Over the past two years, the economy and financial markets have defied expectations, showing resilience in the face of challenges. Many experts have struggled to explain the underlying reasons for this unexpected strength, but Michael Howell, founder and CEO of Crossborder Capital, has long maintained that the answer lies in one key factor: liquidity. In a recent interview, Howell laid out his views on the liquidity landscape and his predictions for what’s to come.
A Surge in Liquidity
Howell’s central thesis is simple yet profound: rising net liquidity has been the driving force behind the surprising strength of both the economy and financial markets over the past two years. According to Howell, this influx of liquidity has acted as a powerful tailwind, pushing up asset prices and supporting economic activity at a time when many analysts were predicting slowdowns. He pointed out that liquidity, often overlooked by mainstream economists, plays a crucial role in determining the direction of financial markets.
Liquidity, in Howell’s view, refers to the availability of capital in the system. When liquidity is abundant, it supports higher asset prices by enabling more lending and investment. Over the past two years, central banks and governments around the world have injected vast amounts of capital into the financial system through stimulus measures, quantitative easing, and other tools. This has led to a sharp increase in net liquidity, driving up stock markets, real estate prices, and other assets.
The Boom Continues, But For How Long?
As we approach the final quarter of 2024, Howell’s predictions have largely come to fruition. Asset prices remain elevated, and the economy, while not without challenges, has continued to perform better than many expected. But the big question on everyone’s mind is: Will this continue into 2025?
Howell is cautious in his outlook. While he acknowledges that liquidity inflows have supported the market thus far, he believes that the tide may be about to turn. In particular, he points to a looming issue that could have significant implications for investors: debt refinancing.
The Risk of Debt Refinancing
According to Howell, debt refinancings will likely begin to suck liquidity out of the system in 2025, creating a much bumpier ride for investors. As companies and governments look to refinance their debt, they will need to absorb more capital from the system, leaving less available for other uses. This could lead to a tightening of liquidity conditions, which would put downward pressure on asset prices.
Debt refinancing is a significant concern because it affects both the private and public sectors. Many companies have taken on large amounts of debt over the past few years, and as this debt comes due, they will need to roll it over or refinance it. Similarly, governments, which have increased borrowing in response to the pandemic and other challenges, will also face refinancing pressures. As this wave of refinancing gathers pace, it could create a drag on liquidity that would be felt across financial markets.
A Bumpier Ride Ahead
Given the potential for a tightening of liquidity conditions, Howell is forecasting a much more volatile 2025 for investors. He believes that the easy gains of the past two years, driven by rising liquidity, may be coming to an end. In their place, investors should prepare for more volatility and uncertainty as the liquidity tide begins to recede.
Howell’s predictions are not limited to 2025. He also warns that 2026 could be even more challenging, as liquidity conditions tighten further and the effects of debt refinancing become more pronounced. While he is not predicting an outright crash, he believes that the market environment will become much more difficult for investors to navigate.
Navigating the Changing Tide
So, what should investors do in light of Howell’s warnings? The answer, as always, depends on one’s individual risk tolerance and investment goals. However, Howell’s insights suggest that a more cautious approach may be warranted in the years ahead. Investors who have benefited from the rising tide of liquidity may want to consider rebalancing their portfolios or reducing exposure to riskier assets as the tide begins to turn.
One potential strategy is to focus on assets that are less reliant on liquidity, such as those with strong cash flows or lower levels of debt. Alternatively, investors may want to consider hedging strategies that can help protect against downside risk in a more volatile market environment. Howell also emphasised the importance of staying informed and monitoring liquidity conditions closely, as changes in liquidity can have a significant impact on asset prices.
Michael Howell’s analysis of the past two years provides a clear explanation for why the economy and financial markets have performed so well: rising liquidity. However, as we look ahead to 2025 and beyond, he warns that the liquidity tide may be about to turn, leading to a much more volatile and challenging environment for investors.
Debt refinancings, in particular, could create a significant headwind for markets, as they drain liquidity from the system. While the exact timing and magnitude of this shift are uncertain, Howell’s message is clear: investors should prepare for a bumpier ride in the years ahead.
The strong performance of financial markets may have surprised many, but for Michael Howell, it has been a story of liquidity. As 2025 approaches, the key question for investors is whether the liquidity tide will continue to rise, or whether it will begin to recede—leaving a very different market landscape in its wake.
Quotes from an interview with Adam Taggart on his YouTube channel Thoughtful Money
