Top Traders Unplugged

GM69: The Global Economy from a Liquidity Perspective ft. Michael Howell

Sep 4, 2024

Michael Howell, Managing Director of Crossborder Capital and author, offers deep insights into liquidity's pivotal role in global markets. He unveils how rising liquidity could favor risky assets, countering the belief that the Fed is tightening. With $70 trillion in annual refinancing needs, he argues inflation is probable, significantly impacting gold and equities. The discussion also navigates intricate FX market dynamics, recent yen fluctuations, and hints at potential strategies to weaken the US dollar, suggesting substantial implications for liquidity and asset values.

01:02:48

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Episode guests

Michael Howell

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Episode notes

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Quick takeaways

Rising liquidity growth is expected to foster a favorable environment for risky assets, countering the narrative of tightened liquidity from the Fed.

The growing need to refinance increasing debt levels highlights the significance of liquidity to prevent financial instability and monetary inflation.

Understanding the liquidity cycle's predictable patterns is crucial for identifying investment opportunities and strategically adjusting portfolios for future trends.

Deep dives

The Importance of Liquidity in Markets

Liquidity plays a crucial role in asset markets, as it represents the total flow of funding through the financial system. Understanding how liquidity affects market dynamics helps in grasping market trends and investor behavior. The current philosophy is that as liquidity expands, it can drive asset prices higher, creating a feedback loop where increased liquidity leads to higher risk-taking among investors. Thus, the interplay between global liquidity and investor risk exposure is foundational to analyzing market conditions.

Intro

2min

Navigating Global Liquidity Dynamics

27min

Debt Dynamics and Economic Implications

12min

Exploring the Interplay of Inflation and Productivity Trends

1min

Currency Dynamics Amid Global Tensions

9min

Examining Risks of Debt Refinancing and the Rise of Private Creditors

4min

Navigating Global Liquidity Dynamics

7min

Michael Howell, Managing Director of Crossborder Capital and Author of the Capital Wars Substack, returns in this episode to speak with Alan Dunne about the liquidity cycle’s influence on global markets. Michael outlines how he sees rising liquidity growth providing a favourable backdrop for risky assets and that the conventional narrative that the Fed has been tightening liquidity via quantitative tightening is misplaced. They discuss how the requirement to refinance $70 trillion in debt every year, and the prospect of double digit growth in debt, will inevitably lead to monetary inflation with profound implications for assets like gold and equities. In contrast, although tactical duration issuance by the US Treasury has supported US Treasuries the longer term outlook is less favourable. The conversation also touches on global FX markets, the recent unwinding of the JPY carry trade, and Michael’s perspective on a possible tacit agreement to weaken the US dollar, which could have far-reaching consequences for liquidity and asset markets.

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Episode TimeStamps:

02:12 - Introduction to Michael Howell

03:15 - Howell's framework for looking at markets

06:32 - How Asian central banks impact U.S equities

09:17 - Do different types of liquidity have different effects?

12:17 - The last 15 years from a liquidity perspective

18:19 - Is liquidity the driver of the bond yield moves?

23:08 - Why has the quantitative tightening not been more disruptive?

32:44 - Is a debt crisis in sight?

39:48 - Howell's advice for allocating assets

42:45 - What has caused the reversal of the Yen?

48:02 - How to distinguish between capital flows and hedging activity

49:44 - Why are the G10 currencies so stable?

51:18 - A risk point on the radar

52:23 - The implications of the shift towards private credit financing

55:02 - A favorable environment for risk assets?

59:15 - Is Howell skeptical about the Chinese currency?

01:00:11 - The outlook of the liquidity cycle

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