Markets Are Misreading A Late Cycle Liquidity Crunch | Michael Howell

**Michael Howell** (0:00)
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.
But I'm listening to what the media is saying and what a lot of commentators are saying. They're saying this is the end of the world, deep recession, whatever it may be. You look at the data, you look at what the markets are doing, it doesn't seem to be the case, does it? Late in the cycle, what destroys liquidity is...

**Felix** (0:44)
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What's going on, everybody? Welcome back to another episode of Forward Guidance. And joining me this week is one of my favorite repeat guests, Michael Howell, CrossBorder Capital. Man needs no introduction. You've been on the show many times before. Always a pleasure to have you on. I think the last time we did this was actually in person at the Digital Assets Summit in London. So that was last October. Well overdue for an update on all things liquidity. Michael, great to have you back.

**Michael Howell** (1:51)
Well, always a pleasure to be here, Felix. So great, I'm looking forward to it.

**Felix** (1:55)
Yeah, likewise as well.
I know you have a stack chart pack, which we will get through and unpack. But obviously, the most important question to get underway here is understanding where we are in the global liquidity cycle. You've been banging the drum that it's been talked for quite a few months now. I feel like that goes against what I've seen. There's a lot of other different variations of how people analyze liquidity or where they're thinking about, even just like monetary policy. If folks are talking about potential rate cuts coming, that to me feels like something that could be positive for liquidity. I just want to get your baseline understanding of where we stand now, and walk through some of the charts to help us better understand that.

**Michael Howell** (2:40)
I think maybe let's start with our views this year. 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, and because the Fed will be forced by the new Fed chair to slash rates at the front end of the market. So you get a much steeper curve. Another view was that actually the markets are more powerful, and what you're likely to see is a flattening curve because the liquidity cycle which dominates market movements is basically inflicting lower. We see things in cyclical terms. I mean, clearly there are trends as well in markets, but at the end of the day, it's the cycle which often comes and bites us unexpectedly. That's what we got to consider right now. Our view is that what you're getting is a cycling liquidity that is basically inflicting 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 precedes what we call turbulence. Turbulence is probably as the name suggests, a very difficult time for risk assets.
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.
Next phase, turbulence, would be an absolute get out and hold much, much bigger cash weightings. Now, I think if you follow that narrative and you say, well, okay, where are we right now?