Michael Howell: We Are Coming To An Inflection Point — Where Liquidity Is Headed

Top-line thesis

Michael Howell (CrossBorder Capital; author of the Substack “Capital Wars”) argues the dominant market driver is financial liquidity and that we are late in a multi‑year liquidity cycle. Liquidity is rolling over from its peak (he dates a cycle trough in late‑2022, a peak around Q3‑2025 and expects a bottom around 2027), and that will drive a transition from a “speculation” phase into a “turbulence” (risk‑off) phase. Positioning should be adjusted now rather than waiting for a clear crisis.

Assets, instruments and sectors mentioned

• Equities (MSCI World referenced)
• Commodities (energy/oil highlighted)
• Gold
• Bitcoin; crypto cocktail ticker “BES” (60% Bitcoin, 30% Ethereum, 10% Solana)
• Government bonds / US Treasuries (bills, notes, bonds)
• Corporate credit / “credits”
• Cash / short‑duration government fixed income
• Sector groups: cyclicals (financials, energy), defensives (consumer staples, utilities)
• Repo / collateral markets

Indicators and central‑bank tools referenced:

• MOVE index (bond volatility)
• SOFR spread vs IORB (SOFR–IORB or similar spread)
• Term premium, yield‑curve slope
• Fed tools: Fed balance sheet, Reserve Management Purchases (RMP), QE / “Treasury QE” / monetization

Other:

• Prime residential real estate

Key numbers, timelines and quantified signals

• Liquidity cycle length: ~5–6 years.
• Cycle timing cited: trough late‑2022 → peak ~end Q3‑2025 → expected bottom ~2027 (liquidity decline may last many months/years).
• Fed liquidity injections: Howell estimates the Fed added roughly $500–$600 billion of liquidity since mid‑December via interventions (RMP and related). He also references RMP totals of about a quarter‑trillion dollars so far.
• Excess reserves in U.S. banks: estimated increase ≈ $600 billion since early December.
• Debt/liquidity ratio: historical average ≈ 200% since 1980; Howell flags stress when this rises above ~210–220%.
• Collateralized lending: World Bank figure cited — ~77% of global lending is collateral‑based.
• Lead/lag relationships: Howell’s liquidity measure leads the yield‑curve by ~9 months and leads crypto returns by ~13 weeks.
• Term premium / policy component example: markets were discounting ~50 bp rise in policy expectations while term premiums had moved materially (substantial term‑premium drop versus policy moves).

Methodologies, frameworks and practical rules

Liquidity measurement

• Focus on dedicated financial‑market liquidity (not broad money like M2/M3).
• Use multiple, daily‑granular inputs (commodity, FX, credit, repo data).
• Apply a short moving average (Howell uses a 10‑day MA) to build a “flash” global liquidity index.

Corroboration checklist (three independent checks before changing strategic positioning)

1. Equity signals — relative performance of cyclical vs defensive stocks.
2. Fixed‑income signals — yield‑curve slope, term premium, demand for safe assets, MOVE volatility.
3. Real economy / business surveys and policy developments — ISM, business confidence indices, etc.

Tactical “traffic light” asset‑allocation framework

• Rebound (green): add risk — equities and credit; avoid commodities and bond duration.
• Calm (green/amber): increase risk, take some credit off, commodities start to rise.
• Speculation (amber; Howell places markets here now): start reducing risk; be cautious; more defensive equities; reduce credit; move away from commodities; move toward bond duration (cautiously).
• Turbulence (red): risk‑off — avoid equities/commodities; increase cash and government bond duration; consider credit only if spreads compensate.

Portfolio construction guidance

• Maintain a core (buy‑and‑hold) allocation for long‑term assets that benefit from monetary inflation: gold, prime residential real estate, some Bitcoin, high‑quality equities with pricing power.
• Use a separate tactical sleeve to trade liquidity cycle rotations (reduce risk as liquidity falls).

Watchlist for systemic stress

• MOVE index spikes (bond volatility → increased haircuts → lower collateral multiplier).
• SOFR vs IORB (or analogous spreads) spiking — loss of control of short‑term funding.
• Repo/collateral market dysfunction (haircuts increase, collateral pool shrinks).
• Rising debt/liquidity ratio and the maturity/refinancing wall.

Explicit recommendations and cautions

• General posture: reduce tactical risk now; be prepared for turbulence; avoid being seduced by late‑cycle relief rallies.
• Fixed income:
  • Early downcycle / flattening phase: shorter duration can be advantageous.
  • Full turbulence: long‑duration government bonds are attractive as safe assets.
  • Use term premium and yield‑curve slope as leading guides.
• Equities:
  • Move from cyclicals toward defensives (consumer staples, utilities) as liquidity rolls over.
  • Stay selective; prefer companies with pricing power for long‑term core holdings.
• Commodities / energy:
  • Commodities tend to perform around the liquidity peak; Howell believes we have passed that phase and recommends reducing tactical commodity exposure now.
• Alternatives:
  • Favor gold for long‑term inflation/monetization risks.
  • Keep some Bitcoin in the core (Howell links crypto performance to liquidity pulses).
• Risk management:
  • Use multiple indicators for confirmation.
  • Expect a drawn‑out liquidity decline (Howell’s model projects risk through 2027).
  • Monitor debt maturities and new issuance demands (government financing, corporate capex/AI, defense spending) as these compete for market liquidity.

Macro and structural points

• Private‑sector liquidity can drain even if central banks are not overtly tightening. Money may move from financial markets into the real economy (working capital, capex, defense spending), reducing liquidity for asset markets.
• Authorities have intervened (RMP, short‑term reserve additions). Howell argues they actively try to cap bond volatility (MOVE) because high volatility would break basis trades and cause collateral/funding stress.
• The system has structurally shifted toward collateral‑based lending and heavy dependence on rollovers/refinancing. Collateral values, haircuts and repo markets are systemic levers.
• “Treasury QE” / monetization: shifting issuance to bills can increase bank holdings (monetization) and channel liquidity toward the real economy rather than financial assets — used as a policy tool per Howell.

Actionable signals to monitor closely

• Howell’s daily global liquidity index (flash estimate + 10‑day MA).
• MOVE index (bond volatility) — sudden spikes worsen collateral haircuts and funding.
• SOFR vs interest on reserve balances (or analogous spread) — spikes indicate funding stress and historically force Fed interventions (RMP).
• Term premium moves and yield‑curve slope (liquidity leads the curve by ~9 months in Howell’s work).
• Relative performance: cyclical vs defensive equities.
• Debt/liquidity ratio (watch moves above ~210–220%).
• Treasury market functioning and the issuance calendar (bill vs long bond mix).

Risks highlighted

• A sustained decline in liquidity exposing the refinancing burden of existing debt (the “maturity wall”), causing funding stress.
• A spike in bond volatility that reduces collateral value and increases haircuts — pro‑cyclical contraction in the collateral multiplier.
• Mis‑timing and being whipsawed by relief rallies if investors ignore the liquidity cycle and react only to short‑term headlines.
• Policy mismatch: shrinking the Fed footprint without private‑sector capacity to supply liquidity could be destabilizing.

Disclosures and caveats

• Howell repeatedly emphasizes corroborating multiple indicators and acknowledges uncertainty (“we can be wrong”).
• Proprietary indices and estimates (his liquidity series, debt/liquidity ratio) are CrossBorder Capital’s models; results depend on those methodologies.
• Howell offers institutional data products and a paid Substack; no formal legal “not financial advice” disclaimer appears in the transcript.

Where to find more / services mentioned

• Capital Wars Substack (Michael Howell) — narrative + data published several times weekly.
• CrossBorder Capital / GLindexes.com — data and institutional products.

Sources / presenters

• Michael Howell — CEO, CrossBorder Capital; author of Capital Wars Substack.
• Interviewer: Julia (Julie) — host of the show.