Global liquidity specialist Michael Howell used an appearance on the Bankless podcast to deliver a clear, if uncomfortable, message for risk assets: the post-GFC \u201ceverything bubble\u201d is ending as the global refinancing machine rolls over, and crypto is late in that cycle rather than at the start of a fresh one.<\/p>\n
Howell\u2019s starting point is his own definition of liquidity, which diverges sharply from textbook aggregates like M2. \u201cThis is the flow of money through global financial markets,\u201d he said. It is not bank deposits in the real economy, but \u201cmoney that is in the financial markets\u2026 it looks at the repo markets, it considers shadow banking,\u201d and \u201cpretty much begins where conventional M2 definitions end.\u201d On his Global Liquidity Index, weekly global liquidity was under $100 trillion in 2010 and now sits \u201cjust under $200 trillion\u201d \u2013 a doubling in a decade and a half.<\/p>\n
What matters most to him, however, is not the level but the momentum of that liquidity. Howell has identified a remarkably stable 65-month global liquidity cycle that he interprets as a debt-refinancing rhythm. Capital markets, he argues, are no longer primarily about funding new investment: \u201cSomething like 70 to 80% of transactions\u2026 are debt refinancing transactions. They\u2019re not about raising new capital.\u201d<\/p>\n
In that world, \u201cdebt needs liquidity for rollovers but actually liquidity needs debt,\u201d because roughly three-quarters of global lending is now collateral-backed. The result, as he puts it bluntly, is that \u201cironically it\u2019s old debt that finances new liquidity.\u201d<\/p>\n
To capture the systemic tension, Howell tracks a debt-to-liquidity ratio for advanced economies: the total public and private debt stock divided by the pool of refinancing liquidity. The ratio averages about two times and tends to mean-revert. When it drops well below that level, liquidity is abundant and \u201cyou get asset bubbles.\u201d When it rises significantly above, \u201cyou start to see a stretched debt-liquidity ratio and you get financing tensions or refinancing tensions and you can see those basically morph into financial crisis.\u201d<\/p>\n
Right now, he says, \u201cwe\u2019re transitioning, unfortunately, out of a period that I\u2019ve labeled the everything bubble,\u201d a phase where liquidity was abundant relative to debt after repeated rounds of QE and emergency support. The COVID era deepened that imbalance by encouraging borrowers to \u201cterm out\u201d debt at near-zero rates. \u201cA lot of the debt that then existed was refinanced back into the late 2020s at low interest rates,\u201d he noted. That created a visible \u201cdebt maturity wall\u201d later this decade: heavy refinancing needs now coming due into a much tighter funding environment.<\/p>\n
Shorter-term, Howell is focused on the interaction between Federal Reserve liquidity operations, the rebuilding of the US Treasury General Account and growing stress in repo markets. SOFR, which \u201cyou\u2019d actually expect to trade below Fed funds\u201d because it is collateralized, has repeatedly traded above its normal range. \u201cWe\u2019ve started to see these repo spreads blow out,\u201d he warned, adding that \u201cit\u2019s not really the extent of these spikes\u2026 it\u2019s really the frequency that\u2019s the most important factor.\u201d If trade fails and leveraged positions begin to unwind, \u201cit\u2019s going to turn quite ugly and that could be the start of the end of the cycle.\u201d<\/p>\n
Inside his four liquidity regimes \u2013 rebound, calm, speculation and turbulence \u2013 Howell places the US firmly in \u201cspeculation,\u201d with Europe and parts of Asia in \u201clate calm.\u201d Historically, early and mid-upswings favor equities and credit, peaks favor commodities and real assets, downswings favor cash and then long-duration government bonds.<\/p>\n
\nLIVE NOW – The Real Crypto Cycle: What Happens When Global Liquidity Peaks<\/p>\n
Global liquidity veteran Michael Howell (@crossbordercap<\/a>) joins to map out the \u201cmaster variable\u201d driving asset price:<\/p>\n
A 65-month global liquidity and debt refinancing cycle that underpins booms, busts,\u2026 pic.twitter.com\/Ryl3fqHoYR<\/a><\/p>\n
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