Speaker 1Michael Howell is one of my favorite macro analysts. He's the author of Capital Wars and the Capital Wars sub stack of which I am a proud subscriber. Love it. Read every post. He's the person I think most of finance and macro quotes when they talk about global liquidity and they say those words. Welcome back to Bankless, Michael. How are you doing? I'm doing very well. Very good to be here. Okay, so Michael, you were last on Bankless about a year ago. This was November 2025 and I talked to you. At that time, you said liquidity growth, it seemed like it was peaking, at least the growth side of things, that crypto was late cycle. That proved right. That proved prescient. Crypto indeed was very late cycle at the end of 2025. And then I followed your work for the past year or so and you've said we were in this speculation era, but we are moving closer and closer to late stage of speculation. I know you have four eras. We'll get to those a little bit later, but the speculation era is ending. That turbulence is coming. That global liquidity, it won't fully bottom until the second half of 2027. And then I saw this post that has been your base case. And then I saw this post on Friday of this week where you took kind of a second look at Bitcoin as an asset. And I know in the past you've called Bitcoin a bellwether asset for global liquidity. So it's important indicator as well as kind of an asset in and of itself. And you said this, that Bitcoin may be an early warning that the liquidity tide is beginning to turn. In your post Friday and with everything that's happening in Bitcoin right now, some of that price recovery, what do you think Bitcoin is telling us?
Speaker 2Well, I mean, I hesitate to say that it's actually signaling an upturn in liquidity because I'm not sure that it is. But I'm not 100% sure of that. And what I was trying to argue in that post was that liquidity drives Bitcoin, but there are clearly feedback effects. And it may well be that we're getting information from the stability of Bitcoin that's telling us a lot about the liquidity environment. Now, the question is, does that help? Well, it does help because liquidity tends to move in clear cycles. And it tends to move in cycles of maybe five to six years. So the plain fact is that if we're able to turn in the liquidity cycle that other data is maybe not fully reflecting yet, but Bitcoin is, Bitcoin could be saying, well, actually, we're entering now the early stages of what will turn out to be another two to three year bull market. So we've got to be alert to that possibility. Now, I raised that point really with evidence of what the Federal Reserve is doing. And the problem with judging the Fed is that so many people, the judges of the Fed, in a sort of textbook way of maybe looking through a pre-2008 GFC lens. So it's all about, in most people's estimation, setting Fed funds rate. And that clearly is not the case. And it hasn't been the case for the last 15 years. And it's not the case going forward. And what I was also trying to add in that piece is that maybe Kevin Walsh has actually rethought policy as well. And we're actually entering, not a new regime, but actually a new, new regime, that this is actually an evolution from the post-2008 environment, where the Fed was using QE quite actively. What they're doing now is they're basically acting alongside the Treasury. They're actually trying to manage, explicitly manage the repo collateral markets. And if you listen to some of the statements that Walsh has made, particularly in the presser, after the last, the last, FOMC meeting, he was pretty explicit that they want to maintain an ample reserve environment for the banks. Now, I think you've got to put that in context, and you've got to look back and say, well, when did they make a big error last? And the big error they made was almost exactly a year ago, when they basically decided they wanted to shrink the balance sheet. And the Federal Reserve went ahead and slashed bank reserves. Now, you've got to remember in the, in the sort of the whole equation of central banking, the one number that the Federal Reserve and central banks control exactly is the level of bank reserves, okay? They have some control over interest rates at the short end of the market, but they have precise control over the level of bank reserves. And if they decide to slash bank reserves, in other words, to reduce the overall level of money market liquidity, then you will see a fallout in other areas of the market. Maybe they weren't expecting the scale of the fallout that we saw. And what you, if you recall, repo spreads, in other words, SOFA-less Fed funds target, for example, spiked significantly, saying there were shortages of liquidity in money markets during that period. The Fed blinked, and it blinked quickly and acted. And what they did is they introduced yet another acronym, RMP, Reserve Management Percentage. And they introduced another acronym, RMP, Reserve Management Percentage. Which is another form of QE, quantitative easing. I mean, of course, they say it's not, but I mean, it plainly is. If it's yellow and quacks, it's a duck, and this is a duck for sure. And they basically, again, boosted the level of bank reserves. Now, if you look at the data, and this is a sort of long-winded answer to your question, but if you look at the data over recent months and weeks, bank reserves, i.e. money market liquidity, are pretty much flatlined. And this is that the Fed looks to be pretty closely managing that. And I think on the other side, looking at the collateral markets, so you've got repo, in other words, what the amount of liquidity in money markets reflected in repo rates. And then you've got on the other side, what's happening to the collateral markets, the stability of collateral. And it seems to me that's exactly what the Treasury is trying to fix. And everything that Besant is doing, contrary to what the media is doing, is exactly what the Treasury is trying to fix. And everything that Besant is doing, contrary to what the media suggests, I mean, the media are well off track on what he's doing, but he's not trying to push down the level of yields necessarily. He's trying to reduce volatility in the market. And generally, Besant's doing a great job because he's retiring what are called off-the-run treasuries, in other words, stale and liquid treasuries, often at 60 cents in the dollar, which is a great deal for the US taxpayer, and replaces those with sort of shiny new debt. And that debt tends to be shorter duration. And so, I think, you know, I think overall volatility in the system is being contained. But I think that what you've got is that you've got two targets there. Number one is low bond volatility. And number two is basically keeping bank reserves at ample levels. Now, that is being played out against the backdrop where the bond markets want or expect Fed funds to rise. Kevin Walsh is giving them that. He's throwing meat, you know, at the bond markets in that regard, but at a relatively slow pace. So, the scale of tightening that you've been seeing in the system is nothing like as pronounced or as rapid as we saw under the Powell Fed. So, here's how
Speaker 1I read your post on Friday, answering the question, like, what could Bitcoin be telling us? And this is just a possibility. And I don't even know if it's your base case now, Michael, but you do indicate that it's a possibility. It seems like Bitcoin could be telling us that we might have a shorter, more turbulent period and that the rebound period might actually occur a little bit faster than you thought. I think you had targeted this rebound period to sometime in the second half of 2027. But Bitcoin could be telling us that Fed and Treasury interventions mean that rebound happens actually a bit sooner than that. And you said that you were looking at the price of Bitcoin in the 70K number. If Bitcoin can hold 70K, that might be meaningful towards the case that you just illustrated. Is that the correct way to interpret this?
Speaker 2It's 100% correct, but I would say it's not my base case. It's not your base case. All right. The base case is still where we said. What I'm saying is that this is a cause for rethinking and one has to monitor these things. If you get Bitcoin above 70,000, if you see more evidence that bank reserves are being managed and maybe even being pushed up, then I would happily change my view and expect to see liquidity picking up. I think the other thing that you've got to factor in is why is liquidity really falling in the system right now? I mean, make no bones it is, financing has become a lot tougher for many institutions wanting to raise money. The yield curve is flattening despite the fact that I think the consensus view, the 100% consensus view at the beginning of this year was that the yield curve was steepened. It's actually been flattening as we, much as we thought because of this turn. And you've got evidence of credit spreads beginning to blow out. The Russell 2000 is probably in a bear market as we speak. So all these things are telling us that liquidity conditions are tightening. But it's not, they're tightening not because, central banks are tightening particularly aggressively. I mean, there are clearly steps in that direction. But as I've tried to suggest, what Kevin Walsh is doing is probably tightening at half pace in many cases. The reason that liquidity is going down is because the economy is growing so fast. And you've got to align that up with what the bond markets are saying. And the bond markets are clearly yields are rising in response to fast nominal GDP growth, not to any deterioration in fiscal finances, as much of the media and informed media seems to be suggesting. This is all a growth story.
Speaker 1We'll get back to Bitcoin because there's more to discuss there. But since you brought up bonds, maybe let's turn towards bonds for a minute and explain yields to us. Why are long duration yields on bonds going up? Because I've heard multiple explanations for this, including the popular explanation that this is debasement, that this is the US's fiscal situation finally catching up to it. This is bond vigilantes saying enough is enough and they're driving up long duration yields. Why do you think yields are going up?
Speaker 2Well, let me answer the question. I mean, I put a slide up to try and understand this. And what it does, I mean, let me just say, preface that by saying, look, once we start talking about bond markets, a lot of people's eyes glaze over and it becomes very wonky stuff. So I'm going to try. I'm going to try to make this as straightforward as I can. You know what?
Speaker 1Before you do, Michael, I just want to pause and ask listeners to pay particular attention to what Michael says with bond markets, because I would have agreed with you that bond markets seem very wonkish, seem very esoteric outside of the main character feature of most markets and what investors care about. This year, though, I would argue that bonds are kind of the main character. Cost of capital. Bonds are at the center. And they're at the center. I mean, we were talking, we were talking about it so much on a crypto podcast. So if investors are going to pay attention to bonds, probably the year 2026 is the year to pay attention to them. So listen to what Michael says very carefully.
Speaker 2Let's listen. Okay. Yeah. And the other thing that I would say is, as another preface to this, is that Bitcoin is a very long duration asset. Okay. And that means it's very sensitive to changes in treasury yields. So if you start to see treasury yields stabilizing or coming down, you would expect to see Bitcoin doing very well for one reason, apart from other reasons, it may do well as well. So that's why it's important. Now, what you can see here is the US treasury yield broken down into its two main components. The black line is looking at rate expectations as measured by the implied terminal policy rate that is embedded in the term structure. The orange line is something called the term premia, which is the key way to evaluate bonds, which is looking at the risk premia that is attached to bonds and compensates investors for holding duration risk, i.e. interest rate risk over the term or horizon of the bond. Now, what I've tried to argue is that if you look at what's driving yields higher, it is the rising black line, not the orange line. The orange line, for much of the last couple of years, has kind of gone sideways. There's been volatility recently, but you can't say that there's an upward trend in term premia. What there is an upward trend in is rate expectations. Now, the question to ask is, what in turn drives rate expectations? And rate expectations tend to be driven by the underlying level of nominal GDP growth. Now, what I'm going to do is to go on to another chart. But just before I do that, I'm going to show you a second one, which is this chart. Which is looking at bond term premia across the world. Now, the other thing to scotch is the whole idea that what's going on in the U.S. is a big deterioration in U.S. fiscal health. I mean, sorry, let me correct that. The bond markets are picking up a big deterioration in U.S. fiscal health. There may well be a deterioration, but the bond markets are not that worried about it, certainly at the moment. And what this chart is indicating is what's happening to term premia across the world. And the bright red line is looking at what's happening in the U.S. And U.S. term premia, rather like Bund, German Bund term premia, and rather like Chinese government bond term premia, are basically low, and if anything, falling, not rising. The rising term premia in areas like Japan, Britain, and in France, and if you look at the headlines in France, there's a reason to doubt why they've got rising term premia. But it's certainly not the case in the U.S. So this is not about any deterioration in fiscal finances or any loss of faith in the Trump administration or Besant or whatever. This is all about strong economic growth. So let me just try and show that chart. The chart that I'm just putting up now is comparing nominal GDP growth in the U.S., which is a four-quarter moving average of NGDP. NGDP growth and 10-year risk-adjusted treasury yields. That is basically the interest rate component, the black line in the earlier chart, graphed against the underlying growth rate, nominal growth rate in the economy. Those two lines match almost exactly. What they're telling us is that yields are high simply because underlying interest rates or policy rate expectations are high, and that's high because of a strong economic growth. So that's because of a strong economy. So this is the question that is really driving bond markets and bond investors right now. It's not any concern about fiscal finances. In France, it may be. In Britain, it may be. In Japan, it may be. But in America, it's not yet.
Speaker 3Can you tell me, Michael, why people frequently say that there just isn't demand at the treasury auction? Because what I'm hearing from you is that that's simply just not true whatsoever. But I've been hearing it across Twitter, financial markets commentary, even debates with Secretary Besant when he gets interviewed, that the demand for bonds, for U.S. bonds at the auction is very, very weak. Why are people saying this if what you're saying is that the demand is actually very, very strong?
Speaker 2Well, I'm not saying that demand is strong. What I'm saying is that it's not a factor that is causing yields to deteriorate or yields to rise. Term premia are basically compressed flat and, if anything, falling. Now, that's not to deny the fact that if you look at the bid-to-cover ratios, they're falling in the auctions. I mean, that's for sure, but they've previously been very high. But there may well be fewer buyers out there. And what we know is that a lot of those buyers are concentrated among hedge funds anyway. So you may have a concentration of demand. I can't argue against that. But I don't think the evidence is there that you're seeing a big deterioration in term premia. I mean, if you were seeing a big deterioration in term premia, measures like straightforward measures, like the 10-5 spread in the bond markets would be going up, not falling. And it's falling at the moment. So that's telling you that term premia are going down.
Speaker 3Another question that I have is that with the rise in yields, with the bond yields going up, this means that the debt that the United States government has to pay is more expensive, more expensive debt. Does that accelerate debasement in the future because the debt has a higher interest rate? Does that mean that the United States government is going to have to print more, issue more, debase more in order to eventually pay their debts? 100% correct. Yeah. I mean, it will. Yeah. And will that flow in? How will that come back into liquidity? Or is that just like something that just doesn't really actually show up acutely in the market?
Speaker 2Well, I think it does. It does show up. And I think one of the things you've got to start thinking about is what is liquidity? How can you define liquidity in a practical way? And the way that we tend to think about it is if you think of a ratio, if you said liquidity is approximately equal to net assets divided by their duration. In other words, if you see an increase in the net asset holdings of the private sector because of government issuance of debt, and you're issuing at a lower, average duration, then you're going to be seeing a liquidity expansion. And that's pretty much what's going on. So what you're seeing in the system going forward, or even now and going forward, is that government debt issuance is increasing. A large part of that is at the short end of the market. So there is deliberate rationing by Besant of longer dated coupons. And the average duration, because it's a bill, not a longer dated coupon, is falling. So that liquidity quotient, if you like, is getting goosed from top and bottom. You're seeing lower duration and a bigger increase in assets. So it's clearly liquidity positive. Now, what I would argue is that a large part of that is actually going into the real economy right now, because it's funding government spending. But it's still liquidity. It's still liquidity expansion. From the experience we've had, and this is treading relatively new ground because these are new features. But what we can see is that does have, or has, a lot of liquidity. And that's why we're seeing a lot of liquidity expansion. A positive impact on Bitcoin itself.
Speaker 1I want to contrast your take on bonds with a piece I read recently from Ray Dalio. He wrote a piece last week published on LinkedIn called The Numbers Behind the Bond Bear Market. And I think he makes this case. Basically, his summary is that 2027 is going to be a bad year for bonds. I believe you are starting to take the opposite on that view. He said this, the bond bear market probably has a long way to fall still. 2027 looks more concerning than 2026 and 2028 looks riskier still. And his case was this, if I understood him correctly, Michael, that there's just a lot of supply coming on the market. When you take a look at kind of the rollovers of long duration, converting to that shorter duration, when you look at all of the treasuries that need to be issued and all the bonds that need to be issued, and also the hyperscaler bonds and capital competing against treasuries. Treasuries that have to be issued. And then you take all of that supply that's coming in the market in 2027 of new debt, U.S. denominated debt. And then you take a look at the demand sources, which is like traditionally we'd have foreigners buying large quantity of bonds. And he makes the case that demand is actually going down as well. And so if you have more supply, decreased demand for bond purchases among investors, then you're going to get yields rising. In 2027. Now, I'm trying to understand like your case versus his case, because I think at some point you might both converge on the idea that, yes, debasement is the long term future. But there's some disagreement as to what happens more in the short term, 2027 and 2028 era. Can you clear this up? Like, what do you think you believe differently than, say, someone like Dalio making the supply
Speaker 2demand case? Well, I would just say the markets, they're moving straight. And I'm definitely there in the long term. I think bonds are an unattractive long term asset for investors. But I think in the short term, they're actually maybe a safe haven if this liquidity downswing continues. Okay. Now, I haven't read Ray Dalio's piece. I would imagine that how he's getting there is by saying that, number one, there's more of an inflation problem than we envision in the economy. And that nominal GDP growth is not simply going to stay where it is, elevated. It's going to accelerate more, but that's really driven by faster inflation. I don't know if that's his argument, but it could easily be. I disagree, but we'll see what happens. The second factor is that he's arguing that, probably implicitly arguing, I don't know, that the US or US treasury assets and the US dollar are no longer safe havens. I would disagree with that very strongly, because I think what is the alternative? I mean, do you want to put money in? You've got basically two other choices, possibly three, if you include Chinese government bonds, but let's make that, it's too complicated, so let's not go there. Japanese government bonds or European government bonds, I would include in that both French and German bonds. Do you really want to risk putting money into the euro, given what's happening on the streets right now?
Speaker 1I don't know if he would say this, Michael. But I think his alternative would be a debasement hedge, something like a gold, maybe in some small portion, maybe a Bitcoin would be the alternative to this.
Speaker 2Fair enough. But I mean, let's be realistic. I mean, the bond markets are massively bigger. And if you're going to make asset allocation shifts, you simply can't put that amount of money into Bitcoin. It would be wonderful if you could, or into gold. The market's not illiquid enough. The fact is, you've got to deal with the bond markets. The bond markets are massive. They're very, very liquid. And if investors want to shift, asset allocation into safe assets, they have no alternative. I mean, the reason that, you know, come back to another point, which is maybe a different rabbit hole, the reason that the US has a whopping great trade deficit is not because US industry is uncompetitive. It's the fact that US finance is so super competitive. Everyone wants to use US financial markets to put their investments. And this is the reality. You've got no alternative. You simply can't put money in many other places. It'd be great to put it into Swiss francs. Okay. Fortunately, it's a tiny little market. It'd be great to put more into gold. Again, illiquid. You can't really do it. You've got to, the US treasury market is the main vehicle, the main sink for these funds. I mean, look at China's whopping great trade surplus. No one's going to convince me they're not putting money into treasuries. They may be doing it surreptitiously through, you know, offshore agencies in Belgium or wherever, but they're definitely buying government bonds because they can't put it anywhere else.
Speaker 1Now, does your outlook with Dahlia, would you say, is going to change? I think it's going to change. I think it's going to tend to converge on longer term timeframes. So if we stretch beyond, say, the one to three year and the five year, and we get to something like the multi-decade long, would you sort of agree? Yeah. You know, debasement hedge, gold, something like that. Why own any bonds?
Speaker 2Yeah. I think that, I mean, I'm sure that's the, I'm sure it's a similar argument. I haven't read his piece, but, you know, I think it makes absolute sense. I mean, you just got to look at the period of, I mean, we talk about debasement, but, you know, broadly, speaking, I mean, ever since, you know, Richard Nixon closed the gold window back in 1971, you've effectively had free floating currencies and ongoing debasement, or certainly accelerated debasement, maybe one would say. And if you look over that period, basically, treasury debt, federal debt has increased at an annual clip of about eight and a half percent. Okay. If you look at global liquidity, that has increased at an annual clip of a tad over. Eight and a half percent. If you look at the gold price, the gold price has gone up a tad over eight and a half percent. Okay. So all these things kind of line up. The S&P has delivered a return a little bit better than that, maybe near a nine, nine and a half, I accept. But look at bonds. You're looking at returns of significantly less. You know, 10-year treasuries have basically given you a return of near a six and five-year treasuries near a five. So, you know, they're a long way short. This is compounding rates per annum. Okay. So, you know, why is the future going to be different from the past? All these politicians are doing is kicking the can down the road. We're not talking hyperinflation here. We're talking about inflation rates that are a few percentage points above where policymakers are targeting. And after all, you know, when was the last time the Fed hit its 2% inflation target? More than five years ago. You know, let's get realistic here.
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Speaker 2Well, I would have thought so. I mean, my personal inflation rate, although I live in Europe, is way above where the official numbers are. It is, and it always has been. So I don't know. How do you account for that? Why is that true? Well, because I think that, I mean, I think there was a deliberate bias in these figures. Anyway, I think it's in their interest to keep, obviously, to keep inflation low. I mean, once you start to target something, I mean, the targets become meaningless. I mean, the targets become meaningless. I mean, that was something I think was called Goodhart's Law, wasn't it? And that probably is the reality. So I think that that may be an explanation. But, you know, you've got, I mean, again, without being, you know, too disparaging, Kevin Walsh's committees and the idea of looking into the CPI stats is another way of fogging the whole question, I think. But, you know, let's see.
Speaker 3Do you have like an actual measure for real inflation in the United States? Yes. I'd say
Speaker 2that the real measure is the consistency. confidence survey. I mean, that's what low consumer confidence is telling you inflation's a problem. Yeah.
Speaker 3I think a lot of people are freaking out because of the rising rates, rising bond yields that we just haven't seen these level of bond yields in 20 plus years. And I think when you compare bond yields to the reported inflation numbers, like we have five and a half percent bond yields, but reported 3.5% inflation, maybe that seems high. But the, there's a, an account on Twitter that I follow, which posts the price of a ribeye steak from their local butcher. And they has done so like every single month for the past like 10, 15 years. And if you look at, if you look at inflation there, it's upwards of 10% in America. Now, if that was the real reported rate, we don't really know what the real numbers are, but comparing the bond yields of 5.5% compared to like potentially real inflation of eight to 10%, all of a sudden bond yields don't look so scary anymore.
Speaker 2Yeah. That's true. And I think if you start to look at the tips market, where the inflation protected securities are yielding 3%, I mean, that's, that's not a bad deal actually. It's very, very rare that you can make 3% real in financial markets over the long term and the US government is underpinning it. So that's not, that's not a bad deal to take, I think. You don't want everything in tips, but I mean, it's not a bad hedge. I'd be looking at that. I mean, I have looked at that.
Speaker 1I would love your take on the current economy, like just, it's a, a level set because, uh, I'm hearing a lot of different voices look at this exact same numbers, exact same economy and come away with different conclusions. So if somebody were to ask me kind of, you know, what are the highlights of the economic situation today? And, you know, in 30 seconds, 90 seconds, I would say equity is running hot. I would say high inflation. I would say nominal GDP is also hot. I don't know, five, 6%. I would talk about, long-term bond yields continuing to rise. Uh, I know you've compared this to a period in the, the 1980s of, uh, nominal economic growth. Um, but if you were to give a 90 second drive by of this economy, what, what would you say? What would the highlights be?
Speaker 2Well, you, you can't dispute the fact that there was a K-shaped economy. Okay. That that's for sure. There's a lot of people who are being left behind, but that's true. Not just in America, that's true globally. Okay. But if you look at the drivers, of what's happening to growth, um, the big fiscal deficit and the AI cap expense are clearly big drivers of America right now. Now, what I've done is I've put on the screen, a chart, which basically looks at the evolution of the business cycle and of the liquidity cycle. And if you look at the comparative data, you get a pretty good sense as to where we are to position ourselves and maybe why this economic data is doing what it's doing and where we are in that. Now, what this diagram is basically illustrating is the red line is looking at the notional liquidity cycle. Um, the, the yellow line is looking at where the real economy is. And you can see that this is sequential, that the liquidity cycle leads the real economy, uh, by roundabout on average, maybe 18 months. Now, um, what tends to coincide is when the liquidity cycle is going down, which is what we argue, Right now, what you also see is a real economy that is accelerating. So in other words, as the red line drops, the yellow line starts to go up. And that's telling us these cycles are moving differently. They're virtually anti-cyclical. And what that really tells us is the simple fact that all money that is anywhere must be somewhere. So if it's in the real economy, it's not in the financial markets. And if it's in the financial markets, it's not in the real economy. Well, let me evidence, uh, in this upcoming chart, um, what that really looks like. And what you can see on this chart are two lines, an orange line, which is measuring our global liquidity cycle and the black line, which is the world business cycle. And what you can see is first of all, they're completely opposite. So when the liquidity cycle goes, oh, it's high, the real economy worldwide is in a slump and similarly vice versa. When the real economy is booming, the real economy is in a slump. Uh, liquidity is, uh, is very tight. And that's what we're basically looking at now. The liquidity cycle is going down while the real economy is picking up. And it may, it may not feel to certain area in certain areas, but that's the case. But you know, that's what the economic data is saying. Uh, that's what business, this data here is business confidence data. That's what business confidence data is saying. And, you know, it's difficult to dispute that, uh, even though I know Parche, you know, what consumers are saying, uh, it's difficult to dispute that, uh, even though I know Parche, you know, what consumers are feeling, um, that it doesn't always feel like a strong economy.
Speaker 1So how would you map that to your four different regimes? So if we're in an era where liquidity is going down, at least the growth of liquidity, because if you look at the global liquidity watch chart, where you plot it, it's, it's up only, of course. So the thing that kind of, sometimes it's down, I should say that, but the thing that changes is really the rate of growth. And so if we're in a regime where global liquidity is, the rate of global liquidity change is going down, then we're in a regime where the rate of global liquidity change is going down. But then also the economy is running hot. So Main Street is running hot. What does that imply across your four different regimes? So you have rebound, calm, speculation, and turbulence. That puts us in what era? Is that the speculation type era? Are we late in the speculation phase? Are we moving towards turbulence? And what assets are key in, in this era? And we, you know, we'll, um, we'll be the assets really to hold across these, these, these phase changes.
Speaker 2Again, with the caveat that, um, the liquidity cycle may be, um, may have a, a, a, a lesser cyclical downturn this time than maybe we've seen historically with that caveat. And I, I say, I'm still on the fence on that. So I'm not, I'm not sure myself, but if you look at what we're seeing, um, you have these four regimes, um, turbulence, rebound, calm, speculation. I mean, the names give you some generic idea about what goes on in each phase. But if you align on the diagram that I'm showing right now of the two cycles, the theoretical liquidity and the theoretical real economy cycle, uh, if you're in the turbulence phase, that tends to coincide with, uh, basically very fast economic growth or even the peak in the economic cycle, the rebound phase, uh, for liquidity. Um, and that is a phase when equities generally do pretty well. I mean, to be clear, the upswing of the liquidity cycle equities normally do very well. They outperform all other asset classes. Um, and typically, um, you would see, um, things like technology really being a very strong performer, uh, in the early stages of that. Now that rebound tends to occur, uh, when you start to see a very noticeable loss of economic momentum, not yet recession. Um, the calm phase, the next up in the liquidity cycle, ironically or paradoxically, is the phase of the liquidity cycle, uh, you know, where you're, uh, where you're actually looking at recession or coinciding with a recession. Uh, and then you get speculation, which is the phase that we've been in for many, many months. And we may, may now be ending, uh, but let's see on that. The evidence will have to be, you know, the evidence is a little bit mixed. Uh, but if I go back to the chart that I just put up on the actual data, you'll see there that in the orange line, the global liquidity cycle, there is the latest data, which is in September picks up. Now that pickup is almost entirely due to what the federal reserve did in September. Okay. So what I was saying earlier on is it looks as if the federal reserve is deliberately targeting money market liquidity. This may be, um, you know, uh, a temporary effect. We don't know, but, it's a really good question of what's this space. Now, which asset classes should you own in these regimes to go back to the traffic light diagram that I'm putting up now, this is basically illustrating ideal asset allocation. Asset classes are shown on the left. Industry groups are shown on the right of the chart. The traffic lights tell us, you know, when to invest and when not you read them as green, go red, stop an Amber proceed with caution. And what it says is in the rebound area, you want to take a little bit of risk, um, but you want equities and credits predominantly in calm, which is what we were in for much of the last two years. Uh, you want equities, uh, you want commodities increasingly, uh, you don't want bond duration at all. And you want to be taking some money out of, uh, credits in speculation, which is the phase that while they're in, or it's just ending, it's dominated by commodities. You don't want credits, uh, and you basically are top slicing equity exposure and maybe putting a toe in the water in terms of bond duration, uh, and then turbulence, which is the upcoming phase in all likelihood, because this thing tends to be moved clockwise. You tend to find, uh, that you only want bond duration, uh, and you want to be, you can move back into credits when the yields look attractive, but you don't want commodities and you don't want equities. And then you look at industry groups, which is shown on the right hand side of that diagram. Uh, technology is the winner in the upswing, uh, financials around a late cycle, um, energy commodities generally as you're peaking and doing the immediate downswing and then defensive through most of that downswing period. And therefore, that would be my asset allocation. And again, if you look at small cap, large cap, small cap tends to do well in the upswing and large cap tends to outperform in the downswing. So that's how I basically argue it. And how about crypto assets across these regimes? I think the crypto, I think you've got to take into account that crypto is both a real asset. In other words, it will relate to what happens in the real economy and a inflation hedge. So a pure monetary inflation hedge would presumably be Bitcoin, but then the rest of the crypto universe is going to be much more like a real economy asset and probably would move more like technology stocks. So I think that you would, I mean, I would say, therefore, that Bitcoin should outperform crypto in the downswing of the liquidity cycle. But the rest of crypto, altcoins or whatever, would be outperforming Bitcoin in the upswing. So maybe you just do that with an Ethereum Bitcoin spread or something.
Speaker 1Now, if I've read your work, Michael, correctly over the last year or so, you seem to have indicated that this speculation phase has lasted a little bit longer than you thought it would originally. And I'm wondering if that's the case, and if so, why? And maybe you could give the case for why it could persist even further. For instance, we'll contrast kind of some of your position with the AI bulls out there, who will tell you and will say that AI is still just getting started. We're still early.
Speaker 2Great point. I mean, I wouldn't say that speculation has lasted longer or less than normal. I mean, we're basically coming up to the normal time span for a speculation zone. Which is about 12 months or so? Yeah, between nine and 12 months. It's about that sort of normal phase. I think that what we've got is the response of equities to that has been unusual. And if you look at the chart that I just put up, what I'm showing here is world PE multiples and reported earnings per share. Okay. The earnings per share data is lagged slightly. So they coincide with what's happening to world PE. And the world PE is shown as a change on 12 months earlier. Now, if you look at what is going on in, bond markets, bond markets are responding, I would say, in an absolutely normal orthodox way to the liquidity cycle. It doesn't look any different from normal or a standard cycle in terms of bonds. Commodity markets are performing exactly as you'd expect relative to where we are in the real economy cycle. And so, you know, to be out of bonds this year and in commodities was a fantastic trade. So that particular element has worked. What has been a lot more difficult, has been the equity play the equity element, which is the transition phase. And if you look at this diagram, what it's showing is what happens to PE multiples. PE multiples tend to come down basically at the end of the cycle, not surprisingly. And that's largely because bond yields go up, right? So in other words, that PE multiples are responding in the same way that bond markets are responding to declining liquidity. So that tick that box, that looks very normal. What is not normal is if you look at the dotted line, as best I can, I've tried to show that the dotted line, and this is purely for world earnings per share, so it's not specifically US, which is even more exaggerated, is that the earning cycle has come through later and in bigger size than normal. And that is the anomaly. Now, the question to raise, and so, for example, to be specific, if you look at technology, technology has had two legs. It's had the first leg when it was acting like a long-duration investment. So as bond yields were falling and liquidity was being injected, long-duration investments like tech outperformed early in the cycle. That bit was clear. But what you're now getting is a second leg where, although PE multiples are coming down in tech, what you've also got is a huge earnings kicker. Now, the question to ask, and I'm not an expert good enough to answer this, is that, is that dotted line increase? Are we going to see permanently high or sustained high growth in earnings over the next few years? I can't answer that question, but I would say everything else in this framework is working like clockwork, but that's the anomaly. And that's why equity markets have maybe gone on longer than we would suspect, or suspected, and particularly why the big cap tech stocks have basically lifted the market. Outside of that, you kind of struggle to find strong outperformance. A lot of international markets are doing pretty much what Russell 2000 is doing and entering bear market territory.
Speaker 1I see. So you're saying that the PE compression that you'd expect to see, according to the cycles, is playing it exactly as you would expect to see it. The difference here is the earnings. The PE is far higher. And that PE being far higher is like mag seven allocated. It's tech allocated. Yeah. For sure. So there's some huge outperformers there. Another question I think that has plagued AI bull investors is this idea that rising yields on treasuries could increase the cost of capital and pop the AI bubble, you know, if we want to use the bubble term, for instance. So we had a core weave scare last week, which is kind of a neocloud provider. And some bond investors were pricing a 50% probability. That core weave could default on some of its debt over a five year period of time. So things like this start to scare AI debt markets, particularly as yields continue to rise. Now, I guess that's not your base forecast that yields will continue to rise that much more in the months to come or into 2027. But do you think that this is a catalyst that could prick the AI bubble? How much are you paying attention to this?
Speaker 2Well, I mean, almost certainly it's a risk. Because if you've got a lot of funding to do and you've got a background where funding is becoming more difficult, then, you know, as the famous Warren Buffett saying is when the liquidity tide goes out, you see who's swimming naked. And this is the reality that it tends to be high yield borrowers that often get squeezed in this environment. And that's the reality. Now, it's not only the fact that you've got a lot of tech debt issuance to come. You've also got government issuance, which is, you know, pretty hefty. And it's not just the new issuance, it's the gross book the government's got to refinance and put strain on markets, which is telling. Add to that, I mean, without being too overly pessimistic, you've got the debt maturity wall aspect, which is the debt that was termed out during the COVID years coming back into the market. And that was a result of, you know, near zero interest rates that was set by policymakers foolishly, in my view, that encouraged a lot of borrowers not just to take up new debt, but actually to turn out the existing debt into the back end of this decade. And that's now coming back into the system. So there's an awful lot of funding demands. So absolutely, that's the case. But to return to the Ray Dalio point, my argument would be is if you're getting these financial stresses, the asset to own is government debt. And that's what, you know, it may be that spreads water, but it's not just the government debt. And that's what, you know, it may be that spreads widen, credit spreads widen. But that's both the combination of government yields falling or staying where they are, and corporate yields blowing out.
Speaker 3There's a conversation out there that is another question that is plaguing AI investors. And because AI has gotten so big, it's kind of impacting anyone who invests, which is how big of a deal is AI from the perspective of the investor. So every once in a while, humans find this technology that breaks rules. Now, we know that AI is at least a little bit of a deal. It's at least a little bit of a deal. It could be a very, very, very big deal. And it's such a big deal that it just breaks all investment models because the returns on AI, the revenue generated by some of the leading AI companies, the economic boom because of the AI technology is just so large that all previous models just don't break. Now, at some point, you know, finance has gravity. There are laws of physics here. We can't just go up forever. What are you paying attention to, Michael, to kind of give you grounding as to how big of a financial anomaly the AI investment cycle is?
Speaker 2Well, it clearly is an anomaly. It's equally the case that it's a revolution. AI is going to transform the world economy. There's no question about that. I think if you look back at history, there are very few of these sort of major sea changes in terms of the impact that technology will have. I mean, one can look back and say, well, you know, the internal combustion engine was clearly one. I mean, air travel would be another jet engine. The washing machine, curiously, is actually a huge productivity booster, invention of glass, all these things. And I think AI is sort of in that realm. We're looking at a major change to the whole dynamics and growth of the world economy. But that's very different from saying that financial models are going to change. They're going to change. They're going to change markets will benefit from that. And I'm always thoughtful about what happened when we saw fiber optic cable, the boom in that, about whatever it was 20, 25 years ago, with a company called Global Crossing that was the darling of Wall Street at the time. It was a major, major new issue that hit the street around about the start of the millennium, if I remember rightly. And what you saw within five years, Global Crossing was in Chapter 11. And the reason being is that fiber optic prices collapsed by 80%. And that was not envisioned in terms of their original prospectus. But that's what happened. That's competition. That's capitalism writ large, roaring tooth and claw or whatever. And we saw that process unravel, or the whole capital market process unravel. But the fiber optic cable is still there on the ground. We're still great beneficiaries of that. And I think the same with AI. That's the risk that you run. And there's competition not just from other, you know, US AI producers. There's also competition with China.
Speaker 1We've talked around this earlier in the conversation, Michael, at least you brought it up. And you're talking about kind of Besant and Warsh and sort of how they were managing things. There's been this term called Treasury QE. I know you've discussed it. And there's also, of course, Besant has been doing some bond buybacks lately. So that's been a force in the market. I think there was a quote out there. He recently called himself the house. I don't know if you agree with that or how accurate that is. But I'm trying to get a sense of what Besant and Warsh are doing. Maybe whether it makes more sense to view them as a system. Both of them intertwine. They're interacting together or as independent entities. But what is this idea of Treasury QE? And what is the whole Fed and Treasury system? What are we driving towards? And is this actually money printing or is that to come later?
Speaker 2Short answer is it is money printing. So it's here and now. The way to think about this is that, you know, people raise the question about are we looking at fiscal dominance? And I would say to be more accurate, this is not really fiscal dominance. It's what you would call. Keynesian dominance. And if you go back to Keynes's general theory, and a lot of the arguments that were surrounded the general theory when it was first published in 1936, it was Keynes himself said, these are policies that are best suited or well suited to totalitarian regimes. Okay. Now, without necessarily trying to make that association with the US, what I'm really saying is that what we're looking at is, is economics for big state, state run economies. And, you know, paradoxically, the US is moving more towards the Chinese model than maybe many people would like. And this is big government, big state. Now, I appreciate the fact that we are in a capital war with China. That doesn't mean a kinetic war. I mean, this is more like the Cold War, where there's a lot of little proxy engagements going on. But hopefully, it doesn't turn into a kinetic war between the major players. But nonetheless, we've got a capital war. And America cannot lose that capital war. And that's really the key, the key point. And, you know, I mean, my, my, you know, one of my analogies is to say, look back at American history, and look at Washington and Grant, the two greatest generals, one of the things that they learned was not to lose. And this is what basically the Trump administration and others have got to try and recognize, you cannot lose this game. It's, it's absolutely critical. And so what needs to be done is the economy needs to be supported as best it can through the Treasury and the Fed. And they are operating in an accord at the moment, in my view. And this is what I've dubbed Treasury QE. Now, what that means is that basically government procurement spending or government spending writ large, is basically being funded through the bill markets. And the attraction of that is that the banks are ready buyers for bills, okay, there's a huge demand for short dated Treasury paper, be it bills or short dated notes. And it's very easy for Besson to sell that stuff. And that is what's going on. If the banks buy government debt of any shape or size, that is monetization. And this is what's happening in the system right now. Now, it's not going to be hyperinflation, it may be an extra one, 2% on Main Street inflation, that's for sure. But you know, what you got to do in this world is to basically buy monetary inflation hedges, that makes an awful lot of sense. But ultimately, what we're looking at here is a very different economic model. A more state run economy or state directed economy that is being funded jointly by the Federal Reserve and the Treasury. And what Besson and Walsh, I think are doing, this is pretty my interpretation, it may be completely wrong. So let's be clear on that. But I would argue that there are three dimensions of monetary policy. Now, there's Fed funds rate, which I think is the lesser of the three. And the other two are number one, managing money market liquidity. Make sure that markets are liquid. And then secondly, the whole repo collateral complex is dependent on low volatility of collateral. And that is what Besson, in my mind, is doing. So he's pushing more and more issuance into bills, which don't have much volatility compared to a 10 or 30 year treasury. And what's more, he's doing buy banks of treasuries. And you know, the whole idea that, you know, as I think it may be, you know, a lot of people are saying, well, I don't know, I don't know, I don't know. As I think it may be the Financial Times or the Journal, you know, poor scorned him by saying, you know, is this man so ridiculous that he does a $6 billion buyback and a $40 trillion debt market? I think it's going to make any difference. Well, come on. You know, I mean, Besson is much cleverer than this. He's got a lot of experience in bond markets. And what he's doing is not trying to alter the yield backdrop. He's trying to reduce volatility in the market, making the bond, making the treasury market more liquid. And the New York Fed itself has said, this is a very important consideration in our policy debates of having a liquid treasury market. And this is what Besson's doing. As I said, if he's retiring, you know, US government debt at 60 cents in the dollar, it's a great deal for American taxpayers, period. That's why you've called this instead of
Speaker 1yield curve control, you've called this yield volatility control. Exactly, volatility control. Also, is this also why the move index has, you know, received such emphasis in some of your indicators? Because the move index is an indicator of bond volatility.
Speaker 2Correct. Correct. It's a great index to watch. And the reason is, is that if you look at how collateral is used or is applied, if you post collateral with a dealer bank, the dealer bank will give a haircut against that collateral. So you might be able to borrow, you know, 95 cents in the dollar or 99 cents or whatever it may be. But that would be effectively determined by the level of volatility in the, in the collateral markets. If you have a lot of volatility, they will post a higher or demand a higher haircut. And that higher haircut will mean that the collateral multiplier, the amount of reuse or use of the collateral diminishes. And therefore you get a much smaller liquidity multiplier.
Speaker 1So because of your encouragement, I've been increasingly adding the move index to sort of my key economic indicators. How should I use that? So when move is going up, like what are the key, key numbers to watch here? And how do you look at the move index? What, what does it tell you when it, when it goes up and what does it tell you when it settles back down?
Speaker 2Okay. Well, the, the key, I mean, I looked at key thresholds. There is a normal zone for, for the move, which is really centered around 70 on the index. Now, very crudely, and this is not necessarily how it's designed, but very crudely, I interpret a 70 level for the move as being 7% annualized bond volatility across the curve. Okay. If it goes to a hundred, my take is that's about 10% bond volatility across the curve. That's a rule of thumb. It's not precise at all, but it's a good way of interpreting it. Now, my estimates would suggest that if you get above 90 on the, on the index, it impairs liquidity creation. So anything above 90 basically means that you get a fall in the collateral. So if you get above 90 on the, on the index, it impairs liquidity creation. That's, that's my take. If you get above 135, it's almost always consistent with recession in the real economy. We're not there yet. Obviously we're, we're, we're close to that on the former, nowhere near on the latter, but bond volatility is spiking and there are attempts to reduce it. And the test of my thesis would be if you start to see more volatility and treasury buybacks increase in frequency and in size, then you're going to see a lot of volatility. So if you get above 90 on the index, then I think case proven.
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Speaker 1Some exciting news. We are launching a new podcast to help people figure out the crypto cycle, how to navigate it. The best crypto cycle investor I know, his name is Michael Nadeau. He runs the DeFi report. This is the guy that sent me a sell alert before the 1010 price drop happened. His cycle analysis has been absolutely on point. I've been following him for years. And this year, we started recording weekly podcast episodes. Each one, we get into his portfolio, what he's holding, the market structure, entry targets, fair market value of Bitcoin and Ether, and where we are in the cycle. There's new episodes that are released every Wednesday. They're 30 minutes. They're short. They're punchy. I think this crypto cycle is harder to navigate than most. So let's do it together. Go subscribe to this podcast, search the DeFi report, wherever you get your podcasts, YouTube, Apple, Spotify, or find a link in the show notes. There's a new episode waiting for you now. Let's talk about the debasement hedges then, if that is the direction of travel, which it seems to be for certain. Maybe gold first. I think you've wrote recently the case for gold. You said this, China has to print money and the Chinese love gold. That's all you need to know. Um, in the past, I think you've talked about gold as being sort of China's primary, debasement hedge. And in fact, Chinese markets and Chinese liquidity was really driving gold more than Fed markets and Fed liquidity. Can you talk about gold as a debasement hedge and how that sort of fits into a strategy?
Speaker 2Okay. This chart is now looking at PBOC, People's Bank of China liquidity. So this is the amount of liquidity that PBOC has injected into the money markets. It's a stock. It's a stock. It's a stock. It's a stock. It's currently just shy of 40 trillion yuan. And alongside that, I've shown gold bullion prices in US dollar terms. Now, when the bullion market began to pick up, that was really around the early part of 2022. A lot of people have ascribed the move in gold, the rising gold to sanctions against Russia. Um, you know, and that was something that's been going on for a long time. And I think something that scared a lot of central banks and pushed them into buying gold. And then on top of that, there's been this argument, the so-called great debasement, uh, that is going on explaining why gold was going up. I don't think that's correct. Uh, I mean, I'm not going to argue against the fact that central banks are buying and the sanctions against Russia were harmful. That's true, but it wasn't really the big catalyst. If you look at this chart, what it tells you, uh, it seems to me what it tells you is that you've got a big increase in the amount of liquidity that was pumping into its markets from early 22. And that ultimately led to a rise in the gold price. And that gold price basically moved up until it didn't. And when it inflected that coincided pretty much with, uh, China slowing down liquidity expansion at the beginning of this year. Uh, why did China do that? I don't know. Uh, nobody knows, but my view is that was connected with the Iran tensions and they didn't want to, uh, goose the economy too much in case it spiked oil prices. Uh, and that would be, you know, deleterious to the world economy and China depends on the world economy and they're very thoughtful about these sorts of things. So I think that would be my explanation. Now people may say, well, of course this is spurious correlation. It may be, but then I showed the following chart, which I've just put up, which is showing a very short term changes, uh, which is six week changes in both the price of gold in dollars and PBOC liquidity. By a couple of months, try and show that it, it predicts. Now that chart is not perfect. And you know, I'm not going to not want to win the, uh, uh, Nobel prize for economics by putting this, uh, chart up. But what it does show is that the correlation is sufficiently close to make it, you know, sit up and make people sit up and think, well, maybe we ought to be watching what China's doing.
Speaker 1So what's your outlook on gold at, you know, today's prices? We did see a run, uh, obviously earlier this year, I think we, we had, um, all time highs, uh, at least denominated in dollars. I know part of your argument is maybe denominate some of this in R and B and see what the difference is, but gold right now, 4,100 per ounce, something along those lines is gold fairly valued according to global liquidity, or is it undervalued? Is it overvalued? You know, what's, what's kind of your, your price point for the fair market entry into
Speaker 2gold? Well, I think the fair, the fair value entry point is that if gold goes down by more, I mean, the fact is that liquidity is moving up over the longterm. Um, you could have made, you could have finessed this point about gold, um, you know, over the last 25 years, but generally gold was compounded at such a rapid rate, uh, as I say, over eight and a half percent, it's more than matched the increase in federal debt. Uh, if you believe that federal debt is going to slow down its growth, uh, and, uh, you know, there's going to be some, uh, renaissance where, um, you know, Besson pulls a rabbit out of a hat, and suddenly manages to pay back debt, uh, you know, ignoring that, that remote possibility. Uh, I think federal debt's got a compounded at a equal, uh, eight to 9% rate over the medium term, pretty similar to what it did over the last 25 years or so. And that would mean gold does exactly the same thing. And you've got to remember that if something is growing at just over 7% per annum, it doubles every, uh, uh, every 10 years. Uh, so you're looking at a more than doubling in the gold price. So I think to buy it, um, on a 10 year view, I think the buy it, uh, in a weakness makes a lot of sense. And I think it's not just federal debt in the U S that's going up. It's basically Chinese monetization, which is going to be forced as well. And for that matter, everybody else, we're all in the same boat. I mean, no one's going to tell me that the, the ECB in Europe, uh, is not going to print money to try and bail France out of his current, uh, difficulties. Sure as eggs are eggs is going to do that. Remember the same, whatever it takes. Yeah. I mean, yeah.
Speaker 1We, we started this episode talking about Bitcoin and maybe we want to, uh, conclude this episode, uh, talking about Bitcoin. I think in the past you've indicated that as sensitive as gold is to global liquidity, and I don't recall the sensitivity, is it 20, 25%, uh, Bitcoin is even more sensitive. I think you've, you've, um, tracked it as 40 to 45% of Bitcoin's draw drivers are actually global liquidity. So that would make it almost like a high octane gold. Uh, again, you know, Bitcoin does not have decades and centuries of, uh, price. So this is, you know, um, much shorter, um, time horizon, but high octane gold, five X gold Bitcoin's track record you've written so far is shorter, but it's sensitivity to the global liquidity has recently been approximately five times greater than gold. And you talk about adding even 5% of crypto assets like Bitcoin to your portfolio can make a massive difference. So let's talk about Bitcoin again, as we end this episode, do you expect that to continue to be the case that Bitcoin is the best way maybe, um, or one of the best ways to have a hedge against the global liquidity continue to increase for the foreseeable future?
Speaker 2Well, if it was, um, if it was the best way and I was sure of that, I'd be a very wealthy person. So, um, I think the fact is that it is a way, uh, it is demonstrably a way in the last 15 years, gold has a track record that goes back, you know, more than 5,000 years or whatever. So we know that gold works as a monetary inflation hedge. Uh, that's for sure. Uh, unless government's trying to stop it. And I think unlike, uh, the early 1930s with, um, you know, the, the gold act when, um, you know, Roosevelt bought in force will be bought in gold. Um, you know, that ain't going to happen again because it's gold is too widely dispersed and you've got ETFs and whatever else, uh, in different countries. So it's very, very difficult to control that. So in that, uh, unless that, um, you know, nightmare happens, I don't think it's practical to do that. Um, gold is going to be a very good hedge. Now what I would be doing would be saying, well, okay, we don't know which is going to be the best of the two. They both work. Uh, why don't you just own both, but you, you wait the portfolio, uh, based on volatility. So Bitcoin is clearly way more volatile than gold. So you've got to have more gold relative to Bitcoin to give a sort of, uh, an average, an average out that volatility, uh, differential. Uh, but over time as Bitcoin becomes more institutional, its volatility will come down and therefore you can increase your waiting over time. But I still think that it's worth buying these assets on weakness. Uh, there may will be further weakness in coming months that that's for sure. Uh, as I say, I draw the, uh, I, I draw out the, the, the other sort of qualification, which is saying that, you know, maybe Bitcoin is telling us a little bit about the change in the monetary environment. So you've got to be alert to, uh, looking at the chart points, uh, providing it doesn't go below 70,000. That would be, you know, that, that would be a, a, a game changer for me, but I'd certainly be thinking about buying in a weakness, uh, and gold too. And I think gold is going to go up because of what China's doing. And I think Bitcoin is going to go up because the liquidity cycle is going to turn.
Speaker 1So let's chart this then and talk about the liquidity cycle turning. Uh, so, I mean, you are famous for your global liquidity index, and I think global liquidity at the time of recording about a year ago was 185 trillion on your market right now. I think it's about $196 trillion. And I don't know if that's rising or falling, but the long-term forecast or even the medium-term forecast for you is that it continues to rise. You noted this in a July 28th note, a 1% change in global liquidity is associated with an 11% change in the best basket. The best basket is Bitcoin, Ethereum, and Solana. So it's not just Bitcoin. I believe it's a composite of those three assets together. Bitcoin being kind of a liquidity sponge. So if we're to forecast global liquidity, let's say, you know, $195 trillion, and we bring you on next year, we bring you on the year after that, let's say we bring you on annually, Michael. And, you know, we're talking about three years from now or five years from now, what would you approximate global liquidity to be? And how will that relate to something like the best index if that 11% change, you know, for every 1% in global liquidity continues to be the case?
Speaker 2Okay. Well, I mean, the starting point is dead. And what I've put up on this chart is our global liquidity cycle. This is shown as an index. It's basically an index of the underlying momentum of global liquidity. So this is the underlying growth rate. And you can see that it moves in. In five to six year spans or cycles, okay. And we're moving down at the moment, as you rightly say, late last year, Q4 last year, there was a peak, and liquidity started to come down. Now, what you see in the world economy is that debt grows exponentially. But liquidity has a large cyclical element to it as well. Okay. That is why you get financial crises, because liquidity and debt don't match. And that's why you get asset bubbles, because the upswings of the liquidity cycle, that money is more than is required for debt refinancing. And therefore, you get the Venti's higher asset prices. So that's really the mechanism. Over the long term, debt and liquidity must move in harmony. And the ratio between debt and liquidity must form an equilibrium. Therefore, if you believe that debt is rising at an average clip of, let's say, circa 8%, therefore, you've got to believe that liquidity is rising at around 8% to per annum. That is also, as it happens, by coincidence, the history of the last 25 years. Wow. And it's going to continue, right? Now, if that's the case, as I said, if something grows at a rate of over 7% per annum, it doubles every 10 years. So the stock of global liquidity will easily be double what it is now in 10 years. And that would mean that the response of monetary inflation hedges would move similarly. Now, I would suspect that if you look at the multipliers, and I come back to your point earlier on, that if you look at the multipliers, Bitcoin is a lot more sensitive than gold to global liquidity. And if you look at the multiplier for gold, it's about 1.25. So in other words, that's the elasticity. So if you get a 10% rise in global liquidity, you'd get about a 12% to 15%, in fact, rise in the gold price. Bitcoin is a lot more than that. But the sensitivity is coming down over time. I mean, that's for sure. The more institutional it becomes, the less it becomes sort of a new kid on the block, and it gets more absorbed, and that ratio tends to fall. So let's not be too optimistic. But the fact is that Bitcoin over that period is easily going to double. So that maybe is all you need to know. But the fact is that the liquidity cycle ultimately will turn higher. It's not as we speak, but I'm watching the chicken burns.
Speaker 1As this plays out over and over again, the full cycle, the global liquidity cycle each time, my big question as we end this episode is thinking about your work and what you've been doing to track it, how many more turns of the wheel do we actually get? So you said in 10 years, this is going to double. In 10 more years, it doubles yet again. I mean, can we just continue to keep on this pace? Or does at some point something break? I mean, global liquidity right here is denominated in dollars. In previous eras, it's been denominated, let's say, in other currencies. Maybe if we looked at this in the year 1900, it would be the pound sterling. Does something eventually break in this chart? Or do we just continue to turn the wheel? Do you expect in the decades to come, we're just going to keep cranking the wheel and we're just going to, the chart is going to continue to go up and to the right?
Speaker 2Well, on the basis that we continue to operate in a credit money economy, the answer is that there's no alternative. This is what's going to happen. It may well be that the names change. It's entirely possible that, I mean, God forbid that we're trading the Chinese yuan, not the US dollar. Everything's denominated in that. That might not be a great world to be in, you know, never say never, of course. But what we're looking at is, broadly speaking, a paper money, a paper money world. In other words, paper credit, that's what's driving everything. And basically, politicians, policymakers et al, kick the can down the road. I mean, just look at the value of the dollar, you know, in what, 1900. Okay, so we're talking 125 years ago. I mean, compared to today, the dollar would, you know, be worth, or that dollar would be worth what? I mean, whatever it is, 11 cents. 11 cents or whatever the number is, maybe even less than that. So, you know, as the years go by, the value of the dollar gets eroded more and more and more. And that's what we've got to expect. But that's true of every currency. Hopefully, it doesn't derail. Like, you know, nobody talks about the Hungarian pengo anymore. That was a hyperinflationary currency or the Reichsmark or whatever it may be. These things, you know, these things do skyrocket in terms of their loss of value. But, you know, hopefully, providing that Besant Walsh et al., you know, keep moderate monetary inflation going, all we need to do is to be alert to where we allocate our assets.
Speaker 1Any final words for investors looking to 2027? What would be your sort of parting words to everyone listening for what to look out for in 2027? How to prepare?
Speaker 2Buy the dips and buy the bigger dips harder. And what we're in is a cyclical world, but a cyclical world dominated by debt. Unless you think that those parameters change, you've got to be invested in things like gold, Bitcoin and monetary inflation hedges.
Speaker 1I think listeners are used to hearing those words, buy the dips. Michael Howell, thank you so much for joining us. For everyone listening, I've got to highly recommend Michael Howell's Substack. I am a paid subscriber. It's fantastic. One of the voices in macro that I always find has signal for me. People can find his work at Michael, thank you so much for joining us today. It's been a pleasure. Great pleasure, guys. Enjoyed it. Thank you. Got to let you know, of course, none of this has been financial advice. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier, not for everyone, but we're glad you're with us on the Bankless Journey. Thanks a lot. Bye.
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