Michael Howell warns that the global financial system is approaching a breaking point, not from a recession, but from a massive mismatch between debt and liquidity. As the U.S. and other governments try to roll over trillions in short-term debt at rising interest rates, the quiet result is monetary inflation.
In this explosive interview with James Connor, Howell explains why 5% bond yields are the new normal, why the 60/40 portfolio model is obsolete, and why China, not just the Fed, may be driving the gold bull market. He warns that global bond markets are flashing danger, and the coming 2026–2028 refinancing cliff could trigger the next big crisis.
Key Topics:
- Why bond yields are rising globally, and what that means for markets
- The most overlooked metric: debt-to-liquidity, not debt-to-GDP
- How governments are quietly monetizing deficits, risking long-term damage
- Why China’s liquidity surge may be fueling the gold and Bitcoin rally
- The real reason traditional portfolios won’t survive this macro regime
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Michael Howell 0:00
We’re in a world of monetary inflation. Get used to it. The 6040, asset allocation model bonds and equities doesn’t work in a monetary inflation.
James Connor 0:14
Michael, thank you very much for joining us today. How are things in the great city of London?
Michael Howell 0:17
Oh, hi, Jimmy. Pretty well. Actually, the sun is shining for a change. It’s all looking good. Great spring weather. Let’s hope the markets are in spring, not autumn.
James Connor 0:27
There’s so many great things about London that I really enjoy, but I’ll tell you the number one thing are the cab drivers. It doesn’t matter who you get. Get a ride with. The cab drivers. Know everything about everything in London or in the UK, and I’m always amazed at their level of knowledge.
Michael Howell 0:44
Yeah, absolutely don’t. Don’t ask them a stock market though. Let’s see. That’s dangerous if they know what’s going on. So
James Connor 0:52
one of the things I’m always looking for when I go to London, I’m always looking for the best fish and chip place. And they’ve I always ask the cabbies, where should I go? And they give me recommendations. Do you have any recommendations? Well, there
Michael Howell 1:04
are a few places, but I think, as we’re saying, or fair, the best places are in the north of Britain or in Scotland, not necessarily London anymore. I think you can get a good curry in London. Not so much fish and chips, but there are a couple of select places. Yeah, it’s a tradition of ghost. Yes,
James Connor 1:21
that’s what I hear. You got to go north. They got good fish and chips. So let’s talk about the financial markets. And the last time you and I spoke was in April, and I’ll tell you so much has changed since then. And just to recap, this year in terms of the financial markets, the s, p topped out at 6100 in February, and went down to 4800 in April, and here we are in June, and we’re pretty well back to where we started, at 6000 and so it’s been very volatile. And when you look at global markets around the world, I can’t get over the strength of the resiliency of some of these markets. Germany, Germany’s DAX, is trading at or near all time highs. It’s up 20% on the year. Even the FTSE is trading at or close to all time highs. It’s up 8% on the year. The US is more or less flat on the year. But I want to start right here. When we spoke in April, you had concerns about the financial markets, and the one thing that really stood out to you was the fact a lot of the markets were under pressure, the bond market, the stock market, the US, dollar? What are your thoughts now? And do you still share those concerns that you had in April?
Michael Howell 2:29
Yeah, I think, I think I do. I mean, the the issue is that if you look at the year as a whole, 2025 it’s going to be a difficult year, I think you can see the well, you can see evidence of that in terms of the volatility we’ve seen so far. But I think more to the point, look at what’s going on in the bond markets. And the bond markets are the truth here. And one thing that is going north, apart from maybe fish and chips, is yields on global bond yield. Global bond yields. They’re rising pretty much everywhere. This is not just a US phenomena, as the media like to say, it’s not people simply trashing the dollar or trashing US bonds as a safe haven. It’s basically a global phenomenon, and we’ve got to ask why that’s going on. I think that’s really the critical element, because at the end of the day, if yields keep moving higher, that’s going to derail stocks, and that’s my concern looking forward,
James Connor 3:21
yes, and I’m glad you brought up the bond market. And I recently saw an interview with Jamie diamond, and he said that there are cracks forming in the bond market. And he went on to say he doesn’t know when it’s going to crack. It’s it could be six months or it could be six years, but he’s very concerned with what’s happening there. And just to recap what we’ve seen in the bond market just this year alone, the 10 year it’s gone from a high of 480 it went all the way down to 4% now we’re at 444 50. But when you look at the bond market, not just in the US, but around the world, what are these higher yields telling you?
Michael Howell 3:56
Well, I think that they’re telling us a number of things. One thing they’re telling us, which is getting into getting slightly into the weeds, straight off, is the term Premier, which is, if you like, the risk premia that embed themselves in the in the fixed income markets are rising, and that is telling us that there’s a lot of uncertainty about future rate prospects or future inflation prospects, and the bond market is not really liking that. And as I say, I keep reiterating the fact this is not a US phenomenon. This is a global phenomenon. There are clearly there’s a US edge as well. But we’ve got to understand that. The fact is that yields are rising, and this is not good news for the Treasury Secretary Scott Besant, because basically he’s got to do funding, and quite a lot of funding, particularly if the, you know, big, beautiful bill goes through in terms of, you know, funding the US deficit and issuing a lot more treasuries. Clearly, if he’s doing that at higher interest rates, the whole debt burden is being compounded the whole time. And that’s really the issue now, I think what we need to understand is maybe step back and see what’s going. On and what these issues are. And I think that you know, to get a better handle on on markets, there’s a chart that I can show, which is the one that I’ve got set up here, which is looking at gold bullion prices and us real interest rates. Now hopefully you can see that that illustration and what that’s doing is looking a comparison between us tips yield, which is the real interest rate on American treasuries, and that is shown as the black line, which is inverted here, and the orange line is the gold price. Now, one of the things that you tend to find in markets, which is a pretty much a dependable relationship, is that real interest rates move inversely to the gold price. So if real interest rates come down, the opportunity cost of holding gold diminishes. And what you find is the gold, the gold bullion market goes up, and similarly, vice versa. If you get rising real interest rates, gold goes down. Now on this chart, you can see here the gold the gold price is shown in orange. The black line is inverted, bond yields, and you can see the relationship really neatly up to late 2022 and then there’s a sudden break in that series. Even though real interest rates have gone up and continue to edge higher, what you’re seeing is the gold bullion market is continuing to make new highs. Okay? Last month it was maybe flat, but generally speaking, that trend has been upwards. And the question is, why is that going on? That is the $64,000 question. And you can see here that I’ve labeled on that chart yellow nomics. And what that basically is telling us is that there is that from that point where there is the departure or break in the two series, what you’re actually getting is a significant change in, let’s say, the prudence of monetary and fiscal policy management in the US and liquidity conditions. Monetary inflation, in other words, is starting to accelerate. Now, you can see that in another way in the chart that I’m going to show you now, which is actually our sort of standard chart on looking at the global liquidity cycle. And global liquidity is the factor that drives all asset markets. And you can see here there’s a very neat tempo in that cycle, which tends to be a five to six year cycle. And we’ve illustrated where we are now, which is clearly on the far right of that diagram, and projecting where we’re going to go. Now, what we’re projecting is an inflection point in that cycle, which is upcoming. There may be a few more months of decent liquidity, but one’s got to be very cognizant of those risks. And we’re moving into a late period for markets right now, simply because we’ve had, you know, what, three years at least, of bull markets, and that is pretty much standard for, you know, most market cycles. And we got to understand why it’s coming to an end and when it’s coming to an end, and liquidity is really the rug that gets pulled in all this. Now, just to reiterate the fact that there is a close tie up between liquidity and asset prices. I’ve shown this graph, which is looking at the growth rate of global liquidity in orange and the black line, which is the return on an all wealth portfolio. So this is what people are getting from their bonds, from their stocks, from their liquid assets, from their residential real estate, from precious metals, from crypto all these things are thrown into the bucket. And what this is showing is that it moves in harmony, pretty much with the liquidity cycle. Now what we’re projecting is some flattening out or rolling over of that liquidity cycle, so the good times are kind of coming to an end, and that’s what we’ve got to really understand. What is going on. Why are we getting a little bit more concerned about markets? And you know, our sort of view to clients is, you know, you don’t necessarily want to go risk off right now, but you don’t want to chase markets, and that’s really the issue now. Why is it We? Are we getting this? And I think this is important to understand that to tie it back into the bond markets, is that what we’ve got here is a situation where tensions and cycles in financial markets come back to debt, and the liquidity cycle is essentially a debt refinancing cycle. In other words, that in order to refinance debt, to roll over debt. I mean, you know, the squatter alert here is that debts never repaid. Of course, it’s only ever rolled over. But to do that roll you need liquidity, and if that liquidity is not forthcoming, you get a financial crisis. And this chart, which I’m going to show now, is looking at the ratio between advanced economies debts and the globe and the pool of global liquidity. And this is a ratio. It’s just over 200% on average. But what it’s saying that for every, you know, for every $2 of debt, you basically the dollar of liquidity to do the refinancing. If you don’t get that, you get. Financial crisis. So if you look at the top of the area of the chart, we’ve been annotated, all those financial crises historically have basically coincided or occurred during a period where there’s a very stretched debt to liquidity ratio. Now if you go below that dotted line, the average, what you find is that when you get very low debt liquidity ratios, you get asset bubbles. And look where we’ve come from. We’ve come through a period where there’s been huge amounts of liquidity going into markets. And this is the anomaly that you find and what we came through a period, you know, where every response to a crisis by policy makers was just to throw more liquidity at the system, be it the GFC, be it the COVID crisis, and then we had a situation where interest rates were forced down to virtually zero. Now, you know, I was schooled in the bond markets at a firm called Salomon Brothers. Salomon Brothers the Bible was a book written by one of the previous heads of research, Sidney Homer called a history of interest rates. It’s still available, I think it’s McGraw Hill book, and what it shows is 5000 years of interest rate history. Nowhere in those 5000 years. Do you ever see zero interest rates that? How is that? Is how much of an anomaly we’ve just come through. So let’s think about that one. In ancient Rome, the lowest interest rates you saw were about 4% in ancient Greece, it was maybe 6% in Renaissance Italy, it was maybe 4% Britain in the 19th century, rates average 3% zero is not on the not on the cards, and this is why, you know, we’ve got to return to normal, and that’s basically what we’re saying. And that return to normal is basically a situation where, I would summarize it as get used to 5% bond yields. And you can see here the world is changing because this debt liquidity ratio is re normalizing, and it’s re normalizing because there’s an awful lot of debt that was termed out during the COVID crisis, that is coming back from refinancing a rollover. And that’s the headache markets have got to face in 26 maybe from as as early as late 25 but 2627 28 so let me stop and see if you’ve got some some questions to well
James Connor 12:18
first, first of all, I can’t believe they actually have records going back 5000 years for interest rates. That must have required a great deal of research.
Michael Howell 12:27
I think it did, but it’s a classic book, so you know, it’s, it’s, it’s wonderful, better I’m reading, I can assure you, Jimmy
James Connor 12:34
and I’m surprised, the Romans were only charging 4% they were charging
Michael Howell 12:38
more at different times. But that was the that was pretty much the minimum that was recorded. That
James Connor 12:42
was recorded. So I just want to summarize a few of the points you made. So first of all, the US is sitting on a pile of debt, $37 trillion in debt. The government takes in $5 trillion a year. They spend 7 trillion so they’re running a $2 trillion deficit. Interest expenses are well over a trillion dollars a year now. It’s the single largest line item in the budget, and the US has to refinance. I believe it’s around $10 trillion this year. Is that correct? Yeah.
Michael Howell 13:12
Gross, yeah, probably more than that. Gross, yeah, yeah. So,
James Connor 13:16
so your whole point is that the US, I mean, what Scott percent is trying to do is get interest rates down. And that’s why you got this war of words going on with with the White House and with the Fed, and why they’re always stressing you gotta get interest rates down, because they want to. Of course, they want to stimulate the economy, but same time, they want to lower their interest expense. Scott percent has also said he wants to get the deficit down from 7% down to 3% do you think that’s possible? No,
Michael Howell 13:45
in a word. I mean, the reason is, it’s, I mean, the question is, the US hasn’t got a revenue problem, the US has got a spending problem. And the question is that it’s not really in Scott Besant gift to slash that spending. I mean, this is basically Congress. Is Congress, and who’s going to vote for that? Politicians don’t, you know, as I say, Turkeys don’t vote for Christmas. Politicians don’t, don’t vote. Spending cuts. So it’s going to be very, very difficult to get that down. A lot of this spending is embedded, and that that really is the problem. And you know, whatever the good offices of Doge or whatever, I mean, that is trimming in the margin, then I’m talking about big issues. And I think the problem for the markets has been, is that those that has actually exposed a lot of the errant spending that’s been going on, the wasteful spending, but it’s not very much they can, they can do about it in the short term, and that really is the issue. So I think the the bond markets are kind of cognizant of the of the risks here, and that’s why you’ve got yields starting to back up now. I think this is an issue that we’ve got to try and get to grips with and understand. And what I was going to go on to say is that what are the tensions that one needs to understand and observe here? And I want just to. To flick on a couple of charts and just show you some of the pressures that are currently building. Now, one of them is this chart, which is looking at, again, this is sort of getting into the weeds slightly, but it’s illustrative in terms of just looking at that image, which is saying, this is, this is looking at the repo markets. Now, the repo markets are something that are terribly wonkish, but it’s the heart out at the heart of the financial system. And basically what it means is that every every type of lending that you’re seeing, in fact, to be accurate, 80% of lending worldwide is collateral based. So think of this is a little bit like a home mortgage. So when you take a loan on a property, your mortgage essentially is being backed by the value of that real estate. Now this is true for most lending now, but a lot of lending, particularly in financial markets, is backed by collateral, and that collateral is US Treasuries or German bonds, in other words, high quality securities. Now, if those securities are not available, the quality is not good enough, or there’s not enough liquidity in the markets. What you find is spreads. The sofa spread here. Sofr, sofa spread against Fed Funds starts to blow out, and that is saying you’re getting tensions in the repo markets. Now, what I’ve shown on that chart is just an illustration, and sort of take that as a just an image, and what it’s trying to show is that the tram lines are normal, and when you get above the tram lines, when you get those big spikes, that’s saying you’re getting problems in the repo, in the repo markets. So refinancing is becoming a big, big problem, and that is one of the key issues. Now if we kind of drill down as to why that’s happening? The answer is kind of here, and this is looking at what the Federal Reserve is doing. Now we know that the Federal Reserve is basically undertaking a Qt policy. It has despite that Qt policy managed to sneak in liquidity at different times to markets over the last 18 months in particular, but it’s very clear looking forward in what they’re saying that they want to they’re absolutely keen to shrink that balance sheet down and get bank reserves lower. Now that is a risk, because if fed liquidity is tightening, then you’re going to get a lot more repo tensions in the markets, and you’re going to get a period where refinancing difficulties are going to pick up. And a lot of that decline in fed liquidity is simply because they are saying the Fed and the Treasury that the so called Treasury general account is going to be rebuilt after the drawdown during the debt ceiling. So that’s taught we were talking about four to $500 billion being taken out of us money markets, if they’re true to their word. And this is the thing to watch. So this is one of the things that’s going on. The other thing, of course, is that Scott Besant is talking about getting rid of, or certainly relaxing, the supplementary liquidity ratio on the banks. Now, why is that so important? Because what it basically means is that the banks will be allowed to buy a lot more treasuries, and that will help to ease his headache on the funding question. Now the problem with that is that if you’re going to use the banks to fund that is what you know is called, technically monetization. You’re monetizing the deficit if you sell any debt security to a credit provider that is basically monetizing the deficit, it’s printing money, and that is not good. You know, monetarists everywhere would be up in arms about that. We know it always ends badly. Milton Friedman, the celebrated monetary turning in his grave, looking at what’s going on here. And you know, as I think it was Stan Druckenmiller said, you know, basically 18 months ago, a lot of these policies that are coming out of the what was then, the Yellen treasury, are the sort of policies you’d expect to be seeing in Latin America, not in the USA. But hey, we’ve got them, and that’s the issue, and that’s what think the bond markets are kind of, you know, worried about. Now, if I go on to show you that that process, this is looking at, again, slightly wonkish, but you can see where we’re heading to. This is looking at the US term structure, in other words, interest rates across the spectrum, or maturity, as you can see on the bottom. So these are different tenors of bonds, and what I show are four different yield curves. Okay, the top one the red line, which, let’s hope we don’t get there, but that was the 70s. That was the Jimmy Carter years, and sort of the period where Volcker had to come in to fix things when you had stagflation. How many times have we heard that word recently, stagflation and interest rates across the curve were very high, on average, at about 10% now that was for a short period. We’re talking about 76 to 82 but that was, that was the reality. And then you look at the contrast, and that contrast is basically the average in the post job. GFC period, which is the bottom line, and you can see there what an anomaly that period has been. The dotted line in the middle of the chart is the average yield curve in America, or term structure, you know, since World War Two. So we’re looking here at 75 years or so of history. And basically what that’s saying is that you’re really averaging around 5% and that’s why I think the sort of the headline here ought to be, get used to 5% because that’s where we’re going, and the orange line is where we are now. So you can see that we’ve moved up from that lower line. That’s the job the bond markets have had, and we’re going higher. And just take a look at this chart, which is looking at, again, slightly wonkishly, but this is looking at the term premia across international bond markets since the beginning of the year. Now what you’ve got here is the US shown in red. And hey, if you look at that closely, Jimmy, what you can see here is actually not a great problem in the US, US, term premium, risk premium on US Treasuries actually have inched up by about 10 basis points since January one. The real problems are in these other bond markets, like the Japanese JGB market, you know, which is, which is shown there in as the, as the sorry, as the dotted black line, the Bund market, which is shown as the orange line, the British gilt market and the French oat market, which are the top two. Generally, all other markets are in worse shape. Their yields are going up faster. Why is that? Because number one in Japan, what we’ve got is an inflation problem emerging now after years of large yes on monetary policy, and the BOJ is not buying bonds, JGB bonds with the same alacrity they’ve done in the last few years. Yolanda, the BOJ governor, is saying they’re going to raise interest rates again. You’ve got in Germany, the debt break is being released now the equity markets may like that, but the bond market doesn’t like that, because there’s a lot more funding coming. So the US has actually become, in many cases, a price taker, not a price maker, in international bond markets, which is a key thing here. Now, what is that doing? And I think we’ve got to be alert to that, to the risks. What it’s doing is actually causing Scott Besant, and it caused Yellen before him, to fund, increasingly, at the short end of the market. And what that basically means is that they’re starting to issue a lot of debt in the form of bills or in the form of short, dated bonds. And clearly this is once the debt ceiling is removed, but that’s the intention, there’ll be funding at the short end, because they can’t afford to pay these higher interest rates on long term debt, so they try and persuade the Fed to keep rates down, or they basically sell a lot of debt to the banks. And the banks like buying bills, and they’re like buying short, dated debt. I’m sure Jamie Donald would be the first to go into an auction and buy this stuff, because it’s ideal for banks, and that’s really what’s happening. And therefore we’ve got a monetary inflation problem. And I could go on and explain where that ends up and why we’ve got it over to you.
James Connor 23:16
So I just want to clarify one thing. When you said rates are going to 5% you’re talking on the 10 year.
Michael Howell 23:22
Yeah. But I think that the the the increasing reality is that, you know, the long end of the market, you know, drives the drives the short end increasingly. So what that’s really, what that’s telling us is that, you know, don’t expect a lot of rate cuts, unless you unless we see a big recession in the US, but if we see a big recession, the deficit is not going to be 2 trillion. It’s going to be a lot more than that, because typically during recessions, the deficits blown out by four to 5% of GDP recently.
James Connor 23:51
So 5% is not too far away, like we could be there next but I think under the right circumstances. But maybe, maybe the real number is five and a half. Maybe it’s six and a half. Do you see that happening? Yeah,
Michael Howell 24:03
I do. Because I think what I’m saying is that you’ve got to get used to 5% that’s the new norm. The new norm is not 2% or 3% the new norm is around five. And that could mean that you could go up to six, you know, on a bad month, and you could go, you know, you could go below that clearly and where we are now, but I think the trend is definitively upwards. And I think one of the things to try and understand, which you know, is maybe again, sort of getting in the weeds a bit. But I just want to, I want to show this, because I think it’s an important thing to look at, is that technically, you can actually find what the fair value of the US 10 year bond is, because there’s another risk free market, which is government backed, which is the mortgage backed securities market. Now you can reverse out mathematically or Bootstrap, as they as we would say, the implied yield on the 10 year bond from the mortgage backed securities market, which I show here. Now. What this is basically illustrating is that the orange line is looking at the 10 year treasury note. Okay, that’s what we that’s what we’re trading now the black line is what the what the implied value of that bond is in the mortgage market, if you had to go to the mortgage market, something really strange is going on, because there’s a disconnect. This shows history since 1985 to show that that difference that we’re looking at now is a real anomaly. We don’t really see that very often. And the question is, why is that going on? And the answer is shown here, where we try and illustrate the gap between those two markets in orange, and we show the growth rate of treasury bills issued by the US Treasury. And what we’ve done is tried to project on the growth rate of treasuries through into next year. And what that’s saying is that Treasury bill issuance is growing at a clip at about 20% now it wasn’t admitting the 50% we saw under Janet Yellen, but we’ve come down a bit, and we’re accelerating. But what that it’s what that chart illustrates, is that basically the funding change, this funding at the short end of the market, is basically causing these yields distortions. And ultimately, the fair value on the market is a lot nearer 5% than it is 4% in other words, that the bond yield is about something like 100 basis points shy of where it really should be, and that is because of this manipulation. Now they can’t keep doing this. Well, they Well, actually correction. They can keep doing it, but it’s really dangerous. You know, it’s equivalent of drug taking. You know, it feels wonderful in the short term, but you get cold turkey at some stage in the future, and this is the problem that you’ve got, which is showing the growth rate of banks holdings of government debt. This is US banks holdings of government debt in orange, and it’s showing how it’s accelerating and driving money supply growth. So this big pickup is because they’ve changed the tenor of issuance towards the short end, and the banks are buying it. So this is monetizing the deficit. Pure and simple. Monetization doesn’t end well. It creates monetary inflation. And is it? Is that what the Treasury market and maybe global bond markets, because the Japanese and the Brits are talking about doing exactly the same thing really being spooked by so we’re in a world of monetary inflation. Get used to it. The 6040, asset allocation model bonds and equities doesn’t work in a monetary inflation. What you’ve got to do is to buy dedicated monetary inflation hedges, and that’s what we have been recommending for a long time to our clients. So you want Bitcoin, you want gold. You want prime residential real estate. You want high quality equities. You do not want government bonds,
James Connor 27:47
real assets. So real assets. You mentioned. One of the big risks to rates going higher is the US going into a recession. And this is one of the things that always confounds me, because there’s so much uncertainty associated with the trade wars and the tariffs, etc, and that’s why we had such a big sell off in the equity markets in April. But and a lot of the q1 numbers, we saw a lot of the guidance we saw from companies, it was like a sign that we’re seeing a weakening, weakening economy and also a weakening consumer and doesn’t matter. If you look at the Airlines, Delta, Southwest American, they all took their guidance down because business travelers, especially weren’t flying. Numerous restaurant companies, McDonald’s, Starbucks and so many others, came out, and they lowered their same store sales, because people just aren’t going in and spending money like they used to. There’s a lot of uncertainty. I just read an article recently, or I saw it on CNBC. They said the prices for vacation homes in the Hamptons, they’re down 2030, 40% because people aren’t renting due to the uncertainty associated with the economy. But at the same time, even though we saw a weak q1 GDP number. A lot of that just had to do with front running and a massive surge in imports. But the economy still, still is measured by GDP is hanging in there quite well, hanging around 2% the unemployment rate is hanging around the 4% level. How do you explain that? And do you see these numbers maybe changing here, especially with the q2 numbers. Do you see? I
Michael Howell 29:26
think there’s a real risk for sure. I mean, the uncertainty over tariffs is clearly, you know, one aspect, but let’s say there’s also to remember the certainty of tariff tariffs, and you know, if the US comes out of this with an average tariff increase from whatever it was 3% to 18% which may be low ball, but that’s maybe what most people’s expectations are. That was a bigger jump than we saw in the 1930s during the Great Depression. So that’s, you know, that’s an eye opening thought, and the fact is that it’s a tax increase. So if you’re. Raise taxes by that amount, you’re going to slow the economy. Now, we’ve not been at any time over the last five years in the recession camp at all. Okay, we think that there’s been a lot of monetary accommodation, and that has actually propelled the economy and underpinned growth. Looking forward, through the back end of this year, I think that there’s still a 5050, chance of recession going on, because I can’t believe that that degree of tax increase is going to bode well for the economy. And I think, as you rightly say, Jimmy, you know, look at a lot of these discretionary areas, the really sensitive stuff, airlines, restaurants, eating out, all this stuff is in a highly sensitive to the uncertainty. And we we’ve got that so, you know, watch this space. I think it’s not over yet. But, you know, ultimately, if we get a recession, and there’s more outlays, a bigger deficit, and there’s more pressure on funding, then you know, we’re still in this, you know, we’re doubling down on this monetary inflation world, and that’s that’s really the big issue, because spending cuts are clearly not, not to be on the cards during that period, either, and that’s the issue. People may go back temporarily to bonds, but in the long term, the problem still exists. Now, you know, I think the other thing that one needs to look at here is what else is happening in the world. We’re not it’s not just us. It’s also, let’s think of China. And if monetary inflation is a real risk in the US, and it’s a real risk in Europe. Then what about in China? And this is basically illustrating the development of Chinese liquidity. Now China is actually facing, as a result of tariffs, a slower economy. There’s a risk of deflation and debt deflation writ large in China, because they’ve got an even bigger debt problem. And so what you’ve got there is the only result to they can take is to print money, and that’s what they’re doing. And you can see that kind of stop go pattern, particularly through last year, when they started to ease print money, and then they dropped off because the Yuan was weakening, and now they’re printing again. The weaker dollar has given them a window to kind of go for it, and in the last six months, they pushed about 8 trillion yuan, that’s basically a trillion US, over a trillion US, into their money markets. Now I think they’ve got to do at least twice that to get out of their debt problems. So actually, what we’re looking at is a significant monetary inflation. And you know, the question to raise is, you know, is it the actions of the Europeans or the US which is driving the gold market? Maybe it’s actually the Chinese. They’re the ones that are the big gold producers. They’re the ones that hold a lot of gold. They’re the ones where, you know, the Shanghai gold market is now the market maker worldwide. And maybe this is what’s going on. So, you know, this is not just a US phenomenon. It’s not the US, only the US which is derailing here. Every economy is and monetary inflation is the solution. And you know, the last chart I was going to show you was this one, which is the relationship between changes in global liquidity, the black line and subsequent changes in the price of Bitcoin. And you can see that, basically, Bitcoin is not a substitute for liquidity or money. It’s a barometer of it. So when you get this monetary inflation, Bitcoin goes up and okay, it can be volatile, we know that. But hey, we’ve got to play the trends here. And if you’ve got a fixed supply of an asset, it’s only going to go up. If there’s monetary inflation, they’re devaluing the paper currency. And although a lot of people can’t get their heads around what Bitcoin really is, you know, it is a scarce asset in a monetary inflation the same way that gold is the same way that prime residential real estate is the same way as you jump you said, generally real assets are, that’s what you want when there’s a paper money inflation, when they’re devaluing paper money, that’s, that’s the fact. You look at the evidence since year 2000 US debt. You know, as you said, it’s up, but it’s what, 37 trillion marketable debt is a bit lower about 28 but that’s gone up 10 times since year 2000 I mean, phenomenal increase in debt. How much has the gold market gone up since then? 11 times it kept pace, more than kept pace.
James Connor 34:13
Oh yeah. The numbers are just crazy. Even when Trump came to power in 2016 2017 I believe the federal debt was at 19 trillion. Now we’re at 37 like it’s just but this is one point I want to push back on, okay, because we’ve been talking about debt levels and deficits for decades now, and even right now, it’s like, everything you hear, everything you read, it’s so negative. And I have to admit, even in April, I thought that’s it. This is the beginning of the end. But then we had this massive rally. The markets continue to climb, this wall of worry. Now, the s, p is close to its all time highs. The DAX is at an all time high. The FTSE is not too far away, you know. And the markets are, they’re all based on future revenues and earnings, right? And so maybe if I was to ask you. Like if you were missing one thing, or if there was one thing that might be wrong in your your thesis, what would it be?
Michael Howell 35:07
Well, I think the things that remember is that the key metric is not debt to GDP, which is what a lot of economists talk about. I mean, I can’t see why debt GDP really matters. What does it really tell you? What you what you really want to know is debt to liquidity, because you’ve got to roll that debt over. That’s the key thing. And if you look at the statistic I showed it, or on the chart, the debt liquidity ratio in the in well, in fact, in the US, but generally globally, is actually very low. It’s only in China, where it’s really very high. The problem is that if we roll forward, the script, forward into 2627 28 that debt to liquidity ratio goes up because so much more debt, which was turned out into those years because of the COVID crisis and zero interest rates, is coming back into the system. So we’ve got a huge amount of refinancing to do. It’s not just Scott Besson. It’s actually the private sector too, and that is the problem. That’s the big debt load on markets, and that’s why I’d be concerned. So
James Connor 36:06
I just want to stay on the topic of topic of debt for a little bit longer. By China. Japan massive holders. China has over 700 billion in us that Japan holds over a trillion. What do you think they’re doing right now, there’s been a lot of speculation that one or both are selling bonds to drive up yields to make things worse, worth worse for the US. Do you think that’s happening? Well, I
Michael Howell 36:35
think that, you know, I mean, you could argue that China may mischievously do a little bit of that, I mean, to hold Trump’s feet to the fire maybe. I mean, that’s possible, but I think the reality is that, you put this into perspective, I mean, China generally owns relatively short to mid duration bonds. They’re not buying anymore. Really, they’re not going to buy anymore. I don’t think they’re going to maybe let those roll off as far as they can. And I think the thing is the marginal buyer has stopped. And what we know is there needs to be a marginal buyer, because the marginal increase in debt is going up the whole time. And the Japanese have got their own problems with yields going up, the JGB yields going up, the demand for us or foreign bonds is going to diminish. And I think the other thing we’ve got to remember is that, you know, whereas if you go back maybe 20 years, the insurance companies and the pension funds in Japan will be buying very long, dated debt, they’ve really got less appetite for it now, because the Japanese population is clearly aging, and a lot of those retirement funds are coming to fruition, or life insurance policies are paying out. So the new generations don’t necessarily want that that same type of security. So, you know, the demand at the longer end of the market is probably diminishing as well. So you know, at the end of the day, we’re not, we’re not in a great position.
James Connor 37:55
You mentioned the Department of government efficiency or Deutsche earlier, and it was interesting, when this the whole talk about this program started not too many months ago. They thought they could remove 2 trillion in spending. Then it was 1 trillion, and then it ended up being 200 billion, or whatever the number is, right? But one thing that you know, I think a lot of people realize, is, like, the only way you can really get it down is if you go after the big ticket items like like defense, like social assistance or Medicare or Medicaid, right? And one of the things that a lot of European governments are doing is they’re increasing the retirement age. And in France, for example, a couple years ago, they took their retirement age from 62 up to 64 Australia, it’s up to 67 Spain, Germany and Italy are all adjusting theirs to 67 what’s the retirement age in the UK?
Michael Howell 38:48
67 but it’s going up incrementally each each year. Yeah,
James Connor 38:53
yeah, yeah. So it’s still 65 in both Canada and the US, but it’s only a matter of time before they change that. That’s
Michael Howell 38:59
that’s where it’s going to go, yeah,
James Connor 39:03
in the in Canada, I can see them pushing that through, you know, with not too much problem. In the US, I think there’s going to be revolts against that.
Michael Howell 39:12
Yeah, be pushed by God. It’s not an easy thing to do. But you know what, the way they’ve done it in Europe is, they’ve done it incrementally for different age bands. And it’s, you know, it’s saying, so you know, for example, you know if you’re, I don’t know if you’re age 55 they’re saying you may have to work until you’re 68 now. But if you’re young, a lot younger, where you know, there’s going to be less pushback. If you’re 30, they may say, Okay, you’re going to work until you’re 71 or something, you’re 72 so they don’t really care. They didn’t think about that. But you know, that’s how they do it. So
James Connor 39:47
you touched on the one big, beautiful bill earlier. So let’s do a discussion, or have a discussion on that now. And it’s essentially an extension of the tax cuts that we saw in 2017 it’s they’re going to result. In lower revenues, but also higher debt, higher deficits. And according to the Congressional Budget Office, it’s estimated that it’s going to add $2.3 trillion to the deficit over the next 10 years, somewhere between four to $6 trillion to the debt over the next 10 years. And a lot of people have said it even said it’s the largest wealth transfer from the poor to the rich that we’ve seen in the history of the US. But what are your thoughts on this? And do you think this bill is a good or bad?
Michael Howell 40:31
Well, I think the thing is, it’s, you know, I don’t know if you’re familiar with the expression. Maybe it’s a Brit expression, a curate egg. I mean, there are good bits and there are bad bits in it. I think the whole idea of cutting taxes and trying to encourage and trying to incentivize wealth creation is clearly a good thing. I think the problem is that if that comes at a cost in terms of a big funding ask, then it’s not such a good thing, because we’re basically at the margins of what is affordable now. And you can see the bond markets are pretty jittery, and you know, I mean, the bill hasn’t got the thumbs up yet from, you know, from Senate, so we don’t really know. But, I mean, ultimately, the bond market said they’re asked to do this funding, they’re gonna, they could bulk and that’s why, I think the issue is, I mean, this is why we’ve got to be, you know, thoughtful about what’s going on here. Is that this is the subtleties of maybe it is wonkish, but it’s the subtleties of funding. If they’re doing funding at the short end of the market, it’s kind of easy or easier for the Treasury to do that, because there is big demand for very short term debt securities, dollar debt securities, things like three months, six month bills. The banks love that stuff, okay? Because they’re running deposit accounts, and they can basically earn a spread very easily against the government rates. Now the problem is with doing that is that what you’re doing is you’re basically expanding the money supply a long time. So what you what’s going on is you’re you’re effectively funding the government by borrowing from the banks. Okay, now, is that a good thing or not? I don’t think it’s a good thing. I think it’s highly dangerous, and it’s likely to be inflationary in the long term. Now, whether it comes through in terms of high street inflation is one question, and that’s not necessarily the case, but it will certainly come through in a monetary inflation in terms of asset markets, and that’s what we’ve got to distinguish between the two can disconnect where you get a lot of changes in cost pressures. So for example, if there’s the Chinese are dumping cheap goods into the US malls, then what you’re going to get is CPI inflation. Headline inflation is a lot lower, but you’ve still got this monetary inflation ticking on in the background, but we don’t really notice it. If you start to get the opposite, and tariffs start to add to the monetary inflation, that you could be seeing some fairly big inflation spikes coming through. You know, I mean, let’s not discount sort of very high single figures. That’s not impossible. I’m not gonna say it’s going to last forever, but, I mean, that’s really a risk, and I think that’s why the Fed is sitting on his hands. The Fed doesn’t like what it’s seeing here, as far as I can see. I mean, my view, in my view is that really, since December, the Fed has sounded a lot more hawkish to me. And I don’t think there’s going to be a lot of rate cuts this year in the US, unless there’s a recession, but if there is a recession, the deficit is going to blow out even more. I
James Connor 43:13
want to ask you about the Fed too, but before we do that, I thought it was interesting to see Elon Musk send out a tweet just recently about this big, beautiful bill, and I got to read it to you in case you missed it, but he said, I’m sorry, but I can’t take it anymore. This massive, outrageous, pork filled congressional spending bill is a disgusting abomination. So I thought it was interesting that he is pushing even he’s pushing back against this whole thing. Yeah,
Michael Howell 43:42
I mean, he’s a businessman. I think he can either future as pretty well. I would imagine he’s got a vision. And I think he can see that, you know, this is going to end badly with all this debt. And you know, it’s not as I say. It’s not so much debt to GDP. That’s really the issue. I mean, you can scale it that way. The real issue is debt to liquidity. And for financial stability reasons, as I argued earlier on, you need a stable debt to liquidity ratio. So if you’ve got all this debt piling up, the only way you can roll it over, because we know it’s never paid back, is basically to create enough liquidity. And if you create enough liquidity, that’s monetary inflation, and then monetary inflation hedges, like gold Bitcoin, the things I said all tend to go up price, and those have been the winners. And so, you know, if you go back to that very first chart that I showed, the disconnect between interest rates and the gold market, that was in late from late 2022 and that’s what I labeled yellow mix. And that’s what, you know, unfortunately, despite his best will, I’m sure Scott Besson is having, is being forced to follow this yellow nomics course of funding at the short end of the market. And other governments are in, are in a painting themselves on a corner as well, and they’re doing the same. So the Brits are talking about it the jazz. Companies are talking about it, and before all the Europeans will be doing it.
James Connor 45:03
So let’s talk about the Fed now, and the last Fed meeting, Jay Powell and company, they came out and they took their growth rates for the US down from 2.1 to 1.7% just citing the uncertainty associated with the trade wars and the tariffs. Nobody knows what the hell is going on. The President really recently met with Jay Powell, and once again, stressed the importance of getting interest rates down. And he sent out a tweet just recently on the back of the ADP numbers, very weak ADP numbers, saying you got to get these rates down. Call them too late. Powell, anyhow, we got a Fed meeting coming up here in June and another one in July. What do you think they do? I
Michael Howell 45:43
simply can’t see them doing anything because, you know, I mean, the fact is that there’s too much uncertainty, particularly over tariffs. I mean, you know, inevitably, there’s got to be a pass through of higher prices. I mean, that’s got to come through at some stage. I mean, that may be short lived. I’ll come quietly on that, but ultimately it’s there. If you look at the latest Michigan consumer survey, you know, a lot of people pour cold water on that and say, Well, okay, it’s inaccurate or whatever, but actually it is registering something which I think is significant, which is consumer expectations of inflation have jumped, okay? And what we know from the election last year was that inflation was really the number one issue that most people were concerned about, even though the headline CPO basket didn’t seem to register a big inflation jump, but the Michigan survey of consumer expectations did, and that was pretty accurate in terms of gaging people’s fears or concerns. And I think people are worried by inflation. And the fact is that what we know, our personal inflation rates are an awful lot more than you know. What you see in the reported CPI food inflation is clearly escalating at higher levels. Restaurant prices are astronomical. And you know, I mean, these guys are going to make a living, but it’s just telling you that costs are really starting to pick up now. So I think that the Federal Reserve is really in a very, very difficult situation, and I don’t see how they can cut rates. And I would think that actually what they ought to be thinking about is maybe increasing rates, although you know that would be, you know, not an appealing prospect either. So they’re sort of damned if they do and damned if they don’t. And I think that, as I say, the tenants coming out of the Fed is much more hawkish from this year. And what’s more, if you look at indicators such as rate expectations from the fixed income markets, what the fixed income markets are expecting the Fed to do, they completely disconnected from now casts of the economy. In other words, that the economy can, you know, slow down dramatically, and the number of cuts that you get factored in, the markets don’t seem to change at all. So the Federal Reserve, they seem to be saying, the Fed ain’t moving.
James Connor 47:51
I agree with what you said on inflation. It has not gone away. It is. I’m just shocked at the prices. Like there’s so much price gouging going on too, and what we need is a major recession and a major financial reset to correct everything. But, man, I take my family out for dinner now, like it’s, you know, even at a fast food restaurant, I’m dropping 80 bucks, for God’s sakes. And you know, when you go to the grocery store, like, I don’t care if you’re at Costco or Walmart or Whole Foods, the prices are outrageous, like, it’s just
Michael Howell 48:25
Jimmy. This is, this is a worldwide phenomenon. I mean, this is not just America. This is you getting it in Europe too. I mean, prices are really going up, particularly for those essential items. So you can see why there’s so much clamor to actually change things, and why Trump got voted in, inflation was a big issue. I mean, Scott Bessen actually acknowledged that. He said, that’s this is why we won. We’re going to get rid of inflation. Trouble is, it’s kind of sticky. It’s difficult. Well,
James Connor 48:53
I am based in Toronto, and I’m telling you, we’re starting to see some some trouble here, and the unemployment rate in the country at 6.9% now, versus 4% in the US, or 4.2% in the province of Ontario, where I reside, the the the unemployment rate is pushing 8% if you can believe that that’s at a 10 year high. So all this uncertainty associated with tariffs and the trade wars, it’s starting to have an impact. Our economy was already weak, even before all of this trade war started, just due to the incompetence of our federal government and our provincial governments. By now, it’s accelerating, and there’s so many you know, companies like we Hudson’s Bay Company. I’m sure you’re familiar with that company. It’s been around since the 1600s who just announced they they’re shutting down. They’re laying off 8000 people numerous auto plants in southern Ontario, or have announced layoffs due to the tariffs and the trade wars. So this is just going to continue to feed through the economy, and it’s only going to get weaker. Okay? So you stretched a few times. How important it is to invest in scarce assets, real assets, like gold, like Bitcoin, like real estate. Maybe you can just touch on gold in Bitcoin, what’s your target price? Gold’s up 25% on the year. Bitcoin, I’m not too sure what’s it what it’s up on the year, but it’s doing very well. It’s not too far away from its all time highs, where do you see these two assets going?
Michael Howell 50:22
Well, I think that the first thing to say is that, you know, the sort of the backdrop here is, what we’ve got to think about, is, what is the script for the Federal Reserve in a stagflation? And that’s really the backdrop. And then we kind of take it from there. And I think if you go back to what happened during the last state floss, which is the 1970s you got, kind of got some idea what went on then you saw gold clearly propelled a lot higher. You saw Prime residential real estate being, you know, a great investment. There wasn’t Bitcoin then. But you kind of get the idea that you want these hedges, these monetary inflation hedges, commodity prices clearly did well. You know, big cap stocks weren’t that bad. I think you can see that working. If they got pricing power, they’re going to make money. It’s really the small cap and maybe some of the more traditional value stuff, which doesn’t necessarily do that well. And you know, these are, you’ve got to be very selective in a portfolio. But what I’m really, what I’m saying is, you know, the days of a 6040, are kind of over, and you’ve got to start thinking about a different mix, and maybe have these dedicated monetary inflation hedges in there, because we just simply don’t trust governments. You know, this is the fact that they’ve run out of money, and they’re either after you’re in taxes or nickel and diming everybody on their taxes. All they’re doing is finding innovative ways of funding. And as I said that this doesn’t bode well for feature. They’re not going to cut spending unless there’s some, you know, some real revolt against government spending. But, you know, this is the reality. We’re in a world of monetary inflation. This is like the 1970s what we need is a Volcker to come in and basically, you know, turn up the Apple Car. Up side of you, turn over the Apple Car. That’s what’s gonna gotta shake things up. Seriously, and that’s not on
James Connor 52:06
the horizon. Yeah, I and I hear you when you talk about taxes and how they nickel and dime. You like, in Canada, we are continuously being taxed on after tax dollars. Like I said, I don’t know how people can get by in this environment. But that was a great conversation. Michael and I want to thank you very much for spending time with us today. If somebody would like to learn more about you and your firm cross border, where can they go? Yeah,
Michael Howell 52:30
thanks, Jimmy. Julie, very much. There were. There are two or three ways. I mean, one is that we write a sub stack, which is called capital wars, that is published two three times a week on all these sort of themes. We also have a website for institutional investors who need data, that’s www cross border capital.com, or there’s a Twitter handle at cross border cap, which, you know, we put in the occasional tweet about what’s going on. So that’s fine. Thank you.
James Connor 52:58
So I’m going to be coming to London in the next couple of months. I want to know, let me know where the best fish and chip places to go are. I would,
Michael Howell 53:06
I will send you an email for sure, once again. Thank you. Great pleasure. Thanks.
