In a recent interview with Adam Taggart on Thoughtful Money, Michael Howell, founder and CEO of Crossborder Capital, shared his insights on global liquidity, financial markets, and the challenges ahead. Howell, a seasoned expert in liquidity cycles, provided a nuanced view of the current economic landscape, highlighting the interplay between central bank policies, debt refinancing, and asset markets. His analysis offers a roadmap for investors navigating an increasingly complex environment.
Howell began by assessing the global economy, describing it as “very mixed.” The U.S. economy remains robust, with strong growth, while China faces significant headwinds, struggling with a debt deflation problem. Europe, meanwhile, sits somewhere in between, weighed down by its exposure to China’s economic slowdown. Howell emphasized that financial markets are now more influenced by liquidity conditions than by the real economy, marking a shift from historical norms. “Finance now drives the real economy much more than vice versa,” he noted.
Central to Howell’s analysis is the concept of liquidity as the lifeblood of financial markets. He explained that liquidity, which represents the balance sheet capacity of the financial system, is critical for debt refinancing. In today’s world, where debt refinancing dominates over new capital raising, liquidity becomes the key determinant of market performance. Howell pointed out that central banks have been the primary drivers of liquidity in recent years, with 85% of global central banks easing liquidity conditions over the past two years. However, this trend is starting to shift, particularly in China, where liquidity is tightening significantly.
China’s liquidity crunch is a major concern. Despite announcing a stimulus program, the scale of the intervention falls short of what is needed to address the country’s debt deflation problem. Howell estimated that China requires a stimulus package akin to the $3 trillion deployed during the 2008 financial crisis, but current proposals are far smaller. Additionally, the financing mechanism remains unclear, and the Chinese central bank is actively tightening liquidity to protect the yuan from a strengthening U.S. dollar. This creates a precarious situation for China, which Howell believes will necessitate a deal with the U.S. to stabilize its economy.
The U.S., on the other hand, has benefited from strong liquidity conditions, partly driven by what Howell described as “hidden stimulus” from the Federal Reserve and the Treasury. He suggested that this stimulus was aimed at supporting the Biden administration’s reelection efforts, but it is now tapering off. As a result, liquidity growth in the U.S. is slowing, which could lead to lower returns for risk assets like equities. Howell predicted that the S&P 500 might see a flat or slightly negative year, while gold could continue to perform well as a hedge against monetary inflation.
Looking ahead, Howell warned of a looming debt refinancing crisis. The massive debt issued during the COVID-19 pandemic, much of it at low interest rates, will start maturing in 2026 and 2027. This will require significant liquidity to refinance, potentially straining financial markets. Howell argued that central banks will need to expand their balance sheets to manage this refinancing wave, a process that will likely involve renewed quantitative easing (QE). “The Federal Reserve will have to restart QE pretty quickly,” he said, emphasizing that this is not a matter of choice but necessity.
Howell’s outlook for gold is particularly bullish. He sees gold as a critical hedge in a world where governments are forced to monetize debt, leading to currency devaluation. “Gold is not going up in value; everything else is going down against gold,” he explained. This dynamic makes gold an essential component of any portfolio designed to withstand monetary inflation.
For investors, Howell’s advice is to focus on robust asset allocation. He recommended a mix of monetary inflation hedges like gold and Bitcoin, high-quality large-cap stocks, and Treasury Inflation-Protected Securities (TIPS). He also stressed the importance of maintaining cash reserves to take advantage of potential market corrections. “We’re moving into a world where volatility is likely picking up,” he cautioned, urging investors to prepare for a more challenging environment.
Howell’s analysis underscores the critical role of liquidity in shaping financial markets and the broader economy. As central banks navigate the delicate balance between supporting growth and managing debt, investors must remain vigilant, adapting their strategies to a world where monetary inflation and debt refinancing dominate the landscape.
*Credit: Insights from Adam Taggart’s interview with Michael Howell on Thoughtful Money.