Liquidity Cycle Turning: What Happens When Refinancing Stops | Michael Howell
Summary
Global Liquidity: The guest warns liquidity is set to drop sharply as central banks tighten, bond volatility rises, the dollar strengthens, and oil prices climb.
Gold: Strong case to own gold as a dedicated monetary inflation hedge; gold’s pricing increasingly driven by China and the Shanghai exchange, with guidance to buy on pullbacks and hold long term.
Oil: Oil is a major liquidity absorber; higher prices are likely and could remain elevated, contributing to a sustained inflation impulse.
Bonds: Despite headlines, falling term premiums signal rising demand for bonds; favor safety via cash and front-end duration now, with longer duration around the liquidity trough.
China: China is easing aggressively, monetizing debt, and likely supporting gold; its markets may hold up better than Western markets amid asynchronous cycles.
Commodities: Broader commodities (copper, aluminum, fertilizers, food) are set to rise alongside oil, reinforcing the inflationary backdrop.
Energy Sector: Energy remains a reasonable hold within the cycle framework as commodity strength persists and inflation pressures build.
Risk Management: The guest advocates a risk-off stance, noting refinancing walls, repo market stress, and the erosion of the traditional 60/40 portfolio in favor of inflation hedges like gold.
Transcript
At the heart of the system is a debt liquidity nexus. Financial markets are now debt refinancing mechanisms. They're not new capital racing systems. Now, the paradox that we've got ourselves into. Is that debt needs liquidity for refinancing because the spoiler revert debt is never repaid. It's only rollover. Hi, I'm Ed D'Agostino from Mauldin Economics, and today we're going to talk about global liquidity. One of the most important concepts for an invest. To understand and thankfully we have one of the world's top experts on liquidity to help us. Michael Howell is the author of Capital Wars on Substack and he's a managing director at GL Indexes, and he's our guest today here at Global Macro Update. A lot going on in the world right now, particularly in the Middle East. What is the impact of of war on global liquidity? Well, the answer is hugely negative. We put a piece out on, uh, our substack yesterday, which basically was called the four Horsemen of the, um, of the liquidity apocalypse. And that basically was saying that you've got four main drivers of global liquidity. one is central bank activity. secondly is basically things like, the collateral multiplier, which really depends on. Volatility or depends on low bond volatility. Uh, another is the US dollar, uh, that's another factor. And the third is oil prices. Oh, sorry. The fourth is oil prices. And you look at those four factors. I mean, we, we think that central banks. They're gonna have to tighten. I mean that, uh, is not necessarily a consensus now, but I think if you start to look within the entrails of bond markets, uh, bond markets are starting to discount higher rates. And we've gotta remember that most central banks around the world don't have dual mandates. They have a single mandate, which is inflation, and inflation is likely to pick up here. The second is the oil prices have jumped. Significantly, they may have further to go. That's a big absorber of liquidity. Uh, the energy industry and particularly the oil industry, uses a lot of liquidity. Uh, just given, you know, just think about, uh, you know, transit and tanker, uh, tankers and whatever. That's very, uh, working capital intensive. Higher prices absorb liquidity. You've got the dollar, which is basically moved up by what so far this month by about three 4%. Uh, that's another factor, which dense liquidity. Uh, so all these things are, are bad. And then as of Friday's close, uh, we saw the move index basically hitting 109, uh, more or less so. You know, these things are not, not great omens. And, uh, basically our conclusion is that, you know, if you look at it on paper and you ex you extrapolate, uh, those trends forwards, you're looking at something like a 25% drop in liquidity. I mean, the, these are big, big events. That's financial liquidity. I'm, I've gotta stress, if you're a central banker and you're looking at what's happening when, and this oil supply shock, are you, are you looking at it and saying, this is temporary and I should sit on my hands? Or do, do you in fact have to raise interest rates? Well, I think my answer would be to that is that you've, you've gotta, you've effectively got to raise interest rates. You've gotta, you've gotta essentially, uh, put down your inflation fighting credentials. The great problem is that, uh, if you are tightening monetary conditions in this environment, you are also against the, uh, you know, you are, you are running or swimming against. The tide in debt, uh, debt needs to be refinanced. And one of the points that we continually make Ed is that, you know, modern financial systems are all about new capital raising. They're all about refinancing existing debts. Something like 80% of all primary transactions in global financial markets now are about refinancing existing debt. That has to be done. And if there's not enough liquidity around in the system, you get a problem, you get a financial crisis. So what we've got here is really the worst of all worlds. We've got inflation picking up. Central banks are gonna have to sort of produce some sort of credibility here, uh, to maintain their inflation fighting credentials. And on top of that, they've gotta make sure that debt gets refinanced. And that's not an easy task. So it's kind of damned if you do and damned if you don't. Very, very tricky if you could explain it in layman's terms. How does raising interest rates in this environment, how does it help their cause, right? Because there's, there's nothing that they can do to bring oil costs down, I'm assuming. Yeah. I, I think that's a, that's an absolutely fair point. Um, and I, I'll, I'll show you a chart in a moment, which probably, you know, emphasizes the. Uh, the, the stress that the system could be under. But I think if we go back to the interest rate question, I mean, I think the, the problem that a lot of central banks have, uh, basically made for themselves is they've, uh, they get everybody to focus on interest rates as the main lever of monetary policy. So if interest rates go up, we're always told that that. Slows an economy down and if interest rates drop, that speeds an economy up. And I, I didn't think that's the case anymore. I think a lot of, uh, you know, much more learned people than me have actually started to question seriously, uh, the impact of, uh, of interest rates on markets. And I think you've just gotta think about, you know, the old world and the new world. In the old world, what you had is interest rates were sort of the arbiter between, um, a private sector that was. Generally speaking, uh, borrowing particularly through the corporate sector and the household sector, was really supplying them with funds and higher interest rates. Basically, uh, you know, capped corporate spending and slowed the economy. Now, come quietly on that. I mean, that's a reasonable explanation. Uh, the trouble is it doesn't happen anymore because. Capital markets are longer, uh, new, uh, new capital raising, uh, mechanisms. They're all about debt refinancing. And what's more, uh, the private sector is in a very different situation. The corporate sector doesn't have a deficit. The corporate sector has a surplus. The household sector has a surplus. It's the government sector that has the huge deficit. So higher interest rates. What do they really mean? I mean, what they mean is that the government has a much bigger interest bill to pay, but that really comes in the form of transfer payments to the private sector. So if interest rates go up, right, what you're getting is higher transfer payments from the government to the private sector. Isn't that an income stimulus? Not a contraction. So I think we've gotta rethink a lot of these normal metrics. Mm. And the problem is that, you know, we're in a world now, it's kind of looking topsy-turvy and um, that's one of the problems. Therefore, you know, the central banks have gotta somehow communicate the fact that they're trying to fight inflation. But at the same time. Preserving enough liquidity in the system to roll over debt, and that is not an easy task. Now, just to come onto the point about, if I can, about, uh, oil. If you look at this slide, which I think kind of puts this into perspective, uh, you know, the, the problem we've got, and this is something which is maybe not a conventional indicator to watch, it's something that I've, I've looked at a lot over the years because it seems to be, uh, an intuitive. Indicator that does seem to work, and this is looking at the gold to oil ratio. Now people in the markets do tend to look at this, uh, you know, traditional economists or academics probably dismiss it as being rubbish, but in actual fact it has a lot of truth to it. And what this shows is the relationship between an ounce of gold and a barrel of oil. And what it's arguing is that there's a long term equilibrium here at about. 20 times. Now, if you look at that chart, which goes right back to the 1970s, you kind of agree that there is some, um, sort of convergence back to those levels. And if you look at the annotations I put on the chart, what that's saying is that. You know, gold in 1970 was 35 bucks an ounce. Oil was about two, just over $2 a barrel. So there you get your approximate 20 times, 1990 gold, 400 oil 20. Simple 20 times, 2015 gold thousand bucks oil 50. It gained 20 times 20, 22 $2,000. Gold. A hundred dollars oil again, 20 times. So start thinking about this and what the data shows is you get convergence back to that level within about a two to three year period, typically. So if we think about where we are now, gold is, well, it's dropping fast, but, you know, let's just, uh, hold the thought that it's around $5,000 an ounce or there, or thereabouts. 20 times would tell you that the barrel of oil is going to $250. Okay? Now, not overnight, we've gotta say, but that may be the equilibrium. So the question is, and I was, you know, called by a client, uh, about a week ago when I put this out, that I was insane. This was just completely complete rubbish. And my answer was, look, well, you've got three variables here. You've got. A gold price. You've got an oil price and you've got a gold oil ratio. Now one of those, one of those three is wrong. Okay. Uh, the goal is wrong at $5,000 an ounce. The gold oil ratio is wrong at 20, so it must have changed in some way. Or the o the oil price, uh, at 250 is wrong and you've gotta take your choice. And I would say looking at, uh, what's going on in the world. Gold looks pretty well underpinned. It may drop further for sure, but it's gonna hang around these levels. It sure ain't going back to $2,000 an ounce supply. See, uh, the gold oil ratio has got a long-term equilibrium. I mean that may have changed a tad, but we are just maybe splitting hairs. So the fact is that we've got a lot of inflation coming through and go, uh, oil is dis representative commodities. I mean, let's talk copper, let's talk aluminum. Uh, let's talk fertilizers. Let's talk food prices. I mean, these things are going up and this is gonna be a big inflationary hit for 2027. And central banks have gotta do something, and that's really the problem. How much of the gold oil ratio is impacted by the strength of the dollar though? Because gold, they're both, if you're pricing both in dollars, is it, is it more an indication that the dollar is. Outta whack compared to other currencies? Well, it should generally be dollar neutral, one would think. Um, okay. Uh, I mean, I would argue that the gold price, I mean, what the, where the asymmetry is, is basically saying that, you know, should the gold, what should the gold price be? If the dollar is under pressure, if you've got, uh, the old paper dollar, I should say the paper dollar is under pressure, um, in terms of the big debt burden that the US government's taking on. Um, therefore the dollar should devalue over the longer term. But against what? Definitely against gold. So you've got an argument to say that the gold price probably has gotta go a lot higher in the long term, which is telling us here a lot about inflation pressures that are building up. And I think this is the the worry that we've all got, that we've gotta start to re reset our parameters. And if you look at this chart, look at the annotations. I mean, someone who was uh, around in 1970 would be familiar with oil at two bucks a barrel. Somebody in 1990 would be familiar with 20. Uh, here we are talking at over a hundred and it may be a lot higher than that. That's, that's quite the chart. Um, I can't stop staring at it. Yeah, so I think a lot of people get confused as to why gold isn't, hasn't been rallying in this environment where we've got, you know, massive inflationary. Pressures, uh, the, the, the US government has found yet another excuse to spend massively blowing out deficits. Why isn't gold rallying? Um, and I've always sort of just thought, well, it, it really has to do with the strength of the dollar more than anything. What are, what are your thoughts on where gold is at price wise right now? As we speak, a gold is sunning off and it's sunning off largely because, uh, it was the, the obvious leverage trade for a lot of CTAs. So if you look at CTA portfolios, that was the one, the one common asset that they all had in size. And I think that, you know, where you get volatility, you get leverage de-leveraging. And I think that's one obvious excuse for or explanation as to why the gold price has come down. So this is really profit taking or, uh, uh, uh, simply a short term market move. The other thing to say is that, you know, let's think about this realistically. Uh, you've had a lot of, uh, so far at least, you know, a lot of potential capacity taken out, uh, in, in the Gulf, whether it be gas or whether it be, you know, oil and, um, those Gulf states. Again, I have to start raising revenue. Uh, you know, even before this crisis, I mean, a lot of the discussion was that the Saudis don't break even until it's a hundred bucks a, a barrel. So, you know, they may be getting close now, but they've, uh, they're not gonna be shipping a lot of, a lot of oil. Um, therefore revenues are gonna be down. They're gonna need revenue. There are a lot of commitments there. Uh, you know, let's, let's, uh, you know, pause and think about the, the big new issues that are coming or slated to come, uh, on Wall Street in uh, coming months. These sort of mega deals where I think the Gulf States will likely to be big participants, but they're gonna need their money elsewhere. And what are they doing? They're selling assets and they're selling gold, and I think that's another reason why you've got this profit taking. So that's a perfect segue into. We talked about last time we, we got together on this podcast, which was, you were, you were indicating that liquidity was going down. Yep. Um, and that stocks just as a blob, stocks probably weren't the place to be. Right. Uh, that you might wanna think about selling your stocks. So has this trend just accelerated that? Yeah. I mean, in, in a word, yes. I mean, what you've had is, anyway, um. A declining liquidity cycle. I mean, let, let me show you some of the evidence. This is looking at, uh, global liquidity in terms of, uh, billions or trillions of dollars, I should say. Uh, this is the aggregate we calculate on a weekly basis. Uh, you can see the trend there, you can see where we've come from. Um, you know, you can, you can, uh, also agree or disagree that this has been the everything bubble. Uh, so you've had a huge expansion of liquidity. I mean, you know, going right back to, uh, uh, you know, the time of the GFC, you've had a doubling of global liquidity. I mean, the, these are, these are not small numbers. These are big, big inflows of money into markets, and you can see the step ups at different times. Uh, one after the COVID crisis, and then another one more recently, uh, as a lot of liquidity is poured into markets, it looks as if that cycle is inflecting. Uh, you get a better idea if you look at the following chart, which is actually an underlying growth rate, uh, which is sort of built up from a micro level of, uh, of many different economies and many different categories of liquidity. But it gives an unambiguous picture of that global liquidity cycle. This goes right back to the 1960s, and what it says is that you've got. A cycle here with a frequency of around 65 months. It seems to be almost exactly on track in terms of its inflections or its peaks and troughs. Its inflections, and what we've had is a decline in liquidity beginning at the end of Q3, last year, 2025, and liquidity is basically edging down now. Uh, as I indicated from the previous slide, it's only just started to drop in absolute terms, but the growth rate, which is this chart here, showing a very clear slowing and that 65 month cycle is, as we keep saying, a debt refinancing cycle, uh, that we've all gotta acknowledge. And it's that debt refinancing bogey, which is really the big problem out there. Uh, you know, aside from Iran or, uh, you know, uh, troubles in the gulf or troubles in, uh. In geopolitics. Uh, the great fact is that all the worrying fact is that we've gotta refinance an awful lot of debt. Uh, and that's still out there. There's no denying that we're closer to a problem than we, than we have been, right? Just by default. Uh, as time marches on. You're saying some pretty ominous things though, right? And, and, and your recent article on Substack Capital War Substack, which is excellent. Uh, about the four horsemen, as we get closer to something, what is that something and, and what does it look like? Is it another great financial crisis? Does it unfold differently because the debt is mostly in the government to be. Perfectly frank. I think it's kind of more of the same. And I think if you look at what happened in the last 15 years in financial markets, you, we face a repeat of that. I mean, I think it's, it's, it's as straightforward as that. What does that mean? It means periodic and sharp financial crises. Those financial crises are always about refinancing problems, refinancing tensions, uh, that causes, uh, when there's a difficulty. Or an inability to roll debt. Central banks are forced back into the system, uh, and they pump more liquidity in. Um, you've got, uh, a, a backdrop where that means monetary inflation. Monetary inflation has grown dramatically. I mean, let me go back to my previous slide. That's global liquidity. Think of that as monetary inflation. So basically since the GFC, you've had a doubling of the pool of liquidity. Uh, and therefore let's say that monetary inflation has, has doubled. So what you've got is this continual, uh, you know, expansion of liquidity in the system because debt needs to be refinanced. And the more that we take on debt, uh, the bigger, the bigger, the bigger the problem. And, you know, what is, you know, with hindsight, amazing, is the fact that if you go back to the COVID crisis, and actually even if you just sort of go back. To the GFC as well. What you find is that policymakers responses to many of these crises have been less about, uh, injecting liquidity, although clearly they did, but much more about getting interest rates right down to near zero levels. Now, that was madness because what a lower interest rates do, they incentivize debt, and actually on top of that, they actually encourage borrowers to term out their debt until later in. Uh, you know, in the decade as they've done. And so what you do is you basically compound and build up the problems, and that's what's happened. I mean, if you go back to, uh, the sort of di of central banking in the 19th century, water badged, uh, water badged always used to say, lend freely. We agree with that, but at a high interest rate, I mean, that's what should be done. You don't wanna encourage people to take on more and more debt, and that's really been the problem. So I think this comes back to this whole idea, this whole notion of using interest rates as the main lever of monetary policy, which seems to me a, a, you know, a, a serious problem. And now I think you can actually question the, the merits because interest rates are actually, maybe ironically, a source of stimulus, not a source of, uh, contraction. Where does one hide? In this type of environment, is there a safe haven? There is a safe haven. I think the, I think the answer is that what you do need are dedicated monetary inflation hedges. Now, those dedicated monetary inflation hedges are things like gold and silver. That's been the long term. Uh, you know, the, the, the, the long-term solution to monitor inflation. If you dease paper money systems, uh, gold and real assets, uh, definitely do well. You've only gotta look at what happened during the 1970s for evidence of that, or look at 4,000 years of history and find that gold has pretty much maintained its purchasing power. And I think that's what people need to think about quite seriously. Um, you know, you've also got the case that. You know, good quality equities, those companies with pricing power tend to do well, although, you know, in the short term their prices may be volatile. Uh, but that's another area. And then Prime Residential real estate tends to be a pretty decent long-term inflation hedge. So I think these are the things that everyone needs to rethink and hold in their portfolios. So the whole idea of a 60 40, uh, portfolio, that has really been something of a luxury over the last 20 years. But it's really, you know, it's not something that works in history. Uh, it's actually, if you look at the long-term, the very long-term track record of a 60 40 portfolio of 60 equity, 40 bonds, it's been actually a pretty miserable performer. Um, and it's only in the last 20 or so years that it's done well, but even now, it's fraying at the edges. Seriously. And I think what you've gotta start thinking about is replacing. Uh, a large part of that bond, uh, position with dedicated monetary inflation hedges, which really means come down to it gold. Um, and that's one of the things to think about now, you know, added to the, you know, what we've spoken about are the problems in the west, the problems in Europe, the problems in the us. You know, China's got big problems as well, and we've gotta start recognizing that, you know, if you start talking about debt, I mean, you know, um, it's not the US and Europe that have got the monopoly here. China is big, big into debt, and China needs to get out of debt desperately because that's having a really deleterious effect on China's economy. Uh, it's strangling growth. Look how much growth and, uh, capital returns have fallen in China, and that's because of this huge amounts of unproductive debt. They've gotta get that off their balance sheet too. They've gotta create monetary inflation and that's what they're doing. And in my reckoning, that's the large, the, the main reason why the gold market has actually gone up significantly over the last 18 months. It's not been the west, it's been actually China, which has been devaluing, uh, you know, its paper money. I have to interrupt to ask you for a quick favor. If you find these interviews helpful, please take a minute to sign up for my free weekly email where I give you a summary of our latest discussion, audio and video versions, along with a full transcript. There's a link in the description, so hit pause right now and take a minute to sign. Let's get back to the interview. You know, as we sit here talking today, a conflict is still raging in the Middle East. How does Japan factor into all of this? I think Japan as always is, you know, somewhat of an anomaly here. Uh, I mean, you know, number one, Japan is a big. Energy importer, so it doesn't sit very well with higher old prices. Mm-hmm. I think the whole argument that people put as you know, what is, you know, a major risk out there, which is the yen carry trade, I kind of dismiss. I don't think it's anything like as important that people make out. It was at one stage. Uh, that is clear, but what really matters much, much more is China and understanding Chinese capital flows and where they're directed. I mean, China has the big surpluses now, not Japan. Um, Japan can, you know, make a difference at the margin, but you know, Japan. 25 years ago was critical to the world economy and certainly world financial markets. And I don't really think it's necessarily that important today. Uh, on the other hand, you know, Japan is facing a very different environment. Uh, inflation is clearly picking up there, and we'll pick up more because of higher oil prices, and it looks as if the Japanese are among the first to raise interest rates. So it may be a bellwether of where we are all going. Japan has got a big debt problem it's gotta get out of, uh, as well. So, you know, the, the, the common factor across all these economies is debt. Now I think what's instructed to think about is this sort of whole debt, uh, liquidity nexus. And what I'm just want to do is to try and. Maybe explain that in, uh, a couple of slides and I'm gonna come back maybe to the other, the, these other charts at, at the end, but it's really this chart, which is something we need to focus on because this is describing what the monetary system looks like today. It's not a textbook, uh, model of what the financial system is because the textbooks are really out of date. What this is telling us is that at the heart of the system is a debt liquidity nexus. Financial markets are now debt. Refinancing mechanisms. They're not new capital racing systems. And what they depend upon in this is this debt liquidity nexus. Now, the paradox that we've got ourselves into is that debt needs liquidity for refinancing because you know, spoiler alert, debt debt is never repaid. It's only rolled over. So what you need is liquidity. In other words, you need. Capacity in financial sector balance sheets. In other words, liquidity to roll your debt. Now the paradox here is that liquidity also needs debt. 'cause liquidity is collateralized. Something like 77% as you see in the top left hand corner. Uh, of all global lending now is collateral based according to the World Bank. So in actual fact, in credit money systems, um, new credit, uh, relies on old debts or the integrity of old debts, uh, as collateral. And if those old debts. Require refinancing, they've gotta have liquidity. So you see there's like a vicious circle that we've created for ourselves that if you get any break in that circle, you get a financial crisis. And those financial crises are basically, uh, either, uh, occurring on the right hand side of that diagram with a break in the refinancing leg where you see term premier starting to crash and credit spreads blowing out. Maybe we're getting that now. Uh, and then you look at the left hand side where you get spikes in the move index. Oh, look what happened on Friday. Or you get the sofa spreads blowing out. So you know, what you can see here is this is beginning to fray at the edges quite badly. Now the reason that this is important to think about is this chart, which I think I showed you before, but this is looking at the ratio between debt and liquidity. Over the long term for the advanced economies, and this is basically saying, look, you know, forget about these notions of debt, GDP, which are sort of. You know, I, I, I dunno why that calculator. They're probably an easy thing for economists to work out, but that doesn't seem to mean very much because debt, gdp, DP just seems to rise ly without problems or whatever. Uh, and different countries have high ratios allowed to have low. So what this is looking at the ratio between debt and liquidity and there seems to be a very clear equilibrium, uh, around two times. So if you get a, uh, ratio straying above. That equilibrium. In other words, you go up to, uh, what looks like 2 20, 2 30 on that, uh, on that index on the left, you start to get financial crises because there's too much debt relative to the liquidity out there. It's very, very difficult to refinance your debt. And if you get refinancing tensions, that's the cause of financial crises. All financial crises in the last um, 20, 30 years have been refinancing crises. And then you look at the other side of that divide. At the bottom when you've got a lot of liquidity relative to debt. The vent is asset markets. There's too much liquidity. Uh, it's not necessary, uh, to refinance debt. It, it finds a blow off in asset price bubbles. And that's what we are looking at. And look at those annotations, you'll see where we are. And this is the everything bubble, which has come through. So that's starting to end and it's ending, uh, really for two reasons. One is liquidity is going down. That's partly a natural cyclical phenomenon. Uh, that's going on. But, you know, central banks aren't helping and they won't help if they're gonna tighten. And the other reason is that if you look at this chart, it's showing the debt maturity wall. And this is basically a, maybe a wonkish concept, but this is basically saying, look, this is the result of COVID. This is the result of zero interest rate policies, uh, and maybe in cases negative interest rate policies that, uh, the central bankers basically operated through that period. And what that did was it incentivized a debt take up, but it also encouraged a lot of borrowers, existing borrowers to term their debt. Into the latter part of the 2020s, and that debt is now coming back into the system to re refinanced. Now, on top of this, you've got, in 2026, you've also got, um, the problem of a lot of new issuance coming. Uh, into the markets. You've got AI spend as well to be financed. And so there's gonna be a clash between scarce liquidity impaired even more by this Iranian conflict. Um, and, uh, these huge demands. And that doesn't sit well. Now, what I would, what I would say is just consider what happened at the end of last year in the repo markets. And the repo markets are at the heart of the financing. In a modern economy, the repo markets spiked when the Federal Reserve took out. Maybe inadvertently 200 billion, uh, from US money markets. A look at the spike you saw in repo. Now, the Fed was forced to come back with alacrity with a new QE measure called Reserve Management Purchases. And those have actually been, uh, you know, pretty strong, uh, in the last few months, and that really is the problem. So here is the collateral, the, uh, the sofa spread blowout that you can see here. At the end of 2025, look at what happened. Uh, they've calmed it down, but they've calmed it down largely because they've been injecting a lot of liquidity, uh, through, uh, more treasury purchases. So this is Treasury is held by the US Federal Reserve and look at what's happened. Uh, in the last few weeks. They've injected carbon from liquidity. Wow. Uh, and this is sort of ULA tab 'cause they're not broadcasting this, but this is what's going on. Would you assume that that was just sort of done in anticipation of stress in the markets due to, uh. Due to the Middle East? No, it was, I, I think Ed rather, the, rather the reverse. It was actually done as a response to the sofa blowout that we basically got, sorry, back here. Um, you know, in the end of 2025. That was a response to that problem. It's not a response to the, to the latest one. Now the repo markets, as we speak, seem to be relatively calm, but you've had a whopping great spike in the Move index. Which is another negative for the system because it basically means that what you get is a lot of de-leveraging, forced by the fact that the collateral multiplier, in other words, how many times you can lend on, on a pool of collateral, uh, that starts to come in dramatically, tends to drop because credit providers say they want bigger haircuts to cushion them against greater volatility. That really is, you know, part of the problem. Now you can see this big move towards risk off, which is going on the whole time. And one of the other things I think that's worth spelling out, which I'm gonna go to a, an earlier chart, which I think is, is this worth, uh, considering here is this chart, which. Getting into the weeds of wonkiness again, but this is looking at term premium and bond markets. Now, as I've read the media in the last week or so about this bond market sell off and how bonds are, you know, bonds are crashing and everything else, whatever. I would say actually it's the opposite, isn't it? If you look inside the bond markets, what you can see is actually the reverse happening. You are seeing term premier in the bond markets starting to drop away significantly. Now, this is not what the narrative should be telling us that or it is telling us. The narrative is saying there's no demand for bonds. Falling term Premier is actually telling you there's increasing demand for bonds. The problem in the bond markets is not the fact that, uh, there's, uh, there's. There's that change in demand. There's actually, the problem is that rate expectations are going up. So what this chart here is trying to show is that big divergence in the bond markets. Now, if you take that orange line, the term premium line, term premium are the. Uh, extra compensation that investors demand to hold a bond. So if that term Premier is dropping, investors are saying they want less cushion, they're prepared to, uh, accept, uh, a lower yield, uh, basically just to hold bonds. So that big plunge that you've seen from basically, um, what mid-February to date, this is daily data is telling us that the demand for bonds is increasing significantly among major investors. And the reason that you've got bond yields going up across the curve is that that black line is telling us that terminal policy rate expectations. In other words, what the bond investors think central banks are gonna do is they're gonna raise rates. And that's seems to be increasingly baked in. And I would, I would suggest that's probably correct. Because to maintain inflation credibility, central banks are gonna have to push rates up. Now, that is the dilemma that everyone faces here, because that's gonna strangle liquidity. Uh, other things being equal. So large investors, institutional investors, governments are saying, um, we want more bonds. We want your bonds, but, but we want a higher rate. Like that, that's a, that's like a little bit of a brain twist. Uh, well, what it's saying is at the front end of the curve, they're saying that rates are going up. But in actual fact, what the, the, the orange line, the term free is saying is actually, that's indicating take that as a signal of increasing demand for bonds. So what you're getting is, uh, you, you are getting the yield curve flattening. And that's really a really important point because it, it is consistent with this whole story. And for, you know, I just wanna show you this chart because it's, maybe it's an important one, but it will tell you what's going on. This is looking at term Premier. So this is the, the extra compensation that bond investors demand to hold a bond shown in black. Okay? And that's actually the change on a year ago, but. Whatever, just take it as a term premium measure. And the orange line is our global liquidity index. Now, what that's saying is these two data series are completely different. One is the flow of liquidity and the other is a rate that comes from the bond markets. And what you can see is they line up exactly. So what the story here is that as global liquidity retreats, so the demand for safety in the system starts to. Increased dramatically, and that's what we've got going on right now. So there's a great, great shift here into safe assets. I think it's being, you know, it's not being recognized by, uh, a lot of commentators, particularly in the media, they're not, they're not acknowledging this, they're saying, you know, avoid bonds or whatever. But the message here is that you want safety. We are not gonna say go into very long duration yet, but certainly you want to be going into the front end of the curve raising cash. I, I think, in this environment, and I think that you've just gotta treat this whole. Exercise of the Gulf, whether, whether the tensions are over tomorrow. I mean, who knows? But I think the damage has been done and you know, oil is not gonna come back quickly. Inflation is gonna be an embedded problem. Um, liquidity is gonna be scarce than it was, and economic activity is gonna be impaired. And I think therefore you need to have some degree of safety. Uh, is this bull market over? I think it probably is. That's, that's my contention. I think we need to go risk off. When you say something like the bull market. Is over and we should go risk off. In general, what's your. What's the timeline that you tend to operate on? Because some investors will say, well, you, you, you, you'll have an interview with an investor and then you find out where their timeline is, say six months. Others will say it's six to 18 months. How does your research time out, if you will? Well, I, what we come back to is this global liquidity cycle that basically is the, is the tempo of investment for us, and that is a timeline of the average cycle. So the black line is looking at the average liquidity cycle since 1970 in terms of months. So minus 30 is when it starts, minus 30 months. Zero is the low point, plus 35 is on the right is when it ends, and the current cycle is in red. So the current cycle doesn't look. You know, dramatically different from what a normal cycle looks like. Now we tend to put that into a framework which is shown here, which is looking at, uh, how the investment cycle works. Now, the way that we read this is to say the upswings of the cycle are, when you want equities, you wanna be risk on. Uh, the peak of the cycle. You want commodities. I mean, we are at the peak. Commodities have been doing well, et cetera, in the downswing, which I would argue we are getting close to, if not already. There. You want more cash and then you want bonds, uh, longer duration bonds around the trough, and then the cycle restarts. So that's really looking, uh, at a cycle, which. You know, let's say each particular phase. So we think of calm, speculation, turbulence, rebound maybe about 15 months each, each phase. Now if you look at these traffic lights, which basically inform, uh, through each of the regimes, and let's say that this. Asset allocation began in late 2022 with the rebound phase when liquidity started to shoot up significantly. That was when you wanted, I mean, you read this by the way, just like a traffic signal. So green is go, ready is stop. Amber is proceed with forward with caution. Um, what that's saying is in the rebound phase. Late 22. You wanted to be increasingly risk on, not fully risk on, but cautiously moving that way. You wanted to be full on equities, full on credits, no commodities, no bond duration by calm, which was basically by middle of, uh, 2023. You wanted then, uh, much more risk on more leverage, more equities starting to trim credits. Uh, into commodities, um, and no bonds yet. Uh, speculation where the US market has probably been for a few months now, uh, maybe six months or so on our reckoning. Uh, that would suggest that what you, what you should be doing, actually maybe a tad more than six months, I should correct myself. Uh, but you know, through much of last year and whatever you wanted to be, beginning to pare down equities, no credits strong on commodities. Beginning to put a toe in the water in terms of bonds, turbulence, which we're not there yet. We still think the US is still late, uh, years in the speculation phase. Turbulence, you basically want no equities or very low equities. You wanna be maybe thinking about credits because they may have come back, uh, because of you. A year of more carry, uh, commodities starting to get out of bond duration full on. And then you look at the industry groups, the same sort of message. Technology does fantastically in the first two phases of the upswing, but you don't want them in the speculation and turbulence phase. Financials do really well in calm, but you wanna be out, uh, getting out in the speculation now, and that's probably not a bad call. Energy. Commodities, you can still hold energy, you know, still looks a decent play, I think. And then you wanna be increasingly thinking about defensive areas. But you know what I'm saying here is. Maybe, um, maybe, sorry. This chart does that is to say, think of this in terms of. An asset allocation cycle, and you can see the timeframes. Uh, this is saying, this is the percentage of markets in the risk on categories of rebound or calm. Now the moment worldwide, we're just on the cusp of going below average. Um, but you can see those cycles, how they unfold. And, you know, I, I wouldn't wanna be messing in markets too much in the next 12 months. I mean, hopefully I'm proved wrong. Uh, and it, it's a nine environment. But I, I just think you, you've gotta pay attention to liquidity and as far as I can see, liquidity is basically being drained and the demands, the competing demands for liquidity in terms of debt refinancing. I just, you know, skyrocketing. What did I not ask you, uh, that I should have? The last point to, to maybe make on this is, is China, and if you look at China, what this is chart is illustrating is the differential. Or maybe we will say the growing differential between the US and China. The black line here is looking at US liquidity. Okay. And you can see that cycle has peaked and has come down. Maybe there's a little. Not up in the last month, but hey, forget that. Uh, it's clearly come down. Uh, China, the orange line used to be really in step with the us, particularly around 2000. And when it got into WTO, so it was, you know, moving with the US cycle, or at least trying to, uh, then you saw this long period through, uh, the post GFC. Crisis period where China was struggling to, uh, you know, get, uh, get out of its bubble economy, its overinvestment and whatever else, monetary conditions were kept pretty tight. And now what you see is China relaunching a monetary cycle that is, that is basically async as cyclical, uh, or anti-cyclical with the us. And you can see there that China is just. Completely different, uh, from what the picture in the US is. So China is easing now that the US is tightening, and I think that is material because it should suggest that the Chinese markets actually hold up a lot better and they have been, uh, than Western financial markets. Now the reason that that is going on, and I'm gonna spin to uh, much later on in the presentation is because of this chart, which is looking at the debt liquidity ratios of China and Japan. Now you recall maybe from an earlier slide, what the debt liquidity ratio for the advanced economi. Was, which was basically Europe and America. And that was, you know, seeing the beginnings of a sharp, downward v uh, pattern, uh, being, being, uh, or unfolding. China and Japan are in a very different situation, and they've had very elevated debt liquidity ratios for a long time. That has caused their economies or strangled their economies. Growth has clearly come down in Japan dramatically from what it was in the eighties. Uh, in China it's also slumped and they need to get out of debt. And the only way you get out of debt in a modern financial system 'cause you can't default debt. Because, uh, it's the collateral for the system is you've gotta devalue it. You've gotta devalue your paper money. So what has Japan done? Omics was all about basically reform and getting the BOJ to buy, uh, huge amounts of jbs. In other words, monetizing what happened to the yen? It's collapsed. Right? What is China doing? China's doing exactly the same thing 15 years later. It is monetizing, uh, it's dead domestically. It's trying to hold up. Uh, it's the external value of the Yuan, uh, because it's basically, you know why I say fiddling the system, but it's doing what Japan did in the eighties because they've got such a big. Capital, sorry. They're big, uh, current account surplus that they can basically control capital flows and they've got controls on capital anyway to make it even more e even easier for them so they can fix the. External value of the U arm, but internally it's devaluing and they're printing money as if it's going outta fashion. So this is net liquidity injections by the PBOC. And there's, you know, this is the year on year change, not the actual level. So you can see what they're doing here. There's an accelerating, uh, injection of liquidity, and what that means is the yuan gold price. This is a bit out of date because it's since, obviously come down in the last few days. This is the Yuan gold price and this is what we think China is targeting. Don't look at Comex anymore. Don't look at the London Gold Exchange. The marginal pricer of gold is the Shanghai Exchange. It's Asia, which drives gold and silver prices now. And this is the mechanism they are monetizing, uh, their debt away and internally. China is basically printing money and the Yuan gold price is going up and here is the evidence, which shows the gold price in US dollars. Again, this is end month data, so it hasn't got the latest drop in, but that is PBOC, liquidity against gold. Oh, interesting. In my view, it's the Chinese that are doing this, not um, the West Amazing chart. Wow. So that's the other story. You've gotta keep thinking about gold long term. This is the, you know, buy on pullbacks. In terms of timing, again, do you, is your belief that China's just going to continue with this policy that they're nowhere near stopping yet? Yeah, they're, and they, they put a trillion US dollars into their markets last year. They're gonna have to do the same again, in my view. They need to get that economy moving. Uh, and, uh, that's even more paramount in a, you know, a communist system like China than it is in the west. They, they need to basically keep people's incomes up, prosperity rolling on, otherwise there's a lot more questions being asked. Uh, so I think that that's, that's the priority. And, you know, like, like core holdings, I mean, the question is, you know, don't, don't trade gold. Own it. That's the bottom line. Yeah. I couldn't agree with you more on that one, and I knew you were gonna be at our strategic investment conference for a much deeper dive into your presentation, so I'm, I'm really looking forward to that. Yeah, me too. Looking forward to that, ed. Thanks. Thanks a lot for your time.
Liquidity Cycle Turning: What Happens When Refinancing Stops | Michael Howell
Summary
Transcript
At the heart of the system is a debt liquidity nexus. Financial markets are now debt refinancing mechanisms. They're not new capital racing systems. Now, the paradox that we've got ourselves into. Is that debt needs liquidity for refinancing because the spoiler revert debt is never repaid. It's only rollover. Hi, I'm Ed D'Agostino from Mauldin Economics, and today we're going to talk about global liquidity. One of the most important concepts for an invest. To understand and thankfully we have one of the world's top experts on liquidity to help us. Michael Howell is the author of Capital Wars on Substack and he's a managing director at GL Indexes, and he's our guest today here at Global Macro Update. A lot going on in the world right now, particularly in the Middle East. What is the impact of of war on global liquidity? Well, the answer is hugely negative. We put a piece out on, uh, our substack yesterday, which basically was called the four Horsemen of the, um, of the liquidity apocalypse. And that basically was saying that you've got four main drivers of global liquidity. one is central bank activity. secondly is basically things like, the collateral multiplier, which really depends on. Volatility or depends on low bond volatility. Uh, another is the US dollar, uh, that's another factor. And the third is oil prices. Oh, sorry. The fourth is oil prices. And you look at those four factors. I mean, we, we think that central banks. They're gonna have to tighten. I mean that, uh, is not necessarily a consensus now, but I think if you start to look within the entrails of bond markets, uh, bond markets are starting to discount higher rates. And we've gotta remember that most central banks around the world don't have dual mandates. They have a single mandate, which is inflation, and inflation is likely to pick up here. The second is the oil prices have jumped. Significantly, they may have further to go. That's a big absorber of liquidity. Uh, the energy industry and particularly the oil industry, uses a lot of liquidity. Uh, just given, you know, just think about, uh, you know, transit and tanker, uh, tankers and whatever. That's very, uh, working capital intensive. Higher prices absorb liquidity. You've got the dollar, which is basically moved up by what so far this month by about three 4%. Uh, that's another factor, which dense liquidity. Uh, so all these things are, are bad. And then as of Friday's close, uh, we saw the move index basically hitting 109, uh, more or less so. You know, these things are not, not great omens. And, uh, basically our conclusion is that, you know, if you look at it on paper and you ex you extrapolate, uh, those trends forwards, you're looking at something like a 25% drop in liquidity. I mean, the, these are big, big events. That's financial liquidity. I'm, I've gotta stress, if you're a central banker and you're looking at what's happening when, and this oil supply shock, are you, are you looking at it and saying, this is temporary and I should sit on my hands? Or do, do you in fact have to raise interest rates? Well, I think my answer would be to that is that you've, you've gotta, you've effectively got to raise interest rates. You've gotta, you've gotta essentially, uh, put down your inflation fighting credentials. The great problem is that, uh, if you are tightening monetary conditions in this environment, you are also against the, uh, you know, you are, you are running or swimming against. The tide in debt, uh, debt needs to be refinanced. And one of the points that we continually make Ed is that, you know, modern financial systems are all about new capital raising. They're all about refinancing existing debts. Something like 80% of all primary transactions in global financial markets now are about refinancing existing debt. That has to be done. And if there's not enough liquidity around in the system, you get a problem, you get a financial crisis. So what we've got here is really the worst of all worlds. We've got inflation picking up. Central banks are gonna have to sort of produce some sort of credibility here, uh, to maintain their inflation fighting credentials. And on top of that, they've gotta make sure that debt gets refinanced. And that's not an easy task. So it's kind of damned if you do and damned if you don't. Very, very tricky if you could explain it in layman's terms. How does raising interest rates in this environment, how does it help their cause, right? Because there's, there's nothing that they can do to bring oil costs down, I'm assuming. Yeah. I, I think that's a, that's an absolutely fair point. Um, and I, I'll, I'll show you a chart in a moment, which probably, you know, emphasizes the. Uh, the, the stress that the system could be under. But I think if we go back to the interest rate question, I mean, I think the, the problem that a lot of central banks have, uh, basically made for themselves is they've, uh, they get everybody to focus on interest rates as the main lever of monetary policy. So if interest rates go up, we're always told that that. Slows an economy down and if interest rates drop, that speeds an economy up. And I, I didn't think that's the case anymore. I think a lot of, uh, you know, much more learned people than me have actually started to question seriously, uh, the impact of, uh, of interest rates on markets. And I think you've just gotta think about, you know, the old world and the new world. In the old world, what you had is interest rates were sort of the arbiter between, um, a private sector that was. Generally speaking, uh, borrowing particularly through the corporate sector and the household sector, was really supplying them with funds and higher interest rates. Basically, uh, you know, capped corporate spending and slowed the economy. Now, come quietly on that. I mean, that's a reasonable explanation. Uh, the trouble is it doesn't happen anymore because. Capital markets are longer, uh, new, uh, new capital raising, uh, mechanisms. They're all about debt refinancing. And what's more, uh, the private sector is in a very different situation. The corporate sector doesn't have a deficit. The corporate sector has a surplus. The household sector has a surplus. It's the government sector that has the huge deficit. So higher interest rates. What do they really mean? I mean, what they mean is that the government has a much bigger interest bill to pay, but that really comes in the form of transfer payments to the private sector. So if interest rates go up, right, what you're getting is higher transfer payments from the government to the private sector. Isn't that an income stimulus? Not a contraction. So I think we've gotta rethink a lot of these normal metrics. Mm. And the problem is that, you know, we're in a world now, it's kind of looking topsy-turvy and um, that's one of the problems. Therefore, you know, the central banks have gotta somehow communicate the fact that they're trying to fight inflation. But at the same time. Preserving enough liquidity in the system to roll over debt, and that is not an easy task. Now, just to come onto the point about, if I can, about, uh, oil. If you look at this slide, which I think kind of puts this into perspective, uh, you know, the, the problem we've got, and this is something which is maybe not a conventional indicator to watch, it's something that I've, I've looked at a lot over the years because it seems to be, uh, an intuitive. Indicator that does seem to work, and this is looking at the gold to oil ratio. Now people in the markets do tend to look at this, uh, you know, traditional economists or academics probably dismiss it as being rubbish, but in actual fact it has a lot of truth to it. And what this shows is the relationship between an ounce of gold and a barrel of oil. And what it's arguing is that there's a long term equilibrium here at about. 20 times. Now, if you look at that chart, which goes right back to the 1970s, you kind of agree that there is some, um, sort of convergence back to those levels. And if you look at the annotations I put on the chart, what that's saying is that. You know, gold in 1970 was 35 bucks an ounce. Oil was about two, just over $2 a barrel. So there you get your approximate 20 times, 1990 gold, 400 oil 20. Simple 20 times, 2015 gold thousand bucks oil 50. It gained 20 times 20, 22 $2,000. Gold. A hundred dollars oil again, 20 times. So start thinking about this and what the data shows is you get convergence back to that level within about a two to three year period, typically. So if we think about where we are now, gold is, well, it's dropping fast, but, you know, let's just, uh, hold the thought that it's around $5,000 an ounce or there, or thereabouts. 20 times would tell you that the barrel of oil is going to $250. Okay? Now, not overnight, we've gotta say, but that may be the equilibrium. So the question is, and I was, you know, called by a client, uh, about a week ago when I put this out, that I was insane. This was just completely complete rubbish. And my answer was, look, well, you've got three variables here. You've got. A gold price. You've got an oil price and you've got a gold oil ratio. Now one of those, one of those three is wrong. Okay. Uh, the goal is wrong at $5,000 an ounce. The gold oil ratio is wrong at 20, so it must have changed in some way. Or the o the oil price, uh, at 250 is wrong and you've gotta take your choice. And I would say looking at, uh, what's going on in the world. Gold looks pretty well underpinned. It may drop further for sure, but it's gonna hang around these levels. It sure ain't going back to $2,000 an ounce supply. See, uh, the gold oil ratio has got a long-term equilibrium. I mean that may have changed a tad, but we are just maybe splitting hairs. So the fact is that we've got a lot of inflation coming through and go, uh, oil is dis representative commodities. I mean, let's talk copper, let's talk aluminum. Uh, let's talk fertilizers. Let's talk food prices. I mean, these things are going up and this is gonna be a big inflationary hit for 2027. And central banks have gotta do something, and that's really the problem. How much of the gold oil ratio is impacted by the strength of the dollar though? Because gold, they're both, if you're pricing both in dollars, is it, is it more an indication that the dollar is. Outta whack compared to other currencies? Well, it should generally be dollar neutral, one would think. Um, okay. Uh, I mean, I would argue that the gold price, I mean, what the, where the asymmetry is, is basically saying that, you know, should the gold, what should the gold price be? If the dollar is under pressure, if you've got, uh, the old paper dollar, I should say the paper dollar is under pressure, um, in terms of the big debt burden that the US government's taking on. Um, therefore the dollar should devalue over the longer term. But against what? Definitely against gold. So you've got an argument to say that the gold price probably has gotta go a lot higher in the long term, which is telling us here a lot about inflation pressures that are building up. And I think this is the the worry that we've all got, that we've gotta start to re reset our parameters. And if you look at this chart, look at the annotations. I mean, someone who was uh, around in 1970 would be familiar with oil at two bucks a barrel. Somebody in 1990 would be familiar with 20. Uh, here we are talking at over a hundred and it may be a lot higher than that. That's, that's quite the chart. Um, I can't stop staring at it. Yeah, so I think a lot of people get confused as to why gold isn't, hasn't been rallying in this environment where we've got, you know, massive inflationary. Pressures, uh, the, the, the US government has found yet another excuse to spend massively blowing out deficits. Why isn't gold rallying? Um, and I've always sort of just thought, well, it, it really has to do with the strength of the dollar more than anything. What are, what are your thoughts on where gold is at price wise right now? As we speak, a gold is sunning off and it's sunning off largely because, uh, it was the, the obvious leverage trade for a lot of CTAs. So if you look at CTA portfolios, that was the one, the one common asset that they all had in size. And I think that, you know, where you get volatility, you get leverage de-leveraging. And I think that's one obvious excuse for or explanation as to why the gold price has come down. So this is really profit taking or, uh, uh, uh, simply a short term market move. The other thing to say is that, you know, let's think about this realistically. Uh, you've had a lot of, uh, so far at least, you know, a lot of potential capacity taken out, uh, in, in the Gulf, whether it be gas or whether it be, you know, oil and, um, those Gulf states. Again, I have to start raising revenue. Uh, you know, even before this crisis, I mean, a lot of the discussion was that the Saudis don't break even until it's a hundred bucks a, a barrel. So, you know, they may be getting close now, but they've, uh, they're not gonna be shipping a lot of, a lot of oil. Um, therefore revenues are gonna be down. They're gonna need revenue. There are a lot of commitments there. Uh, you know, let's, let's, uh, you know, pause and think about the, the big new issues that are coming or slated to come, uh, on Wall Street in uh, coming months. These sort of mega deals where I think the Gulf States will likely to be big participants, but they're gonna need their money elsewhere. And what are they doing? They're selling assets and they're selling gold, and I think that's another reason why you've got this profit taking. So that's a perfect segue into. We talked about last time we, we got together on this podcast, which was, you were, you were indicating that liquidity was going down. Yep. Um, and that stocks just as a blob, stocks probably weren't the place to be. Right. Uh, that you might wanna think about selling your stocks. So has this trend just accelerated that? Yeah. I mean, in, in a word, yes. I mean, what you've had is, anyway, um. A declining liquidity cycle. I mean, let, let me show you some of the evidence. This is looking at, uh, global liquidity in terms of, uh, billions or trillions of dollars, I should say. Uh, this is the aggregate we calculate on a weekly basis. Uh, you can see the trend there, you can see where we've come from. Um, you know, you can, you can, uh, also agree or disagree that this has been the everything bubble. Uh, so you've had a huge expansion of liquidity. I mean, you know, going right back to, uh, uh, you know, the time of the GFC, you've had a doubling of global liquidity. I mean, the, these are, these are not small numbers. These are big, big inflows of money into markets, and you can see the step ups at different times. Uh, one after the COVID crisis, and then another one more recently, uh, as a lot of liquidity is poured into markets, it looks as if that cycle is inflecting. Uh, you get a better idea if you look at the following chart, which is actually an underlying growth rate, uh, which is sort of built up from a micro level of, uh, of many different economies and many different categories of liquidity. But it gives an unambiguous picture of that global liquidity cycle. This goes right back to the 1960s, and what it says is that you've got. A cycle here with a frequency of around 65 months. It seems to be almost exactly on track in terms of its inflections or its peaks and troughs. Its inflections, and what we've had is a decline in liquidity beginning at the end of Q3, last year, 2025, and liquidity is basically edging down now. Uh, as I indicated from the previous slide, it's only just started to drop in absolute terms, but the growth rate, which is this chart here, showing a very clear slowing and that 65 month cycle is, as we keep saying, a debt refinancing cycle, uh, that we've all gotta acknowledge. And it's that debt refinancing bogey, which is really the big problem out there. Uh, you know, aside from Iran or, uh, you know, uh, troubles in the gulf or troubles in, uh. In geopolitics. Uh, the great fact is that all the worrying fact is that we've gotta refinance an awful lot of debt. Uh, and that's still out there. There's no denying that we're closer to a problem than we, than we have been, right? Just by default. Uh, as time marches on. You're saying some pretty ominous things though, right? And, and, and your recent article on Substack Capital War Substack, which is excellent. Uh, about the four horsemen, as we get closer to something, what is that something and, and what does it look like? Is it another great financial crisis? Does it unfold differently because the debt is mostly in the government to be. Perfectly frank. I think it's kind of more of the same. And I think if you look at what happened in the last 15 years in financial markets, you, we face a repeat of that. I mean, I think it's, it's, it's as straightforward as that. What does that mean? It means periodic and sharp financial crises. Those financial crises are always about refinancing problems, refinancing tensions, uh, that causes, uh, when there's a difficulty. Or an inability to roll debt. Central banks are forced back into the system, uh, and they pump more liquidity in. Um, you've got, uh, a, a backdrop where that means monetary inflation. Monetary inflation has grown dramatically. I mean, let me go back to my previous slide. That's global liquidity. Think of that as monetary inflation. So basically since the GFC, you've had a doubling of the pool of liquidity. Uh, and therefore let's say that monetary inflation has, has doubled. So what you've got is this continual, uh, you know, expansion of liquidity in the system because debt needs to be refinanced. And the more that we take on debt, uh, the bigger, the bigger, the bigger the problem. And, you know, what is, you know, with hindsight, amazing, is the fact that if you go back to the COVID crisis, and actually even if you just sort of go back. To the GFC as well. What you find is that policymakers responses to many of these crises have been less about, uh, injecting liquidity, although clearly they did, but much more about getting interest rates right down to near zero levels. Now, that was madness because what a lower interest rates do, they incentivize debt, and actually on top of that, they actually encourage borrowers to term out their debt until later in. Uh, you know, in the decade as they've done. And so what you do is you basically compound and build up the problems, and that's what's happened. I mean, if you go back to, uh, the sort of di of central banking in the 19th century, water badged, uh, water badged always used to say, lend freely. We agree with that, but at a high interest rate, I mean, that's what should be done. You don't wanna encourage people to take on more and more debt, and that's really been the problem. So I think this comes back to this whole idea, this whole notion of using interest rates as the main lever of monetary policy, which seems to me a, a, you know, a, a serious problem. And now I think you can actually question the, the merits because interest rates are actually, maybe ironically, a source of stimulus, not a source of, uh, contraction. Where does one hide? In this type of environment, is there a safe haven? There is a safe haven. I think the, I think the answer is that what you do need are dedicated monetary inflation hedges. Now, those dedicated monetary inflation hedges are things like gold and silver. That's been the long term. Uh, you know, the, the, the, the long-term solution to monitor inflation. If you dease paper money systems, uh, gold and real assets, uh, definitely do well. You've only gotta look at what happened during the 1970s for evidence of that, or look at 4,000 years of history and find that gold has pretty much maintained its purchasing power. And I think that's what people need to think about quite seriously. Um, you know, you've also got the case that. You know, good quality equities, those companies with pricing power tend to do well, although, you know, in the short term their prices may be volatile. Uh, but that's another area. And then Prime Residential real estate tends to be a pretty decent long-term inflation hedge. So I think these are the things that everyone needs to rethink and hold in their portfolios. So the whole idea of a 60 40, uh, portfolio, that has really been something of a luxury over the last 20 years. But it's really, you know, it's not something that works in history. Uh, it's actually, if you look at the long-term, the very long-term track record of a 60 40 portfolio of 60 equity, 40 bonds, it's been actually a pretty miserable performer. Um, and it's only in the last 20 or so years that it's done well, but even now, it's fraying at the edges. Seriously. And I think what you've gotta start thinking about is replacing. Uh, a large part of that bond, uh, position with dedicated monetary inflation hedges, which really means come down to it gold. Um, and that's one of the things to think about now, you know, added to the, you know, what we've spoken about are the problems in the west, the problems in Europe, the problems in the us. You know, China's got big problems as well, and we've gotta start recognizing that, you know, if you start talking about debt, I mean, you know, um, it's not the US and Europe that have got the monopoly here. China is big, big into debt, and China needs to get out of debt desperately because that's having a really deleterious effect on China's economy. Uh, it's strangling growth. Look how much growth and, uh, capital returns have fallen in China, and that's because of this huge amounts of unproductive debt. They've gotta get that off their balance sheet too. They've gotta create monetary inflation and that's what they're doing. And in my reckoning, that's the large, the, the main reason why the gold market has actually gone up significantly over the last 18 months. It's not been the west, it's been actually China, which has been devaluing, uh, you know, its paper money. I have to interrupt to ask you for a quick favor. If you find these interviews helpful, please take a minute to sign up for my free weekly email where I give you a summary of our latest discussion, audio and video versions, along with a full transcript. There's a link in the description, so hit pause right now and take a minute to sign. Let's get back to the interview. You know, as we sit here talking today, a conflict is still raging in the Middle East. How does Japan factor into all of this? I think Japan as always is, you know, somewhat of an anomaly here. Uh, I mean, you know, number one, Japan is a big. Energy importer, so it doesn't sit very well with higher old prices. Mm-hmm. I think the whole argument that people put as you know, what is, you know, a major risk out there, which is the yen carry trade, I kind of dismiss. I don't think it's anything like as important that people make out. It was at one stage. Uh, that is clear, but what really matters much, much more is China and understanding Chinese capital flows and where they're directed. I mean, China has the big surpluses now, not Japan. Um, Japan can, you know, make a difference at the margin, but you know, Japan. 25 years ago was critical to the world economy and certainly world financial markets. And I don't really think it's necessarily that important today. Uh, on the other hand, you know, Japan is facing a very different environment. Uh, inflation is clearly picking up there, and we'll pick up more because of higher oil prices, and it looks as if the Japanese are among the first to raise interest rates. So it may be a bellwether of where we are all going. Japan has got a big debt problem it's gotta get out of, uh, as well. So, you know, the, the, the common factor across all these economies is debt. Now I think what's instructed to think about is this sort of whole debt, uh, liquidity nexus. And what I'm just want to do is to try and. Maybe explain that in, uh, a couple of slides and I'm gonna come back maybe to the other, the, these other charts at, at the end, but it's really this chart, which is something we need to focus on because this is describing what the monetary system looks like today. It's not a textbook, uh, model of what the financial system is because the textbooks are really out of date. What this is telling us is that at the heart of the system is a debt liquidity nexus. Financial markets are now debt. Refinancing mechanisms. They're not new capital racing systems. And what they depend upon in this is this debt liquidity nexus. Now, the paradox that we've got ourselves into is that debt needs liquidity for refinancing because you know, spoiler alert, debt debt is never repaid. It's only rolled over. So what you need is liquidity. In other words, you need. Capacity in financial sector balance sheets. In other words, liquidity to roll your debt. Now the paradox here is that liquidity also needs debt. 'cause liquidity is collateralized. Something like 77% as you see in the top left hand corner. Uh, of all global lending now is collateral based according to the World Bank. So in actual fact, in credit money systems, um, new credit, uh, relies on old debts or the integrity of old debts, uh, as collateral. And if those old debts. Require refinancing, they've gotta have liquidity. So you see there's like a vicious circle that we've created for ourselves that if you get any break in that circle, you get a financial crisis. And those financial crises are basically, uh, either, uh, occurring on the right hand side of that diagram with a break in the refinancing leg where you see term premier starting to crash and credit spreads blowing out. Maybe we're getting that now. Uh, and then you look at the left hand side where you get spikes in the move index. Oh, look what happened on Friday. Or you get the sofa spreads blowing out. So you know, what you can see here is this is beginning to fray at the edges quite badly. Now the reason that this is important to think about is this chart, which I think I showed you before, but this is looking at the ratio between debt and liquidity. Over the long term for the advanced economies, and this is basically saying, look, you know, forget about these notions of debt, GDP, which are sort of. You know, I, I, I dunno why that calculator. They're probably an easy thing for economists to work out, but that doesn't seem to mean very much because debt, gdp, DP just seems to rise ly without problems or whatever. Uh, and different countries have high ratios allowed to have low. So what this is looking at the ratio between debt and liquidity and there seems to be a very clear equilibrium, uh, around two times. So if you get a, uh, ratio straying above. That equilibrium. In other words, you go up to, uh, what looks like 2 20, 2 30 on that, uh, on that index on the left, you start to get financial crises because there's too much debt relative to the liquidity out there. It's very, very difficult to refinance your debt. And if you get refinancing tensions, that's the cause of financial crises. All financial crises in the last um, 20, 30 years have been refinancing crises. And then you look at the other side of that divide. At the bottom when you've got a lot of liquidity relative to debt. The vent is asset markets. There's too much liquidity. Uh, it's not necessary, uh, to refinance debt. It, it finds a blow off in asset price bubbles. And that's what we are looking at. And look at those annotations, you'll see where we are. And this is the everything bubble, which has come through. So that's starting to end and it's ending, uh, really for two reasons. One is liquidity is going down. That's partly a natural cyclical phenomenon. Uh, that's going on. But, you know, central banks aren't helping and they won't help if they're gonna tighten. And the other reason is that if you look at this chart, it's showing the debt maturity wall. And this is basically a, maybe a wonkish concept, but this is basically saying, look, this is the result of COVID. This is the result of zero interest rate policies, uh, and maybe in cases negative interest rate policies that, uh, the central bankers basically operated through that period. And what that did was it incentivized a debt take up, but it also encouraged a lot of borrowers, existing borrowers to term their debt. Into the latter part of the 2020s, and that debt is now coming back into the system to re refinanced. Now, on top of this, you've got, in 2026, you've also got, um, the problem of a lot of new issuance coming. Uh, into the markets. You've got AI spend as well to be financed. And so there's gonna be a clash between scarce liquidity impaired even more by this Iranian conflict. Um, and, uh, these huge demands. And that doesn't sit well. Now, what I would, what I would say is just consider what happened at the end of last year in the repo markets. And the repo markets are at the heart of the financing. In a modern economy, the repo markets spiked when the Federal Reserve took out. Maybe inadvertently 200 billion, uh, from US money markets. A look at the spike you saw in repo. Now, the Fed was forced to come back with alacrity with a new QE measure called Reserve Management Purchases. And those have actually been, uh, you know, pretty strong, uh, in the last few months, and that really is the problem. So here is the collateral, the, uh, the sofa spread blowout that you can see here. At the end of 2025, look at what happened. Uh, they've calmed it down, but they've calmed it down largely because they've been injecting a lot of liquidity, uh, through, uh, more treasury purchases. So this is Treasury is held by the US Federal Reserve and look at what's happened. Uh, in the last few weeks. They've injected carbon from liquidity. Wow. Uh, and this is sort of ULA tab 'cause they're not broadcasting this, but this is what's going on. Would you assume that that was just sort of done in anticipation of stress in the markets due to, uh. Due to the Middle East? No, it was, I, I think Ed rather, the, rather the reverse. It was actually done as a response to the sofa blowout that we basically got, sorry, back here. Um, you know, in the end of 2025. That was a response to that problem. It's not a response to the, to the latest one. Now the repo markets, as we speak, seem to be relatively calm, but you've had a whopping great spike in the Move index. Which is another negative for the system because it basically means that what you get is a lot of de-leveraging, forced by the fact that the collateral multiplier, in other words, how many times you can lend on, on a pool of collateral, uh, that starts to come in dramatically, tends to drop because credit providers say they want bigger haircuts to cushion them against greater volatility. That really is, you know, part of the problem. Now you can see this big move towards risk off, which is going on the whole time. And one of the other things I think that's worth spelling out, which I'm gonna go to a, an earlier chart, which I think is, is this worth, uh, considering here is this chart, which. Getting into the weeds of wonkiness again, but this is looking at term premium and bond markets. Now, as I've read the media in the last week or so about this bond market sell off and how bonds are, you know, bonds are crashing and everything else, whatever. I would say actually it's the opposite, isn't it? If you look inside the bond markets, what you can see is actually the reverse happening. You are seeing term premier in the bond markets starting to drop away significantly. Now, this is not what the narrative should be telling us that or it is telling us. The narrative is saying there's no demand for bonds. Falling term Premier is actually telling you there's increasing demand for bonds. The problem in the bond markets is not the fact that, uh, there's, uh, there's. There's that change in demand. There's actually, the problem is that rate expectations are going up. So what this chart here is trying to show is that big divergence in the bond markets. Now, if you take that orange line, the term premium line, term premium are the. Uh, extra compensation that investors demand to hold a bond. So if that term Premier is dropping, investors are saying they want less cushion, they're prepared to, uh, accept, uh, a lower yield, uh, basically just to hold bonds. So that big plunge that you've seen from basically, um, what mid-February to date, this is daily data is telling us that the demand for bonds is increasing significantly among major investors. And the reason that you've got bond yields going up across the curve is that that black line is telling us that terminal policy rate expectations. In other words, what the bond investors think central banks are gonna do is they're gonna raise rates. And that's seems to be increasingly baked in. And I would, I would suggest that's probably correct. Because to maintain inflation credibility, central banks are gonna have to push rates up. Now, that is the dilemma that everyone faces here, because that's gonna strangle liquidity. Uh, other things being equal. So large investors, institutional investors, governments are saying, um, we want more bonds. We want your bonds, but, but we want a higher rate. Like that, that's a, that's like a little bit of a brain twist. Uh, well, what it's saying is at the front end of the curve, they're saying that rates are going up. But in actual fact, what the, the, the orange line, the term free is saying is actually, that's indicating take that as a signal of increasing demand for bonds. So what you're getting is, uh, you, you are getting the yield curve flattening. And that's really a really important point because it, it is consistent with this whole story. And for, you know, I just wanna show you this chart because it's, maybe it's an important one, but it will tell you what's going on. This is looking at term Premier. So this is the, the extra compensation that bond investors demand to hold a bond shown in black. Okay? And that's actually the change on a year ago, but. Whatever, just take it as a term premium measure. And the orange line is our global liquidity index. Now, what that's saying is these two data series are completely different. One is the flow of liquidity and the other is a rate that comes from the bond markets. And what you can see is they line up exactly. So what the story here is that as global liquidity retreats, so the demand for safety in the system starts to. Increased dramatically, and that's what we've got going on right now. So there's a great, great shift here into safe assets. I think it's being, you know, it's not being recognized by, uh, a lot of commentators, particularly in the media, they're not, they're not acknowledging this, they're saying, you know, avoid bonds or whatever. But the message here is that you want safety. We are not gonna say go into very long duration yet, but certainly you want to be going into the front end of the curve raising cash. I, I think, in this environment, and I think that you've just gotta treat this whole. Exercise of the Gulf, whether, whether the tensions are over tomorrow. I mean, who knows? But I think the damage has been done and you know, oil is not gonna come back quickly. Inflation is gonna be an embedded problem. Um, liquidity is gonna be scarce than it was, and economic activity is gonna be impaired. And I think therefore you need to have some degree of safety. Uh, is this bull market over? I think it probably is. That's, that's my contention. I think we need to go risk off. When you say something like the bull market. Is over and we should go risk off. In general, what's your. What's the timeline that you tend to operate on? Because some investors will say, well, you, you, you, you'll have an interview with an investor and then you find out where their timeline is, say six months. Others will say it's six to 18 months. How does your research time out, if you will? Well, I, what we come back to is this global liquidity cycle that basically is the, is the tempo of investment for us, and that is a timeline of the average cycle. So the black line is looking at the average liquidity cycle since 1970 in terms of months. So minus 30 is when it starts, minus 30 months. Zero is the low point, plus 35 is on the right is when it ends, and the current cycle is in red. So the current cycle doesn't look. You know, dramatically different from what a normal cycle looks like. Now we tend to put that into a framework which is shown here, which is looking at, uh, how the investment cycle works. Now, the way that we read this is to say the upswings of the cycle are, when you want equities, you wanna be risk on. Uh, the peak of the cycle. You want commodities. I mean, we are at the peak. Commodities have been doing well, et cetera, in the downswing, which I would argue we are getting close to, if not already. There. You want more cash and then you want bonds, uh, longer duration bonds around the trough, and then the cycle restarts. So that's really looking, uh, at a cycle, which. You know, let's say each particular phase. So we think of calm, speculation, turbulence, rebound maybe about 15 months each, each phase. Now if you look at these traffic lights, which basically inform, uh, through each of the regimes, and let's say that this. Asset allocation began in late 2022 with the rebound phase when liquidity started to shoot up significantly. That was when you wanted, I mean, you read this by the way, just like a traffic signal. So green is go, ready is stop. Amber is proceed with forward with caution. Um, what that's saying is in the rebound phase. Late 22. You wanted to be increasingly risk on, not fully risk on, but cautiously moving that way. You wanted to be full on equities, full on credits, no commodities, no bond duration by calm, which was basically by middle of, uh, 2023. You wanted then, uh, much more risk on more leverage, more equities starting to trim credits. Uh, into commodities, um, and no bonds yet. Uh, speculation where the US market has probably been for a few months now, uh, maybe six months or so on our reckoning. Uh, that would suggest that what you, what you should be doing, actually maybe a tad more than six months, I should correct myself. Uh, but you know, through much of last year and whatever you wanted to be, beginning to pare down equities, no credits strong on commodities. Beginning to put a toe in the water in terms of bonds, turbulence, which we're not there yet. We still think the US is still late, uh, years in the speculation phase. Turbulence, you basically want no equities or very low equities. You wanna be maybe thinking about credits because they may have come back, uh, because of you. A year of more carry, uh, commodities starting to get out of bond duration full on. And then you look at the industry groups, the same sort of message. Technology does fantastically in the first two phases of the upswing, but you don't want them in the speculation and turbulence phase. Financials do really well in calm, but you wanna be out, uh, getting out in the speculation now, and that's probably not a bad call. Energy. Commodities, you can still hold energy, you know, still looks a decent play, I think. And then you wanna be increasingly thinking about defensive areas. But you know what I'm saying here is. Maybe, um, maybe, sorry. This chart does that is to say, think of this in terms of. An asset allocation cycle, and you can see the timeframes. Uh, this is saying, this is the percentage of markets in the risk on categories of rebound or calm. Now the moment worldwide, we're just on the cusp of going below average. Um, but you can see those cycles, how they unfold. And, you know, I, I wouldn't wanna be messing in markets too much in the next 12 months. I mean, hopefully I'm proved wrong. Uh, and it, it's a nine environment. But I, I just think you, you've gotta pay attention to liquidity and as far as I can see, liquidity is basically being drained and the demands, the competing demands for liquidity in terms of debt refinancing. I just, you know, skyrocketing. What did I not ask you, uh, that I should have? The last point to, to maybe make on this is, is China, and if you look at China, what this is chart is illustrating is the differential. Or maybe we will say the growing differential between the US and China. The black line here is looking at US liquidity. Okay. And you can see that cycle has peaked and has come down. Maybe there's a little. Not up in the last month, but hey, forget that. Uh, it's clearly come down. Uh, China, the orange line used to be really in step with the us, particularly around 2000. And when it got into WTO, so it was, you know, moving with the US cycle, or at least trying to, uh, then you saw this long period through, uh, the post GFC. Crisis period where China was struggling to, uh, you know, get, uh, get out of its bubble economy, its overinvestment and whatever else, monetary conditions were kept pretty tight. And now what you see is China relaunching a monetary cycle that is, that is basically async as cyclical, uh, or anti-cyclical with the us. And you can see there that China is just. Completely different, uh, from what the picture in the US is. So China is easing now that the US is tightening, and I think that is material because it should suggest that the Chinese markets actually hold up a lot better and they have been, uh, than Western financial markets. Now the reason that that is going on, and I'm gonna spin to uh, much later on in the presentation is because of this chart, which is looking at the debt liquidity ratios of China and Japan. Now you recall maybe from an earlier slide, what the debt liquidity ratio for the advanced economi. Was, which was basically Europe and America. And that was, you know, seeing the beginnings of a sharp, downward v uh, pattern, uh, being, being, uh, or unfolding. China and Japan are in a very different situation, and they've had very elevated debt liquidity ratios for a long time. That has caused their economies or strangled their economies. Growth has clearly come down in Japan dramatically from what it was in the eighties. Uh, in China it's also slumped and they need to get out of debt. And the only way you get out of debt in a modern financial system 'cause you can't default debt. Because, uh, it's the collateral for the system is you've gotta devalue it. You've gotta devalue your paper money. So what has Japan done? Omics was all about basically reform and getting the BOJ to buy, uh, huge amounts of jbs. In other words, monetizing what happened to the yen? It's collapsed. Right? What is China doing? China's doing exactly the same thing 15 years later. It is monetizing, uh, it's dead domestically. It's trying to hold up. Uh, it's the external value of the Yuan, uh, because it's basically, you know why I say fiddling the system, but it's doing what Japan did in the eighties because they've got such a big. Capital, sorry. They're big, uh, current account surplus that they can basically control capital flows and they've got controls on capital anyway to make it even more e even easier for them so they can fix the. External value of the U arm, but internally it's devaluing and they're printing money as if it's going outta fashion. So this is net liquidity injections by the PBOC. And there's, you know, this is the year on year change, not the actual level. So you can see what they're doing here. There's an accelerating, uh, injection of liquidity, and what that means is the yuan gold price. This is a bit out of date because it's since, obviously come down in the last few days. This is the Yuan gold price and this is what we think China is targeting. Don't look at Comex anymore. Don't look at the London Gold Exchange. The marginal pricer of gold is the Shanghai Exchange. It's Asia, which drives gold and silver prices now. And this is the mechanism they are monetizing, uh, their debt away and internally. China is basically printing money and the Yuan gold price is going up and here is the evidence, which shows the gold price in US dollars. Again, this is end month data, so it hasn't got the latest drop in, but that is PBOC, liquidity against gold. Oh, interesting. In my view, it's the Chinese that are doing this, not um, the West Amazing chart. Wow. So that's the other story. You've gotta keep thinking about gold long term. This is the, you know, buy on pullbacks. In terms of timing, again, do you, is your belief that China's just going to continue with this policy that they're nowhere near stopping yet? Yeah, they're, and they, they put a trillion US dollars into their markets last year. They're gonna have to do the same again, in my view. They need to get that economy moving. Uh, and, uh, that's even more paramount in a, you know, a communist system like China than it is in the west. They, they need to basically keep people's incomes up, prosperity rolling on, otherwise there's a lot more questions being asked. Uh, so I think that that's, that's the priority. And, you know, like, like core holdings, I mean, the question is, you know, don't, don't trade gold. Own it. That's the bottom line. Yeah. I couldn't agree with you more on that one, and I knew you were gonna be at our strategic investment conference for a much deeper dive into your presentation, so I'm, I'm really looking forward to that. Yeah, me too. Looking forward to that, ed. Thanks. Thanks a lot for your time.