speaker 1You're in contact. With a wide range of global asset allocators, when you're talking to them, do you find that it's a bullish or bearish outlook for world stock markets that you're discussing? And what would be your preferred overweight and underweight positions for a global multi-asset portfolio?
Speaker 2Well, I think great questions. I mean, I think the point I would say is that if you're coming into this year, there was universal bullishness about markets pretty much. I think if you look at the performance of a lot of asset managers, I mean, I'm talking very broadly here and I'm talking broadly geographically as well as sort of different asset types or whatever. Performance has been poor generally. It's been poorer than the headline indexes would suggest. I think that's clear. It's been a very, very tough year to make money and much easier to lose it by being in the wrong things at the wrong time. What you've had in the markets is vicious rotation. But if you look at the evolution that we've been seeing, as I indicated, I mean, the sort of transition from peaking liquidity towards trough has been fairly consistent. You've seen flattening yield curves. Bond markets have lately performed pretty strongly after their sell-off. You're starting to see credit spreads widening. So the corporate debt markets are souring. Small cap have been pretty terrible. Mining stocks have been hit hard. Tech is, you know, well, we know it's volatile. Depending if you're in the right area of tech, you either made or lost a lot of money. And you're starting to see a big rotation now and just stable demand areas, consumer staples, things like health care and whatever. So I think that it's been hard to make money. But what I would be doing looking forward is that generally over the next six months, I'm pretty underwhelmed by risk markets. I would be underweighted in equity. Where I would be positioned in equity would be effectively in energy stocks. I'd be thinking about buying miners on weakness because they've been hit pretty hard. And I think the next up cycle would be good. I'd be overweight fixed income. It doesn't mean to say that I'm hugely bullish fixed income, but I think they're a good safe haven to own. And as I indicated earlier on, I'd be leaning more towards the dollar than not and generally watching Bitcoin.
Speaker 1When it comes to the boom in artificial intelligence, how do you see that playing out?
Speaker 2Well, I think you've got to differentiate the value of the technology from the financial market implications of that. I think the you know, as you well know, if you look at past technologies, be it, you know, whether it's the internet, fiber optic, railroads, whatever, even washing machines. I mean, the technology has been left with us. It's been, you know, a huge boon to humanity in every case. I can't see why this would be any different. I mean, AI or SI, depending on where you sit, is a phenomenal achievement. And it will clearly change the nature of the world economy over overcoming decades. That's clear. But I think the financial implications are very different, because the funding requirements are often what upsets investors. And we've seen that very clearly historically. Look at the railroads, how many railroad companies went bust. The track is still there. Look at fiber optic. I mean, that was the sort of the big boom area, what, 20 years ago, global crossing, which was a celebrated stock new issue, a big company that came to the market in late 90s, early 2000s. That went into chapter 11 within five years. And the reason being is margins got crushed. And I think the point is, is that you've got a lot of implications here, a lot of uncertainties. Either margins, you could come down heavily, which really compromises the cash flow of these companies and makes it very difficult to repay debt. They're issuing debt at something like a $1 trillion a year clip or something very close to that. And it's really the bond markets and the credit markets, which really are the execution in many cases of good returns from these things. So I'd be skeptical. Michael, many thanks for this very
Speaker 1interesting insight into the GLI service. IRF is offering a short trial to the GLI service and can provide details of how to subscribe to the full service. More information is available from IRF on request. Thank you for listening to this IRF podcast with Michael Howe, the founder and CEO of Global Liquidity Indexes.
Speaker 2Good. Thank you.
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