Markets Are Misreading A Late Cycle Liquidity Crunch | Michael Howell

“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.”

“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. 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.”

“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.”

“And we've made the case for some time that financial markets today are debt refinancing mechanisms and you need balance sheet capacity to roll over debt. And that balance sheet capacity you can measure with global liquidity. Real economy liquidity is something different. And that is much more measuring the transactions in the real economy.”

“Effectively, what these things are, they're moving counter cyclically. When you get a strong economy, that's absorbing liquidity and financial markets tend to lose out because financial liquidity is depressed. 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.”