Michael Howell

“The liquidity cycle which dominates, market movements is basically inflecting lower. We think of four regimes or, if you like, four seasons. And we're in the season that we currently call speculation, which is a late one. Take that as the autumn, the autumnal season. And, it's, you know, it precedes what we call turbulence. And turbulence is, probably, as the name suggests, a very difficult time for risk assets.”

“One of the things that we've been pointing to, which was very much a contrarian view, back January 1, was that yield curves would basically begin to flatten by the middle of the year. And that was a very different view than the consensus, which was basically wedded to the idea that yield curves would steepen and probably steepen significantly because of inflation problems at the long end.”

“You've got money which is moving in financial markets, and you've got money that's moving in the real economy. And what we say at the top of that is that all money that is anywhere must be somewhere. So we can't really be in two places at once. If it's in the financial sector, it's not in the real economy. And if there is a surplus of money in financial markets, it will spill over into the real economy and drive an economic boom.”

“What the policy of the administration has been to do is to kinda reduce the Fed's footprint in markets. So they've been trying to shift from what I've called Fed QE in general terms to treasury QE, and the treasury QE is the black area. The black area is basically changes in the tenor of issuance in the markets. So in other words, rather than issuing long dated bonds, to institutions like pension funds, and insurance firms, what you're getting instead is the Fed is issuing bills.”

“Markets are all about refinancing debt. We've got a huge amount of debt to refinance. And that's why markets are often laboring because they need liquidity to do that, that transformation. The products in the heart of the financial system is that debt needs liquidity to be in order for it to be rolled over because the fact is that if you issue a five year debt, bond, it's gotta be renewed five years hence.”

“What's happening in the US Treasury market with buybacks? The simple regression of that data, it shows you that each 10 increase in the move index basically leads to, subsequently, a 28,000,000,000 increase in treasury buybacks. So there's a direct correlation. It seems as if the treasury is directly targeting the move index. It wants bond volatility low.”

“The size of the federal debt, outstanding has grown by about five and a half times. So there's a big, big increase in federal debt, and these markets are huge now. And the capacity the dealer capacity in the market from the private sector, the dealer banks is probably down by about half. You've got a much, much bigger bond market, with, you know, a market capacity, which is arguably lower. So there's risks here for the bond market. And so you need the Federal Reserve to be there, I think, to supporting liquidity.”

“In the modern world, what do interest rates really mean? Who is the big debtor now? It's the government sector. So if you raise interest rates, doesn't it mean that transfer payments from the government sector to the private sector increase, which is an income increase? And that is being more and more monetized by bill issuance. So this should be paradoxically, a stimulus to economies, not now, a contractory force.”

“The narrative that you've been getting, from the media is that bonds have been selling off. No one likes bonds. Safe assets are dead, etcetera. I think it's a lot more subtle than that. If you've got a more uncertain world where you've got tightening liquidity and increasing systemic risks beginning to build, then investors will go to the safety of government bonds. And what the bond market is telling us right now is there's an increasing demand for safety.”

“If you go back and you like the history of financial markets, you know, I used to work at Salomon Brothers. Salomon Brothers and Phillips Brothers, the commodity firm, merged in the late nineteen seventies. And the reason for that was the commodity cycle, which was then furious running furiously, and the bond cycle were completely countercyclical. So in other words, what ends the liquidity cycle is rising commodity prices. Late in the cycle, what destroys liquidity is basically commodity markets going up.”

“This chart I put up is one that we often show, which is looking at how liquidity drives crypto. Crypto is a great barometer of liquidity in the system. It's the most liquidity sensitive of all assets, understandably in many cases. I do exactly the same thing for a basket of crypto, which is Bitcoin, Ethereum, and Solana. So it's 60% Bitcoin, 30% Ethereum, 10% Solana in that waiting.”

“We've got four ducks here, economy, bond markets, equity market sectors, and liquidity, and they all seem to be saying the same thing. You're getting stronger economies. Commodity markets are moving. You're getting bear flattenings in yield curves, and you're getting things like cyclical value stocks, resources, energy outperforming, and liquidity kinda going down. And that's what it central banks not tightening yet. Just wait till they do. Then there's a problem.”

“The liquidity cycle, which dominates market movements, is basically inflicting lower. And we're in the season that we currently call speculation, which is a late one, take that as the autumn, precedes what we call turbulence. And turbulence is probably, as the name suggests, a very difficult time for risk assets.”

“We've got four ducks here, economy, bond markets, equity market sectors and liquidity. And they all seem to be saying the same thing. So although we're not in turbulence yet, we're basically moving in that direction. Our view has been basically to pay back risk during this period. I mean, not get out of markets entirely, but we're basically moving more risk off, that's for sure.”

“The reason for that is not because central banks are tightening and withdrawing liquidity, it's because the real economy is actually accelerating or increasing its appetite to be more correct. It's working capital demands and that is sucking liquidity out of markets. Now, whether that is because of higher oil and energy costs, or whether it's because there's more inventory build, more capex spend, more economic activity going on, is kind of a moot point.”