Liquidity is the lifeblood of financial markets, but what happens when it peaks? In this insightful interview, James Connor welcomes Michael Howell to explain why 2025 marks a critical turning point for global liquidity, how it could reshape investment opportunities and the risks every investor should know. Learn why gold, Bitcoin, and real assets are key to protecting your wealth, the growing dangers in U.S. and global debt markets, and how China’s economic slowdown could trigger global ripple effects. This is your essential guide to navigating what’s next in markets.
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Michael Howell 0:00
We’ve been arguing for a long time that the peak in global liquidity would be sometime late in 2025 Well, we’re pretty we’re getting pretty close to that peak time, so we think anyway, you know, we’re due for some inflection, but the fact is that maybe we’re getting there earlier.
James Connor 0:21
Michael, thank you very much for joining us today. How are things in the great city of London? Hi,
Michael Howell 0:26
Jimmy. Good to see you very well, actually, yeah, I must say, I wish I was in the states instead. But still, there we are. London is duller than it used to be. We got a socialist government, which is not good.
James Connor 0:37
Well, Samuel Johnson once said, If you are tired of London. You’re tired of life, and many things have changed since he said that quote back in the 1700s but what are your thoughts on London now? Well, I
Michael Howell 0:50
think the problem is that if you compare now with then taxes are a lot higher today, and I think the outlook is maybe less inspiring, but I take exactly what you say, but we need, we need to get some dynamism. So maybe we ought to be looking across the Atlantic. Well, we need
James Connor 1:07
the, we need the exactly the same thing in Canada too, because we have a lot of problems here. But why don’t we just dive right into it? And I want to start with the basics. You and your team at cross border capital focus on liquidity, trends and flows in 90 different economies. What exactly are liquidity flows, and how can they help me as an investor, make proper decisions?
Michael Howell 1:29
Yeah, it’s a great question. I mean, liquidity is what moves markets. I think that unless you’ve been asleep for people have been asleep for the last few years, they won’t have realized that liquidity is the all important factor. Think of the QE processes, or the Qt processes of central banks. Look at the amount of money that’s been injected into markets since the 2008 global financial crisis, and you’ll see the liquidity is really all important here. Best way to see it is probably visually. If you look at as one of the slides that I send over slide seven, you’ll see there a chart of global liquidity against World Wealth. In other words, the returns from a portfolio of world assets. That’s global bonds, global equities, global real estate, crypto precious metals, everything. And there’s a very, very tight correlation between that and the movements in global liquidity. You know, I’m not going to say one for one, but it’s close enough to pay attention. And what you’re looking at is a situation where global liquidity is is rising right now. It looks like it’s forming a peak. You know, it probably is supporting markets in the near term. I think our concerns would be after a pretty decent Bull Run after all over the last two years or so that we’re kind of running out of road a bit. We don’t know what, what’s the Fed’s going to do is the Fed got room to restart QE. I noticed the Bank of Canada has actually announced, re announced, they’re going to start a QE, but they say it’s not QE, QE, so they’re buying Canadian government bonds again. So, you know, you’re effectively there. Federal Reserve’s got to start. But yeah, there’s a number of uncertainties. We know that. I mean, one of the big things we think that, you know, featuring next year, there’s a series of bullets I put, I think, on slide two of the of the slide deck. But yeah, one of the things that we think is is a key thing is really China. But it’s not necessarily the China that people think of in terms of the tariff deal. It’s much more about some way of accommodating China within the world economy, and in particular, letting China devalue its currency which, not which, in our view, needs to be devalued seriously. And
James Connor 3:40
so in other words, when you talk about liquidity, are you just talking about money, money printing?
Michael Howell 3:46
Oh yeah, let me drill into that definition. Let’s make that a bit bit more concrete. I mean what? We’re not looking at money supply in the traditional sense, in the in the sense of looking at bank deposits that are in high street banks. We’re looking much more at financial liquidity and looking at the flows of money that are going through financial markets worldwide. So these are things like, you know, flows through repo markets. I mean, it’s get, we get sort of caught in the weeds of it here. But this is, this is wholesale money, in other words, not retail money. It’s a much bigger pot, as you’ll understand. And it’s that which is really driving global financial assets. And I think, you know, one of the things that people need to increasingly get come to terms with is we’re in a situation now where the financial economy or the financial markets are driving the real economies, rather than the other way around. And we’ve been brought up in the textbooks by getting everyone to think that it’s the real economy that drives the financial market. It’s much more the other way around now. And you know, the world economy, the real economy, is really moving to the tempo and to the beat of these financial markets. So you’ve got to understand these financial cycles. And financial cycles are all about understanding liquidity, and that liquidity growth is really a. Function of a number of things, but one of them, clearly, is what central banks are doing. And so understanding the movements of central banks and these QE processes are absolutely critical to investment returns and ultimately to the real economy. But it comes down to understanding these wholesale money flows, which are complex areas, but it’s cross border flows between markets, it’s repo market activity. It’s things like shadow banks, which clearly hadn’t gone away. It’s these huge debt piles. And, you know, the unfortunate thing is that it changes the character of economies, and it sort of brings up this whole concept, which I know is is very alive in North America, about sort of so called financial nihilism, where, you know, a lot of the millennial generation to find themselves disenfranchised, either from jobs or from wealth creation. I mean some of the numbers, as you will know, it’s sort of eye wateringly. You know poor.
James Connor 5:50
Well, here we are in a new year with a new government, new policies, but a whole lot of uncertainty. And if you need help navigating this uncertainty and the financial markets, and you would like to speak with a professional financial advisor, go to wealthion.com/free once again, That’s wealthion.com/free to find out more information. Okay, very well articulated. So I want to get your views on the global economy right now. And you touched on this a little bit already. But when we look at some of the largest regions in the world, China, for example, GDP, second largest economy in the world with a $20 trillion GDP. The European Union also at around $20 trillion in GDP. But these two regions are very weak. But then when you look at the US, it’s just the opposite. It’s very strong. Single largest economy in the world, GDP is around 30 trillion. The q3 GDP number came in at a very or, I should say, was revised upward for the third time. It came in at 3.1% versus 2.8% also, the most recent non firm number came in very high. 256,000 jobs were added in the month of December, versus expectations of 155,000 jobs. When you look at these different regions in the world, what’s your take on the global economy? And how do you see things unfolding in 2025
Michael Howell 7:13
Well, I think the I mean the answer is that you’ve got a very mixed picture. And I think the you know that mixed picture is that the the US looks cyclically very strong. There’s no question about that. I mean, one’s got to remember that to a large extent that’s to do with fiscal policy. There’s been a big fiscal policy boost. But you know, the other thing to kind of dig down into is that, you know, both Janet Yellen, Treasury Secretary, and the way ex treasury secretary and and power to the Fed have been secretly, if you like, undertaking a hidden easing of policy in the US. And so there’s a big cyclical surge as well through what we have sort of called not QE, QE and not yield curve control. Yield curve control, they’ve been manipulating or fiddling the books. And Scott Besant, you know, incoming Treasury Secretary, is, you know, very clear that, you know, they’ve been, they’ve been cheating here, and we need to get a more disciplined or sort of, you know, sound money policy in the US. And I can come back to that, but I think, you know, the US has got this cyclical pickup. That’s for sure. You’ve got on top of that, a backdrop where China is really hitting the skids. And make no mistake, I mean, the Chinese economy is in a bad place. You know, in the last 15 years, the return on capital in Chinese industries plunged from about 14% to about 4% it’s now below the returns that US industry is earning. So, I mean, there’s been a huge, huge transformation. China is suffering as we speak, debt deflation. You look at the Chinese bond market, yields are collapsing, which is a classic sign the Chinese bond market is going in the different direction to what the US Treasury, Canadian bond market and European bond markets are doing. Yields are going down, whereas elsewhere, they’re going up, and that is symptomatic of debt deflationary problems. And Chinese just can’t go on like this. It basically needs to to ease policy. But in order to keep the yuan elevated against the strong US dollar, which is key here, the Chinese are having to tighten even more. So they’re creating a serious Roger on their own back. And I think what this is leading up to is a need for a major deal this year with America. You know, we’ll see on that. Then you come to Europe, and Europe is in a very poor situation for a number of reasons. You know, number one is, where do they get their energy from? Because they haven’t got any Russian we’ve turned the Russian tap off. So they’re, they’re basically stuffed in that direction. They’ve got aging demographics at a much faster rate than anywhere else in the world, and that is causing problems, both in terms of government spending and in terms of the tax take. They’re trying to squeeze the economy themselves by raising taxes. So taxes seem to be going up, and it’s not a happy place. Are then, to cap it all, they’re hugely dependent on China. Because they’ve been they’ve sold their soul through exports to China. And the Chinese economy is in a bad place. So the European economy is not well at all. So if you look at the world overall, you know it’s, as they say, it’s a cure, it’s egg, if you know the expression, it’s a very mixed bag. And the US is in North America generally, is in probably a pretty decent place. I mean, Canadian figures, from what I’ve seen are not that bad. They’re sort of being lifted by America. But the American economy is doing pretty well. Now, if you come back to the question about what needs to be done looking forward, you got to remember that a lot of the you know, 25% gain in gold and 25% gaining in the s, p last year have all been down to this sort of stimulus that has been undertaken by Yellen and Powell secretively. And if you look at a chart on page 25 what you can see there, which is looking at the US Fed and the US Treasury injecting what we call not QE, QE, into the system. What that basically tells us is that as of the peak last year, in the spring of last year, there was a whopping $8 trillion of additional stimulus that had been cooked up through his hidden programs, injected into the economy on top of the 7% budget deficit. So the US economy, no wonder it’s going Gangbuster right now, the real question that we’ve got to pose is, Can that continue? Because if you look at the graph, it’s coming off fast. They’re running out of road. Now, in order to ease so broadly, the Fed has got to make a serious decision in the next few months. When do they restart balance sheet expansion and QE again? And that may be that’s clearly a policy question, but it’s really wrapped up in this whole issue of, how is the deficit going to be funded? What’s Scott besser going to do? Is he going to start upping coupon issuance again in America, or is he going to go down the route of easy route of Bill finance? And I think he’s going to have to be forced to go through coupon issuance, which is not great for the bond market. So it means that bond yields keep going up. And so what you’ve got is, you know, a mixed picture, I think, for financial markets,
James Connor 12:19
interesting points. So you mentioned Janet Yellen a couple of times, and I want to get your opinion on her. She’s no longer in office, so you don’t have to worry about retribution. But if you were to rate her on a scale of one to 10, what ranking would you give her?
Michael Howell 12:35
Well, I think from a from if I was Biden, I’d give her a 10. If I was the the US populous or US population, I give her a zero or what one, you know. I mean, she’s done wonders for the last administration in terms of, sort of keeping their head above water, but I think in terms of the long term, I mean, she’s been very clever at what she’s done. There’s no mistake. But, I mean, the fact is, skewing the issuance of US debt so much towards the short end. I mean, as Scott besser, very eloquently said, but I think Stan Druckenmiller made the point earlier on is that, you know, look at the numbers coming out of US Treasury, and these are the numbers that come that should be coming out of the Latin American economy, not out of the USA. I mean, the funding statistics are, you know, eye watering poor.
James Connor 13:19
And so she’s been criticized quite a bit for for funding at the short end of the curve. Why is this such an issue?
Michael Howell 13:27
Well, it’s an issue because, number one, you’re held hostage to the markets in terms of short term rates. So if there’s an unexpected rate hike, your interest rate bill goes up. Para pursu. So if rates double, your interest Bill doubles. The interest bill is already over a trillion dollars, so it’s one of the biggest items on the budget, bigger than defense, as we know. So that’s number one. You’re really hostage to Fortune and markets. I mean prudent treasury management that says that you term out debt as long as you can. And that clearly hasn’t been done if you’re funding it three or six months all the time. That means that Scott Besson has to roll over 30% of the 28 trillion total of US marketable debt next year, sorry, this year, which is clearly a big ask to do in the markets, certainly when yields are rising. So I think that’s number one. And I think number two is that if you’re issuing bills, the real question is, who’s buying them. Now, this may be getting into the weeds a bit, but the the fact is that who loves bills are banks. And if you’re running a very loose monetary policy, sorry, fiscal policy, which, which the US Treasury is, you’re creating lots of bank bank deposit accounts. So in other words, money supply is rising, and the bill issuance means that the banks can fund that balance sheet expansion very easily. So they’re directly monetizing the deficit, and what you’re doing is, in crude terms, printing money. Now, ultimately, what that means is inflation in the long term. So you know, we think that if you look at the the data, and you can get that by cross referencing the Treasury market. It the break even market and the agency mortgage market. Underlying inflation, break even inflation in America is not the 2% as advertised. It’s actually near a three and a half percent already, okay? And that’s because all these shenanigans have been going on at Treasury by Bill financing have depressed the long end of the market artificially by about 100 basis points, which has meant you’ve got, or you’ve had, for a long time, an inverted yield curve, artificially fooling a lot of economies that a recession was about to hit. But it wasn’t. And secondly, your break even inflation calculation in America from the tips market, which is supposedly about two, is in reality near a three, three and a half, so underlying inflation is higher. And look at the University of Michigan survey about a week ago or so, and what you saw there was a big jump in inflation expectations. And that’s what’s going on. It’s it’s giving the Fed less room for maneuver on rates. So it’s beginning to unravel already, is the short answer.
James Connor 15:59
So just to clarify, you’re saying Jay Powell and company, they’re trying to get the they’re trying to get the Fed rates lower, because when the Treasury goes to refinance this debt at some point in the future, they want to make sure they do so at a lower interest rate so their expenses are not so high.
Michael Howell 16:18
That’s what they’re like. But the problem is that, you know, you can only do this. You can only take the drug for so long, and the more that you take the drug, the more inflation you create, and the more inflation you create, the more you’ve got to keep interest rates elevated. So you can try these tricks at the short end for a certain amount of time. But they really they they come back to bite you in the long term. And the problem is, they’re not biting Janet Yellen, they’re biting Scott Besant, right, right. So
James Connor 16:42
to your point, the the Fed has done a great job in lowering short term interest rates. Here, they took them down a full percentage point in the last few months and but at the same time, the long end of the curve has gone up a like amount in September of 2024 the 10 year was at 380 give or take. Now it’s at 464, 70. Some analysts have said that the Fed has lost control of the long end of the curve. What are your views on this? Well,
Michael Howell 17:11
I think there’s, there’s some truth in what they’ve said. I think the Fed is losing control of the long end. In reality, the Federal Reserve never really has control. It’s not in control of the long end. It’s the market that’s in control of the long end. The Federal Reserve can try and please the market by what it’s doing. But you know, as they as you would have heard, the bond vigilantes who police the long end of the market are back in control, and what they’re saying is what they see they don’t like. Now, broadly, that situation is one which is one is reflecting the fact that inflation expectations are beginning to build up. So the long end needs that protection against inflation risks. And the other is that if you look at the supply of duration coming back into the market, in other words, the supply of coupon treasuries that will be issued, likely issued by a Besant, they’re preparing for that. So they’re saying we’re only going to buy these new issues coming forward, prospective issues, if yields are substantially higher. And if you look at the charts, and you look at the agency mortgage market, where you can benchmark or bootstrap what the Treasury should be yielding, you’re getting a figure of five, five and a half percent. And that’s the direction we’re moving. Real question is, can the markets, can the economy stand that, and that’s a that’s a big question mark.
James Connor 18:24
I’m sorry. Can you just clarify that? How do you get five or five and a half percent?
Michael Howell 18:29
Well, one is just looking at the trend in the charts, because the charts have been moving up. Well, I’m not saying the straight line, but on a pretty steady path. And if you extrapolate that, it looks like you’re going to hit five, five and a half. And in terms of bootstrapping the agency market, the reason that the Treasury market is distorted is the Janet Yellen was doing so much Bill issuance, and she wasn’t doing any issuance at the at the lower doing so much issuance at the longer end. Now there’s a chart, in fact, two charts that you can reference. You know, in this in my pack 26 which is looking at the degree of yield suppression in the treasury market, which is basically looking at the actual 10 year yield, which is an orange line. And then there’s a bootstrap version of that, which basically comes from the agency mortgage market. Now agency mortgage markets are underwritten by the GSEs, Fannie, Mae, Freddie Mac their government securities. They’re guaranteed by the US government. They’re equivalent to treasuries. They’ve got slightly different duration convexity characteristics. You can adjust for that, and from that, you can bootstrap what a fair value Treasury yield should be to balance the agency mortgage market. So if the agency mortgage market is not distorted by this issuance, these issuance factors, that’s really telling you what the true yield should be on the market market, and it’s 100 basis points higher than the Treasury yield is currently. You. Yielding. Now that you can see on the following chart, 27 is correlated exactly with Bill issuance. So the bigger the bill issuance, the more the repression, or suppression rather of yields, and that’s what we’ve got. If you get a normalization of Bill issuance, then yields are going to climb to where the bootstrap version from the agency market says they should be, which is about five and a half percent. So that’s the math. I mean, that’s this bond market math. That’s what’s coming out already. And this is not saying it could get worse on top of that. So you know, the bond market’s got an issue. And I think if you come back to this bond vigilante question, which is clearly a factor. I mean, it’s it’s not on many people’s radar, but for professional investors, you’ve got to be very cognizant of this. One of the things that is behind all this concern is that the buyers of coupon bonds now are no longer, you know, foreign governments, stable foreign governments, or long term institutions, it tends to be, let’s say, flighty hedge funds who are doing a lot of basis trade or doing a lot of arbitrage trading, and they’re one of the big buyers at the margin, and they could be spooked very easily. And what you’ve seen at different times in the past where they’ve been dominating the market is that yields can spike up very, very quickly when they get spooked by the fear of losing money, and that’s the problem. So you’re looking at a bond market at the moment is sort of, you know, resting on quite weak foundations, and that’s not a great backdrop generally for markets, because bonds are so critical to the whole architecture.
James Connor 21:39
And we saw a similar scenario play out in the UK in 2022 when Liz Triss, or, sorry, Liz truss was the Prime Minister. Do you see a similar scenario happening in the US?
Michael Howell 21:54
Well, I think that what, I think it’s a very, it’s a very different, obviously a very different situation. But I think we’re, treading down the same road. I mean, the US has got far more robust financial potential, funding potential, because the US is the reserve currency and the US Treasury is, you know, pristine collateral worldwide. So it’s kind of different. I mean, I think if you, you know, if you look at at the direction, I would agree. I think the scale is, is unlikely to be the same problem in scale. But I mean, clearly we got to be conscious of this. And you know, the list trust moment, as people call it, is really when the bond vigilantes came back to police governments. I mean, government, government says can’t keep spending willy nilly forever. They’ve got it. They’ve got to be disciplined. That it’s the bond markets to discipline them. I think if you you know, focus back on the UK. The real problem that the UK has got is they’re in now a far worse situation than at the least trust time. And what the UK has got to do is to fund against the deteriorating world background with a whopping great fiscal deficit, a whopping great current account deficit, and Sterling, which probably can only go one direction, which is downwards. I mean, Sterling is likely to reach hit parity against the American dollar within two years, because the funding situation is so bad.
James Connor 23:13
Yeah, and you alluded to this earlier, but there’s still a lot of uncertainty with the new administration, and we don’t know what they’re going to do in terms of taxes and tariffs and deregulation, but we’ve seen a lot of volatility in the financial markets, and both the stock market the bond market. We already talked about interest rates. And I guess the other element too, that really brought into a lot of uncertainty and volatility was the last Fed meeting, and Jay Powell said, instead of cutting three times in 2025 they’re now going to cut two times. And I guess a lot of it had to do with how strong the US economy is. But I’m just kind of wondering, with all these unknowns, let’s just assume the 10 year spikes to 550 maybe it goes to 6% but what’s that going to do to financial markets,
Michael Howell 24:01
well, it will cause a significant correction. I mean, there’s no question about that. I mean, bond markets are critical to the valuation of all asset classes, and what you need is a benign bond market. And you know, as we frequently said, you know, it’s not the vix index of volatility that you need to pay attention to. It’s the move index of bond market volatility, which is really the critical metric these days, because it’s very important in terms of understanding a the inputs into equities, per se, because bonds are critical of valuation, but more importantly, because it governs the whole collateral system on which global liquidity rests. So bond market volatility is key, and if you see the bond market selling off, then you’ve got a problem. And you know, one of the danger signs right now, as I sort of alluded to, is that actually the two major bond markets worldwide, the Chinese government bond market and the American government bond market, are going in different directions. China is going down because their bonds yields are dropping because they’ve got debt deflation. They’re in a. Serious, serious bind. They’ve got to create inflation in China without any question, and that America yields are going up because the funding equation doesn’t work anymore, certainly in the long term. And I think there’s underlying inflation coming through in America. So these are the these. This is the change. And, you know, I can’t emphasize enough this is radically different from where we were a year ago. I mean, we were very bullish a year ago. I’m certainly not bullish now. I’m not going to sound bearish, because I think markets have got a I’ve got a chance of holding up, but I’d certainly think the downside risks are elevated. You know, this time from a year ago,
James Connor 25:35
when you say you were a bullish a year ago, you mean on the s, p, I
Michael Howell 25:39
think on most assets. I mean, we’ve been we thought the turn came. I mean, you can see it on our global liquidity data. Yeah, we thought the turn came very clearly around September of 2022 and you know, we’ve been arguing for a long time that the peak in global liquidity would be sometime late in 2025 Well, we’re pretty we’re getting pretty close to that peak time. So we think anyway, we’re due for some inflection. But the fact is that maybe we’re getting there earlier because of these uncertainties with the bond markets in China. So the answer was yes, we’ve been bullish, but at most assets, most risk assets, I think in the long term, I remain very upbeat about certain assets, I think gold, Bitcoin, are going to do very well in the long term, because ultimately, what we know from experience is that politicians will kick the can down the road when it comes to government debt, and the only thing that they can do to cover government debt is to monetize it and print money. And in that environment, you know, there’s going to be more liquidity created and thrown into markets in the medium term, and therefore you want to hedge against that. So why not, you know, go for the assets or always do well during those phases, which tend to be gold, traditional monetary inflation hedges, large cap growth stocks, you know, big name companies, and by evidence of the last five to 10 years, Bitcoin. So
James Connor 27:02
I want to ask you about gold and Bitcoin. But before I do that, I want to first ask you about the US dollar. This thing’s been a beast here in the last year, as measured by the d x y index, it was up 7% 2024 versus the Canadian dollar. Listen to this, Michael, the Canadian dollar lost 10% in 2024 I can’t even afford to take my family to Disney World. Now, it’s because I have to mortgage my house. Well,
Michael Howell 27:26
this is, this is a problem we all face, unfortunately, unless we’re, we’re US dollar based. But you know, if you take a look, there’s a chart I’ve got in my pack, which is chart four, which is the way I like to look at the US dollar. And that’s looking at something called the real trade weighted exchange rate, which is like the D, x, y, but it’s taking into account inflation as well. And what you can see from that is a very, very clear, unambiguous breakout of the American dollar upwards since about 2010 or pretty much coincident with the global financial crisis. And that was because, to a large extent, developments elsewhere in the world, be it China, be it Europe, where it looks a lot worse, and because US assets were critical for the collateral base of the world financial system. So everybody wanted treasuries and US dollars. And if you look at that trend, it is very much intact. There’s no evidence that that trend is breaking down as we speak now. The following chart to that on slide five is looking at capital inflows into the US and those capital inflows, okay, I come quietly, they’ve lost a bit of momentum, but they look certainly very positive, and they’ve been a very firm underpinning both this bull market and to strengthen the US dollar. So I think that it continues. What’s more, I think it’s a policy, maybe a hidden policy, of the Trump administration. And although Trump himself says, you know, makes remarks about how he’d like a more competitive dollar, the reality is they want a strong dollar. Number one, it helps the inflation metrics, and I think, as I said, there’s a problem there. But number two, it also gives them a really strong negotiating hand when it comes to other countries, particularly China, in negotiating trade deals, and that is what’s needed. And why do you want to weaken the dollar and weaken your you know, trade your ability to do a deal with a weak dollar? Why do it keep the dollar strong? And that may have been deliberate in the last few months, which is maybe why the Fed has not been putting that much liquidity into markets, as people have seen. So at the end of the day, you know, I think the dollar remains firm, and I think it’s part of the policy remit,
James Connor 29:35
but you raise a couple of good points there, and I guess this, I’m glad you brought this up because Trump has said, One, he wants a lower dollar so the US can be more competitive in the global markets and have a more robust export sector, but at the same time, he wants a stronger dollar to, I guess, help with inflation. So my first question is, how does a strong US dollar help with inflation?
Michael Howell 29:59
Well, basically, because a lot of products are priced in dollars, if the dollar is strong, then, if you’re a foreign supplier, you you basically, if you want to get margin in the US, you’ve got to start cutting, cutting your prices a bit. So it basically keeps a lid on inflation generally. So I think that’s, that’s number one. It creates a deflation in the world economy. So in other words, that’s another input into that whole, that whole mix. So generally speaking, dollar strength is good. Dollar weakness tends to be bad, but there’s a cost for the rest of the world. And people speak correctly about the dollar wrecking ball that you tend to find swinging through the world economy during a period of dollar strength. So I think that’s that’s one thing, but, you know, the other question is, when we start thinking about maybe bringing in the gold question as well? China is desperate for a devaluation. But, you know, China has several different exchange rates. There’s an exchange rate which balances trade, there’s an exchange rate which balances maybe the real economy, there’s an exchange rate value which balances the capital account. And which one of those does China try and manipulate on trade? They’re competitive. There’s no question about that. They don’t need a devaluation. They probably need a revaluation. But when it comes to the capital account if China took off capital controls. Now, what would be the direction of those capital flows? They’d be extinct China ASAP. As far as I can see, there’d be a huge run of money out of China. So we know that the exchange rate is wrong, and it probably should be a lot lower, and that’s reflecting the debt deflation that China’s seeing. So China’s got to devalue the paper Yuan, not against the American dollar so much, but against real assets to make it competitive. And real assets are things like gold. So ideally, the yuan gold price should be substantially higher than where we are now, and our reckoning it should be probably 30% higher now, already, the yuan gold price is hitting all time highs. The Shanghai gold market is quite an open gold market. Chinese residents are buying it, even the Chinese government’s buying it. And I think people are anticipating a devaluation against gold. And the question is is, will the will the US administration allow that? Well, then they’ve got to allow the dollar gold price to go up. But my view is that that’s inevitable. Anyway, gold has very neatly kept pace with US government debt over the last 25 years, the gold price has gone up. What? 810, times the amount of US government debt in issue has gone up, 810, times. Very neat relationship. Next 20 years, government debt. Stock doubles triples. In America, gold price easily double triples. So this is what you got to think. Start thinking about monetary inflation. Is what governments create by monetizing their debt. The best hedge against that is monetary inflation hedges like gold, or, as I say, Bitcoin, or maybe large, large cap stocks. Companies have got margin ability.
James Connor 33:02
So let’s talk about gold now. Uh, it had a pretty good 2024 it was up 25% not Bitcoin like but it was, you know, respectable. I think it was the best performing year in 14 years. Bitcoin was up 140% it also had a massive 2023 but why do you think we’re seeing such a performance with Bitcoin in the last few years and gold, to your point, it just kind of, it’s very stable. It’s not volatile, but we’re not seeing excessive moves that you would expect to see in this inflationary environment that we’ve had in the last five years.
Michael Howell 33:38
Well, I think the I think if you start with gold, and then I’ll finish up with Bitcoin, I think if you, if you look at the gold market, I mean, gold has responded to the monetary and inflation pretty much as one would expect. And if you do a statistical analysis on gold versus liquidity, what you find is there’s a multiplier of about, traditionally, about 1.4 1.5 times. In other words, if you get a 10% increase in global liquidity, you’ll get a 14, 15% increase in the price of gold. And actually, that’s been more or less on track through this year. So the 25% rise in gold has probably been a tad on the upside, but not much. I mean, it’s been pretty much in line with what you’d expect, with a little bit of catch up effect thrown in. So I think gold has been doing that. But really what you’ve got to look at is the long term. And you know, maybe that gold pulls back in the short term, sure. I mean, I accept that markets have cycles, but you’ve got to think about the long term. And over the long term, goal has kept pace with monetary inflation pretty, you know, pretty closely on almost one to one basis. And that’s what you’ve shown through millennia. That’s why people always hold gold, and that’s what you’re going to see in the future as well. So I think gold is doing what it says on the tin. I think the Bitcoin question is a lot more complex. And you know, truthfully, I wish I knew the answer, but what I would say is that Bitcoin is really embracing two effects. One is that it is a month. Three inflation hedge like gold, and there’s a factor there, maybe that. It’s a slightly bigger factor than the 1.5 for gold, but it’s there. But you’ve also got, you know, a learning effect, or what you might say as a sort of extensive margin for Bitcoin, because it’s a very unfamiliar asset class. So more and more people are sort of coming into it, and think of it a little bit like the diffusion of a of the internet, or the diffusion of mobile phones, like an S shaped growth curve. So where are we on the S shaped growth curve? We’re very low down on the s because so few people have it in their portfolios. But maybe it’s one of those things that, you know, people should be owning. And you know, this is, this is one of the things to start thinking about that. It may well be a generational, uh, feature, so whereby, you know, I it’s certainly, you know, traditionally for me, I buy gold in a monetary inflation, and I wouldn’t think necessarily about Bitcoin. I don’t know about you, but, you know, my children are more interested in buying, uh, cryptocurrencies and Bitcoin rather than buying gold. And the reality is, if you flip back, and I think this may be an interesting analogy without sort of drawing up unnecessary conclusions, but go back to Germany in the 1920s when you saw a hyperinflation. Now, during that hyperinflation, the older generations bought and held bonds, right? Because that’s what everyone had done through history. They’d grown up with bonds. They thought they were safe, but they lost all their wealth, right? The younger generations actually bought equities, and equities were very out of fashion. People unfashionable asset class, rather like, you know, Bitcoin in crypto, in the US or in the west today. Okay? Their parents were saying, You’re idiots. Why do you buy equities? But they bought equities, and there was a huge wealth transfer from the older generations to the younger generations in Germany with, you know, one would have to say, you know, political consequences we won’t go into. But what went what’s going on now is maybe that same phenomenon, you know, we’re scratching our heads, saying to our children, well, look, hang on a second. This is a bubble about to burst. And they’re saying, Well, look, okay, see, we bought our Bitcoin at, you know, $200 now we’re we’re sitting pretty. So, you know, these are the issues we’ve got to think about. And everybody wants monetary inflation hedges, but maybe it’s things like Bitcoin and crypto which are the answers. I don’t know. I wish I did, but all I’m saying is, you need some form of monetary inflation hedge, because, believe me, the politicians are only going to kick the can down the road. There’s no way that, whatever the good intentions of Elon Musk, you know, a Doge, he can’t get that much out of us. Government spending. Most of his mandatory 80% of it is mandatory spending. On top you’ve got the interest bill, and then you’ve got defense. So what is their discretionary that you can really cut nothing reality. So they’ve got to keep issuing debt. And if they more debt they issue, the more they got to monetize it, the more the gold price goes up. The trouble is that we’re starting from a very difficult position now, where the debt GDP ratio is high and things are going to escalate very quickly, compound very quickly.
James Connor 38:04
Yeah. So one thing the government’s regardless of where they’re located and throughout the world, the one thing they do very well is destruction of wealth. Exactly. It’s standard, and also your standard of living,
Michael Howell 38:16
yeah. So you find tax havens, or you find monetary inflation hedges or whatever. And that’s what people have got to do more and more, because, you know, some form of financial repression will come, will come to buy, come to bite you. I mean, to give you a good example. I mean, look, you know, I read in the in the press recently, the lot of pension fund holders were, were criticizing their managers for saying, Why have you held 40% of our pension funds in bonds when you know, since 2020 most government bond markets have fallen in value by 20, over 20% okay? But the fact is that that’s what governments are, more or less mandating them to do, okay, under their under prudence rules. So they’re forcing them to hold bonds, and those are government bonds. So the government so actually winning out on this basis, but they’re going to put more and more regulations on banks and insurance companies to basically hold large amounts of government bonds. This, this is financial repression. This is what happens people are going to, you know, they’re going to get wealth, you know, stolen seamlessly.
James Connor 39:18
So you’re very bullish on gold, you’re very bullish on Bitcoin,
Michael Howell 39:25
yes. And I think if you look at the s, p, I think the the qualification I’ve got is that, you know, we’re at the top of we’re near the top of the liquidity cycle. It’s very easy to see a correction, but I think if you start to look out over the medium term, and what I’m saying that you know, beyond any correction short term, I think what people have got to start thinking about is, where do you hold your assets on a long term view, the 6040 model of 60 equity, 40 bonds is finished. That’s toast. There’s no that’s not going to work anymore, because basically, the government bond markets are going to lose value. You in real terms over the long term, what you need is monetary inflation hedges. Monetary inflation isn’t necessarily High Street inflation. Monetary inflation is destroying the value of money through printing it okay? And that’s what they’re doing. And so what you’ve got to do is to think about a portfolio which has got gold in or precious metals which has basically got, I think large cap equities that have got, uh, ability to raise their profit margins. And you’ve also got to have some section which is, which is Bitcoin. And also for opportunistically, you’ve got to have cash, because cash, even if yields are at 5% is not bad, and it gives you the opportunity to buy markets after a correction and volatility is going to be here. Let’s face it, so
James Connor 40:42
we’ve had a couple of big years in the S P, last year was up 25% you said you think we’re topping out here, but are you looking for a down year in the S P?
Michael Howell 40:53
I think it’s possible. I think that’s possible. I think the, you know, the the market looks rich on traditional valuation grounds. And there’s no question about that. If you look at the at a different metric, which is a broader world metric, which is the world MSCI index, Morgan Stanley Capital International index, as people refer to and you look at that relative to a standard market, we’ve almost extended the or we’ve almost gone through the full extent of an average bond market in the MSCI World Index. So what that’s telling us is we know we’re late cycle. Okay, so the chances of a correction this year are high. Make no mistake with the uncertainties that I’ve cited, and particularly the worries about a strong dollar and the bond market deteriorating, yield, no question about a correction. Would I be buying on weakness? Yes. Because the reason is that if you look back through history, what you know is, number one, the only way that governments get rid of deficits and debt is to monetize and they’re going to be printing money. And you put more money in, you get asset market inflation. And, you know, the the other, the other reason is that if there is a financial crisis anyway, like a 2008 you know, the central banks come back quickly as well, because I got to bail out the banks. So, you know, you need, you need to, you know, keep a foot in the door. But you know, I would I be adding now, no, I would not. Will I be taking a lot of money out now? Well, if I was brave enough, yes, probably, but I think I would be, you know, looking at for a bit more evidence that we’re going to see a correction first and then starting to move. But I’d be buying back on any on any lows, because I know this is a cyclical business, but the trend is definitively higher for all these asset classes I mentioned because monetary inflation is here. We can’t trust politicians to do anything, apart from kick the can down the road. That’s That’s life,
James Connor 42:49
if I was going to take the other side of that argument. Michael, people have been talking about valuations now for quite some time, and then when you you spend a lot of time talk about China and what sort of troubles the Chinese economy is. In Europe is a total mess. And the one thing we’ve seen in the last few years is all this money flowing into the US because it is the strongest economy in the world. And don’t you think it might just continue to flow into the US, because these other areas like China and Europe are just so weak. Yeah, that’s
Michael Howell 43:22
That’s entirely possible. But, you know, there’s only so far it can go. And I think the question is that the more that the dollar, I mean, let’s run through that scenario, the more the dollar goes up. And I’m not saying that can’t happen in the near term. Clearly it can. But the more the dollar goes up, there are costs. Number one cost is you lose trade competitors in America, and that causes the economy problems. Okay, that’s that’s number one. Number two is that the US dollar is used widely as a lending currency. Internationally. US banks do a lot of offshore lending or foreign lending, and if you start to get the dollar going up, you’ll get defaults. In the rest of the world, the US banking system will suffer, and then there could be a banking crisis in that regard. You know, that was, that was one of the big fears in the mid 1980s when the dollar was equally very strong, there were great fears about the integrity of the US banking system. Then it hasn’t been echoed now, because they don’t think you haven’t seen the any sign of defaults, and banks are provisioned pretty well, but never say never. So these are risks that could happen. What you know, what you don’t want is a very unbalanced world economy, because that’s when you can see accidents.
James Connor 44:35
Michael, you have said in the past that all financial disasters are brought up by an inability to refinance debt. Do you see this threat looming in the horizon where the US is not able to finance?
Michael Howell 44:48
Well, well, I see, I think the US is in, as I said, in a very luxurious situation where it can, it can fund because it’s the world’s reserve currency. And. So we can debate what the price of that funding is. That fund, that price may be five and a half percent yields, but the US will always be able to fund I think other governments will be in a less luxurious situation as regards that. I think when it comes back to the issue about debt, and let’s just look at that from an aggregative point of view, bear in mind that as the reserve currency, America can always print money. Okay? So we’ve always got the Fed, you know, put as people call it. But if you take a look at slide 33 in the pack that I sent, there is a chart there that looks at the ratio between debt, world debt, and world liquidity. What that’s basically trying to say is there’s an equilibrium between the two, and what you need is a stable ratio. If you have too much liquidity relative to debt, you get asset market booms. If you get too much debt relative liquidity, you get financial crises. Okay, we’ve had no financial crises for 15 years, pretty much because we’ve had abundant liquidity courtesy of central banks, and also because low interest rates have encouraged borrowers to term out their debt into 2026, 2027, etc. Now if you look at the chart, what you’ll see is we’re below the line right now. The danger design, if you like. We’ve called that the cryptocurrency boom period, where there’s abundant liquidity and not much debt to refinance, and that’s because of those two factors. But if you look at the future, you get the you get the line moving vertically back towards the danger zone. And what that’s saying is that that is because a lot of debt is coming back into the market, the so called debt maturity wall, which needs to be rolled over, and that will absorb liquidity. Now, if the central banks are sitting on their hands and doing Qt, there’ll be a problem. Make no mistake, okay, that’s that’s an issue. There will be a financial crisis. But at the moment, it’s still out there. It’s a it’s a possibility, but it’s something we need to watch quite carefully, and that’s why I’m saying that inevitably, because we’re living in a world of debt, you’ve got to have monetary expansion, and you’ve got to have liquidity, and you’ve got to have this long term monetary inflation, which is why gold is the excellent asset long term for that. And, you know, from gold, most other commodity markets move. So you’re really talking about a world of real assets, if you like, in the longer term. And that’s, you know, logically, that must be the case if we’ve got too much paper debt. And that paper debt is, you know, is, is unproductive and worthless. It’s got to devalue against Real Assets, surely. And that’s just saying that the price of real assets has got to go up. And that’s all we’re saying. It’s as simple as that, and it won’t happen overnight, but it’s going to be a protracted, drawn out period, but that’s where investors have got to start thinking about
James Connor 47:55
moving Well, Michael, that was a great discussion and a great overview of liquidity flows, and I want to thank you very much for spending time with us today, and as we wrap and as we wrap up, if someone would like to follow you online or learn more about your services, where can they go?
Michael Howell 48:07
Well, Jimmy, thanks. It’s been a pleasure. Easiest way is capital wars, which is our sub stack that is a sort of bi weekly report twice a week, where we give data and opinions. And we’ve got a website, which is cross border capital.com which gives a pretty clear indication of where institutions can go to get data or whatever you know of our services and talk about liquidity. There’s also a Twitter handle at cross border cap for the occasional tweet. So that’s very kind. Thank you. Enjoyed it very much. Once
James Connor 48:38
again, thank you, pleasure. Well, I hope you enjoyed that discussion with Michael Howell, as he mentioned, he’s very bullish on gold in the coming year. And if you would like to learn more about gold and how it can benefit your portfolio, go to our sister company, hard assets, alliance.com to learn more information about gold. Once again, that’s hard assets, alliance.com I hope you enjoyed this discussion today, and I look forward to seeing you again soon. You.
