Michael Howell: AI Will Fuel Inflation, And Markets Aren’t Ready

**SPEAKER_1** (0:00)
So you're saying with Hilton Honors, I can use points for a free night stay anywhere?

**Maggie Lake** (0:04)
Anywhere.

**SPEAKER_1** (0:06)
What about fancy places like the Canopy in Paris? Yeah, Hilton Honors, baby. Or relaxing sanctuaries like the Conrad and Tulum?

**Michael Howell** (0:13)
Hilton Honors, baby.

**SPEAKER_1** (0:15)
What about the five-star Waldorf Astoria in the Maldives? Are you gonna do this for all 9,000 properties?

**SPEAKER_4** (0:22)
When you want points that can take you anywhere, anytime, it matters where you stay. Hilton for the stay.

**Michael Howell** (0:30)
We're in speculation now, there's no question about that. We've left calm behind in the short term, whatever the merits of AI, it's inflationary for the economy. The big driver of gold has not been what has been happening from the Fed or from the ECB, it's basically been China.

**Maggie Lake** (0:53)
Hello and welcome to Wealthion, I'm Maggie Lake. Joining me today to discuss global markets is Michael Howell, Managing Director at GL Indexes. Hello Michael, wonderful to have you on again.

**Michael Howell** (1:03)
Well, hi Maggie, great to be here. Lots and lots going on as always.

**Maggie Lake** (1:06)
Lots going on and I want to follow up because the last time you and I spoke, you had the odds of a crisis pretty high. I think we were getting near 90% and you saw some sort of concerns or cracks in the system that you were worried about. What are your liquidity models telling you now?

**Michael Howell** (1:24)
Well, I think it's kind of unchanged really. I mean, the evolution that we're talking about is not an instant correction. It's basically saying that we're around the top of the cycle in terms of liquidity impulses.
The cycle actually is beginning to inflate lower.
You can see a chart that I'll put up there which looks at the global liquidity cycle. This is a measure of the underlying momentum in liquidity worldwide. You can see the black line on the chart is basically indicating the underlying rate of growth of liquidity conditions worldwide. Now, the fact that that black line is turning lower is not really telling us that liquidity is falling in absolute terms because it isn't. I mean, liquidity is still inching higher. But the key word is inching. I mean, it's not really moving very fast. What you've got is a number of cross currents that are going on. I think if I outline those three, you can see maybe what the issues are. The first of those is that if you take US liquidity per se, US liquidity is dropping, overall liquidity is dropping. Now, digging into that number, what you find is actually the real economy. In other words, the liquidity that's being used to drive manufacturing or service industry in the US is starting to fall off quite noticeably. Now, that is really an indication of money shifting from financial markets into the real economy. So it's really testimony to a strong economy or an economy which is basically gearing up for growth. So all money that is anywhere must be somewhere. And if it's in the real economy, it's not in the financial sector. So the numbers that we're getting for financial liquidity that you're looking at here are really being tested or pulled down by the fact that liquidity is exiting financial markets and going much more into real things. So that's, I think, point number one.
Point number two is that the Federal Reserve is actually trying to battle against that in cooperation with the Treasury. And what they're trying to do is to maintain stability in financial markets against this sort of headwind.
It may be great for a real economy, but it's not necessarily so good for funding and for financial market conditions. Really over the last six months, the Fed itself has put about 600 billion effectively back into money markets, which is a pretty large sum. And let's face it, and what's more, the Treasury has been acting very active in terms of shared buybacks and trying to maintain stability in the Treasury market. So that's the second element. And then the third element we've got is that China mysteriously, and I scratched my head, I'm pretty puzzled by this, has really hit the brakes in terms of liquidity creation. And we can dig into this later. It's a baffling fact, but the fact is that it's a fact. And liquidity conditions by the People's Bank have kind of fallen off a cliff of late. Now, that pretty much coincided with both Trump's visit and maybe the escalation of tensions in Iran, in the Iran situation. And it may be connected. And there's been a lot of stories in the media or the submedia about how China's got a speculation problem. Maybe the authorities are trying to clamp down on that. But whatever the reason, the court is he's going down and that's not helpful. And I think you can see that already in the gold market.