MacroVoices #507 Michael Howell: Is This The end of the Everything Bubble

Key Concepts

• Global Liquidity Cycle: A recurring pattern in the flow of funds through global financial markets with a 65-month periodicity, driven by debt refinancing.
• Debt Refinancing Cycle: The primary driver of the global liquidity cycle, linked to the average maturity of debt in the global economy (approximately 5.5 years or 65 months).
• Debt Liquidity Nexus: The critical relationship where debt requires liquidity for rollover, and liquidity requires debt as collateral. An imbalance leads to financial crises (deficient liquidity) or asset bubbles (excess liquidity).
• Fed Liquidity: Components of the Federal Reserve's balance sheet that directly inject liquidity into markets, including QE and "not QE" (e.g., Bank Term Funding Program, reverse repo account rundown).
• Treasury QE: A policy shift towards financing government deficits through short-term debt issuance (Treasury bills), effectively monetizing the deficit and injecting liquidity into the banking system.
• Capital War: A struggle for global economic dominance between nations, particularly the US and China, fought through currency and capital rather than traditional trade.
• Digital Collateral vs. Gold Collateral: The US system is increasingly backed by stablecoins and digital assets, while China is backing its system with gold.
• 65-Month Cycle: The identified periodicity of the global liquidity cycle, supported by independent analysis.
• Asset Allocation Cycle: The cyclical performance of different asset classes (equities, commodities, cash, bonds) in relation to the global liquidity cycle.
• Repo Markets: Crucial for debt refinancing, tensions in repo markets (wider spreads, unexpected blowouts) signal liquidity stress.
• Bank Reserves: A key indicator of liquidity in money markets; a dip below critical thresholds can lead to market volatility.
• Debt Maturity Wall: The increasing amount of debt that needs to be refinanced in upcoming years, creating significant demand for liquidity.
• Monetary Debasement: The erosion of currency value through excessive money printing, making real assets like gold attractive.

Global Liquidity Cycle and Market Outlook

This episode of Macrovoices features Michael Howell, CEO of Global Liquidity Indices, discussing the 65-month global liquidity cycle and its implications for financial markets. Howell argues that global liquidity has been a primary driver of asset prices, and its current downturn signals a potential end to the equity bull trend and a shift towards commodity outperformance.

The 65-Month Global Liquidity Cycle

Howell introduces the concept of the global liquidity cycle, defined as the flow of funds through world financial markets, distinct from traditional money supply measures like M2. This aggregate represents "financial money" and is found in areas like repo markets and shadow banking. The cycle, identified through Fourier analysis and independently corroborated by the Foundation for the Study of Cycles, exhibits a consistent 65-month periodicity.

The rationale for this cycle is its strong correlation with the debt refinancing cycle. Howell posits that capital markets are primarily mechanisms for refinancing existing debt rather than raising new capital for investment. With a significant portion of financial market transactions (70-80%) involving debt rollovers and an average debt maturity of approximately 5.5 years (65 months), this debt refinancing dynamic drives the liquidity cycle.

The current cycle, which bottomed in October 2022, has been in an uptrend. However, Howell's analysis, supported by a sine wave model developed 25 years ago, indicates an inflection point around late 2025 to early 2026, suggesting a downturn is imminent. This is further supported by recent market events, including the S&P 500's first close below its 50-day moving average since February 2025, a signal that historically preceded significant market declines.

Asset Allocation and Market Phases

Howell presents a schematic diagram (Slide 13) illustrating the asset allocation cycle overlaid with the liquidity cycle. The phases are:

• Rebound: Strong equity performance, early commodity interest.
• Calm: Equities pick up more strongly, initial commodity action.
• Speculation: Equities proceed with caution, commodities in full green. Howell believes the US market is currently in this phase.
• Turbulence: Investors should exit equities, consider credit, and focus on bond duration.

The corresponding industry group performance suggests:

• Rebound & Calm: Cyclicals and Technology lead.
• Mid-cycle Calm: Financials perform strongly.
• Late Cycle: Energy and Commodities do well.

Despite a seemingly flat global economy, Howell notes that the liquidity and asset allocation cycles have operated "like clockwork," with Technology, Financials, and Commodities showing strong performance, aligning with the expected cycle.

Policy Shifts and Liquidity Pressures

The discussion touches upon potential policy responses to market weakness, particularly in light of the upcoming 2026 mid-term elections. Howell suggests a shift from "Fed QE" (Quantitative Easing) towards "Treasury QE." This involves directing stimulus towards "Main Street" rather than solely "Wall Street." This could manifest as interest rate cuts coupled with Federal Reserve balance sheet shrinkage, a seemingly contradictory but potentially intended policy to withdraw liquidity from financial markets while supporting the real economy.

This policy shift is seen as a move away from the post-Global Financial Crisis (GFC) era of abundant liquidity. Howell highlights the debt liquidity nexus as central to the financial system. The paradox is that debt needs liquidity for rollover, and liquidity needs debt as collateral. An imbalance leads to crises or bubbles. The debt-to-liquidity ratio historically mean-reverts around 200%. Deviations above this level have coincided with global financial crises, while low periods have led to asset bubbles, such as the recent "everything bubble."

The current rise in the debt-to-liquidity ratio is attributed to policymakers plowing liquidity into the system post-GFC and COVID, coupled with historically low interest rates incentivizing debt accumulation and terming out. Slide 23, illustrating the debt maturity wall for advanced economies, shows a significant increase in debt that needs refinancing from 2024 onwards, particularly in the next five years. This creates a substantial demand for liquidity at a time when policymakers may be less inclined to provide it.

Repo Market Tensions and Bank Reserves

Tensions in the repo markets, the primary arena for debt refinancing post-GFC, are a key indicator of liquidity stress. Howell notes that spreads between repo rates and Fed Funds have widened, with repo rates trading above Fed Funds, a situation not seen since 2019. This suggests the Fed is losing control of interest rate setting.

This stress is linked to declining bank reserves. When bank reserves fall below critical thresholds (estimated around $3.3 trillion), it leads to increased trade fails among primary dealers, contributing to volatility in financial markets, particularly bond markets. Howell's analysis of "Fed Liquidity" (components of the Fed's balance sheet that inject liquidity) shows a significant drop, with even a projected QE of $250 billion in the next year insufficient to significantly boost Fed liquidity growth.

The New Currency Wars and China's Role

The conversation shifts to the evolving global monetary landscape, particularly the "new currency wars" and the gold-Bitcoin axis. Howell discusses the concept of Treasury QE, where issuing short-term debt (bills) leads to banks financing the government, effectively monetizing the deficit. This is seen as a global phenomenon, potentially accelerating M2 money supply growth beyond the Fed's 2% inflation target. This debasement risk makes real assets like gold attractive.

China's actions are highlighted as a significant factor. China is actively accumulating gold, potentially to back its currency and reduce reliance on US Treasuries. This is framed as a move away from a gold standard towards a system where China trusts gold and the US trusts technology (stablecoins and digital collateral). The US's use of stablecoins is seen as a threat to China's monetary system, potentially leading Chinese exporters to favor stablecoins over domestic or Western banking systems due to risks of sequestration. This dynamic is driving China to inject liquidity into its markets and buy gold.

Howell's research suggests that Chinese liquidity impulses have a significant impact on commodity prices. As China's economic engine potentially re-accelerates, it is expected to drive commodity prices higher.

Outlook for Commodities and Equities

Howell reiterates his bullish outlook for commodities, driven by Chinese liquidity and the broader asset allocation cycle. Regarding commodity stocks, he notes that while they may look cheap on traditional valuations, their performance is a function of both earnings (E) and price-to-earnings (PE) multiples. While rising commodity prices should boost earnings, general market weakness could suppress PE multiples. He personally favors mining stocks due to their underlying value.

Trade of the Week: Interest Rate Outlook

Patrick Szna translates Howell's outlook on interest rates into a trade. The takeaway is that the Fed is likely to pivot towards a more dovish stance, cutting rates faster than the market anticipates due to liquidity pressures, Treasury issuance, and a focus on Main Street. The trade is a 3-month SOFR December 2026 97.12 to 98.50 basis point wide vertical call spread, costing 8 basis points for a potential 42 basis point profit. This positions for deeper rate cuts by owning convexity while the market is distracted by short-term timing noise.

Postgame Analysis: Market Technicals and Dollar Strength

The postgame segment delves into market technicals. The S&P 500 has experienced its first 5% correction and a close below the 50-day moving average since February 2025. Despite positive Nvidia earnings, market breadth remains weak, with a significant percentage of stocks below their 50-day moving average. Financials and the equal-weight S&P 500 are showing clear breakdown patterns. The analysis suggests a potential topping formation for the fourth quarter, with a retest of highs being premature.

The US dollar index (DXY) is showing signs of an upside breakout, which is seen as a headwind for risk assets and the reflation trade that has dominated the past nine months. Synchronized US dollar strength is observed across major currency pairs.

Crude oil is consolidating, with the $58-$59 level being defended. While the primary trend is down, there's a quiet accumulation phase. A potential catalyst like an attack on Venezuela could spark a short-term breakout.

Gold is forming a pennant or symmetrical triangle formation, with dips being bought and the 50-day moving average holding. Consolidations are expected to continue into December, with a potential breakout in the first quarter of 2026.

Uranium is experiencing a correction, but with the AI trade showing resilience (Nvidia earnings), the correction in uranium ETFs like URRA is seen as a potential buying opportunity, though price action remains distributive.

The 10-year Treasury yield has been rising since the last FOMC meeting but has not yet established a new bull trend. The jobs report delay and potential Fed hold in December suggest yields may remain muddled for the remainder of the fourth quarter, with a more significant move expected in the new year.

Conclusion and Further Resources

The interview emphasizes the critical role of global liquidity in driving asset prices and the cyclical nature of markets. The current environment suggests a shift away from equities towards commodities, driven by a confluence of factors including debt refinancing pressures, policy shifts, and geopolitical capital wars. Listeners are encouraged to download the accompanying slide deck and research papers for a deeper understanding of these complex dynamics. Resources for further engagement include Global Liquidity Indices' Substack ("Capital Wars"), their website (crossbercapital.com), and their Twitter account (@crossboarder_cap).