This episode reveals that global liquidity, not traditional economics, is the master variable driving a predictable 65-month debt cycle that dictates crypto and all asset prices, and we are now at its peak.
The Genesis of Global Liquidity Analysis
- Michael Howell, drawing from his experience at the investment bank Salomon Brothers, explains that financial markets are not driven by textbook economic equations but by the tangible flow of money. He observed that on a large trading floor, “there were no unrelated events,” as money visibly moved from one desk to another, revealing the true supply and demand dynamics that form asset prices. This insight led him to develop a framework for tracking these capital flows globally.
- Howell’s perspective is grounded in the practical mechanics of market trading rather than abstract economic theory. He emphasizes that understanding where money is moving is the key to anticipating asset price movements.
- This approach contrasts with traditional analysis that focuses on metrics like GDP or interest rate comparisons, which Howell suggests are less relevant in a financial system dominated by debt refinancing.
“Asset prices are formed in the market. They're formed by supply and demand and money flows are really a very very important factor.”
Understanding the Global Liquidity Index (GLI)
- The Global Liquidity Index (GLI) is a proprietary measure tracking the flow of money through global financial markets, which has nearly doubled from under $100 trillion to just under $200 trillion since 2010. Howell clarifies this is distinct from traditional money supply measures like M2, which track money in the real economy (e.g., retail bank deposits).
- Global Liquidity: This refers to the pool of capital available in financial markets for funding and investment, including money in repo markets and shadow banking systems. It is the capital that directly fuels asset price movements.
- The GLI aggregates data from approximately 90 economies, with the US, China, and the Eurozone being the most significant contributors. Its consistent upward trend reflects a long-term pattern of monetary inflation.
The 65-Month Debt Refinancing Cycle
- Howell introduces the core of his model: a highly predictable 65-month global liquidity cycle, which measures the momentum (rate of change) of the GLI. This cycle is not arbitrary; its length corresponds almost exactly to the average maturity of global debt, making it a direct reflection of the world's debt refinancing schedule.
- The cycle last bottomed in October 2022 and is projected to peak in late 2025. Current data shows the “beginnings of a downward inflection,” suggesting the cycle is turning.
- Strategic Insight: For liquidity to grow, two conditions are needed: central banks actively injecting money and a relatively weak real economy. Currently, the opposite is occurring—central banks are tightening, and the real economy is strengthening, pulling money out of financial markets.
The Debt-Liquidity Nexus: The Engine of Modern Finance
- Howell presents the central paradox of the modern financial system: debt requires liquidity to be refinanced, but new liquidity requires existing debt to serve as collateral. An estimated 77% of all global lending is now collateral-backed, creating a tightly coupled system where old debt finances new liquidity.
- This dynamic is captured by the Debt-to-Liquidity Ratio. When this ratio for advanced economies rises above its average of 2x, it signals refinancing stress and precedes financial crises. When it falls significantly below 2x, excess liquidity creates asset bubbles.
- We are currently transitioning out of the “everything bubble,” a period where abundant liquidity (driven by QE and zero interest rates) suppressed this ratio.
The Debt Maturity Wall and the End of the 'Everything Bubble'
- The period of near-zero interest rates during the COVID-19 pandemic encouraged massive debt refinancing, pushing maturities into the future. This has created a “debt maturity wall,” where an enormous volume of debt is scheduled to be rolled over in the coming years.
- This impending wall of refinancing demand coincides with central banks slowing their liquidity injections, creating a significant hurdle for markets.
- Investor Takeaway: The end of the “everything bubble” is driven by two forces: the structural challenge of the debt maturity wall and the cyclical downturn in central bank liquidity provision.
Warning Signs: Repo Market Stress and Fed Liquidity Contraction
- Howell points to tangible signs of stress emerging in the financial system's plumbing. He highlights the repo markets, where crucial short-term funding occurs, as a key area to watch.
- SOFR (Secured Overnight Financing Rate) Spreads: The interest rate on repo borrowings has been consistently trading above its normal range against the Fed Funds rate. Howell notes, “it's really the frequency that's the most important factor,” and these blowouts have become persistent, signaling funding stress.
- His proprietary Fed Liquidity metric, which isolates the true liquidity-creating actions of the Federal Reserve, shows a sharp contraction. This is primarily due to the US Treasury replenishing its account at the Fed, effectively pulling over $500 billion out of the market.
- The S&P 500 shows a strong correlation with Fed liquidity when lagged by six months, suggesting a market correction may be imminent based on the recent liquidity downturn.
The Asset Allocation Cycle: Navigating the Four Regimes
- Howell maps the 65-month liquidity cycle to four distinct asset allocation regimes: Rebound, Calm, Speculation, and Turbulence. He provides a "traffic light" system to guide investors on which asset classes perform best in each phase.
- Current Phase: The US is in the Speculation phase, while Europe and parts of Asia are in the late Calm phase. This is the period just before the cycle peaks, where commodities and real assets typically outperform.
- Regime Breakdown:
- Rebound (Early Upswing): Equities and credits lead. Technology is the best early-cycle sector.
- Calm (Mid-Cycle): Equities and commodities perform best.
- Speculation (Late Cycle): Commodities and real assets dominate as risk increases.
- Turbulence (Downturn): Cash and long-duration government bonds are the safest assets.
Positioning Crypto: A Hybrid of Tech and Gold
- Howell's analysis concludes that crypto assets, particularly Bitcoin, do not fit neatly into one category. They exhibit dual characteristics, behaving cyclically like a technology stock while trending long-term like a commodity (gold).
- Bitcoin's Drivers: Approximately 45% of Bitcoin's systematic movements are driven by global liquidity, 25% by its relationship with gold, and 25% by broad market risk appetite (e.g., correlation to the NASDAQ).
- Bitcoin and Gold Relationship: They share a positive long-term correlation as monetary inflation hedges but have a negative short-term correlation, often acting as substitutes. Howell uses the analogy of a dog (Bitcoin) on a leash held by its owner (gold)—they move in the same ultimate direction, but with short-term deviations.
The Emerging Capital War: US Stablecoins vs. Chinese Gold
- Looking at the larger geopolitical landscape, Howell argues the world is cleaving into two competing monetary blocs, representing a new front in the "capital war."
- The US Bloc: This system is built on digital collateral, primarily US Treasuries packaged into stablecoins. This innovation allows global investors to access dollar-based savings outside the traditional banking system, posing a threat to capital controls in other nations.
- The China Bloc: In response, China is de-dollarizing and building a monetary system with credibility backed by physical gold. The People's Bank of China is aggressively accumulating gold to provide an alternative to the dollar-based system.
- Strategic Implication: This bifurcation means investors should hold assets from both blocs. “It's not Bitcoin or gold. Bitcoin and gold,” Howell states, as both serve as essential hedges against the persistent monetary inflation that will define this era.
Long-Term Outlook: Monetary Inflation and Asset Price Projections
- Howell asserts that the trend of rising global liquidity is irreversible. Governments cannot default on their debt because the entire financial system is built upon it; their only option is to monetize it, leading to sustained monetary inflation for decades.
- Based on projections from the Congressional Budget Office (CBO) for US federal debt, Howell extrapolates potential future asset prices.
- If gold maintains its historical relationship with US debt, its price could reach $10,000/oz by the mid-2030s and $25,000/oz by 2050.
- Actionable Insight for Crypto Investors: Given Bitcoin's relationship with gold, investors can “do the math” to project its potential long-term value in a world of accelerating debt monetization.
Reconciling Crypto's 4-Year Cycle with Global Liquidity
- When asked about crypto's well-known four-year halving cycle, Howell states that his model does not show evidence of it. Instead, it points to the dominant 5-to-6-year debt refinancing cycle as the primary driver.
- He suggests the halving cycle is a supply-side factor, whereas his model focuses on the demand-side impact of global liquidity.
- However, he notes that the two cycles appear to be converging at this moment, which could amplify downside risk as both point toward a potential peak. This suggests that even if the four-year cycle thesis holds, it is currently being overpowered or aligned with the larger, more powerful global liquidity cycle.
Conclusion
The global financial system operates on a predictable 65-month liquidity cycle, which is now peaking. Investors and researchers must monitor repo market stress and Fed liquidity for signs of an imminent downturn. The long-term strategy remains clear: hold both Bitcoin and gold as essential hedges against unavoidable, persistent monetary inflation.
