‘Absolute Madness’: Trillions In Debt Maturing Soon As Inflation Reignites | Michael Howell

The everything bubble rested on two features. Number one was that every financial crisis or every problem in the world economy has been met by one solution, more cash. The primary goal of the Federal Reserve, despite what it says in terms of, you know, its mandate is supposedly employment and inflation. Its real mandate is to maintain the integrity of the government bond market. So if you get instability in the Treasury market, they will be throwing liquidity at it. As the Federal Reserve prepares to buy Treasury securities for the first time in a few years, we're going to be talking about what this means for global liquidity. Our next guest is basing his prediction on global markets, on global liquidity conditions and debt conditions. His name is Michael Howell. He is the founder, managing director of GL Index, formerly known as Cross Border Capital and the author of Capital Wars on Substack. Follow him in the links down below. This is a very interesting discussion. He's got some very interesting research on global liquidity conditions and cycles. Welcome to the show, Michael. Good to see you. Well, thanks, David. Great to be here. A lot of things going on in markets right now. Absolutely. And I want to pull up the first slide and I'll let you show the rest. I just want to show this very briefly. The title of your presentation that we're going to be going over is Outlook 2026, Financial Crisis and Inflation. And I just want to have you please explain to the audience before we get started, before we delve into your outlook itself, what your thesis is, how global liquidity is tracked and used to make predictions on markets, and why it is that you've put crisis and inflation as the title of this particular substack or slide deck, rather. Okay, well, that's a high bar to jump in maybe a couple of sentences, but let's have a go. I mean, we look at global liquidity. Global liquidity is what has been driving asset markets for certainly much of the last three or four years, but arguably a long time before that, too. Assets are very sensitive to liquidity. Just look at what look at the behavior of Bitcoin for one particular example. In terms of why we think that liquidity is going down or peaking is broadly because of two things. One is the central banks generally. And I know the Fed has changed a little bit in the last two days, but the Fed, but generally central banks are beginning to slow their liquidity injections into markets. But set against that, what you've got is a strong real economy. You've got something called the debt maturity wall, which is upcoming, which is basically funding a lot of debt that was turned out during the COVID crisis. And that's coming back to haunt markets. And the third thing is we know that fiscal spend is racing ahead. And that somehow has got to be funded. So in other words, there's not enough money around. And if you take the thesis that all money that is anywhere must be somewhere, if it's in the real economy, it's not in financial markets. And that really is the problem. I just want to go back to the statement that you made, which is that central banks are halting liquidity injections. So we've got the Federal Reserve of the US that's going to inject more liquidity. The Bank of England, where you're based, is about to cut rates. I believe the Bank of Canada, where I'm based, is holding rates steady. The Bank of Japan is hiking rates. So there's policy divergence all around the world. How are you getting that information? What are you basing that on? Well, the first thing is that we're tracking the movements of liquidity from central banks. We're looking at the amount of liquidity they put into the system. You're absolutely right to say the Federal Reserve has actually changed to some extent in the last couple of days. The question is, has it changed enough? The key point is that over the preceding three to four months, the Federal Reserve actually took a lot of liquidity or oversaw the extraction of a lot of liquidity from US financial markets, which is largely why you've seen this volatile move through the indexes and why Bitcoin has basically fallen back. So that's the US story. Eurozone, the basic prediction is that rates will be all around inclined now. There's more likely to be tightening in the Eurozone. If you look at Japan, they're signaling the same thing. And if you look at China, rates are basically beginning to edge up. So I think on all these, what you've got is a backdrop where we may be near the peak in the liquidity cycle. We're not saying that liquidity is falling strongly yet, but we're saying that this is a prospect for 2026. Why can you just maybe at a high level to explain the theory behind why global liquidity moves in cycles to begin with? Yeah, it moves in cycles really because I guess for two reasons. I mean, one is that it's feeding. One is you've got central banks that are effectively injecting a lot of liquidity into the system at different times. They may have objectives such as stimulating employment growth. They may have other objectives such as trying to rein in inflation. You've got a real economy which is using that liquidity. And on top of that, you've got debt which needs to be refinanced. What we're looking at here is a cycle that is around six years, actually five to six years, an average of 65 months. It goes back all the way here to the mid 1960s. That cycle is very well established. You can see if you cast your eye towards 2022-23, that the cycle basically bottomed almost exactly on the point that the sine wave, the dotted red line was indicating. We've now been in a bull market for liquidity and asset markets for about three years. We're coming close to a prospective inflection point. Why is it six and a half years? I'm sorry, why is it five to six years? The reason probably is that this is a debt refi cycle. Fundamentally, liquidity is in the system to refinance debt. Financial markets globally have got so much debt. Most of the transactions that go through financial markets today are debt refinancing transactions. So this is a refi cycle. And the average maturity of global debt is, lo and behold, about five to six years. So it all seems to dovetail quite well. Michael, does this chart overlay with GDP growth or markets? Well, it overlays with markets. I think you'll probably see in the deck, there's actually an attempt to try and relate. There's a chart a little bit, I think it may be a little bit later in that, but it's showing, if I recall. There we are. If you look at the pink one, what you'll see is something I snipped from Twitter, which was an article about bubbles in asset markets worldwide. You can just about make that out, I hope. But that pink sheet may well have come from the Financial Times. I can't really read the source, but basically what that shows is a series of asset bubbles in different colours. What I've done, I've overlaid on the top of that in red, our global liquidity cycle. And what it's trying to show is that every bubble has coincided with a peak in liquidity. And every collapse in a bubble has been associated with liquidity conditions tightening. Now, if you look at the latest cycle, and I'm not saying this is particularly scientific, because I've just overlaid one chart on the other, but you can see that within liquidity beginning to inflect downwards, there is a danger for the so-called everything bubble. And that is a real problem, potentially. When we say everything bubble, do we literally mean everything, or is it mostly just tech stocks, Michael? Well, no, I think that there's a lot of things which are clearly going up, generally. And I just use that moniker because that's what a lot of people are now dumbing it, the everything bubble, because we've been in a period where asset markets generally have been inflating pretty nicely for a number of years. And that has been courtesy of a lot of liquidity in the system. This would be a good explanation as to why everything's been moving up in tandem, things that typically have not been correlated with each other on a shorter term or even longer term scale. So gold, for example, and Bitcoin and stocks, and to a certain extent, bonds have all done well this year up until now. Well, Bitcoin is now down here to date, but up until October, it was up. And so how can one explain all assets moving up together, even at a time when the Federal Reserve was not cutting rates as dramatically as one may think that they should be? Well, I think the point is that interest rates are an incredibly misleading indicator of the stance of monetary policy. And that must be the case if you're looking at an economy which is dominated by lots and lots of public debt. Because if you take the US as an example, treasury debt is so large that there are huge transfers of interest payments from the government to the private sector. Now, if you cut interest rates, you're actually cutting people's income. So it's not entirely clear to me that an interest rate cut is stimulating an economy in the same way as it historically did, in the same way that an increase in interest rates is unclear as well. If you're adding liquidity to an economy, it's unambiguous that that is a stimulant to spending. If you take liquidity out of the system, that is clearly putting the brakes on. So liquidity is a much less ambiguous guide than interest rates. Before we jump back into the video, let's talk about something most people ignore, but it's very important, your online privacy. Your personal information isn't just sitting on your phone or email, it's being scraped, bought, and sold by data broker sites every day online without your permission. Our sponsor today, Delete.me, helps you take that control back. They scan the web for your exposed information, send you regular privacy reports, and remove your data from hundreds of broker sites so it can't be used against you. And in their latest report, they reviewed over 325 listings to see if any data broker had my personal information, and they continue to check every week to make sure it stays off. Go to joindelete.me.com slash davidlin and use promo code davidlin at checkout, or scan the QR code here on the screen. Get 20% off on all US plants. Take control of your privacy today. This is a very important chart. Global liquidity and world wealth. All wealth, including gold and housing. Are you including also the stock market as well? It shows everything in there, David. It shows stocks, bonds, all liquid assets. It shows precious metals, cryptocurrencies, residential real estate. It's a global figure. And what you can see there is the gyrations of liquidity, which is shown in orange with a projection as the dotted line of what we think is happening over the coming 12 months against the returns, the annual returns from that portfolio, which is shown in black. It's not exactly one-to-one, and I would have to say that if you go back previous one or two decades, there is a correlation. It's not quite as precise as this, but it's definitely there. But what we've seen in the period since the global financial crisis is that the correlation between liquidity and asset returns has been almost one-to-one. And what is driving that liquidity, it's principally what central banks have been doing. So I have a few follow-up questions. First is what happens to the real economy when wealth, total wealth drops? This graph makes a lot of sense when the global liquidity conditions rise and or drop. Wealth, including stocks, gold, and everything that you've measured, follow. So what happens to the real economy when global liquidity and wealth both go down? Well, it's probably not a particularly good signal, that's for sure, in the sense that if you're getting a loss of wealth, presumably consumers are going to be spending less. And if there's a tightening of liquidity conditions, generally businesses are going to find it, but they're going to struggle to either build inventory or raise capex. So I think you would expect it to be a negative factor. I think one of the things one's got to think about is that is there a very clear transition between money in the financial system and money in the real economy? And although the textbooks kind of gloss over that, the linkages are there, but they're not exactly precise. And you can have money washing around the financial sector, which doesn't spill over into the real economy. As I said earlier on, all money that is anywhere must be somewhere. But if it's in the financial sector feeding a speculative bubble, it's certainly not going into the real economy. It may spill over to some extent, but it's clearly not a one-for-one relationship. Now, I think that really underscores the policy of the US administration at the moment, where what I would describe them doing is shifting from, I think, a label of what you might call Fed QE, in other words, Fed-led stimulus of injecting liquidity into the system, to what I've called Treasury QE, where the Treasury is already trying to do that itself. And what you're seeing very clearly in the US and everything in terms of all this legislation, the changes in bank regulations, the funding at the short end of the market with Treasury bills, you could even argue the Genius Act, in other words, the support of stablecoins, all these particular features are trying to endorse the background for Treasury QE. And what that really means is that the Treasury is doing spending itself in the real economy, whether it's defense procurement, whether it's critical minerals, whether it's taking stakes in strategic industries, the Treasury is spending money in the real economy. It is driving employment and driving the real economy. It's paying for that through issuing Treasury bills and short-dated debt. And that is the Treasury QE process. The Federal Reserve, when it acts, basically acts with an unguided hose. Everybody gets soaked or every asset gets soaked. That's good for some people, but it ain't good for Main Street. And that's what the emerged origin is trying to correct. I'm curious as to how we can determine whether or not contraction in global liquidity is going to lead to an economic contraction recession or even a market meltdown. So you can see here a couple of cases in which a huge contraction makes sense. The dot-com bubble in 2000, 2008 financial crisis. Interestingly, COVID did not see global liquidity drop to negative levels. That's interesting, but it did drop in 2022. That coincided with the everything market drop as well. That's when the Federal Reserve was raising rates. But then you see periods in like 2015, for example, 2012, and to a certain extent, mid-2000s when global liquidity dropped below zero or near zero and the economy was just fine. Markets were just fine during those times. You know, what happened? Yeah, well, I mean, I don't use global liquidity particularly as a predictor of what happens in the real economy. I think the two things are separate. There is a linkage. What I'm looking at is global liquidity as a driver of asset markets. And what you can see there is a much closer relationship. I see. Now, just to emphasize this backdrop, and I'm going to go down three rabbit holes. The first one is the previous chart that you put up with the traffic lights, I think. You can see there that what we tend to think about is different phases of the liquidity cycle. Now, I actually think maybe we need to introduce this by looking at the chart before. Yes. It's showing a schematic asset allocation. But what it shows here is that the liquidity cycle has very clear phases that we call rebound, calm, speculation, turbulence. And then we also have phases on the right-hand side of asset performance, linked to asset performance, such as equities due on the upswing of the liquidity cycle, commodities around the peak, cash in the downswing, government bonds at the trough. Now, if you go to the traffic lights, you'll see that, you know, describing, these are set in stone pretty much, these traffic lights. But it's just a guide for asset allocation. And if you look at the four different columns, first on the left, which are assets, and then on the right, which are industry groups, the rebound is the beginnings of the upswing in the liquidity cycle. That says, reading this as a traffic light, if it's amber, proceed, go forward, but be careful. Green is clearly go, ready, stop. So in the rebound phase, which began in late 2022, you want equities and credits. You were basically, you know, marginally or moderately risk on. You didn't want commodities or bond duration. By the time you get to calm, which let's say is over the last 18 months, you wanted a strong risk on, you wanted equities. You were starting to be a little bit more neutral towards credits, but certainly building up commodities. We are now in speculation in the US. So you want your commodities. I mean, just viz what's happening in the precious metals, silver, you know, a big, big rise in this year in particular. Gold has done well. Commodity prices like copper are up significantly. You've got equities, which we're now starting to trim. Credits probably you want to be wary of. And then as we move towards turbulence, you want to be sticking a toe in the water as regards government bonds. Look again at industry groups. Same idea, cyclicals in the upswing, defensives in the downswing, led by technology. They've been the star performance through the markets in the last three years. Financials have had a stunning 18 months, globally, certainly, but also in the US. And that's a typical mid-cycle move. And then you look at energy commodities, which tend to dwell around the calm, speculative areas of the market. And then finally, if you're in the, as you go into the downswing, you want to be a lot more defensive for things like consumer staples as the quality is contracting. So what I'm saying here is that rabbit hole number one is basically saying, look, we've had a flat lining of economies, flattening on the business cycle since COVID. That has not explained asset allocation one jot, right? Economists have been telling us for many, many quarters now that the economy is about to go into recession, which certainly hasn't, it's growing quite well. What you've seen is a pronounced liquidity cycle, and that pronounced liquidity cycle has taken us through asset allocation themes pretty well. I mean, it's described what we've been going on. This is a liquidity-driven asset allocation cycle, and it's moving very, very normally. So that's rabbit hole number one. Rabbit hole number two is if you go down at the presentation and you look at a chart where we describe the, I'll tell you when to stop the QE backdrop. If you go down a bit further, there's a lot of charts in this, but if you keep going down, I'll tell you when to hold. So keep going here, right there, one before, sorry. There we go, up one, up one. That's it, great. Now, if you look at this, this is looking at the U.S. Fed and U.S. Treasury stimulus liquidity injections into the U.S. system. And what this is basically showing is the amount of liquidity or liquidity equivalent that goes into the market. The red area of that is conventional QE. So that's basically the Federal Reserve buying coupon securities in the market. The orange is what we slightly flippantly call not QE QE. So it was not headline QE. It was actually occurring during a time when they were engaged largely in what they called quantitative tightening, although they didn't really do that. This was backdoor stimulus, if you like, a sula tabla, a sort of liquidity impulse. Things like the reverse repo facility was pared down, treasury general account, all these sort of phenomenon. A bit wonkish, but that shows liquidity going into the system. And then you've got the black area, which is really what the treasury has been doing, funding a lot of its expenditure through treasury bills. And what you can see is as the cycle has evolved, there's clearly been a cycle for sure. But the black area, which is treasury QE, is dominating proceedings in 2026. So the Fed is stepping back. The treasury is stepping forward. It's a transition from Fed QE to treasury QE that underscores a much stronger economy. And what you can see in the little window that we've put in that chart is the black line on that sort of shadow outline, the orange outline of this previous, of this bigger cycle. The black line is the change in the US PMI index lagged by around nine months. So what you can see there is how that relates to the cycle in liquidity. So what that's telling us is that 2026 should be a good year for the economy. And that may be exactly what the administration wants, given the fact that you've got a midterms upcoming next year. A good year for the economy, but not necessarily a good year for the markets, but given the liquidity conditions, right? Right. So the corollary of that is what you may be seeing is a pickup in inflation. And if you look at the next slide, now this is a little bit wonkish, but what this is basically showing is that because the treasury is issuing so much debt at the short end of the market, the question you've got to ask is, who is buying that? Well, it's the banks, because the banks love that stuff. They love short-dated government debt. That's exactly what they need to put into their balance sheets, because it matches the duration of deposits and deposits are bloated because there's lots of fiscal spending. So what you can see here is the orange line shows the growth rate of banks' holdings of treasury and agency securities in the US. It's outpacing conventional money supply growth, the M2 number, and that is pure monetization of the deficit. OK, that doesn't end well. We know that from history. So this is inflationary, and you can see this both globally, if you look at the next slide. So this is not just a US phenomenon. This is happening worldwide. I mean, everyone has worked out that Scott Besson has got the secret elixir here, and this is how you fund the government deficits. You start going down the short end of the market. And what you can see here is the monetization of government debt worldwide in terms of that line is showing the percentage of domestic liquidity that is now accounted for by public debt or growth holdings of public debt, the incremental amount. So it's bank holdings of government debt. This is effectively, you know, giving a credit line to the government. It's printing money to fund the deficits. This is a global phenomenon. Japan is starting to do it. The Brits are starting to do it. The US is leading the way. I mean, this is, you know, this is how governments tend to, governments are now funding themselves. It's inflationary. Look at the next slide. And what this is showing is, is a couple of scary things. One is that the orange line is breakeven inflation in the US, the TIPS market. Well, that's not showing anything, but I think that's being massaged a bit. The dotted line is the same calculation, but not using the treasury market, but using the MBS market to try and bootstrap a breakeven inflation rate. And that's higher. But just take a look at the black line, which is the University of Michigan Consumer Survey for Inflation. That is, you know, jacking up very, you know, very high levels. And we're talking at 4% inflation. What do you think that's from? Tariffs or liquidity? No, I think it's, I don't, I mean, tariffs are clearly having an effect, but this is basically because of monetization. It's because the economy is starting to heat up. I mean, look at all these commodity prices rising. That's not tariffs, believe me. This is because the economy is starting to get hot. And, you know, next year is going to be a challenge for that. Now, the third rabbit hole is, okay, if that's not enough, and I don't want to sound too bearish because I'm not that bearish, but clearly I'm getting a bit more cautious. If you start to go up in that presentation, you'll see why I labeled this presentation about financial stability as well. Now, if you keep going up, there'll be a time to, I'll call a halt. This one, well, it says debt liquidity cycle. Now, the debt liquidity cycle is a chart that is a schematic, but I'm just going to run through that because it's not what you see in textbooks. This is the financial system post-2008, post-global financial crisis. At the heart of the system is a debt liquidity nexus. That debt liquidity nexus tells us that something like 70 to 80% of all transactions in financial markets today are debt refinancing transactions. Capital markets, despite what the textbooks tell us, are not about raising new capital for new greenfield investment projects. They're basically about refinancing existing debt. That's the situation we got ourselves in. There's so much debt. So what you need to refinance debt is liquidity, and that's why liquidity is critical. You need balance sheet capacity among credit providers, and that is the liquidity that we measure. Financial stability rests on this idea that you've got a stable or robust debt liquidity ratio. Paradox in the financial system is that debt needs liquidity, but liquidity needs debt because something like nearly 80%, you'll see that the figure on the top left is 77%, but nearly 80% of global lending is now collateral backed. Not our figure, that comes from the World Bank. And what that's saying is that liquidity needs debt and that debt needs liquidity. If this derails on the right, you get a refinancing crisis, but you can spot that through credit spreads and term premium. If it derails on the right, so you can't turn your debt into liquidity, then you get a repo collateral crisis. Lo and behold, that's what we've just been witnessing in US repo markets, and that's the problem. Take a look at the next slide, and this is showing the equilibrium in financial markets since 1980. What this is showing is the debt liquidity ratio in the advanced economies. This is showing where you get financial crises when that ratio is elevated. So when you get lots of debt relative to liquidity, you get refinancing tensions appearing, particularly in repo markets, and that can spread out across the yield curve, along the yield curve to affect debt of all stripes. And what you see is problems we've annotated where you get financial crises. In the lower part of the diagram, below the dotted line at 200%, so that's the equilibrium level, you get periods where liquidity exceeds debt needs, and that's the vent is asset markets, and you get asset price bubbles, which I've also annotated. Look at where we are now, so-called everything bubble. Certainly has been feeling like that, but then if you look at that orange line, it's going up. Why is it going up? It's going up for two reasons. One is it looks as if central banks generally are beginning to curtail. I'm not saying they're doing it in big size yet, but the cycle of central bank liquidity is just starting to inflect lower, okay? And that's what we've got to be conscious of. It's not press the red button yet, but we're starting to get a little bit cautious. And then what you have got on top of that is a lot of debt needs to be refinanced. And that debt is debt that was termed out during the COVID crisis in particular. Now, the everything bubble rested on two features. Number one was that every financial crisis or every problem in the world economy has been met by one solution, more cash, okay? Central banks just dishing cash to markets, QE or QE squared or whatever you call it. It's been going in big time. That's the solution to a problem. I mean, you could even say, look at the RMP that was announced two days ago in the Fed. Problem in the repo markets, give them more money. And that's what they're doing. The other thing was that interest rates fell to nearly zero. Now, in my years at Salomon Brothers, we were schooled on a book called The History of Interest Rates by Sidney Homer, which looked at four millennia, 4,000 years of monetary history. Nowhere in those pages is there any mention of zero interest rates. This is a new feature. It's not normal. We've just had that. If you have zero interest rates, it encourages debt. We don't want debt, but it also encourages people to term out their borrowings. And if you look at the next- What about negative? What about negative interest rates like we saw in Japan where real negative interest rates like in some parts of Europe that we've seen? Yeah, exactly. What kind of incentive does that provide? It's madness. Absolute madness. This is the policy makers have got it completely wrong. So this is the debt maturity wall. So this is looking at the increment, not the absolute level, the increment in debt that is coming forward needing to be refinanced every year. And this is in trillions of dollars. So the underlying level is about 25, 30 trillion, but these are the incremental amounts each year. And you can see the bite out of the chart that occurred in 21, 22, 23, which was the period that we said of zero interest rates or even negative interest rates where people said, thanks very much. We're going to refinance. We're going to term out our debt. And we're sticking into the late 2020s. That's now coming back to haunt us, which is the dark red bars. And it's that which is the problem. I'm not going to say it won't be refinanced. What I'm saying is it probably will be refinanced, but it's going to absorb a lot of liquidity out of markets. And that is the problem. And what happens if you get that occurring, you start to get problems in the repo markets. And if you look at the next slide, it'll show you that this is the problem that we've seen in the US over recent weeks or months, which is the spread between SOFR rates and Fed funds rates. Now, this probably leads us to the last rabbit hole, which is basically looking at what the Fed has done and what the Federal Reserve has done has tried to calm the markets down by giving them more liquidity. Now, if you get problems and imbalance between debt and liquidity, you get spikes in the repo markets. In other words, banks, dealer banks are scrambling for liquidity to try and do these roles. Now, what you can see is that SOFR, which is a market rate, is elevated relative to Fed funds, which is the central bank's policy rate. And you can see that we've been in what I've labeled as the danger zone, where you start to get serious problems and you start to get a pickup, a significant pickup in trade fails. In other words, that trades just won't settle. And that can lead to volatility in markets and nasty things. So the Federal Reserve has tried to cure that. And what they've done is they've injected or prospectively started to inject liquidity from today, in fact, where they're going to start to buy bills totaling about 40 billion on a monthly basis, 40 billion US of treasury bills, the so-called RMP purchases, Reserve Management Purchases. Now, they won't call that QE, of course, but it is, there's nothing, there's no difference from that. It's simply a liquidity injection into markets. And that backdrop is clearly positive for markets in the near term because they get another dose of liquidity. The question is, as 2026 unfolds, is that going to be sufficiently positive to keep Wall Street bubbling up? My view is probably not, but let's keep an open book on that because in actual fact, one of the merits of what the Federal Reserve announced two days ago was they pretty much said that they were flexible on these purchases. Now, they did warn the market that maybe these purchases come down, they don't always go up. But I think the point is, is if they're addressing as they claim a technical plumbing problem, then if you get another air blockage in the pipes, they're going to start injecting a lot more liquidity in there to clean them out. And so this is kind of open-ended in a way. It could be more than 40 billion, it could be less. But what they're really doing is I think they're saying, okay, what we're now doing is we're targeting SOFR rates. That's the intention. We're giving the repo markets a put. Is this the phenomenon you're describing or is this something else? The banks have been tapping into the Federal Reserve's standing repo facility for quite some time. In fact, this is the highest usage since the program was introduced shortly after COVID, if I'm led to believe. So banks tapped. This is a couple of months. This is a phenomenon. This is what you're talking about. Okay. Exactly. Yeah, this is it. Is this actually adding liquidity into the system though? I've been getting mixed messages about this. You bet it is. Yeah, absolutely. No question it's adding liquidity. The banks are borrowing from the Fed. They're adding liquidity to the system. How much of that borrowing is actually transmitted to bank lending? Well, that's a very different question, David. I mean, how much comes through in bank lending is a very difficult thing to say. What it does is secures the balance sheet. It probably would stop them liquidating areas of the balance sheet. So I think it gives them support. But I wouldn't necessarily say that that necessarily comes from bank lending. I mean, in the same way, if you look at the QE programs over the last, what, 15 years, has that radically increased bank lending in the US or any other country? Not particularly, no. Certainly inflated asset markets. So we don't know definitively, Michael, if more debt is going to translate to more commercial lending and commercial credit available in the system. Well, the short answer is no, we don't because that's not really the mechanism and how these things work. But the point is, if the Federal Reserve is injecting liquidity, not withdrawing liquidity, it's at least a positive sign. And asset markets will benefit from that. But the key point, the key transition is this transition from Fed QE towards Treasury QE, as I've labeled it. And that is trying to get the real economy moving. And contrary to what many people would argue, I still believe that we're likely to see a much stronger economy in 2026 because on top of this fiscal spend, and that's this, remember, that the one big beautiful bill starts to bite significantly next year. You've got a lot of AI spending coming, CapEx from AI spending coming through as well. And that is likely to underpin a stronger GDP in the US. I want to go back to this chart one more time, Michael. Do we have any models or predictions to forecast or tools, rather, to forecast the degree of global liquidity falling? In other words, the magnitude of the drop, because I am interested to know how far stock markets would be impacted. You look at this chart, for example, there's a pretty good correlation and they do seem to move roughly in the same magnitude of percentage change year over year as well. Well, the answer is that we're trying to project what we're doing at the moment is predicting the beginnings of an inflection. I think that it's quite possible it's going to be worse than this. But what we're seeing, we're just using our current measures to try and show what central banks are up to. Now, they haven't started to put the brakes on sharply, but clearly, if there is an inflation breakout, they may well decide to do that. I wouldn't necessarily believe that if the Federal Reserve is intent on cutting interest rates, which the dot plot seemed to indicate, that's going to have any particular bearing on liquidity conditions per se. It may well help to weaken the dollar. It may still help to fuel inflation. It may help small businesses, but that's not really a liquidity injection. They're two very different things. But I think generally what we're leaning towards is a period where you've got a stronger economy and a weaker, potentially weaker stock market or certainly a more troubled financial backdrop. Now, the chart that you just put up is basically saying, well, OK, can I lean back on history to give any support to this argument? And what this is saying is, well, look, hey, just take a look at this. This is the average gain on the S&P in each year of a US presidential term, the average figure from 1970 through N24. And what that's saying is, look, I mean, this year is pretty much on track here. Year one of the presidential, Trump won. Then we get year two of Trump. Next year, 26. Well, that's going to be a subpar year looking at that. It may be a subpar year for the markets, could be a positive year for the economy. And year three is the one where it comes back again. You get a strong rebound in markets historically. I love to see this chart broken up by Republican and Democrat four-year averages of Republican presidents versus Democrat presidents. I'm curious to see whether or not they differ. I don't know. Have you done that before, Michael? It's straightforward to do. I've looked at it, but I can't remember the conclusions. I think it varies, really, to be true. Yeah, I think you're right. So basically, what you're saying is based on history, if you just take an historical average, second-year presidential terms historically have not been great if you take the average, plus the fact that we're getting liquidity crunch next year. What does that mean for the S&P altogether? Well, I think my view, which I've been saying for some months now, is that 2026 is likely best to be a range-bound market for the S&P. I think that investors ought to be moving more defensively. We've been very bullish over the last three years, so we're not always in the negative camp, for sure. I'm not going risk-off yet, but I'm saying to our clients, you've got to start moving more defensively. There may be a case for putting a toe in the bond market waters already. And although many, many people are negative on fixed-income markets, the plain fact is that if you start to get an inflection in the liquidity cycle, yield curves flatten, and a flattening of the yield curve may actually give some return for mid-duration bonds. Now, okay, so we've talked about asset allocation. We've talked about the potential magnitude of the S&P 500 move. What about gold and silver? Have we applied similar cycles to precious metals? I bring them up because unprecedented moves have been occurring for both of these metals in the entire precious metal space, and people are wondering, first of all, what are the signals for global economic growth, but secondly, where those assets are in their respective cycles, Michael? Okay, let me have a bash at that. I mean, basically what you've got to think about are these are monetary inflation hedges, okay, in the long term. Look back over the last 25 years, what's happened to federal debt? Federal debt has gone up 10 times, okay, 10-fold. I mean, that's an eye-wateringly large amount of increase in 25 years. How much has the gold price gone up? Gold price has gone up basically 12, at least 12 times over that period. It's more than matched the increase in federal debt, and that's what you'd expect because there's monetization going on. How much has the S&P gone up? Under five times. So gold has been a fantastic asset. Could you have timed that? You probably could have timed that and got even better returns, but you didn't need to. You just need to hold gold, and that's what I would say looking at the medium term. Any weakness in gold, silver, precious metals, Bitcoin, buy on weakness, okay? What do I mean by that? Because you've got to be explicit. I would say if you're 20% below the trend line, I would be snapping it up because I think these assets are going up medium term. That's the fact because we've got more debt. Debt is riddling this financial system, but it keeps going up. Governments are spending. They're issuing debt. Debt means you need liquidity. And if you get liquidity following debt, that is monetary inflation. You need monetary inflation hedges because basically central banks, policymakers are devaluing paper money. So you need these hedges. Last point on this is let's think about China. What is China doing? China has a real estate problem, a big real estate problem. Japan had a real estate problem back in the late 1980s, early 1990s. The US had a real estate problem around the time of the GFC. How have those two economies got out of their real estate problems? How have they basically managed to inflate collateral in these markets by printing money? China's got a bigger problem. What has China got to do? It's got to inflate massively and it's got to try and devalue the Yuan and that is going on. How do you check that? Don't look at the Yuan-US dollar cross rate. Look at the Yuan gold price. The Yuan gold price is going up. It's going up number one because they're printing money. It's going up number two because the Chinese central bank is buying gold. And that is going to go a long way. Stig Brodersen Look, going back to the economy and wealth. So if you're saying that the stock market is probably at best going to stagnate next year, go grind sideways, that implies and I guess for the rest of markets, well, that may imply that the wealth for the wealthy who own assets may not increase by much relative to past years like this year in 2024, for example. What does that mean for spending? The wealth effect theory states that if the wealthy do not get wealthier or in fact, they lose wealth, that has a real effect on actual spending. In fact, reports in the US are already indicating K-shaped economies popping up all over the country, whereby the wealthy 10%, the most wealthy 10% are driving up most of the spending in shopping and retail sales. And so if that stops, wouldn't that halt economic growth, which you were talking about? Greg Phillips Well, clearly it's one factor. I mean, one can't ignore that. If consumer spending slows down, the economy is going to suffer. But then you've got on the other side of the balance, Scott Besant, who is spending a lot of money through the US government. So he's the one that's effectively helping to drive growth. Then you've got the AI companies that are spending lots of capex. And then if we manage to get the US dollar down a tad and the world economy is reviving, US exports will be pretty decent. So I think if you throw all those factors in, it's probably positive for the US GDP score next year. Stig Brodersen This is a story that maybe not directly related to global liquidity, but I'm just curious to see how liquidity flows and capital flows happen around the world. Here we have something from Bloomberg dated last week. Asian economies aren't just shifting their trading ties to fight against US tariffs. They're also increasingly moving their financing to other markets, underscoring how President Trump's policies risk eroding American dominance of capital raising. Asian borrowers increased euro-denominated issuance to a record 23% of the total across both currencies this year. What do you make of this story? David Morgan Well, you can't make much of it. I mean, you could argue this two ways, couldn't you, David? You could say actually they're borrowing in euros because they think the euro is about to decline in value. So what does it tell you? It doesn't tell me very much. Stig Brodersen Okay, but it doesn't say the dollar is going to fall. David Morgan No, I don't think so. I mean, you could actually argue the dollar is going to go up because if you thought the dollar was going to decline, you'd borrow in dollars. Stig Brodersen Fair enough. Fair enough. Well, finally, any upside to the market that you see, in other words, anything that could break your thesis of stagnating U.S. stock markets and potentially we see a surge like we saw early in the year? David Morgan Well, I think it comes down to the central banks. I mean, if the central banks are going to throw more money at the system, then you'll see a surge in the markets. And I think the fact is that what you've got is reactive central banks who are prepared to bail out volatile markets. I mean, the plain fact is that what we need is stability in the U.S. treasury market. If you don't get stability, you will find the treasury and the Fed acting to try and ensure that stability by adding liquidity to the system. That's what they always do. The primary goal of the Federal Reserve, despite what it says in terms of, you know, its mandate is supposedly employment and inflation. Its real mandate is to maintain the integrity of the government bond market. So if you get instability in the treasury market, they will be throwing liquidity at it. That's true not just for the U.S., it's true worldwide. Look at the alacrity with which the Bank of England stopped its QT and engaged in a QE two or three years ago during the Liz Trust debacle. I mean, that shows what they intend to do. They want government bond markets to be stable and they'll do anything to make sure that happens. Why do we see such a divergence in monetary policies around the world? Like I stated earlier in the interview, the Bank of Japan's doing their own thing. The Bank of England is doing their own thing. The Bank of Canada isn't following the U.S. right now. And the U.S. is kind of just following what Trump wants to do. And so we're not seeing any sort of coordination at all, at least on the surface. Am I correct? Well, I would disagree with that. I think what you're seeing is actually a convergence of, if you look at terminal policy rates through term structures worldwide, there's actually a convergence going on. So you've got very high rates in the U.S. and the U.K. They're starting to come down. You've got very low rates across the Eurozone, Japan and China, and they're starting to move up. So actually, there seems to be a convergence of interest rates, short-term policy rates worldwide towards some equilibrium level. And then if you look at liquidity injections by central banks globally, although they're beginning to inflect downwards, as I said, they've been correlated pretty closely over the last three or four years. I mean, otherwise, you know, why have markets generally done much the same thing? OK, the Eurozone is a tad behind. It is leading. Sorry, it is lagging the U.S. market a tad. But generally, you're looking at bull markets in many, many places. As I said, it's an everything bubble. All right. Finally, let's take a look at bond yields. Do you have any idea as to where the 10 year is going to go? On the one hand, if you're predicting inflation, presumably the long end of the curve should follow inflation expectations up higher. But then if the Fed is interested in QE, to some extent, that could also bring down the long end of the curve. We'll see what happens. What do you think? Well, I think that as regards to the bond market, I think what you're looking at, best guess next year is probably some stability. I think that you've got the likelihood, as I said, of an inflecting yield curve that may give some hope for the long end of the market. But I think that maybe people are being way too bearish about the long end of the market for next year, given the fact that I think what we're seeing is slowing liquidity. And if slowing liquidity transpires, as we suggest, there's actually an ability to support that. There's forces that will support the long end of the market. Certainly the short end of the curve is going to go down. But what does that mean for, well, if the yield curve steepens into declining liquidity conditions, what does that usually mean for markets or the economy? Well, I think the point is, is that if you look at the economy, if we're correct, then you're going to see an acceleration in the economy. It's typical that the yield curve will flatten. The peak in the yield curve tends to occur around the trough in the economic cycle in terms of economic growth. So if you've got a stronger economy through next year, it's quite consistent with a flattening yield curve. Perfect. Well, that was a great discussion, Michael. Very thorough rundown of the global economic and liquidity situations. Where can we follow your work and learn more about global liquidity indices? Well, the best way is to look at Capital Wars, which is our substack. If you want more detailed data, there's glindexes.com, which is our website, or still the crossbordercapital.com works. So as I said, we're sort of associated with cross-border capital still. Those are the main ways for getting data for institutional work. But Capital Wars is a pretty good way in. Okay, good. We'll put the links in the description down below. Thank you very much, Michael. I appreciate your time. And we'll speak again soon. Take care for now. Great pleasure, David. Enjoyed it. Thank you. Thank you for watching. Don't forget to like, subscribe, follow Michael. Links down below.