This episode reveals we are in a historically unique monetary environment, forcing a global rush into hard assets as governments systematically devalue paper money.
Introduction to Global Liquidity
- Global Liquidity: This refers to the total amount of money available for investment in financial markets worldwide. Howell’s firm monitors capital flows across 90 financial systems to gauge this liquidity.
- Howell’s core thesis is that money flow, not textbook economics, drives markets. He emphasizes that money is either in the real economy or financial markets, and his focus is on tracking its presence in the latter.
- Michael Howell states, "What drives markets is not textbooks, it's money flow." This simple but powerful statement grounds his entire analytical framework.
The Global Liquidity Cycle: Nearing a Peak Amid a Debasement Trend
- The debasement trend is evident in investor behavior. Howell cites an example of a precious metals dealer who has seen no secondhand gold supply despite record-high prices, indicating people are holding onto hard assets.
- He warns that the cycle could turn down for several reasons, including central banks getting scared by strains in the financial system. Fed Chair Jay Powell’s recent comments on tensions in the repo markets signal this concern.
- Strategic Implication: Investors should differentiate between the cyclical liquidity peak, which may cause short-term volatility, and the long-term debasement trend, which strengthens the case for holding hard assets like gold and crypto.
Economic Reacceleration vs. Liquidity Topping Out
- Quinn Thompson of Leer Capital introduces a counterintuitive dynamic: while the liquidity cycle may be topping out, the US economy shows signs of reaccelerating. He argues that the US has already passed through a "Main Street recession" in early 2024, which was masked by nominal asset price inflation and government support.
- Thompson notes the bifurcation in market signals: gold prices are signaling an economic crisis, while equity markets are at all-time highs. This has been smoothed over by government debt issuance and Fed liquidity.
- Howell clarifies that the economic and liquidity cycles are completely out of sync. He sees liquidity as a leading indicator for the economy by 12-15 months, making a US economic acceleration into 2026 plausible.
- Actionable Insight: The apparent conflict between a topping liquidity cycle and a reaccelerating economy suggests that liquidity is being directed differently. Investors should watch for shifts from broad financial market support to targeted real-economy stimulus.
Unpacking "Quantitative Tightening" and its Impact on Crypto
- Howell asserts there has been no real QT in the US. He argues the Fed has been injecting liquidity through "underhand means" and is now shifting toward what he calls Treasury QE.
- Treasury QE: This is not a formal Fed program but a strategy by the US Treasury to shift its debt issuance from long-term bonds to short-term Treasury bills. This injects liquidity into the funding markets and directs capital toward the real economy for initiatives like defense and AI capex.
- This shift could deplete bank reserves, creating the "tensions in the repo markets" that Powell mentioned. This is a critical risk factor for financial markets.
The Three Drivers of Bitcoin's Price
- Global Liquidity (50%): This is the single largest driver, explaining why crypto investors are so focused on central bank policies.
- Risk Appetite (25%): Bitcoin’s price is correlated with tech stocks like the NASDAQ. When risk appetite is high, Bitcoin tends to rise.
- Gold Price (25%): The relationship with gold is complex. In the short term, they are negatively correlated (if one goes up, the other tends to languish). However, in the long term, they catch up to each other.
- Strategic Implication: The recent spike in gold suggests Bitcoin is due for a significant positive move to close the gap. Investors should also monitor China, which has injected the equivalent of $1 trillion into its markets, as a major source of global liquidity.
Gold as the Canary in the Coal Mine for Crypto
- Quinn Thompson argues that gold is currently the clearest signal for the debasement trade. He believes the traditional four-year crypto cycle is over, and Bitcoin has become a different asset class since the launch of spot ETFs.
- Despite a 50% year-to-date rally in gold, Bitcoin has been consolidating for months, causing anxiety among investors. Thompson posits that this is a shakeout before a major upward move, similar to what occurred in late 2023.
- He believes Bitcoin is about to catch up to gold, predicting a move that will “resemble a November 2020 and an October 2023 type of move.”
- Actionable Insight: Researchers should analyze the breakdown of the historical four-year cycle and model Bitcoin's price action more closely with global macro liquidity and cross-asset correlations, particularly with gold.
The Geopolitical Role of Stablecoins and Gold
- Michael Howell frames the current geopolitical landscape as a "Capital War" between the US and China, fought over the control of global capital flows.
- He argues that stablecoins—digital tokens pegged to fiat currencies like the US dollar and collateralized by assets like Treasury bills—pose a systemic threat to China's financial sovereignty.
- Stablecoins offer a mechanism for Chinese citizens and corporations to move capital out of the yuan and bypass the state-controlled banking system, risking massive capital flight.
- In response, China is aggressively collateralizing its financial system with gold. This explains the massive liquidity injections and the surge in the yuan-denominated gold price, which is now driving the global gold market.
The Societal Impact of Monetary Debasement
- Howell connects rising gold prices to falling fertility rates in the West. Monetary debasement inflates house prices faster than incomes, making housing unaffordable for younger generations and delaying family formation.
- Quinn Thompson adds that in the US, first-time homebuyers are older than ever, and over a third rely on their parents for a down payment, highlighting a forced intergenerational wealth transfer that exacerbates inequality.
- Quinn notes, "Socially and politically, these are just more forms of kicking the can and ultimately there will be repercussions."
A Historically Unprecedented Moment
- In closing, Michael Howell provides a stark historical context for the current financial environment.
- Referencing a 4,000-year history of interest rates, he notes that zero interest rates are a modern anomaly. Governments have run out of traditional tools like raising taxes or cutting spending.
- Their only remaining option is to monetize debt—effectively devaluing paper money to manage their obligations. This makes the current situation unique not just in our lifetimes, but across millennia.
- Strategic Implication: This is not a typical cycle. The structural need to devalue currency makes holding monetary inflation hedges like gold and crypto a long-term strategic necessity, not a tactical trade.
This conversation underscores that we are in a unique era of monetary debasement, driving a global flight to hard assets. Investors and researchers must look beyond traditional cycles and focus on global liquidity flows, especially from China, while viewing Bitcoin and gold as essential hedges against systemic currency devaluation.
