MacroVoices #545 Michael Howell: Warsh vs. The Markets

Key Points

• Global liquidity has peaked and is now declining, following a regular 5-6 year cycle that bottomed in late 2022 and peaked at end of 2025, with a likely bottom in mid-to-late 2027.
• The liquidity downturn is driven by strong real economic growth crowding out financial markets, not yet by central bank tightening, though Fed tightening is expected soon.
• Rising bond yields, especially at the long end, signal higher policy rates ahead, despite President Trump’s desire for cuts; Kevin Warsh may face conflict with Trump over Fed policy.
• The "everything bubble" is fueled by collateral-based lending and self-reinforcing liquidity creation, which historically ends in a bust as liquidity rolls over.
• China is a key exception: it is expanding liquidity to devalue the yuan internally and stimulate its economy, contrasting sharply with Western tightening.
• Gold has likely bottomed and is rallying, driven by Chinese (PBOC) liquidity expansion rather than Western demand; the yuan gold price is the key indicator.
• Crypto is more tied to global and Fed liquidity, which is contracting, so it may underperform gold in the near term, though both assets have long-term upside.
• The economy is stronger than many think, and the path ahead may resemble late 2021/early 2022, with significant risk-asset drawdowns.

Summary

In this episode, Michael Howell of Cross Border Capital discusses the global liquidity cycle and its implications for markets, emphasizing that money drives asset prices. He identifies that global liquidity, particularly in advanced economies, has peaked and is now declining, following a regular five-to-six-year cycle that bottomed in late 2022 and peaked at the end of 2025. The current downturn is not primarily due to central bank tightening, which is still forthcoming, but rather because a strong real economy is absorbing liquidity, crowding out financial markets. Howell stresses that all money must be somewhere—if it’s in the real economy, it’s not boosting asset prices, and vice versa. He expects the cycle to bottom around mid-to-late 2027, though it could occur earlier if conditions concertina.

A central theme is the tension between President Trump’s desire for lower rates and the reality that markets, not central banks, control interest rates. Rising long-end bond yields, driven by strong nominal GDP growth globally, are pushing up short-term rates, and Howell argues the Fed, likely under Kevin Warsh, will face pressure to tighten explicitly, potentially leading to an unhappy relationship with Trump. He compares the current setup to late 2021/early 2022, when the S&P dropped 25% and Bitcoin fell 75%, warning that risk assets dislike central banks that are tightening.

Howell describes the "everything bubble" as the result of excessive liquidity, now self-sustaining through collateral-based lending—about 80% of global lending is collateralized, so rising asset prices boost borrowing capacity, creating a feedback loop. History shows every major bubble has been rooted in liquidity expansion, and signs of rolling over suggest a bust is inevitable.

China is a notable exception, moving almost oppositely to the West. It has maintained tight liquidity to support the yuan, leading to debt deflation and weak growth, but is now embarking on significant liquidity expansion to devalue the yuan internally (not externally, given capital controls and forex reserves). This stimulus is expected to boost global commodity prices and economic activity. Howell ties gold’s recent rally directly to PBOC liquidity injections, noting a strong correlation between Chinese money supply and gold prices. He believes gold has bottomed and will continue higher, driven by Asian demand, with the yuan gold price as the key metric. In contrast, crypto is more sensitive to Fed and global liquidity, which is contracting, so it may underperform gold short-term, despite long-term upside for both assets. Ultimately, Howell advises watching PBOC actions for gold and Fed actions for broader markets, expecting a period of turbulence ahead.