‘Absolute Madness’: Trillions In Debt Maturing Soon As Inflation Reignites | Michael Howell
Summary
Liquidity Cycle: The guest argues global liquidity is peaking and likely to inflect lower into 2026, driving asset allocation shifts and increasing market turbulence.
Precious Metals: Bullish medium-term; framed as monetary inflation hedges with a clear “buy on weakness” approach given ongoing debt monetization and policy support.
Gold: Highlighted as outperforming over decades versus rising federal debt, supported by central bank buying (notably China) and currency devaluation pressures.
Bitcoin: Presented as liquidity-sensitive and an inflation hedge; despite volatility, the guest favors buying dips alongside precious metals.
Commodities: Expected to perform in the current “speculation” phase; rising prices in areas like copper signal a heating economy and inflation risk.
US Treasuries: The Fed’s bill purchases support near-term liquidity; the guest suggests cautiously adding mid-duration bonds as yield curves may flatten with slowing liquidity.
Market Outlook: 2026 could see a stronger real economy but a rangebound or more challenged equity market, with risks from the debt maturity wall and repo market stresses.
Risk Management: Shift more defensively, monitor central bank flexibility to inject liquidity during plumbing issues, and watch inflation dynamics from Treasury-led fiscal monetization.
Transcript
The everything bubble rested on two features. Number one was that every financial crisis or every problem in the world economy has been met by one solution, more cash. The primary goal of the Federal Reserve despite what it says uh in terms of you know its mandate is uh uh supposedly employment and inflation. Its real mandate is to maintain the integrity of the government bond market. So if you get instability in the Treasury market, they will be throwing liquidity at it. As the Federal Reserve prepares to buy Treasury securities uh for the first time in a few years, we're going to be talking about what this means for global liquidity. Our next guest is basing his prediction on global markets on global liquidity conditions and debt conditions. His name is Michael Howell. He's the founder, managing director of GL Indexes, formerly known as Crossber Capital, and the author of Capital Wars on Substack. Follow him in the links down below. This is a very interesting discussion. and he's got some very interesting research on global liquidity conditions and cycles. Welcome to the show, Michael. Good to see you. >> Well, thanks, David. Great to be here. A lot of things going on in markets right now. >> Absolutely. And uh I want to pull up the first slide and I'll let you show uh the rest. I just want to show this very briefly. The title of your presentation that we're going to be going over is Outlook 2026 financial crisis and inflation. And I just want to have you please explain to the audience before we get start before we delve into your outlook itself what your thesis is. How global liquidity is tracked and used to make predictions of markets and why it is that you've put crisis and inflation is the title of this particular substack or slide stack rather. >> Okay. Well uh that's a high bar to jump in maybe a couple of sentences but let's have a go. U I mean we look at global liquidity. Global liquidity is what has been driving asset markets for uh certainly much of the last 3 or 4 years but arguably a long time before that too. Um assets are very sensitive to liquidity just look at what look at the behavior of bitcoin for uh one particular example. Um in terms of why we think that liquidity is going down or peaking um is broadly because of uh of two things. One is that central banks generally and um uh I know the Fed has changed a little bit in the last two days but the Fed but generally central banks are beginning to uh slow their liquidity injections into markets but set against that what you've got is a strong real economy. Uh you've got something called the debt maturity wall which is upcoming which is basically funding a lot of debt that was turned out during the COVID crisis and that's coming back to haunt markets. And the third thing is we know that fiscal spend is uh is racing ahead and that somehow has got to be funded. So in other words there's not enough money around and if you take the thesis that all money that is anywhere must be somewhere uh if it's in the real economy it's not in financial markets and that really is the problem. >> I just want to go back to the statement that you made which is that central banks are halting liquidity injection. So we've got the Federal Reserve of the US that's going to inject more liquidity. The Bank of England where you're based is about to cut rates. I believe the Bank of Canada, where I'm based, is holding rates steady. The Bank of Japan is hiking rates. So, there's policy divergence all around the world. So, um, how are you getting that information? What are you basing that on? >> Well, the first thing is that we're tracking the movements of liquidity from central banks. So, we're looking at the amount of liquidity they put into the system. Uh, you're absolutely right to say the Federal Reserve has actually changed uh to some extent in the last couple of days. The question is, has it changed enough? Uh the key point is that over the preceding uh 3 to four months, the Federal Reserve actually took a lot of liquidity or oversaw the uh extraction of a lot of liquidity from US financial markets, which is largely why you've seen this volatile move through uh the indexes and why Bitcoin has basically fallen back. So that's the US story. Uh Euro zone, the in the uh the basic prediction is that rates will be uh or on an incline now. uh there's more likely to be tightening in the Euro zone. Uh if you look at Japan that they're signaling the same thing and if you look at China, rates are basically beginning to edge up. Um uh so I think on all these what you've got is a backdrop where we may be near the peak in the liquidity cycle. Uh we're not saying that liquidity is falling strongly yet, but we're saying that this is a prospect for 2026. >> Why can you just maybe at a high level to explain the theory behind why global liquidity moves in cycles to begin with? Yeah, it it moves in cycles really because uh I I guess for two reasons. I mean, one is that it's feeding one one is you've got central banks that are effectively injecting a lot of liquidity into the system at different times. They may have object objectives such as stimulating employment growth. They may have other objectives such as trying to re inflation. Uh you've got a real economy which is using that liquidity. And on top of that, you've got debt which needs to be refinanced. Uh what we're looking at here is a cycle that is around six years actually 5 to 6 years an average of 65 months. Uh it goes back all the way here to the mid1 1960s. Uh that cycle is very well established. Uh you can see if you cast your eye towards 2022 23 that the cycle basically bottomed almost exactly uh on the point that the sine wave the dotted red line was indicating. uh we've now been in a bull market for liquidity and asset markets uh for about 3 years. We're coming close to a prospective infl uh inflection point. Why is it 6 and 1/2 years or sorry, why is it 5 to 6 years? The reason probably is that this is a debt refy cycle fundamentally. Uh liquidity is in the system to refinance debt. Financial markets globally uh have got so much debt. Most of the transactions that go through financial markets today are debt refinancing transactions. So this is a refi cycle and the average maturity of global debt is lo and behold about 5 to 6 years. So it all seems to dovetail quite well. >> Michael, does this chart overlay with GDP growth or markets? >> Well, it overlays with markets. Um, I think you'll probably see in the deck there's actually an attempt to try and um uh relate uh there's a a chart a little bit uh uh uh I think it may be uh a little bit later in that but it's showing um uh if I recall. There we are. Uh if you look at the pink one, what you'll see is something I snipped from Twitter, which was u um an article about bubbles in asset markets worldwide. uh you can just about make that out I hope but that pink sheet may well have come from the Financial Times. I can't really read the source but uh basically what that shows uh is a series of asset bubbles in different colors. What I've done I've overlaid on the top of that in red our global liquidity cycle and what that is trying to show is that every bubble has coincided with a peak uh in liquidity and every collapse in a bubble has been associated with liquidity conditions tightening. Now, if you look at the latest cycle, uh, and I'm not saying this is particularly scientific because I've just overlaid one chart on the other, but you can see that within uh liquidity beginning to inflict downwards, there is a danger for the so-called everything bubble and that is a real problem potentially. >> When we say everything bubble, do we literally mean everything or is it mostly just tech stocks, Michael? >> Well, no. I think that you've got there's a lot of things which are which are clearly going up generally. Uh, and I think the I I just use that that moniker because that's what a lot of people are now dubbing it, the everything bubble. Uh, because we've been in a period where asset markets generally have been inflating uh, pretty nicely for a number of years. Uh, that has been courtesy of a lot of liquidity in the system. >> This would be a good explanation as to why everything's been moving up in tandem. Things that typically have not been correlated with each other on a shorter term or even longer term scale. So gold for example and Bitcoin and stocks and to a certain extent bonds have all done well this year up until now. Well, Bitcoin is now down here to date, but up until October it was up. And so how can one explain all assets moving up together even at a time when the Federal Reserve was not cutting rates as dramatically as one may think that they should be? >> Well, I think the point is that interest rates are an incredibly misleading indicator of the stance of monetary policy. uh and that must be the case if you're looking at an economy which is dominated by uh lots and lots of public debt uh because if you take the US as an example treasury debt is so large that there are huge transfers of interest payments from the government to the private sector now if you uh cut interest rates you're actually cutting people's income. So it's not entirely clear to me that an interest rate cut is stimulating economy uh in the same way as it historically did uh in the same way that an increase in interest rates is uh is unclear as well. If you're adding liquidity to an economy it's unambiguous that that is a stimulant to uh to spending. If you take liquidity out of the system that is clearly putting the brakes on. So liquidity is a much uh much less ambiguous guide than interest rates. >> Before we jump back into the video let's talk about something most people ignore but is very important. your online privacy. Your personal information isn't just sitting on your phone or email. It's being scraped, bought, and sold by data broker sites every day online without your permission. Our sponsor today, Delete Me, helps you take that control back. They scan the web for your exposed information, send you regular privacy reports, and remove your data from hundreds of broker sites so it can't be used against you. And in their latest report, they reviewed over 325 listings to see if any data broker had my personal information. And they continue to check every week to make sure it stays off. Go to joindeme.com/davidlin and use promo code David Linn at checkout or scan the QR code here on the screen. Get 20% off on all US plans. Take control of your privacy today. This is a very uh important chart. Global liquidity and world wealth. all wealth including gold and housing. Are you including also the stock market as well? >> It shows everything in there David. It shows stocks, bonds, all liquid assets. It shows precious metals, cryptocurrencies, residential real estate. uh it's a global figure and what you can see there is the gerations of liquidity uh which is shown in orange with a projection as the dotted line what we think is happening over the over the coming 12 months uh against the returns the annual returns from that portfolio uh which is shown in black uh it's not exactly 1:1 and I would have to say that if you go back uh previous uh one or two decades there is a correlation it's not quite as precise as this but it's definitely there uh but what we've seen in the period since the global financial crisis is that the correlation between liquidity and asset returns has been almost one to one and what is driving that liquidity. It's principally what central banks have been doing. [snorts] So I I I have a few follow-up questions. First is what happens to the real economy when wealth uh total wealth drops. This graph makes a lot of sense when global liquidity conditions rise and or drop uh wealth including stocks, gold and everything that you've measured follow. So what happens to the real economy when global liquidity and [snorts] wealth both go down? >> Well, it's probably not not a particularly good signal. That's for sure. In the sense that if you're getting uh a loss of wealth, uh presumably consumers are going to be spending less. And if there's a tightening of liquidity conditions, uh generally businesses are going to find it are going to struggle to uh either build inventory or or or raise capex. So I think you would expect it to be a negative factor. I think one of the things one's got to think about is that is there a very clear transition between money in the financial system and money in the real economy and although the textbooks kind of uh you know gloss over that uh the linkages are there but they're not exactly precise and you can have money uh washing around the financial sector uh which doesn't spill over into the real economy. Uh as I said earlier on all money that is anywhere must be somewhere but if it's in the financial sector feeding a speculative bubble it's certainly not going into the real economy. It may spill over to some extent, but it's clearly not a one forone relationship. Now, I think that really uh underscores the policy of the US administration at the moment where what I would describe them doing is shifting from uh I think a label of what you might call Fed QE, in other words, FedEled stimulus of injecting liquidity into the system to what I've called Treasury QE, where the Treasury is already trying to do that itself. And what you're seeing very clearly in the US and everything in terms of all this legislation, the changes in uh in bank regulations, uh the funding at the short end of the market with treasury bills, you could even argue the Genius Act, uh in other words, the support of stable coins, all these particular features are trying to endorse the background for Treasury QE. And what that really means is that the Treasury is doing spending itself in the real economy. Whether it's defense procurement, whether it's uh critical minerals, whether it's taking stakes in strategic industries, the Treasury is spending money in the real economy. It is driving employment and driving the real economy. It's paying for that through issuing Treasury bills and shortdated debt. Uh and that is the Treasury QE process. Uh the Federal Reserve when it acts basically acts with an unguided hose. Everybody gets soaked or every asset gets soaked. Uh that's good for some people. Uh but it ain't good for Main Street. And that's what the immersion is trying to correct. >> I'm curious as to how we can determine whether or not a contraction in global liquidity is going to lead to an economic contraction, recession or even a market meltdown. So you can see here a couple cases in which uh a huge contraction makes sense. The dotcom bubble in 2020 financial crisis uh interestingly co did not see global liquidity drop to negative levels. That's interesting. But it did drop in 2022 that coincided with an everything market drop as well. That's when the Federal Reserve was raising rates. But then you see periods in like 2015 for example uh 2012 uh and to a certain extent mid 2000s when global liquidity dropped below zero or near zero and the economy was just fine markets were just fine during those times. You know h what happened? >> Yeah well I mean I'm I don't use global equity particularly as a predictor of what happens in the real economy. I think the two things are separate. There is a linkage but what I'm looking at is global liquidity is a driver of asset markets and what you can see there is a much um you know is is a much closer relationship. Now just to just to emphasize this backdrop and I'm going to go down three rabbit holes. The first one is the previous chart that you put up with the traffic lights. I think uh you can see there that what we tend to think about is uh is different phases of the liquidity cycle. Now I actually think maybe we need to introduce this by looking at the at the chart before showing a schematic asset allocation. But what it shows here is that the liquidity cycle has very clear phases that we call rebound, calm, speculation, turbulence. And then we also have phases on the right hand side of asset performance linked to asset performance such as equities do well in the upswing of the liquidity cycle, commodities around the peak, cash in the downswing, government bonds at the trough. Now if you go to the traffic lights you'll see that you know describing the these are these are set in stone pretty much these traffic lights but it's just a guide for asset allocation and if you look at the four different uh columns uh on first on the left which are assets and then on the right which are industry groups the rebound is the beginnings of the upswing in the liquidity cycle that says reading this as a traffic light uh if it's amber proceed go forward but be care be careful uh green is clearly go ready to stop. So in the rebound phase which began in late 2022, you want equities and credits, you were basically you know marginally or moderately risk on. You didn't want commodities or bond duration. By the time you get to calm, which let's say is over the last 18 months, you wanted uh uh strong risk on. You wanted equities. You were starting to be a little bit more neutral towards credits, but certainly building up commodities. Uh we are in now in speculation in the US. So you want your commodities uh I mean just vis what's happening in the precious metals silver you know all a big big rise in this year in particular gold has done well uh commodity prices like copper are up significantly u you've got equities which we're now starting to trim uh credits probably you want to be wary of and then as we move towards turbulence you want to be sticking your toe in the water uh as regards government bonds look again at industry groups uh same uh idea cyclicals in the upswing, defensive in the downswing. Led by technology, they've been the star performers uh through the markets in the last 3 years. Financials have had a stunning 18 months uh globally certainly, but also in the US and that's a typical midcycle move. And then you look at energy commodities which tend to do well around the calm speculative areas of the market. Uh and then finally, if you're in the uh the as you go into the downswing, you want to be a lot more defensive uh for things like consumer staples as liquidity is contracting. So what I'm saying here is that rabbit hole number one is basically saying, look, we've had a flatlining of economy, flattening of the business cycle since co that has not spa explained asset allocation at one jot. Right? Economists have been telling us for many many quarters now that the economy is about to go into recession. It certainly hasn't. It's growing quite well. What you've seen is a pronounced liquidity cycle and that pronounced liquidity cycle has taken us through uh asset allocation themes uh you know pretty well I mean it's described what we've been going on. This is a liquiditydriven asset allocation cycle and it's moving very very normally. So that's rabbit hole number one. Rabbit hole number two is if you go down in the presentation and you look at a chart where we describe the uh I tell you when to stop the the QE uh uh backdrop. Uh if you go down a bit further uh there's a lot of chance in this but if you keep keep going down I'll tell you when to to hold. Um so so uh keep going here right there. But one before sorry there we go up up up one up one. That's it. Great. Now if you look at this this is looking at uh the US and U the US Fed and US Treasury stimulus liquidity injections into the US system. And what this is basically showing is the uh amount of liquidity uh or liquidity equivalent that goes into the market. Um the red area of that is conventional QE. So that's basically uh the Federal Reserve buying uh coupon securities in the market. Uh the orange is what we some slightly flippantly call not QEQE. So it was not headline QE. uh it was actually occurring during a time where they were uh engaged largely in uh what they called quantitive tightening although they didn't really do that. Uh this was backdoor stimulus if you like a sula tarabler uh a sort of liquidity u impulse uh things like the reser uh reverse repo uh facility was paired down treasury general account all these sort of phenomenon uh bit wonkish but that shows liquidity going into the system and then you got the black area which is really what the treasury has been doing funding a lot of its expenditure through treasury bills and uh what you can see is as the cycle has evolved there's clearly been a cycle for sure. But the black area which is Treasury QE is dominating proceedions proceedings in 2026. Uh so the Fed is stepping back, the Treasury is stepping forward. It's a transition from Fed QE to Treasury QE that underscores a much stronger economy. And what you can see in the little window that we've put in the in that chart is the black line uh on that sort of shadow outline, the orange outline of this uh previous of this bigger cycle. uh the black line is the change in the US PMI index uh lagged by around 9 months. So what you can see there is uh how that relates to uh the cycling in liquidity. So what that's telling us is that 2026 should be a good year for the economy. Uh and that maybe is exactly what the administration wants given the fact that you've got uh midterms upcoming uh next year. >> A good year for the economy but not necessarily a good year for the markets given the liquidity conditions. Right. >> Absolutely right. So the the corollery of that is what you may be seeing is a pickup in inflation and if you look at the next slide uh now this is a little bit wonkish but what this is basically showing is that because the treasury is issuing so much debt at the short end of the market. The question you got to ask is who is buying that? Well it's the banks because the banks love that stuff. They love shortdated government debt. that's exactly what they need uh to put into their balance sheets because it matches the duration of deposits and deposits are bloated because there's lots of fiscal spending. So what you can see here is the orange line shows the growth rate of banks holdings of treasury and agency securities in the US. It's outpacing conventional money supply growth, the M2 number and that is pure monetization of the deficit. Okay, that doesn't end well. We know that from history. So this is inflationary and you know you can see this uh both globally if you look at the next slide. So this is not just a US phenomenon. This is happening worldwide. I mean everyone has worked out that Scott Besson has got the secret elixia here and this is how you fund the the government deficits. You start going down the short end of the market. And what you can see here is the monetization of government debt uh worldwide uh in terms of uh that line is showing the percentage of domestic liquidity that is now accounted for by public debt or growth uh holdings of public debt the incremental amount. So it's bank holdings and government debt. This is effectively uh you know giving a credit line to the government is printing money uh to fund the deficits. This is a global phenomenon. Japan is starting to do it. The Brits are starting to do it. The US is leading the way. I mean this is you know this is how uh governments tend to governments are now funding themselves. It's inflationary. You look at the next slide and what this is showing is um is you know a couple of scary things. One is that the orange line is break even inflation in the US the tips uh market. Well that's not showing anything but I think that's being massaged a bit. The dotted line is the same uh calculation but not using the treasury market but using the MBS market uh to try and bootstrap uh a break even inflation rate and that's higher but just take a look at the black line which is the University of Michigan consumer survey for inflation uh that's is is uh you know jacking up very you know very high levels and we're talking at 4% inflation. >> What do you think that's from tariffs or liquidity? No, I think it's B I don't I mean tariffs are clearly having an effect, but this is this is basically because of monetization. Uh it's because the economy is starting to heat up. I mean look at all these commodity prices rising. Uh that's that's not tariffs, believe me. This is because the economy is starting to get hot and you know next year is going to be a challenge for that. Now the third rabbit hole is okay if that's not enough and I don't want to sound too bearish because I'm not that bearish but uh clearly I'm I'm getting a bit more cautious. uh if you start to go up in that presentation and you'll see why I labeled this presentation uh about financial stability as well. Now keep if you keep going up they'll there'll be a time to uh I'll call hall uh this one well debt it which says debt liquidity cycle. Now the debt liquidity cycle is a chart that is a schematic but I'm just going to run through that because it's not what you see in textbooks. This is the financial system post 2008 post global financial crisis. At the heart of the system is a debt liquidity nexus. That debt liquidity nexus tells us that something like 70 to 80% of all transactions in financial markets today are debt refinancing transactions. Capital markets, despite what the textbooks tell us, are not about raising new capital for uh for new green field investment projects. They're basically about refinancing existing debt. That's the situation we got ourselves in. There's so much debt. So, what you need to refinance debt is liquidity. And that's why liquidity is critical. You need balance sheet capacity among credit providers. And that is the liquidity that we measure. Financial stability rests on this idea that you've got a stable or robust debt liquidity ratio. The paradox in the financial system is that debt needs liquidity that liquidity needs debt because something like uh nearly 80% you'll see that the figure on the top left is 77% but nearly 80% of global lending is now collateral backed not our figure that comes from the World Bank and what that's saying is that liquidity needs debt and net debt needs liquidity. If you get a if this derails on the right, you get a refinancing crisis, but you can spot that through credit spreads and term premier. If it derails on the right, so you can't turn your debt into liquidity, then you get a repo collateral crisis. Lo and behold, that's what we've been witnessing in US uh repo markets. And that's the problem. Take a look at the next slide. And this is showing the equilibrium in financial markets since 1980. What this is showing is the debt liquidity ratio in the advanced economies. Okay, this is showing where you get financial crisis when that ratio is elevated. So when you get lots of debt relative to liquidity, you get refinancing tensions appearing particularly in repo markets and that can spread out across the yield curve along the yield curve to affect uh debt uh of of all stripes. And what you see is problems we've annotated where you get financial crisis in the lower part of the diagram below the dotted line at 200%. So that's the equilibrium level. Uh you get periods where liquidity exceeds debt needs and that's vent is asset markets and you get asset price bubbles which I've also annotated. Look at where we've well now so-called everything bubble certainly has been feeling like that. But then if you look at that orange line it's going up. Uh why is it going up? It's going up for two reasons. One is it looks as if central banks generally are beginning to curtail. I'm not saying they're doing it in big size yet, but they be the cycle of central bank liquidity is just starting to inflect lower. Okay? And that's what we got to be conscious of. It's not, you know, it's not pressed the red button yet, but we're we're starting to get a little bit cautious. And then what you have got on top of that is uh is a lot of debt needs to be refinanced. And that debt is debt that was termed out during uh the COVID crisis in particular. Now the everything bubble rested on two features. Number one was that every financial crisis or every problem in the world economy has been met by one solution more cash. Okay, central banks just dishing cash to markets uh QE or QE squared or whatever you call it. It's been going in big time. That's the solution to a problem. I mean you could even say look at the R&P that was announced two days ago in the Fed problem in the repo markets. Give them more money and that's what they're doing. Um, the other thing was that interest rates fell to nearly zero. Now, in my years at Salomon Brothers, we was schooled on a book called The History of Interest Rates by Sydney Homer, which looked at four millennia, 4,000 years of monetary history. Nowhere in those pages is there any mention of zero interest rates. This is a new feature. It's normal. We've just [clears throat] had that. If you have zero interest rates, it encourages debt. We don't want debt. But it also encourages people to term out their their borrowings. And if you look at that, what about negative just just sorry before what about negative interest rates like we saw in Japan were real negative interest rates like in some parts of Europe that we've seen. >> Yeah, exactly. You know [laughter] >> what kind of incentive does that provide? >> It's madness. Absolute madness. This is the policy makers have, you know, have got it completely wrong. So this is the debt maturity wall. So this is looking at the increment not the absolute level the increment in debt that is coming forward needing to be refinanced every year and this is in trillions of dollars. So the underlying level is about 2530 trillion but these are the incremental uh amounts each year and you can see the bite out of the chart that occurred in 2122 23 which was the period that we said of zero interest rates or even negative interest rates where people said thanks very much we're going to we're going to refinance we're going to term out our debt and we're sticking into the late 2020s that's now coming back to haunt us which is the dark red bars and it's that which is the problem. Uh I'm not going to say it won't be refinanced. What I'm saying is it probably will be refinanced but it's going to absorb a lot of liquidity out of markets and that is the problem. And what happens if you get that occurring you start to get problems in the repo markets and if you look at the next slide it'll show you that this is the problem that we've seen in the US over recent weeks uh or months which is the spread between sofa rates and fed funds rates. Now this probably leads us to the last rabbit hole which is basically looking at what the Fed has just done and what the Federal Reserve has done has tried to calm the markets down by giving them more liquidity. Now uh if you get problems and imbalance between debt and liquidity you get spikes uh in the repo markets in other words banks dealer banks are scrambling for liquidity uh to try and do these roles. Now what you can see is that sofa uh which is a market rate is elevated relative to fund fed funds which is the central bank's uh policy rate and you can see that we're uh we've been in what I've labeled as the danger zone uh where you start to get serious problems and you start to get a pickup a significant pickup in trade fails uh in other words that that trade just won't settle and that can lead to volatility in markets and nasty things. So the Federal Reserve has tried to cure that and what they've done is they've injected or prospectively started to inject liquidity from today in fact uh where they're going to start to uh buy bills uh totaling about 40 billion on a monthly basis 40 billion US uh of Treasury bills uh the so-called R&P purchases reserve management purchases. Now they won't call that QE of course but it is there's nothing there's no difference from that. it it's simply a liquidity injection into markets and that backdrop is clearly positive for markets in the near term because they get another dose of liquidity. The question is is as 2026 unfolds is that going to be uh sufficiently positive to keep Wall Street bubbling up? My view is probably not. Um but let's keep an open book on that because in actual fact one of the merits of what the Federal Reserve announced 2 days ago was they uh pretty much said that they were flexible uh on uh on these purchases. Uh now they did warn the market that maybe these purchases come down. They don't always go up. But I think the point is is if they're addressing as they claim a technical plumbing problem, then if you get another air blockage in the pipes, uh they're going to start injecting a lot more liquidity in there to clean them out. And so this is kind of open-ended in a way. It could be more than 40 billion, could be less. But what they're really doing is I think they're saying, "Okay, what we're now doing is we're targeting uh sofa rates. That's the intention. We're putting a we're giving the repo markets a put." >> Is this the uh phenomenon you're describing or is this something else? The the banks have been tapping into the Federal Reserve standing repo facility for quite some time. In fact, this the highest usage since the program was introduced shortly after CO if I'm led to believe. So banks tapped. This is this is a couple months. >> This is a phenomenon. This is what you're talking about. Okay. >> Exactly. Yeah. This is it. >> Is this actually adding liquidity into the system though? I I'm getting I've been getting mixed messages about this. >> You bet it is. Yeah. Absolutely. No question. It's adding liquidity. Uh it's it's uh the the banks are borrowing from the Fed. They're adding liquidity to the system. >> How much of that how much of that borrowing is actually transmitted to bank lending? >> Well, that's that that's a that's a very different question, David. I mean, that how much concern in bank lending is a is a very difficult thing to say. uh what it does is secures the balance sheet. It probably would stop them uh liquidating uh areas of the balance sheet. So I think it it gives them uh you know it gives them support but I wouldn't necessarily say that that necess that necessarily comes through in bank lending. I mean in the same way as if you look at the QE programs over the last uh what 15 years has that radically increased bank lending in the US or any other country? Not particularly no certainly inflated asset markets though. So, we don't know definitively, Michael, if more debt is going to translate to more commercial lending and commercial credit available in the system. >> Well, in the the short answer is no, we don't because that's not really the mechanism and how these things work. But but the point is if the Federal Reserve is injecting liquidity, not withdrawing liquidity, it's at least a positive sign and asset markets will benefit from that. But the key point, the key transition uh is this transition from Fed QE towards Treasury QE as I've labeled it. and that is trying to get the real economy moving. And contrary to what many people would argue, I still believe that we're like likely to see a much stronger economy in 2026 because on top of this fiscal spend uh and that's this remember that the one big beautiful bill starts to bite significantly next year. You've got a lot of AI spending uh coming capex from AI spending coming through as well. Uh and that is likely to underpin a stronger stronger GDP in the US. I want to go back to the chart one more time. Michael, do we have um any models or predictions to forecast uh or tools rather to forecast the degree of global liquidity falling. In other words, the magnitude drop because I am interested to know uh how how far uh stock markets would be impacted. you look at this chart for example, there's a pretty good correlation and they do seem to move roughly um in the same magnitude of percentage change year-over-year as well. >> Well, the answer is that we we're trying to project what we're doing at the moment is is predicting the beginnings of an inflection. Uh I think that you know it is that it's quite possible it's going to be worse than this. Uh but what we're seeing we're just using our our current measures to try and show what central banks are up to now. they haven't started to put the brakes on sharply. Uh but clearly if there is an inflation breakout uh they may well decide to do that. Um you know I uh I wouldn't necessarily believe that if the Federal Reserve is intent on cutting interest rates which the dot plots seem to indicate that that's going to have any particular bearing on liquidity conditions per se. Uh it may well help to weaken the dollar. It may help to fuel inflation. It may help small businesses but that's not really a liquidity injection. uh they're two very different things, but I think generally what we're leaning towards is a period where you've got uh uh a a stronger economy and a weaker potentially weaker stock market or certainly a more troubled financial backdrop. Now, the chart that you just put up is basically saying, well, okay, uh can I can I lean back on history to give any support to this argument? And what this is saying is, well, look, just hey, just take a look at this. This is the average gain on the S&P uh in each year of a US presidential term. Uh the average figure from 1970 through N24. And what that's saying is look, you know, I mean, this year is pretty much on track here. Um year one of of the presidential of Trump won, then we get year two of Trump. U next year 26. Well, that's going to be a subpar year. Looking at that, uh it may be a subpar year for the markets. could be a a positive year for the economy and uh year three is the is one where it comes back again. You get a strong rebound in markets historically. Does >> I love to see this chart broken up by Republican and Democrat four-year averages of Republican presidents versus Democrat presidents. I'm curious to see whether or not they differ. I don't know. >> Have you [laughter] have you have you done that before, Michael? >> Well, it's it's straightforward to do. I I've looked at it, but I I you know, I can't remember the conclusions. I think it varies really to be >> I I think you're right. So basically what you're saying is based on history, if you just take an historical average, secondyear presidential terms historically have not been great if you take the average plus the fact that we're getting a liquidity crunch next year. What does that mean for the S&P altogether? >> Well, I think my my view, which I've been saying for some months now, is that 2026 is likely at best to be a rangebound market for the S&P. U you know, I think that investors ought to be moving more defensively. Uh you know, we've been very bullish over the last 3 years. So, uh, you know what? We're not always in the negative camp for sure. Uh, I'm not going risk off yet, but I'm saying to our clients, you've got to start moving more defensively. There may be a case for putting a toe in the bond market waters uh already. Um uh and although many many people are negative on uh fixed income markets, the plain fact is that if you start to get an inflection in the liquidity cycle, uh yield curves flatten and a flattening of the yield curve may actually give some return uh for for mid- duration bonds. >> Now the um okay, so we've talked about asset allocation, we've talked about the potential magnitude of the um S&P 500 move. Um uh what about gold and silver? Have we applied similar cycles to precious metals? I bring them up because unprecedented moves have been occurring for both of these metals in the entire precious metal space and people are wondering first of all what the signals for global econ global economic growth but secondly uh where where where those assets are in their respective cycles. Michael. >> Okay, let me let me have a bash at that. I mean basically what you've got to think about these are monetary inflation hedges. Okay, in the long term, um, you know, look back over the last 25 years, what's happened to federal debt? Uh, federal debt has gone up 10 times. Okay, 10fold. I mean, that's an eyewateringly large amount of increase in 25 years. How much has the gold price gone up? Gold price has gone up basically 12 at least 12 times over that period. It's more than match the increase in federal debt. And that's what you'd expect because there's monetization going on. How much has the S&P gone up? Under five times. So gold has been a fantastic asset. Uh could you have timed that? You probably could have timed that with, you know, and got even better returns, but you didn't need to. You just need to hold gold. And that's what I would say looking at the medium term. Any weakness in gold, silver, precious metals, Bitcoin, buy on weakness. Okay. Uh what do I mean by that? Because you got to be explicit. I would say if you're 20% below a below the trend line, I would be snapping it up because I think these are these assets are going up medium-term. That's that's the that's the fact because we've got more debt. More debt. Debt is is is uh you know is is is riddling this financial system. But it keeps going up. Governments are spending. They're issuing debt. Debt means you need liquidity. And if you get liquidity following debt, that is monetary inflation. You need monetary inflation hedges because basically central banks, policy makers are devaluing paper money. So you need these hedges. Last point on this is let's think about China. What is China doing? China has a real estate problem. Uh a big real estate problem. Japan had a real estate problem back in the late 1980s, early 1990s. The US had a real estate problem uh around the time of uh the GFC. How have those two economies got out of their real estate problems? How have they basically managed to inflate collateral in these markets? By printing money. China's got a bigger problem. What has China got to do? It's got to inflate massively and it's got to try and devalue the yuan. Um, and that is going on. How do you check that? Don't look at the yuan US dollar cross rate. Look at the yuan gold price. The yuan gold price is going up. It's going up number one because they're printing money. It's going up number two because the Chinese central bank is buying gold and that is going to go a long way. >> Look going back to the uh econ economy and wealth. So if you're saying that the stock market is probably at best going to stagnate next year, go grind sideways, that implies and I guess for the rest of the markets, well that may imply that the wealth uh for the wealthy who own assets may not increase by much relative to past years like this year in 2024 for example. >> Correct. [snorts] >> What does that mean for spending? The wealth effect theory states that if the wealthy do not get wealthier or in fact they lose wealth that has a real effect on actual spending. In fact, reports in the US are already indicating K-shaped economies uh popping up all over the country whereby the wealthy 10% the most wealthy 10% are driving up most of the spending and shopping and retail sales. And so if that stops, wouldn't that halt economic growth which you were talking about? >> Well, clearly it's one factor. I mean, one can't ignore that. if consumer spending slows down, the economy is is going to suffer. Uh but then you've got on the other side of the balance Scott Bessant who is spending a lot of money uh through the the US government. So he's the one that's effectively helping to drive growth. Then you've got the AI companies that are spending lots of capex. Uh and then if we manage to get the uh uh the US dollar down a tad and the world economy is reviving, US exports will be pretty decent. So I think if you throw all those factors in uh it's probably positive for the for the US uh GDP um score next year. >> Uh this is a story that maybe not directly related to global liquidity but I'm just curious to see how liquidity flows and capital flows happen around the world. US loses financial edge uh as Asian borrows in euros. So here here we have something from Bloomberg dated couple last week. Asian economies aren't just shifting their trading ties to fight against US tariffs. They're also increasingly moving their financing to other markets, underscoring how President Trump's policies risk eroding American dominance of capital raising uh Asian borrowers uh increased euro denominated issuance to a record 23% of the total across both currencies this year. What do you make of this story? >> Well, you can't make much of it. I mean, you could you could argue this two ways, couldn't you, David? You could say actually they're borrowing in euros because they think the euro is about to decline in value. Sure. [laughter] >> So, what what does it tell you? It doesn't tell me very much. Okay. But it but it doesn't it doesn't say the dollar is going to fall. >> No, I don't think so. I mean, you could actually you could actually argue the dollar is going to go up because if you uh if you thought the dollar was going to decline, you'd borrow in dollars. >> Fair enough. Fair enough. Well, um finally, uh any any upside to the market that you see, in other words, anything that could break your thesis of stagnating US stock markets and potentially we see a surge like we saw early in the year. Well, I think it comes down to the central banks and if the central banks are going to throw more money at the system, uh then you'll see a surge in the markets. And I think the fact is that what you've got is reactive central banks who are prepared to bail out uh volatile markets. I mean, the the plain fact is that what we need is stability in the US Treasury market. Uh if you don't get stability, you will find the Treasury and the Fed acting to try and ensure that stability by adding liquidity to the system. That's what they always do. The primary goal of the Federal Reserve despite what it says uh in terms of you know its mandate is uh uh supposedly employment and inflation its real mandate is to maintain the integrity of the government bond market. So if you get instability in the treasury market they will be throwing liquidity at it. That's true not just for the US is true worldwide. Look at the elacrity with which the bank of England stopped its QT and engaged in a QE uh two or three years ago during the LIS trust debacle. Uh, I mean that shows what they they intend to do. They want government bond markets to be stable and they'll do anything to make sure that happens. Why do we see such a divergence in monetary policies around the world? Like I stated earlier in the interview, the Bank of Japan's doing their own thing. The Bank of England is doing their own thing. The Bank of Canada isn't following the US right now and the US is kind of just following what Trump wants to do. And so we're not seeing any sort of coordination at all, at least on the surface. Am I correct? >> Well, I don't I would disagree with that. I think that what you're seeing is actually a convergence of if you look at terminal policy rates through uh through term structures worldwide there actually a convergence going on. So you've got very high rates in the US and the UK uh they're starting to come down. You've got very low rates across the Euro zone, Japan and China and they're starting to move up. So actually there is uh seems to be a convergence of interest rate short-term policy rates worldwide towards some equilibrium level. Uh and then if you look at liquidity injections by central banks globally although they're beginning to inflct downwards as I said they've been correlated pretty closely over the last 3 or four years I mean otherwise you know why have markets you know generally done much the same thing uh okay the euro zone is a tad behind is leading sorry is is lagging the US market a tad but generally uh you're looking at bull markets in many many places as I said it's an everything bubble >> all right uh Finally, let's take a look at uh bond yields. Now, I have either US 10 year do you have any idea of as to where the 10 years is going to go. On the one hand, if you're predicting inflation, uh presumably the long end of the curve should follow inflation expectations up higher, but then the Fed is instituting QE to some extent that could also bring down the long end of the curve. We'll see what happens. What do you think? >> Well, I think that as as regards the bond market, I think what you're looking at best guess next year is probably some stability. I think that you've got uh the likelihood, as I said, of an inlecting yield curve that may give some hope for the long end of the market, but you know, I think that maybe people are being way too bearish about the long end of the market for next year given the fact that I think what we're seeing is slowing liquidity. And if slowing liquidity transpires as we suggest, uh there's actually an ability to support that there's there's forces there will support the long end of the market. >> Certainly the uh short end of the curve is going to go down. But what does that mean for well if the yield curve steepens into uh into uh declining liquidity conditions? What does that usually mean for markets or the economy? >> Well, I think the point is is that if you look at the economy, if we're correct that you're going to see an acceleration in the economy, uh it's not uh it's it's typical that the yield curve will flatten. Uh the peak in the yield curve tends to occur around the trough in the economic cycle in terms of economic growth. Um, so if you've got a stronger economy through next year, it's it's quite consistent with a flattening yield curve. >> Perfect. Uh, well, that was a great discussion, Michael. I appreciated that very thorough rundown of the global uh economic and liquidity situations. Where can we follow your work and learn more about uh global liquidity indices? >> Um, well, the best way is to uh is to look at capital wars, which is our substack. Um if you want more detailed data uh there's glindexes.com which is our website or uh still the crossberc capitalap.com works. So uh as I said we're sort of associated uh with crossboarder capital still uh those are the main ways for getting data from uh for institutional work. Uh but capital law is a pretty good way in. >> Okay good. Uh we'll put the links in the description down below. Thank you very much Michael. I appreciate your time and uh we'll speak again soon. Take care for now. >> Great pleasure David. Enjoyed it. Thank you. Thank you for watching. Don't forget to like, subscribe, follow Michael. Links down below.
‘Absolute Madness’: Trillions In Debt Maturing Soon As Inflation Reignites | Michael Howell
Summary
Transcript
The everything bubble rested on two features. Number one was that every financial crisis or every problem in the world economy has been met by one solution, more cash. The primary goal of the Federal Reserve despite what it says uh in terms of you know its mandate is uh uh supposedly employment and inflation. Its real mandate is to maintain the integrity of the government bond market. So if you get instability in the Treasury market, they will be throwing liquidity at it. As the Federal Reserve prepares to buy Treasury securities uh for the first time in a few years, we're going to be talking about what this means for global liquidity. Our next guest is basing his prediction on global markets on global liquidity conditions and debt conditions. His name is Michael Howell. He's the founder, managing director of GL Indexes, formerly known as Crossber Capital, and the author of Capital Wars on Substack. Follow him in the links down below. This is a very interesting discussion. and he's got some very interesting research on global liquidity conditions and cycles. Welcome to the show, Michael. Good to see you. >> Well, thanks, David. Great to be here. A lot of things going on in markets right now. >> Absolutely. And uh I want to pull up the first slide and I'll let you show uh the rest. I just want to show this very briefly. The title of your presentation that we're going to be going over is Outlook 2026 financial crisis and inflation. And I just want to have you please explain to the audience before we get start before we delve into your outlook itself what your thesis is. How global liquidity is tracked and used to make predictions of markets and why it is that you've put crisis and inflation is the title of this particular substack or slide stack rather. >> Okay. Well uh that's a high bar to jump in maybe a couple of sentences but let's have a go. U I mean we look at global liquidity. Global liquidity is what has been driving asset markets for uh certainly much of the last 3 or 4 years but arguably a long time before that too. Um assets are very sensitive to liquidity just look at what look at the behavior of bitcoin for uh one particular example. Um in terms of why we think that liquidity is going down or peaking um is broadly because of uh of two things. One is that central banks generally and um uh I know the Fed has changed a little bit in the last two days but the Fed but generally central banks are beginning to uh slow their liquidity injections into markets but set against that what you've got is a strong real economy. Uh you've got something called the debt maturity wall which is upcoming which is basically funding a lot of debt that was turned out during the COVID crisis and that's coming back to haunt markets. And the third thing is we know that fiscal spend is uh is racing ahead and that somehow has got to be funded. So in other words there's not enough money around and if you take the thesis that all money that is anywhere must be somewhere uh if it's in the real economy it's not in financial markets and that really is the problem. >> I just want to go back to the statement that you made which is that central banks are halting liquidity injection. So we've got the Federal Reserve of the US that's going to inject more liquidity. The Bank of England where you're based is about to cut rates. I believe the Bank of Canada, where I'm based, is holding rates steady. The Bank of Japan is hiking rates. So, there's policy divergence all around the world. So, um, how are you getting that information? What are you basing that on? >> Well, the first thing is that we're tracking the movements of liquidity from central banks. So, we're looking at the amount of liquidity they put into the system. Uh, you're absolutely right to say the Federal Reserve has actually changed uh to some extent in the last couple of days. The question is, has it changed enough? Uh the key point is that over the preceding uh 3 to four months, the Federal Reserve actually took a lot of liquidity or oversaw the uh extraction of a lot of liquidity from US financial markets, which is largely why you've seen this volatile move through uh the indexes and why Bitcoin has basically fallen back. So that's the US story. Uh Euro zone, the in the uh the basic prediction is that rates will be uh or on an incline now. uh there's more likely to be tightening in the Euro zone. Uh if you look at Japan that they're signaling the same thing and if you look at China, rates are basically beginning to edge up. Um uh so I think on all these what you've got is a backdrop where we may be near the peak in the liquidity cycle. Uh we're not saying that liquidity is falling strongly yet, but we're saying that this is a prospect for 2026. >> Why can you just maybe at a high level to explain the theory behind why global liquidity moves in cycles to begin with? Yeah, it it moves in cycles really because uh I I guess for two reasons. I mean, one is that it's feeding one one is you've got central banks that are effectively injecting a lot of liquidity into the system at different times. They may have object objectives such as stimulating employment growth. They may have other objectives such as trying to re inflation. Uh you've got a real economy which is using that liquidity. And on top of that, you've got debt which needs to be refinanced. Uh what we're looking at here is a cycle that is around six years actually 5 to 6 years an average of 65 months. Uh it goes back all the way here to the mid1 1960s. Uh that cycle is very well established. Uh you can see if you cast your eye towards 2022 23 that the cycle basically bottomed almost exactly uh on the point that the sine wave the dotted red line was indicating. uh we've now been in a bull market for liquidity and asset markets uh for about 3 years. We're coming close to a prospective infl uh inflection point. Why is it 6 and 1/2 years or sorry, why is it 5 to 6 years? The reason probably is that this is a debt refy cycle fundamentally. Uh liquidity is in the system to refinance debt. Financial markets globally uh have got so much debt. Most of the transactions that go through financial markets today are debt refinancing transactions. So this is a refi cycle and the average maturity of global debt is lo and behold about 5 to 6 years. So it all seems to dovetail quite well. >> Michael, does this chart overlay with GDP growth or markets? >> Well, it overlays with markets. Um, I think you'll probably see in the deck there's actually an attempt to try and um uh relate uh there's a a chart a little bit uh uh uh I think it may be uh a little bit later in that but it's showing um uh if I recall. There we are. Uh if you look at the pink one, what you'll see is something I snipped from Twitter, which was u um an article about bubbles in asset markets worldwide. uh you can just about make that out I hope but that pink sheet may well have come from the Financial Times. I can't really read the source but uh basically what that shows uh is a series of asset bubbles in different colors. What I've done I've overlaid on the top of that in red our global liquidity cycle and what that is trying to show is that every bubble has coincided with a peak uh in liquidity and every collapse in a bubble has been associated with liquidity conditions tightening. Now, if you look at the latest cycle, uh, and I'm not saying this is particularly scientific because I've just overlaid one chart on the other, but you can see that within uh liquidity beginning to inflict downwards, there is a danger for the so-called everything bubble and that is a real problem potentially. >> When we say everything bubble, do we literally mean everything or is it mostly just tech stocks, Michael? >> Well, no. I think that you've got there's a lot of things which are which are clearly going up generally. Uh, and I think the I I just use that that moniker because that's what a lot of people are now dubbing it, the everything bubble. Uh, because we've been in a period where asset markets generally have been inflating uh, pretty nicely for a number of years. Uh, that has been courtesy of a lot of liquidity in the system. >> This would be a good explanation as to why everything's been moving up in tandem. Things that typically have not been correlated with each other on a shorter term or even longer term scale. So gold for example and Bitcoin and stocks and to a certain extent bonds have all done well this year up until now. Well, Bitcoin is now down here to date, but up until October it was up. And so how can one explain all assets moving up together even at a time when the Federal Reserve was not cutting rates as dramatically as one may think that they should be? >> Well, I think the point is that interest rates are an incredibly misleading indicator of the stance of monetary policy. uh and that must be the case if you're looking at an economy which is dominated by uh lots and lots of public debt uh because if you take the US as an example treasury debt is so large that there are huge transfers of interest payments from the government to the private sector now if you uh cut interest rates you're actually cutting people's income. So it's not entirely clear to me that an interest rate cut is stimulating economy uh in the same way as it historically did uh in the same way that an increase in interest rates is uh is unclear as well. If you're adding liquidity to an economy it's unambiguous that that is a stimulant to uh to spending. If you take liquidity out of the system that is clearly putting the brakes on. So liquidity is a much uh much less ambiguous guide than interest rates. >> Before we jump back into the video let's talk about something most people ignore but is very important. your online privacy. Your personal information isn't just sitting on your phone or email. It's being scraped, bought, and sold by data broker sites every day online without your permission. Our sponsor today, Delete Me, helps you take that control back. They scan the web for your exposed information, send you regular privacy reports, and remove your data from hundreds of broker sites so it can't be used against you. And in their latest report, they reviewed over 325 listings to see if any data broker had my personal information. And they continue to check every week to make sure it stays off. Go to joindeme.com/davidlin and use promo code David Linn at checkout or scan the QR code here on the screen. Get 20% off on all US plans. Take control of your privacy today. This is a very uh important chart. Global liquidity and world wealth. all wealth including gold and housing. Are you including also the stock market as well? >> It shows everything in there David. It shows stocks, bonds, all liquid assets. It shows precious metals, cryptocurrencies, residential real estate. uh it's a global figure and what you can see there is the gerations of liquidity uh which is shown in orange with a projection as the dotted line what we think is happening over the over the coming 12 months uh against the returns the annual returns from that portfolio uh which is shown in black uh it's not exactly 1:1 and I would have to say that if you go back uh previous uh one or two decades there is a correlation it's not quite as precise as this but it's definitely there uh but what we've seen in the period since the global financial crisis is that the correlation between liquidity and asset returns has been almost one to one and what is driving that liquidity. It's principally what central banks have been doing. [snorts] So I I I have a few follow-up questions. First is what happens to the real economy when wealth uh total wealth drops. This graph makes a lot of sense when global liquidity conditions rise and or drop uh wealth including stocks, gold and everything that you've measured follow. So what happens to the real economy when global liquidity and [snorts] wealth both go down? >> Well, it's probably not not a particularly good signal. That's for sure. In the sense that if you're getting uh a loss of wealth, uh presumably consumers are going to be spending less. And if there's a tightening of liquidity conditions, uh generally businesses are going to find it are going to struggle to uh either build inventory or or or raise capex. So I think you would expect it to be a negative factor. I think one of the things one's got to think about is that is there a very clear transition between money in the financial system and money in the real economy and although the textbooks kind of uh you know gloss over that uh the linkages are there but they're not exactly precise and you can have money uh washing around the financial sector uh which doesn't spill over into the real economy. Uh as I said earlier on all money that is anywhere must be somewhere but if it's in the financial sector feeding a speculative bubble it's certainly not going into the real economy. It may spill over to some extent, but it's clearly not a one forone relationship. Now, I think that really uh underscores the policy of the US administration at the moment where what I would describe them doing is shifting from uh I think a label of what you might call Fed QE, in other words, FedEled stimulus of injecting liquidity into the system to what I've called Treasury QE, where the Treasury is already trying to do that itself. And what you're seeing very clearly in the US and everything in terms of all this legislation, the changes in uh in bank regulations, uh the funding at the short end of the market with treasury bills, you could even argue the Genius Act, uh in other words, the support of stable coins, all these particular features are trying to endorse the background for Treasury QE. And what that really means is that the Treasury is doing spending itself in the real economy. Whether it's defense procurement, whether it's uh critical minerals, whether it's taking stakes in strategic industries, the Treasury is spending money in the real economy. It is driving employment and driving the real economy. It's paying for that through issuing Treasury bills and shortdated debt. Uh and that is the Treasury QE process. Uh the Federal Reserve when it acts basically acts with an unguided hose. Everybody gets soaked or every asset gets soaked. Uh that's good for some people. Uh but it ain't good for Main Street. And that's what the immersion is trying to correct. >> I'm curious as to how we can determine whether or not a contraction in global liquidity is going to lead to an economic contraction, recession or even a market meltdown. So you can see here a couple cases in which uh a huge contraction makes sense. The dotcom bubble in 2020 financial crisis uh interestingly co did not see global liquidity drop to negative levels. That's interesting. But it did drop in 2022 that coincided with an everything market drop as well. That's when the Federal Reserve was raising rates. But then you see periods in like 2015 for example uh 2012 uh and to a certain extent mid 2000s when global liquidity dropped below zero or near zero and the economy was just fine markets were just fine during those times. You know h what happened? >> Yeah well I mean I'm I don't use global equity particularly as a predictor of what happens in the real economy. I think the two things are separate. There is a linkage but what I'm looking at is global liquidity is a driver of asset markets and what you can see there is a much um you know is is a much closer relationship. Now just to just to emphasize this backdrop and I'm going to go down three rabbit holes. The first one is the previous chart that you put up with the traffic lights. I think uh you can see there that what we tend to think about is uh is different phases of the liquidity cycle. Now I actually think maybe we need to introduce this by looking at the at the chart before showing a schematic asset allocation. But what it shows here is that the liquidity cycle has very clear phases that we call rebound, calm, speculation, turbulence. And then we also have phases on the right hand side of asset performance linked to asset performance such as equities do well in the upswing of the liquidity cycle, commodities around the peak, cash in the downswing, government bonds at the trough. Now if you go to the traffic lights you'll see that you know describing the these are these are set in stone pretty much these traffic lights but it's just a guide for asset allocation and if you look at the four different uh columns uh on first on the left which are assets and then on the right which are industry groups the rebound is the beginnings of the upswing in the liquidity cycle that says reading this as a traffic light uh if it's amber proceed go forward but be care be careful uh green is clearly go ready to stop. So in the rebound phase which began in late 2022, you want equities and credits, you were basically you know marginally or moderately risk on. You didn't want commodities or bond duration. By the time you get to calm, which let's say is over the last 18 months, you wanted uh uh strong risk on. You wanted equities. You were starting to be a little bit more neutral towards credits, but certainly building up commodities. Uh we are in now in speculation in the US. So you want your commodities uh I mean just vis what's happening in the precious metals silver you know all a big big rise in this year in particular gold has done well uh commodity prices like copper are up significantly u you've got equities which we're now starting to trim uh credits probably you want to be wary of and then as we move towards turbulence you want to be sticking your toe in the water uh as regards government bonds look again at industry groups uh same uh idea cyclicals in the upswing, defensive in the downswing. Led by technology, they've been the star performers uh through the markets in the last 3 years. Financials have had a stunning 18 months uh globally certainly, but also in the US and that's a typical midcycle move. And then you look at energy commodities which tend to do well around the calm speculative areas of the market. Uh and then finally, if you're in the uh the as you go into the downswing, you want to be a lot more defensive uh for things like consumer staples as liquidity is contracting. So what I'm saying here is that rabbit hole number one is basically saying, look, we've had a flatlining of economy, flattening of the business cycle since co that has not spa explained asset allocation at one jot. Right? Economists have been telling us for many many quarters now that the economy is about to go into recession. It certainly hasn't. It's growing quite well. What you've seen is a pronounced liquidity cycle and that pronounced liquidity cycle has taken us through uh asset allocation themes uh you know pretty well I mean it's described what we've been going on. This is a liquiditydriven asset allocation cycle and it's moving very very normally. So that's rabbit hole number one. Rabbit hole number two is if you go down in the presentation and you look at a chart where we describe the uh I tell you when to stop the the QE uh uh backdrop. Uh if you go down a bit further uh there's a lot of chance in this but if you keep keep going down I'll tell you when to to hold. Um so so uh keep going here right there. But one before sorry there we go up up up one up one. That's it. Great. Now if you look at this this is looking at uh the US and U the US Fed and US Treasury stimulus liquidity injections into the US system. And what this is basically showing is the uh amount of liquidity uh or liquidity equivalent that goes into the market. Um the red area of that is conventional QE. So that's basically uh the Federal Reserve buying uh coupon securities in the market. Uh the orange is what we some slightly flippantly call not QEQE. So it was not headline QE. uh it was actually occurring during a time where they were uh engaged largely in uh what they called quantitive tightening although they didn't really do that. Uh this was backdoor stimulus if you like a sula tarabler uh a sort of liquidity u impulse uh things like the reser uh reverse repo uh facility was paired down treasury general account all these sort of phenomenon uh bit wonkish but that shows liquidity going into the system and then you got the black area which is really what the treasury has been doing funding a lot of its expenditure through treasury bills and uh what you can see is as the cycle has evolved there's clearly been a cycle for sure. But the black area which is Treasury QE is dominating proceedions proceedings in 2026. Uh so the Fed is stepping back, the Treasury is stepping forward. It's a transition from Fed QE to Treasury QE that underscores a much stronger economy. And what you can see in the little window that we've put in the in that chart is the black line uh on that sort of shadow outline, the orange outline of this uh previous of this bigger cycle. uh the black line is the change in the US PMI index uh lagged by around 9 months. So what you can see there is uh how that relates to uh the cycling in liquidity. So what that's telling us is that 2026 should be a good year for the economy. Uh and that maybe is exactly what the administration wants given the fact that you've got uh midterms upcoming uh next year. >> A good year for the economy but not necessarily a good year for the markets given the liquidity conditions. Right. >> Absolutely right. So the the corollery of that is what you may be seeing is a pickup in inflation and if you look at the next slide uh now this is a little bit wonkish but what this is basically showing is that because the treasury is issuing so much debt at the short end of the market. The question you got to ask is who is buying that? Well it's the banks because the banks love that stuff. They love shortdated government debt. that's exactly what they need uh to put into their balance sheets because it matches the duration of deposits and deposits are bloated because there's lots of fiscal spending. So what you can see here is the orange line shows the growth rate of banks holdings of treasury and agency securities in the US. It's outpacing conventional money supply growth, the M2 number and that is pure monetization of the deficit. Okay, that doesn't end well. We know that from history. So this is inflationary and you know you can see this uh both globally if you look at the next slide. So this is not just a US phenomenon. This is happening worldwide. I mean everyone has worked out that Scott Besson has got the secret elixia here and this is how you fund the the government deficits. You start going down the short end of the market. And what you can see here is the monetization of government debt uh worldwide uh in terms of uh that line is showing the percentage of domestic liquidity that is now accounted for by public debt or growth uh holdings of public debt the incremental amount. So it's bank holdings and government debt. This is effectively uh you know giving a credit line to the government is printing money uh to fund the deficits. This is a global phenomenon. Japan is starting to do it. The Brits are starting to do it. The US is leading the way. I mean this is you know this is how uh governments tend to governments are now funding themselves. It's inflationary. You look at the next slide and what this is showing is um is you know a couple of scary things. One is that the orange line is break even inflation in the US the tips uh market. Well that's not showing anything but I think that's being massaged a bit. The dotted line is the same uh calculation but not using the treasury market but using the MBS market uh to try and bootstrap uh a break even inflation rate and that's higher but just take a look at the black line which is the University of Michigan consumer survey for inflation uh that's is is uh you know jacking up very you know very high levels and we're talking at 4% inflation. >> What do you think that's from tariffs or liquidity? No, I think it's B I don't I mean tariffs are clearly having an effect, but this is this is basically because of monetization. Uh it's because the economy is starting to heat up. I mean look at all these commodity prices rising. Uh that's that's not tariffs, believe me. This is because the economy is starting to get hot and you know next year is going to be a challenge for that. Now the third rabbit hole is okay if that's not enough and I don't want to sound too bearish because I'm not that bearish but uh clearly I'm I'm getting a bit more cautious. uh if you start to go up in that presentation and you'll see why I labeled this presentation uh about financial stability as well. Now keep if you keep going up they'll there'll be a time to uh I'll call hall uh this one well debt it which says debt liquidity cycle. Now the debt liquidity cycle is a chart that is a schematic but I'm just going to run through that because it's not what you see in textbooks. This is the financial system post 2008 post global financial crisis. At the heart of the system is a debt liquidity nexus. That debt liquidity nexus tells us that something like 70 to 80% of all transactions in financial markets today are debt refinancing transactions. Capital markets, despite what the textbooks tell us, are not about raising new capital for uh for new green field investment projects. They're basically about refinancing existing debt. That's the situation we got ourselves in. There's so much debt. So, what you need to refinance debt is liquidity. And that's why liquidity is critical. You need balance sheet capacity among credit providers. And that is the liquidity that we measure. Financial stability rests on this idea that you've got a stable or robust debt liquidity ratio. The paradox in the financial system is that debt needs liquidity that liquidity needs debt because something like uh nearly 80% you'll see that the figure on the top left is 77% but nearly 80% of global lending is now collateral backed not our figure that comes from the World Bank and what that's saying is that liquidity needs debt and net debt needs liquidity. If you get a if this derails on the right, you get a refinancing crisis, but you can spot that through credit spreads and term premier. If it derails on the right, so you can't turn your debt into liquidity, then you get a repo collateral crisis. Lo and behold, that's what we've been witnessing in US uh repo markets. And that's the problem. Take a look at the next slide. And this is showing the equilibrium in financial markets since 1980. What this is showing is the debt liquidity ratio in the advanced economies. Okay, this is showing where you get financial crisis when that ratio is elevated. So when you get lots of debt relative to liquidity, you get refinancing tensions appearing particularly in repo markets and that can spread out across the yield curve along the yield curve to affect uh debt uh of of all stripes. And what you see is problems we've annotated where you get financial crisis in the lower part of the diagram below the dotted line at 200%. So that's the equilibrium level. Uh you get periods where liquidity exceeds debt needs and that's vent is asset markets and you get asset price bubbles which I've also annotated. Look at where we've well now so-called everything bubble certainly has been feeling like that. But then if you look at that orange line it's going up. Uh why is it going up? It's going up for two reasons. One is it looks as if central banks generally are beginning to curtail. I'm not saying they're doing it in big size yet, but they be the cycle of central bank liquidity is just starting to inflect lower. Okay? And that's what we got to be conscious of. It's not, you know, it's not pressed the red button yet, but we're we're starting to get a little bit cautious. And then what you have got on top of that is uh is a lot of debt needs to be refinanced. And that debt is debt that was termed out during uh the COVID crisis in particular. Now the everything bubble rested on two features. Number one was that every financial crisis or every problem in the world economy has been met by one solution more cash. Okay, central banks just dishing cash to markets uh QE or QE squared or whatever you call it. It's been going in big time. That's the solution to a problem. I mean you could even say look at the R&P that was announced two days ago in the Fed problem in the repo markets. Give them more money and that's what they're doing. Um, the other thing was that interest rates fell to nearly zero. Now, in my years at Salomon Brothers, we was schooled on a book called The History of Interest Rates by Sydney Homer, which looked at four millennia, 4,000 years of monetary history. Nowhere in those pages is there any mention of zero interest rates. This is a new feature. It's normal. We've just [clears throat] had that. If you have zero interest rates, it encourages debt. We don't want debt. But it also encourages people to term out their their borrowings. And if you look at that, what about negative just just sorry before what about negative interest rates like we saw in Japan were real negative interest rates like in some parts of Europe that we've seen. >> Yeah, exactly. You know [laughter] >> what kind of incentive does that provide? >> It's madness. Absolute madness. This is the policy makers have, you know, have got it completely wrong. So this is the debt maturity wall. So this is looking at the increment not the absolute level the increment in debt that is coming forward needing to be refinanced every year and this is in trillions of dollars. So the underlying level is about 2530 trillion but these are the incremental uh amounts each year and you can see the bite out of the chart that occurred in 2122 23 which was the period that we said of zero interest rates or even negative interest rates where people said thanks very much we're going to we're going to refinance we're going to term out our debt and we're sticking into the late 2020s that's now coming back to haunt us which is the dark red bars and it's that which is the problem. Uh I'm not going to say it won't be refinanced. What I'm saying is it probably will be refinanced but it's going to absorb a lot of liquidity out of markets and that is the problem. And what happens if you get that occurring you start to get problems in the repo markets and if you look at the next slide it'll show you that this is the problem that we've seen in the US over recent weeks uh or months which is the spread between sofa rates and fed funds rates. Now this probably leads us to the last rabbit hole which is basically looking at what the Fed has just done and what the Federal Reserve has done has tried to calm the markets down by giving them more liquidity. Now uh if you get problems and imbalance between debt and liquidity you get spikes uh in the repo markets in other words banks dealer banks are scrambling for liquidity uh to try and do these roles. Now what you can see is that sofa uh which is a market rate is elevated relative to fund fed funds which is the central bank's uh policy rate and you can see that we're uh we've been in what I've labeled as the danger zone uh where you start to get serious problems and you start to get a pickup a significant pickup in trade fails uh in other words that that trade just won't settle and that can lead to volatility in markets and nasty things. So the Federal Reserve has tried to cure that and what they've done is they've injected or prospectively started to inject liquidity from today in fact uh where they're going to start to uh buy bills uh totaling about 40 billion on a monthly basis 40 billion US uh of Treasury bills uh the so-called R&P purchases reserve management purchases. Now they won't call that QE of course but it is there's nothing there's no difference from that. it it's simply a liquidity injection into markets and that backdrop is clearly positive for markets in the near term because they get another dose of liquidity. The question is is as 2026 unfolds is that going to be uh sufficiently positive to keep Wall Street bubbling up? My view is probably not. Um but let's keep an open book on that because in actual fact one of the merits of what the Federal Reserve announced 2 days ago was they uh pretty much said that they were flexible uh on uh on these purchases. Uh now they did warn the market that maybe these purchases come down. They don't always go up. But I think the point is is if they're addressing as they claim a technical plumbing problem, then if you get another air blockage in the pipes, uh they're going to start injecting a lot more liquidity in there to clean them out. And so this is kind of open-ended in a way. It could be more than 40 billion, could be less. But what they're really doing is I think they're saying, "Okay, what we're now doing is we're targeting uh sofa rates. That's the intention. We're putting a we're giving the repo markets a put." >> Is this the uh phenomenon you're describing or is this something else? The the banks have been tapping into the Federal Reserve standing repo facility for quite some time. In fact, this the highest usage since the program was introduced shortly after CO if I'm led to believe. So banks tapped. This is this is a couple months. >> This is a phenomenon. This is what you're talking about. Okay. >> Exactly. Yeah. This is it. >> Is this actually adding liquidity into the system though? I I'm getting I've been getting mixed messages about this. >> You bet it is. Yeah. Absolutely. No question. It's adding liquidity. Uh it's it's uh the the banks are borrowing from the Fed. They're adding liquidity to the system. >> How much of that how much of that borrowing is actually transmitted to bank lending? >> Well, that's that that's a that's a very different question, David. I mean, that how much concern in bank lending is a is a very difficult thing to say. uh what it does is secures the balance sheet. It probably would stop them uh liquidating uh areas of the balance sheet. So I think it it gives them uh you know it gives them support but I wouldn't necessarily say that that necess that necessarily comes through in bank lending. I mean in the same way as if you look at the QE programs over the last uh what 15 years has that radically increased bank lending in the US or any other country? Not particularly no certainly inflated asset markets though. So, we don't know definitively, Michael, if more debt is going to translate to more commercial lending and commercial credit available in the system. >> Well, in the the short answer is no, we don't because that's not really the mechanism and how these things work. But but the point is if the Federal Reserve is injecting liquidity, not withdrawing liquidity, it's at least a positive sign and asset markets will benefit from that. But the key point, the key transition uh is this transition from Fed QE towards Treasury QE as I've labeled it. and that is trying to get the real economy moving. And contrary to what many people would argue, I still believe that we're like likely to see a much stronger economy in 2026 because on top of this fiscal spend uh and that's this remember that the one big beautiful bill starts to bite significantly next year. You've got a lot of AI spending uh coming capex from AI spending coming through as well. Uh and that is likely to underpin a stronger stronger GDP in the US. I want to go back to the chart one more time. Michael, do we have um any models or predictions to forecast uh or tools rather to forecast the degree of global liquidity falling. In other words, the magnitude drop because I am interested to know uh how how far uh stock markets would be impacted. you look at this chart for example, there's a pretty good correlation and they do seem to move roughly um in the same magnitude of percentage change year-over-year as well. >> Well, the answer is that we we're trying to project what we're doing at the moment is is predicting the beginnings of an inflection. Uh I think that you know it is that it's quite possible it's going to be worse than this. Uh but what we're seeing we're just using our our current measures to try and show what central banks are up to now. they haven't started to put the brakes on sharply. Uh but clearly if there is an inflation breakout uh they may well decide to do that. Um you know I uh I wouldn't necessarily believe that if the Federal Reserve is intent on cutting interest rates which the dot plots seem to indicate that that's going to have any particular bearing on liquidity conditions per se. Uh it may well help to weaken the dollar. It may help to fuel inflation. It may help small businesses but that's not really a liquidity injection. uh they're two very different things, but I think generally what we're leaning towards is a period where you've got uh uh a a stronger economy and a weaker potentially weaker stock market or certainly a more troubled financial backdrop. Now, the chart that you just put up is basically saying, well, okay, uh can I can I lean back on history to give any support to this argument? And what this is saying is, well, look, just hey, just take a look at this. This is the average gain on the S&P uh in each year of a US presidential term. Uh the average figure from 1970 through N24. And what that's saying is look, you know, I mean, this year is pretty much on track here. Um year one of of the presidential of Trump won, then we get year two of Trump. U next year 26. Well, that's going to be a subpar year. Looking at that, uh it may be a subpar year for the markets. could be a a positive year for the economy and uh year three is the is one where it comes back again. You get a strong rebound in markets historically. Does >> I love to see this chart broken up by Republican and Democrat four-year averages of Republican presidents versus Democrat presidents. I'm curious to see whether or not they differ. I don't know. >> Have you [laughter] have you have you done that before, Michael? >> Well, it's it's straightforward to do. I I've looked at it, but I I you know, I can't remember the conclusions. I think it varies really to be >> I I think you're right. So basically what you're saying is based on history, if you just take an historical average, secondyear presidential terms historically have not been great if you take the average plus the fact that we're getting a liquidity crunch next year. What does that mean for the S&P altogether? >> Well, I think my my view, which I've been saying for some months now, is that 2026 is likely at best to be a rangebound market for the S&P. U you know, I think that investors ought to be moving more defensively. Uh you know, we've been very bullish over the last 3 years. So, uh, you know what? We're not always in the negative camp for sure. Uh, I'm not going risk off yet, but I'm saying to our clients, you've got to start moving more defensively. There may be a case for putting a toe in the bond market waters uh already. Um uh and although many many people are negative on uh fixed income markets, the plain fact is that if you start to get an inflection in the liquidity cycle, uh yield curves flatten and a flattening of the yield curve may actually give some return uh for for mid- duration bonds. >> Now the um okay, so we've talked about asset allocation, we've talked about the potential magnitude of the um S&P 500 move. Um uh what about gold and silver? Have we applied similar cycles to precious metals? I bring them up because unprecedented moves have been occurring for both of these metals in the entire precious metal space and people are wondering first of all what the signals for global econ global economic growth but secondly uh where where where those assets are in their respective cycles. Michael. >> Okay, let me let me have a bash at that. I mean basically what you've got to think about these are monetary inflation hedges. Okay, in the long term, um, you know, look back over the last 25 years, what's happened to federal debt? Uh, federal debt has gone up 10 times. Okay, 10fold. I mean, that's an eyewateringly large amount of increase in 25 years. How much has the gold price gone up? Gold price has gone up basically 12 at least 12 times over that period. It's more than match the increase in federal debt. And that's what you'd expect because there's monetization going on. How much has the S&P gone up? Under five times. So gold has been a fantastic asset. Uh could you have timed that? You probably could have timed that with, you know, and got even better returns, but you didn't need to. You just need to hold gold. And that's what I would say looking at the medium term. Any weakness in gold, silver, precious metals, Bitcoin, buy on weakness. Okay. Uh what do I mean by that? Because you got to be explicit. I would say if you're 20% below a below the trend line, I would be snapping it up because I think these are these assets are going up medium-term. That's that's the that's the fact because we've got more debt. More debt. Debt is is is uh you know is is is riddling this financial system. But it keeps going up. Governments are spending. They're issuing debt. Debt means you need liquidity. And if you get liquidity following debt, that is monetary inflation. You need monetary inflation hedges because basically central banks, policy makers are devaluing paper money. So you need these hedges. Last point on this is let's think about China. What is China doing? China has a real estate problem. Uh a big real estate problem. Japan had a real estate problem back in the late 1980s, early 1990s. The US had a real estate problem uh around the time of uh the GFC. How have those two economies got out of their real estate problems? How have they basically managed to inflate collateral in these markets? By printing money. China's got a bigger problem. What has China got to do? It's got to inflate massively and it's got to try and devalue the yuan. Um, and that is going on. How do you check that? Don't look at the yuan US dollar cross rate. Look at the yuan gold price. The yuan gold price is going up. It's going up number one because they're printing money. It's going up number two because the Chinese central bank is buying gold and that is going to go a long way. >> Look going back to the uh econ economy and wealth. So if you're saying that the stock market is probably at best going to stagnate next year, go grind sideways, that implies and I guess for the rest of the markets, well that may imply that the wealth uh for the wealthy who own assets may not increase by much relative to past years like this year in 2024 for example. >> Correct. [snorts] >> What does that mean for spending? The wealth effect theory states that if the wealthy do not get wealthier or in fact they lose wealth that has a real effect on actual spending. In fact, reports in the US are already indicating K-shaped economies uh popping up all over the country whereby the wealthy 10% the most wealthy 10% are driving up most of the spending and shopping and retail sales. And so if that stops, wouldn't that halt economic growth which you were talking about? >> Well, clearly it's one factor. I mean, one can't ignore that. if consumer spending slows down, the economy is is going to suffer. Uh but then you've got on the other side of the balance Scott Bessant who is spending a lot of money uh through the the US government. So he's the one that's effectively helping to drive growth. Then you've got the AI companies that are spending lots of capex. Uh and then if we manage to get the uh uh the US dollar down a tad and the world economy is reviving, US exports will be pretty decent. So I think if you throw all those factors in uh it's probably positive for the for the US uh GDP um score next year. >> Uh this is a story that maybe not directly related to global liquidity but I'm just curious to see how liquidity flows and capital flows happen around the world. US loses financial edge uh as Asian borrows in euros. So here here we have something from Bloomberg dated couple last week. Asian economies aren't just shifting their trading ties to fight against US tariffs. They're also increasingly moving their financing to other markets, underscoring how President Trump's policies risk eroding American dominance of capital raising uh Asian borrowers uh increased euro denominated issuance to a record 23% of the total across both currencies this year. What do you make of this story? >> Well, you can't make much of it. I mean, you could you could argue this two ways, couldn't you, David? You could say actually they're borrowing in euros because they think the euro is about to decline in value. Sure. [laughter] >> So, what what does it tell you? It doesn't tell me very much. Okay. But it but it doesn't it doesn't say the dollar is going to fall. >> No, I don't think so. I mean, you could actually you could actually argue the dollar is going to go up because if you uh if you thought the dollar was going to decline, you'd borrow in dollars. >> Fair enough. Fair enough. Well, um finally, uh any any upside to the market that you see, in other words, anything that could break your thesis of stagnating US stock markets and potentially we see a surge like we saw early in the year. Well, I think it comes down to the central banks and if the central banks are going to throw more money at the system, uh then you'll see a surge in the markets. And I think the fact is that what you've got is reactive central banks who are prepared to bail out uh volatile markets. I mean, the the plain fact is that what we need is stability in the US Treasury market. Uh if you don't get stability, you will find the Treasury and the Fed acting to try and ensure that stability by adding liquidity to the system. That's what they always do. The primary goal of the Federal Reserve despite what it says uh in terms of you know its mandate is uh uh supposedly employment and inflation its real mandate is to maintain the integrity of the government bond market. So if you get instability in the treasury market they will be throwing liquidity at it. That's true not just for the US is true worldwide. Look at the elacrity with which the bank of England stopped its QT and engaged in a QE uh two or three years ago during the LIS trust debacle. Uh, I mean that shows what they they intend to do. They want government bond markets to be stable and they'll do anything to make sure that happens. Why do we see such a divergence in monetary policies around the world? Like I stated earlier in the interview, the Bank of Japan's doing their own thing. The Bank of England is doing their own thing. The Bank of Canada isn't following the US right now and the US is kind of just following what Trump wants to do. And so we're not seeing any sort of coordination at all, at least on the surface. Am I correct? >> Well, I don't I would disagree with that. I think that what you're seeing is actually a convergence of if you look at terminal policy rates through uh through term structures worldwide there actually a convergence going on. So you've got very high rates in the US and the UK uh they're starting to come down. You've got very low rates across the Euro zone, Japan and China and they're starting to move up. So actually there is uh seems to be a convergence of interest rate short-term policy rates worldwide towards some equilibrium level. Uh and then if you look at liquidity injections by central banks globally although they're beginning to inflct downwards as I said they've been correlated pretty closely over the last 3 or four years I mean otherwise you know why have markets you know generally done much the same thing uh okay the euro zone is a tad behind is leading sorry is is lagging the US market a tad but generally uh you're looking at bull markets in many many places as I said it's an everything bubble >> all right uh Finally, let's take a look at uh bond yields. Now, I have either US 10 year do you have any idea of as to where the 10 years is going to go. On the one hand, if you're predicting inflation, uh presumably the long end of the curve should follow inflation expectations up higher, but then the Fed is instituting QE to some extent that could also bring down the long end of the curve. We'll see what happens. What do you think? >> Well, I think that as as regards the bond market, I think what you're looking at best guess next year is probably some stability. I think that you've got uh the likelihood, as I said, of an inlecting yield curve that may give some hope for the long end of the market, but you know, I think that maybe people are being way too bearish about the long end of the market for next year given the fact that I think what we're seeing is slowing liquidity. And if slowing liquidity transpires as we suggest, uh there's actually an ability to support that there's there's forces there will support the long end of the market. >> Certainly the uh short end of the curve is going to go down. But what does that mean for well if the yield curve steepens into uh into uh declining liquidity conditions? What does that usually mean for markets or the economy? >> Well, I think the point is is that if you look at the economy, if we're correct that you're going to see an acceleration in the economy, uh it's not uh it's it's typical that the yield curve will flatten. Uh the peak in the yield curve tends to occur around the trough in the economic cycle in terms of economic growth. Um, so if you've got a stronger economy through next year, it's it's quite consistent with a flattening yield curve. >> Perfect. Uh, well, that was a great discussion, Michael. I appreciated that very thorough rundown of the global uh economic and liquidity situations. Where can we follow your work and learn more about uh global liquidity indices? >> Um, well, the best way is to uh is to look at capital wars, which is our substack. Um if you want more detailed data uh there's glindexes.com which is our website or uh still the crossberc capitalap.com works. So uh as I said we're sort of associated uh with crossboarder capital still uh those are the main ways for getting data from uh for institutional work. Uh but capital law is a pretty good way in. >> Okay good. Uh we'll put the links in the description down below. Thank you very much Michael. I appreciate your time and uh we'll speak again soon. Take care for now. >> Great pleasure David. Enjoyed it. Thank you. Thank you for watching. Don't forget to like, subscribe, follow Michael. Links down below.