Michael, Al, welcome back to the show.
Thanks, Moni. Very good to be here.
It's great to have you. And for those of you who have not joined an episode of TFTC with Michael,
he's the founder of Cross Border Capital, which is over 35 years of tracking global liquidity.
Michael also authors the Substack Capital Wars, which I highly recommend you subscribe to. We're
going to talk about his latest piece that he dropped yesterday. And he also built the GLI,
the global liquidity index, which is the most widely cited liquidity measure in macro.
And I think it's very fitting that we're recording today because it seems like the
liquidity cycle may be crescendoing, topping out. And you wrote a newsletter and published it
yesterday talking about what's next for Bitcoin, 30K or 90K. And so I think jumping into just a
state of global liquidity in general, where we are, where we may be going, and then we can jump
into how it may affect Bitcoin as well. Sure. Okay. Let me kick off. Essentially,
what we're doing is we're tracking money flow through markets. And the idea here is a very
straightforward one that money moves markets. In other words, if there's a lot of cash coming in,
asset prices are likely to go up. And if money is leaving, asset prices are likely to come under
pressure. And what we've seen, and you can probably see it on the graphic that we've put up,
is that liquidity has very recently peaked and is starting to edge down. Now, I'm going to stress
that this is a momentum measure, so it's a rate of change. The absolute level of liquidity is not
falling yet. In actual fact, paradoxically, we're just creeping or inching up to highs,
but the momentum has definitely slowed down. And at the margin, markets price off the margin. So
this inflection could be quite serious. Now, you'll see as well that that cycle
tends to oscillate with around a five to six-year frequency. We've had a pretty decent upswing,
which has lasted over three years. So kind of by rights, we are likely to be going down,
but maybe a similar kind of period. And that's clearly something to be concerned about,
if that actually transpires. But we've had a decent bull market in many cases.
You know, what we've been looking at or what one's been seeing over the last three years has been absolutely, you know, a blueprint for a normal market.
Nothing is unusual. The only unusual thing has already been the tempo of the economy.
But otherwise, asset performance has been absolutely on the nail.
And so we just hit an all time high of global liquidity, correct? 188.8 trillion?
Yeah. But the growth rate has been, I mean, it's been a tough, you know, this is the, you know, hauling yourself up to the peak is often the most difficult bit.
I mean, you're obviously challenged with the altitude and everything else, lack of oxygen.
We're beginning to roll over.
I mean, that's the signal that you see here is just showing that the growth rate has already peaked and we're beginning to come down.
And as I say, it's that marginal change, which is really important.
And so we have these sort of countervailing forces in the liquidity market right now.
Obviously, you've written it's been boosted by strong PBOC injections, firmer collateral,
newest dollar weakness, but Bank of Japan, QT, and lack of liquidity, and ECB, Bank of
England is probably driving us further down, correct?
Yeah, absolutely.
I mean, I think the thing to start thinking about here is why are you getting this inflection when you've got what seems to be actually some decent news?
I mean, one is, as you rightly say, that Chinese are actually pumping money in to their markets.
I mean, that's actually a normal thing ahead of the Lunar New Year.
They normally make markets very liquid and they've done it again.
But actually kind of beyond that, they really need to pump a lot more cash to get the Chinese economy moving again.
And China is really in the doldrums in terms of growth. It's been adversely affected by huge debt load. And what's more, tariffs, or what were tariffs, probably still are tariffs in China's case, are impeding economic growth. So you've got a backdrop, which is actually not great for the Chinese economy, and they desperately need growth. Their model of society doesn't work if it's stagnating. And therefore, that explains why they're actually going for it and actually putting a lot of cash to work.
Now, I think if you then say, what has the Fed been doing? I mean, hands up, the Fed has actually done a pretty decent job in the last three months because it was facing serious problems in the US repo markets.
Repo rates, in other words, short-term interest rates were spiking above where the Fed wanted.
There was a shortage of liquidity.
The Fed came in with a new QE measure called reserve management purchases.
and that has actually quelled the fire. It's put the fire out in the repo markets and actually repo
spreads are kind of back down to normal levels. So that's helped. The problem is if you kind of
look forward, it's not so much that the Fed could be tightening here. It's much more the fact that
strong real economy is actually going to be absorbing cash. And the point that we make is
that all money that's anywhere must be somewhere. And if it's going into the real economy, it's not
there to drive asset prices, Bitcoin or whatever upwards. And that's really the problem.
Yeah, you said it. I mean, you just reiterated, but that was the one line I highlighted
from your newsletter from yesterday is note that all money that is anywhere must be somewhere. And
if it's driving Main Street, it's not available for Wall Street. So in terms of driving Main
Street, what type of flows or policies are overfocus on Main Street compared to Wall Street
right now? Well, I think, I mean, you've got a number of features. I mean, one is the one big,
beautiful bill. I mean, that's clearly coming out. You've got AI capex spend, which is clearly going
to be significant. You know, you've got the effects of treasury policy, which has really
been to issue a lot of debt at the very short end of the market. And that is being funded by the
banking system because the banks like buying very short-dated US treasury bills and short-dated
notes. And that's basically monetization. So in a way that money is being printed, not by the Fed
here, but by the banking system to fuel economic growth, basically funding government spending.
So the government sector and private sector CapEx are the main engines of economic activity.
But if you kind of look through the last print, the Q4, which was clearly distorted by
shutdowns and whatever else, the underlying tenor of the economy looks pretty decent.
And one would suspect that you're going to get a figure over the 12 months to end March,
something of the order of about 4%, 4.5% maybe for your U.S. real GDP growth, which is actually
a pretty decent clip. So that needs cash to be financed. Industry needs working capital. It needs
money for the CapEx. On top, the Treasury is demanding more funding. And so money is being
progressively drained out of financial markets. And if central banks are not at the margin issuing
more liquidity, pumping it in, which I mean, the Fed is kind of flatlining at best now,
you've got a problem in terms of the amount of liquidity available for financial assets.
And that's really the point I'm making. I mean, it's, you know, the old paradox is that,
I think, as you know, the veteran investor, Sandy Druckerman always says,
the best time to invest in markets is when you've got a sluggish economy that central banks
basically want to goose upwards. And that's really what we've had for much of the last three years.
Now the economy is starting to gain traction. It's just desserts in terms of pulling liquidity out of financial markets.
Yeah, the idea that the commercial banking system is really going to be the one driving flows outside of the Treasury.
And the Fed is something I've actually been discussing with a colleague of mine on a show that we do every Monday morning.
record after this but i think if you look at the nomination of kevin warsh many people
took the headline of that and said oh we got a hawkish bed chair coming in here which uh was a
surprise to many people he wants to lower interest rates but continue with qt doesn't want to expand
the balance sheet too much but if you look at uh policy particular like particularly in the
commercial banking industry with the SLR ratios and the ability for these banks to take on more
treasuries to then lever up and lend into the economy. It looks like the implicit sort of policy
is, hey, we don't want the Fed driving this. We want the banks really injecting this liquidity
via credit creation. Yeah, I think that's absolutely right. I think the issue is that
if the banking sector does it, it's more likely to go into the real economy. If the Fed does it,
It's much more likely to go into financial markets, you know, evidence the last three years.
So I think that, you know, there's logic in what they're doing.
I think the problem with that is that we saw what happened at the tail end of 2025 when there was a withdrawal of Fed liquidity because of it.
I mean, this is a wonkish comment, but because of this jump in the Treasury General account.
And what that meant was that liquidity from the Fed kind of contracted by about 250 billion, but actually created havoc in the repo markets.
So repo spreads blew out in a way that was uncomfortable for the Fed.
And the Fed had to reinvent QE in the form of these RMP purchases, reserve management purchases.
And that was really a way of solving the problem.
Now, if Kevin Walsh is talking about not billions here, but trillions, dream on.
There's no way that the system could accomplish that.
Now, I accept the point that they want to do bank deregulation.
But the real question at the end of the day is that are banks' balance sheets kind of
big enough on their own without Fed support to basically backstop the markets?
And if you get a situation where there's trouble in the Treasury market, we face a
situation where dealer balance sheets have actually shrunk or they've halved since the GFC.
Now, that's at a time when I think I'm correct in saying that the stock of federal debt since that
time is up four or five times. So what you've got is a situation where the capacity to handle
the private sector to be market maker and handle volatility in the treasury market is long, long
gone. They need the Federal Reserve and they need a big Federal Reserve balance sheet. The problem
that is being engineered here, or we're walking into a trap, I suppose, is that if you get a
situation where the Fed has to intervene quickly and in size, they're going to have to keep coming
back into the markets. And they put their credibility on the line each time, which I
don't think is a particularly great recipe for robust policy. So I think the ability to shrink
the balance sheet meaningfully is just not there, however high on the wish list it is.
I saw some headlines
I haven't really taken the time
to dive into it but it seems like
the repo market is beginning
to
lighten up again, people tapping it
overnight I think there was
something like 18 billion tapped
in repo markets last week or
one day last week
it seems like
there could be some liquidity
it seems like liquidity crunch
is on and that's actually a good
segue into the bitcoin part of the conversation because it's one thing um i think it's a bit
counterintuitive to many people out there uh and especially if you're looking at the price of bitcoin
now almost 50 off its all-time high that it hit in late october early november last year
if they're looking at gold silver equities markets and bitcoin seems to have detached and people are
really picking on bitcoin right now saying look it's not not what you marketed it but marketed it
to be it's not a store value asset but um that would push back that the properties of bitcoin
the protocol and how it works make it such that if you understand how that works it is a good store
value it has predictable um sort of consensus policies and you know there's only ever going
to be 21 million but uh the counterintuitive use case of bitcoin is this liquidity profile that it
has trades 24-7, 365 liquid markets, even though the market cap has come down significantly
in recent months.
But the ability to basically sell Bitcoin on a moment's notice, get cash right away,
and then bolster margin in another part of your portfolio is actually a fundamental value
prop that I don't think people really recognize yet.
And the whole point of bringing this up is that I believe that Bitcoin acts as this liquidity alarm bell, maybe a leading indicator for liquidity tremors on the horizon.
And I think what we've seen since late November, and especially cross-referencing it with the work that you do in the GLI, it seems like that may be the case.
Yeah, I think absolutely.
I mean, as a segue into what's happening in Bitcoin, I mean, you may want to look at this slide that I've just put up, which is what we think of as the asset allocation cycle.
And, you know, the whole point right now is the watchword is rotation.
You need to be rotating through the cycle.
I mean, this is a dynamic asset allocation.
It never stands still.
And if you look at how the cycle evolves, eyeing back the previous cyclical diagram of liquidity, this is aligning that with asset allocation choice.
And what it says is that if you're around the peak of the cycle, which we are now, commodity markets are really the thing that tends to run.
And lo and behold, you've got very strong commodity markets.
Gold evidence gold for example but equally copper a lot of other metals are moving up strongly as well Equities kind of precede that So in the upswing of the cycle you tend to find equities do probably by
far and away the best asset class in a risk return perspective. And then as that cycle rolls over
and starts to go down, cash tends to be the best asset in absolute terms, reaching the trough,
Bonds then come into their own, long-duration government bonds.
And then the cycle starts again with a risk-on move and back to equity.
So you see that sort of movement through.
And what we've seen through the cycle is absolutely that particular phenomenon.
Now, the traffic-like diagram I'm going to show here, it was really the segue into what's
happening in Bitcoin.
And what this shows is, again, that asset allocation process with assets on the left
and industry groups on the right. And what is divided into are four different regimes,
rebound, calm, speculation, turbulence, which is generic descriptions of the phase of the
liquidity cycle in each case. Traffic lights are traffic lights. So green is go, red is stop,
amber is proceed with care. And you can see in the rebound and calm, the risk on phases,
that you really want equities, full on equities. You want some credits early in the cycle rebound.
You want commodities as the cycle matures. By the end of the cycle, you want to end up in
long-duration government bonds. On industry groups, the upswing, the cyclical stage,
is dominated by technology. And that's clearly the stage where Bitcoin as an asset does best
in the upswing of the cycle. Financials do well about mid-cycle. And then at the top of the cycle,
you want energy commodity stocks. And that's really what's running right now with a move
beginning into defensive things like consumer staples are beginning to move all utilities.
So that's how the asset allocation process works. Now, does that line up with Bitcoin? It does. And
I'm going to shift on to a slide a little bit later on if I can get up there quickly, which is
basically looking at the correlation between Bitcoin and liquidity. And the reason that that's
an important point to watch, is that if we believe that liquidity is trending lower now,
that's going to come at the cost of Bitcoin performance. Notwithstanding the long-term
merits of Bitcoin, as you rightly point out, and I'm a strong believer in, I mean, I think Bitcoin
has to form a part of everyone's portfolio for a lot of the reasons you cite. But this is
evidencing the fact that the orange line, which is a basket of actually Bitcoin, Ethereum, and
Solana with a 60-30-10 weighting. What that's showing is strong correlation between movements
in liquidity. We look at six-week changes here. But we've advanced the liquidity data,
the black line, forward by three months to show that basically Bitcoin et al. are very liquidity
sensitive. They're the most liquidity sensitive assets on the planet. And they're a barometer or
canary in the coal mine for tightening liquidity conditions. And that's basically the story right
now. If you think liquidity is weakening significantly, and I think there's a real
risk that that cycle is going to head downwards further, then you've got a risk that Bitcoin is
going to fall more. And that's an unfortunate feature. It'd still be a long-term buyer,
even at these levels. But I still think that you can pick it up cheaper.
so i guess let's dive into the newsletter that you published yesterday and just giving people
sort of a range of possibilities and the different cases for the liquidity crunch and the potential
big rebound between 30k and 90k i guess just walk us through the sort of dynamics at play
what would lead the price to move down even further? And in the outside chance that there
is a correction to the upside, what would be the driver of an upside correction?
Well, I think the first thing is what would cause a further drop. And a further drop would be
basically the result of tightening liquidity conditions. And that could come from not
necessarily from a fair tightening, although clearly that would be a factor, but more likely
in this case, from a stronger real economy and by the increasing demands on the financial sector
for funding from other areas. Now, we know you've got the AI spend, but you've got a big federal
deficit to fund. And maybe after the Supreme Court's decision, there's an even bigger federal
deficit to fund. We will see how that plays out. But generally, funding demands are going up.
And that will come at the cost of risk assets. Investors will have to take money out of one area
portfolio to basically fund another. So that would be the cause of problems. The 90,000 is
a longer term aspiration, I think, that really rests on the idea that central banks ultimately
will have to start printing money aggressively, both in one corner to fund government deficits,
because I think that that's in many ways the only game left. You've got to monetize these deficits.
There's no way that it could be afforded through typical means of debt issuance because of bond vigilantes around, or more particularly because of taxation, because we're on the wrong side of the Laffer curve.
I mean, nobody really can sustain higher tax rates.
So it's got to be a monetization in some form.
And that, as you alluded to, is probably already happening now anyway.
I mean, subtly through the mechanism of issuing lots of short-term debt, that's a backdoor way
into banks basically monetizing. So I would say those are the two extremes. Now, what is more
likely near term? I think what's more likely near term is further downside. And the reason for that
is that you can already see signs in the bond markets that things are not going very well for
maybe risk assets. I'm going to show you this chart, which kind of denies the claim that many
people have been making over the last few months, that there is a monetary debasement going on,
which is basically fueling the price of gold. And this is this chart. And if you take that in
association with the previous one on Bitcoin et al, these two charts together basically say,
debasement, what debasement? Because actually what they're both showing is liquidity conditions
are actually starting to tighten. And I say that because this chart, although it's a bit of a sort
of super nerd chart, but it's basically looking at bond term premia, which makes most people's
glaze over, sometimes even mine. But what this is looking at is the risk premium that investors
are forced to pay on holding government bonds. And this is showing how much premium they need
or discount they're prepared to give for holding interest rate risk over the term of the bond.
Now, just think of it as a straightforward risk premium for a bond. But that particular term
premium, if there was a big debasement and bucket loads of liquidity in the system, that would be
going up, not flatlining as it's doing here or even coming down. And what you can see is despite
all the scorn thrown on the US dollar and the US Treasury market as sort of now fading safe assets,
as many people like to say, look at that line, the bright red line. You can see that the Treasury
term premium has flatlined almost for the last 15 months. I mean, it's been no change. That's
been a robust performance. Now, what I would argue is if the bond market is so robust,
it's certainly not detecting any monetary inflation right now. So the whole idea of the
gold is being propelled by that reason is wrong. And I think that's an interesting point to ponder
in the light of what's happening to Bitcoin in particular. So why is it that Bitcoin is going
down? My view is because global liquidity is challenged. And why is the gold market going up?
I think that's a very specific reason, which is all to do with China, which we can go on to later.
Well, you can go into it later.
Now you have me curious.
Why is China driving that?
I mean, there's the theories.
I mean, the theory that makes the most sense to me is that we have this sort of multipolar geopolitical landscape accelerating at an ever quickening pace.
and I think I mean post 2022 at the seizure of the Russian treasury assets it would make sense
to me that Russia China and others got together and said hey we can't we can't depend on this
dollar reserve system we need to diversify away uh to an alternative monetary standard and
falling back to gold makes a lot of sense and if you look at all the gold that's been called on
warrant at the Shanghai Exchange by the PBOC. It looks like they want to put that gold that
they've accumulated to work in some sort of settlement network. Yeah, I agree with that
money 100%. I think that's definitely going on. And I think that's a further argument really behind
why gold is going up. But that's explaining why you're getting official purchases of gold,
which I can come on to in terms of how the future monetary system look or what it looks like.
But this particular chart that you see here is looking at People's Bank of China, that's PBOC, net liquidity injections into their monetary system.
Now, this is shown daily, and I put a trend line through that, a 50-day rolling average through that.
But you can see the upward trend, and this is the year-on-year change in their liquidity injections.
So they're basically accelerating their liquidity inflows.
Now, why are they doing that?
that's because of debt, because there's huge debt in the Chinese system they need to get out of.
And basically, that liquidity increase is trying to devalue internally the value of debt. So they're
actually, if you like, destroying their paper money. And that is encouraging purchases of gold,
in particular by the private sector, notwithstanding what the official level is doing as well.
So if you look at this chart, this is the yuan gold price. In other words, the price of gold in yuan. And China is driving that process. It's the Shanghai Exchange, which is the marginal price of gold, no longer COMEX or London. And I think that they've been targeting gold at different levels for different periods. And, you know, we're now getting gold over 35,000 yuan or renminbi an ounce.
And I think it's going higher because I think they're going to have to put the same amount of liquidity back in their system this year that they put in last year, another trillion dollars.
Now, if you look at this chart, this is the one that many people cite as to why the gold market is experiencing this great debasement.
And what it shows is the decoupling between the gold price, which is in orange here, and real interest rates as shown inverted.
So this is real dollar interest rates shown upside down.
And there's a break around 2023 where the gold market shoots up for interest rates kind of flatline.
So people say, look, something else is going on here. This is central banks basically debasing money.
Well, actually, it's China. And this is the gold price again against Chinese PBOC liquidity injections.
That's a pretty decent correlation. And that's showing that what you've got here is a driver that's coming primarily from China.
Now, that's what's behind private sector gold purchases. And it's going to get worse because if I show you this chart, this is what China really has to do. And what this is explaining is the plight that China is facing, which is a plight of having too much debt that needs refinancing. And they don't have the liquidity in the system at the moment to refinance that. So they've got to injure more liquidity.
And the two lines on the chart are measuring debt liquidity ratios. Now, the reason for looking at
this is that although many other people cite alternative measures like debt GDP, our view is
that debt liquidity is a crucial statistic because debt has to be refinanced. And financial markets
are dominated today by refinancing transactions. It's not about raising new capital. It's all about
rolling over existing debts. And if you've got debt that's issued in the world economy,
which is, what, $350 trillion, and circa the amount of debt outstanding, and you've got an
average maturity of five years, that means you've got to refinance about $70 trillion a year on
average. And that's a huge ask. So basically, in China's case, the debt liquidity ratio,
the orange line is high, and that has to come down, and they're printing money. Japan did the
same thing. Japan is the red line. Look at what happened after the Japanese bubble burst in 1990.
The debt liquidity ratio went up significantly. And Abenomics was forced to basically address
that problem. And it did that through reform. And it did that through the Bank of Japan buying
huge amounts of Japanese government bonds, trashing the currency. The yen has collapsed.
But Japan is digging its way out of its problems. And Japan now actually looks a pretty decent
investment. China is doing the same thing 10, 15 years later. It's printing a lot of liquidity,
and they're going to have to do as much this year as they did last year or more to get out of the
problems. And that's where you've got this monetization going on. That's the microchism
of why gold is going up, why Bitcoin isn't. Now, that's your, if you like, thesis about
why you could get a lower Bitcoin price in the near term, but the gold market could paradoxically
hold up against this backdrop.
But the other question you ask is what then drives Bitcoin in the future in the long term towards 90 or even beyond And I be optimistic to say it going to be a long way beyond that Now the reason for that
if you want me to go on, is to basically look at what's happening in terms of debt
in the world economy, which I can come to in this chart. Should I proceed on this?
Yes, sir. So if you think about what the financial system is,
This is looking at the debt liquidity cycle. And this is saying, look, financial markets are all
about refinancing existing debts. We've got way too much debt in the world economy. Everybody will
acknowledge that. But the thing that is shied away from is the fact that debt needs to be
refinanced or rolled over because it has term. In other words, it's issued for five years or three
years or seven years or whatever. But it will come back and needs refinancing. So you need liquidity
for that. So basically, what you've got here is this nexus at the middle of the financial system
between debt and liquidity. And the paradox is that debt needs liquidity to be refinanced to
something like 70 to 80% of all transactions in financial markets now, primary transactions,
are about debt refinancing. But the paradox is that liquidity also needs debt as collateral,
because something like 77%, according to the World Bank, of all global lending is now collateral
backed. So you've got this paradox. And what it really means is that new credit relies on old debt
as collateral. So you get this sort of vicious or virtuous circle. It's virtuous until it's vicious.
And it can go wrong from either way. Either you get credit spreads blowing out and term premia
changing, as the right-hand side says, or you get problems in the move index, bond volatility,
or SOFA spreads as of last year begin to blow out. Now, the ratio between debt and liquidity
is an equilibrium relationship. And that's what it's looked like over time. So this is for the
advanced economies. We just saw the chart for Japan and for China. And this is what the world
has looked like. Now, this is dominated by the US and by Europe, obviously. But basically,
what you can see in this chart is an equilibrium level of about 200%. And then either side of that,
you get fluctuations, where you either see financial crises at the top, or you get asset
bubbles at the bottom. When there's too much liquidity, the ratio is low, you get an asset
bubble. When the ratio is too high, you get a financial crisis. Now, you can see where we've
come from, we've come from this period that we've labeled here the everything bubble. And that was a
very curious period, unusual period for sure, because it was one where the GFC and the COVID
emergency elicited huge liquidity injections by central banks, all the QE exercises, et cetera,
worldwide were engaged. You saw interest rates being slashed to zero or even below that, which
encouraged more debt, ironically, and it also encouraged the terming out of debt. And now what
you've got is that terming out of debt is coming back into markets, that liquidity is beginning to
be drained into the real economy because of a stronger pickup in real activity. And so that
orange line is starting to go up quite significantly. And as it starts to cross that threshold of
sort of harmony, you then get into the risk of increasing turmoil as you get into that gray area
that we've projected through to 2030. Now, just to spell out what that means in debt refinancing
terms, this is the debt maturity wall for the advanced economies, according to our estimates.
So this is what you see. And this is basically the amount of debt that's coming back into the
system to be refinanced every year. Now, if that doesn't look dramatic, then that which looks at
the changes every year is more dramatic. And you can see the change dramatically from the early
2020s through to the late 2020s when the debt maturity more comes back. And that's the risk
that markets are running. Now, if you get a financial crisis, what is going to happen?
And like every other financial crisis, the only way you resolve it is by throwing more liquidity at the system.
And because of the fragility of our financial system, because of all this debt, central banks have got no choice but to do QE time and time again.
And so you want an asset that is likely to hedge monetary inflation.
That's gold and Bitcoin and other crypto.
Yeah, these maturity walls are a bit daunting to look at.
And that's, I mean, having been doing this for decades now, has there ever been a similar situation where you have a debt maturity wall looking like this with interest rates?
I mean, they're back at historical norms, but relative to where they were post-GFC and especially post-COVID stimulus.
That's one thing I worry about.
It's just the – you look at the 10-year, the 30-year, where they are and you think of the magnitude of debt that needs to be rolled over.
Is this unique in the history of your tracking of these metrics?
Yes, quite similar, Marty.
It is for two reasons.
I mean one is that we haven't seen this explosion in debt before.
I mean, if you look at, take the US, take US federal debt as this one example.
You've had a situation where US federal debt has increased, I think I'm correct in saying 12 fold since year 2000.
I mean, this year, not 12%, 12 times, even since the GFC, I think is up four or five times.
And that's not, you know, the US is not unique here.
Debt everywhere has gone up.
So we haven't seen this amount of debt in the system that needs refinancing before.
is point number one. Point number two is that if you come back to the interest rate question,
during COVID, what happened was that interest rates were slashed to near zero in cases.
Some countries actually went negative. And that was a very unusual situation.
Now, years ago, when I worked at Salomon Brothers, the book that we used as a sort of
Bible of interest rates was a book called The History of Interest Rates by Sidney Homer.
And that book detailed, I think it's 4,000 or 5,000 years of interest rate history.
Nowhere in those pages do you ever get any reference to zero interest rates.
It's never happened before.
So this turning out of debt and encouragement of debt by policymakers at the time of COVID
was really unusual.
And it's caused that skew of debt refinancing.
So you've got a cyclical pickup on top of what is anyway a fast rising trend.
So short answer is no, it's never happened before.
Yeah.
Interesting times.
You mentioned the relative strength in the real economy here in the US.
Did last week's GDP print coming in 50% below expectations?
Does that change your analysis of what's going on in the real economy, or do you think that
was simply because of the government shutdown and you didn't have the treasury pumping?
Well, I think it was the shutdown.
This is a way of looking at that.
This is measuring the world business cycle, not just the US business cycle here in Orange.
So the Orange line is basically all the major surveys, the ISM, Tancan in Japan, the EFO
in Germany, the CBI in Britain, aggregated by economic size.
The black line is the index that I think Stanley Druckenmiller calls the internals of the
market, which is basically, in his view, a much better guide than economists to what's
going on.
And this is looking at the performance of cyclical stocks relative to defensive stocks within the MSCI. But you can equally take the S&P 500 as a similar benchmark. So this is just looking at what cyclical stocks are doing. So they're basically on a roll at the moment. So that's suggesting that you've got a pretty decent economy coming through.
Now, what does that mean?
I venture again to this point that all money that's anywhere must be somewhere.
And this is a track of global liquidity in orange against the black line, which is the
world business cycle.
So you can see there, I mean, we've moved them a tad to line them up exactly, but they're
more or less in sync.
And what that's saying is that strong economies don't always have strong financial markets,
particularly if central banks are not doing that much, which they're not anymore.
And actually, you've even got some central banks, such as the Bank of Japan or the Reserve Bank of Australia, that are actually hiking interest rates and tightening right now.
So what this is saying is that as the real economy goes up, the black line accelerates.
So the amount of liquidity in financial markets drops because of these increasing needs for funding and working capital demands and whatever else.
So all money that's anywhere must be somewhere.
So if it's not, you know, if it's on the black line, it's not on the orange line.
And that's the risk that we're running.
I love sitting down and speaking with you because I think you're very unemotional about this.
You zoom out and just look at the numbers and the cycles and where we are within these cycles.
And I think it's just fascinating reading your newsletter and then juxtaposing it to the headlines and what seems like, I mean, we're in a midterm election year here in the United States.
the economy is the number one focus of the Trump administration.
I think beyond the economy, the state of asset prices for boomers specifically who are looking
to retire.
I mean, voting sentiment in November will be driven heavily by how the economy is doing
and how people's portfolios are doing.
It seems like there could be a storm on the horizon for the Trump administration or the
Republican Party if they want to keep the House and the Senate in midterms if this liquidity
cycle turns over.
And it seems like Scott Bessent, Donald Trump, and his administration are sort of maniacally
focused on making sure that the economy and financial assets are humming heading into
November.
But it looks like they may be running into a buzzsaw.
Yeah, I think the Wall Street may have an issue.
I mean, what I would say is that if you look at what the Fed is doing right now, it's a monetary policy consistent at best with a range bound market.
It's not a monetary policy that's capable, I think, in my view, of actually pushing the market a lot higher.
Now, the chart that I've just put up is trying to understand the balance of policy between the Fed and the Treasury in terms of liquidity injections.
And what this is basically trying to evaluate is the strength of stimulus that comes either from the Fed directly, which is the red area there, which is straightforward balance sheet expansion, traditional QE by the Fed.
The orange bit is the part that I sort of tongue-in-cheek called not QEQE, which was the sort of Sula Tabla stuff the Fed did.
It wasn't fessing up to QE, but it was doing it behind the scenes, things like changes in the Treasury General account, things like bank term funding programs, things like this latest RMP, things like changes in reverse repo facilities.
all these sort of factors that were not headline QE but added liquidity is the orange bit. And then
the black part is what the Treasury does through changing the tenor of bill issuance. And very
briefly, I mean, that's a sort of wonkish point. But broadly, if you're issuing a 10-year bond,
you take up more balance sheet capacity risk terms than if you issued a bill. So in other words,
a bond is a lot, a long-dose bond is a lot less liquid than a short-term treasury. So if they're
shifting towards the treasury bill end of the issuance calendar or spectrum, then they're
actually delivering more liquidity of the market. So the black area is what I've called treasury QE,
which is what the treasury is doing by changing the average tenor of debt held by the private
sector. So that's a liquidity stimulus equivalent. And if you look at what's happening, you look at
2026, I mean, there's a cycle for sure. And that cycle is picked up in the little window at the top,
which is showing changes in the ISM index in black with a six-month lag. And that's showing
that you should be getting a much stronger ISM through this year. You're tracing out that orange
line. But you'll see, if you look at the bigger chart, through 2026, the black area, the treasury
stimulus, by far and away dominates what the Fed is doing. And this is the whole idea that I think
is endorsed both by Besson and by Walsh, that you're shifting the hose from the Fed, where it's
undirected and soaks everything, to the Treasury, where Treasury spending is much, much more directed
on areas they want, whether it's defense procurement, where it's critical minerals,
whatever it may be. Yeah, it's interesting taking this in the context to
I'm not sure if you caught up, but last year, Richard Werner's sort of press tour, particularly his conversation with Tucker Carlson about what actually drives the real economy and his whole idea that that credit creation from banks lending to businesses is the type of sort of monetary expansion you would want to see because it actually gets that money into the real economy versus just Fed, QE, which just pumps financial assets specifically.
And it seems like the MAGA Trump administration is trying to affect that again via the Treasury going back to the SLR ratio changes and their focus on resting control of monetary policy from the Fed and creating this unified policy between
the Fed and the Treasury.
So it seems like we're meandering into new territory in terms of what used to be an implicit
independence of the Fed and the Treasury. And now there seem to be throwing away any implied
separation to saying, no, hey, we're going to try and make it so the Fed and the Treasury
are moving in lockstep.
Yeah, makes sense. I think that's exactly what's going on. Yeah.
Yeah. What, I mean, moving away from a US focus towards Europe and Japan specifically,
I mean, two different beasts. It seems like Europe is not doing well economically. I think
they've taken the posturing of the Trump administration to heart saying, hey, we're not
going to put the bill for NATO in your defense anymore if we don't believe that you're, if we're
getting back a commensurate amount of value that we're putting in to this agreement. And it seems
like European governments are scrambling to re-architect how they defend themselves and
how they operate their economies. And then over in Japan, it seems like they are trying to defend
or not defend their yield curve as much as they were in the past. Like you said, their policy
right now is QT. It seems like they have a pretty drastic domestic focus right now.
And it seems like they recognize that enabling this global carry trade has not worked out
particularly well for them. And they're trying to re-architect what they're doing as well. So it
seems like there's a lot of shifting sort of policies across the world, not only here in the
United States. Yeah, I think absolutely. I mean, I think if you want to turn to Japan,
I mean, one thing to say is this is looking, I mean, again, this is sort of getting into the
weeds of the fixed income markets, but it's an important point, I think, to make. And that is,
if you look at the, this is the components, the two components of the 10-year Japanese government
bond, JGB. And the one to really watch is the orange one, which is, again, looking at the term
premium. Now, the term premium has clearly shot up from those sort of low levels that we're looking
at back around October of last year. But actually, they've started to come down meaningfully since
the election. And it looks as if the whole question about, you know, concerns over Japanese
bonds are disappearing fast. And I think that that's quite, that's well deserved. And, you know,
My view has always been that we're going to make Japan great again before we see MAGA.
I think that's been the deliberate policy.
If you need a bulwark against China's expansion, you've got to basically enliven the Japanese
economy and make it more robust.
So I think that Japan is definitely a very good area to invest in.
I think it's going to see some pretty solid long-term gains out of Japan.
Now, if you come to this chart, which is coming back to maybe one of your questions about the yen carry trade, the yen carry trade has clearly spooked a lot of investors.
I mean, it's sort of the big bogeyman out there. But I think that its impact is much exaggerated.
This chart is looking at capital outflows from Asia. And by definition, those capital outflows tend to go into the US dollar.
into the US dollar. There's nowhere else really for them to go. And if you look at the left-hand
side of that chart, by the way, the black line is all Asia and the orange is China, the red is Japan.
And if you go back to the early part of the chart, 85 through 1919, whatever, probably through to
actually the early 2000s, that chart was dominated by Japanese capital outflows. I mean, that's really
the yen carry trade in its fullness. If you look at the more recent periods, particularly since
2015, the capital outflows have been absolutely dominated by China. And so it's China we're going
to focus on rather than Japan, in my view, in terms of impact on the dollar and financial markets.
And China, as we know, is running a huge trade surplus. It's got a lot of capital inflow that
it's got to try and deploy. And the question is, what does it do with that? Now, I think,
Marty, you quite rightly said that it doesn't want to lean too heavily on the dollar because that's where it's been forced to lean too much before.
And it's trying to diversify into other areas, gold being one of those areas and probably commodities on top.
And I think what that tells me is you're getting the world monetary system kind of dividing into two very distinct spheres.
I'm not going to say unconnected.
I mean, there may be bridges between them.
But broadly, you've got a Chinese system, which is being backed increasingly by gold
and maybe other precious metals or commodities.
But that's what they're doing.
Because remember, China doesn't have a big international bond market that they can lean
back on.
No one trusts Chinese government bonds internationally.
They've always got that as a benchmark.
So they need to use a benchmark everyone's familiar with.
And gold is probably the most obvious backstop for the Chinese system.
And then you've got on the other extreme, you've got the US, which does have the Treasury market,
but it needs to broaden that appeal. And so stablecoins are the way forward. And so I think
what you've got is effectively two monetary systems running in parallel, the commodity-based one for
China and a digitally-based one for the US. And that's how I think they're going to evolve. So
the growth of stablecoin and then by association, other digital currencies are really going to be
foremost in terms of understanding the international monetary system in the future.
Yeah. And I forgot to mention it earlier, but as it pertains to China driving the gold price and
Bitcoin suffering over the last six months as gold has skyrocketed, I think another key point
to add there is that yet again, China has come out and announced that they're banning the use of
cryptocurrencies. And there was a report, I believe in late November, earlier December of
the CCP stepping into one of the provinces and shutting down a large mining operation.
And many were speculating represented something like 10% of global hash rate on the Bitcoin
network. And so- This is very significant. I mean, the Chinese issued a notice called Notice 42
about two or three weeks ago, which basically doubled down on control over crypto, I mean,
specifically US crypto. And my point last year was, one of my points last year was,
they've actually stablecoin are a huge, huge threat to the integrity of the Chinese monetary
system. And what they've now done is they've basically outlawed all sorts of crypto,
any form of digital currency to legal within China. And they are basically putting up a defensive,
great financial wall, if you like, or great firewall of China to try and protect the economy
against this threat. And I think it's a real threat. So China realizes that. But what is true
for China is true for many, many other countries. And so other countries are going to feel the heat
of US competition on stablecoin. Now, I think the way the international monetary system is evolving
is an interesting one to ponder. And I'm not going to say that I've completely understood it.
But I would say if you go back to a very sort of basic monetary system where one used precious metals or banks or whatever, in that example, the money you chose determined the payment system.
But in the modern world, it's kind of the other way around.
The paradox is that it's the payment system which is almost determining the form of money.
And so if the US gets the architecture of crypto payments correct and established, that will almost underscore the role of the dollar in the world economy.
Yeah, it's wild times. And particularly if you look at this sort of domestic swabbling
on Capitol Hill right now with this Clarity Act bill, which is essentially a fight right now between
the big banks and crypto upstarts, for lack of a better term, like Coinbase, who want to share
the yield that is generated from holding short-term treasuries in reserves for the stable coins with
with customers than you have Scott Bessett and Trump basically saying, hey, gentlemen,
get to the table, get this figured out because we need to get this policy out there to begin
sort of building this architecture that you just described.
Yeah, I think absolutely right. It's absolutely essential.
Yeah. And that's like, when you take this into consideration too, that's if China
specifically is going pro-gold, anti-Bitcoin and other cryptos, I would like to believe
that the United States should view that as an incredible opportunity.
Obviously, they've highlighted stable coins as a big point of focus,
and they want to lean into that as much as possible.
And maybe this is my bias showing,
but I would hope that they recognize the sort of geopolitical gravity of China,
basically betting it all on gold and the opportunity that exists with Bitcoin,
specifically where you have this very similar asset
that is form-fitted for the digital age, where that could be an incredible counter to China
leading into the gold, is the US actually following up with something like a strategic
Bitcoin reserve and basically signaling to American citizens via de minimis tax exemptions,
maybe capital gain tax exemptions that we should be building around Bitcoin, as well
as a stablecoin infrastructure.
Yeah, I agree.
I agree.
Absolutely.
Awesome. Well, this has been incredible. Thank you for your work. Is there anything we haven't
covered today that is on your radar that you think people should be paying attention to?
I think the one thing that I would say to round it off in terms of putting this together,
and it may come back to the bond markets and judging what's happening to fixed income,
is to basically think of maybe two charts. And this may be a step too far into the weeds of
bond market analysis. But this chart is an interesting one, because it basically
shows us that we can talk glibly about trends and the optimism about the long term. But
it's the cycle that often skewers people and bites them in places they don't like.
And this is looking at the global liquidity cycle again in orange. But it's also showing
in black the changes in term premium worldwide. Now, term premium, as we went into,
the risk premia that investors demand to hold bonds over their term. So it's effectively,
if you like, the price of safe assets inverted. So if you basically see a very high term premia,
that's saying there's no demand for safe assets. Whereas if the black line in this case is low or
falling, you're looking at increasing demand for safe assets in the system. In other words,
risk, people are starting to price risk more aggressively. Now, these two charts, liquidity and
the term premium, are completely unconnected in the sense that they're very, very different
variables. One's a flow of liquidity and the other is a rate coming from the term structure.
But they do correlate pretty closely, as one might infer from what I've just said. So if you're
looking at declining liquidity, you're saying that systemic risks in the system must be rising by
definition, because there's less liquidity around. If there's more odds of default, therefore,
investors are going to be less risk seeking, and they're going to start to shift towards
safe assets. And that's what the chart seems to be telling us. So there's a consistent story in
the bond markets that seems to be coming through. And that kind of reinforces the idea that bond
prices have been remarkably stable. Now, if you put that into what that really means for the
average investor. This is showing the yield curve, which is the way that you kind of evaluate the
bond market. So this is looking at the spread across the term structure. People normally look
at 10, too, but I've looked at the average across all rates here. So this is just a simple average
of the term structure slope. And the orange line is US liquidity. Now, what that says is that if
this thesis, this whole stuff I've been talking about is correct, what you'd expect to see looking
at that chart and eyeballing it is the US term structure. In other words, the yield curve should
flatten by about mid-year. And that would be a pretty good signal, I think, of a risk-off
positioning move. And that's what the liquidity data is kind of telling us. So if you want to
monitor what's going on, I mean, the two best things to monitor outside of Bitcoin, which is
clearly, I think, a barometer of liquidity generally, is to look at the yield curve slope
And to look at things like the repo spreads in the short-term money markets, that's another sign of things going awry.
So if you want some risk control, I'd monitor those.
But my long-term view is that everybody needs to have gold and Bitcoin in their portfolios in some form.
Yeah. And just to make sure I'm correct in believing this, the trough of this cycle of liquidity is drying up would be in some point next year.
correct? I think that's great, Monty. Yeah. That's my best guess. Awesome. Well, Michael,
thank you for the work that you do. Thank you for taking some time on this Monday afternoon,
your time to discuss all this. I think it's incredibly fascinating, very high signal. And
again, I really appreciate your ability to zoom out and look at everything on emotionally and
just look at the data. I think it's very important to be able to do that.
Well, it's great, Mike. Always a pleasure. Thank you.
All right.
That's all we got today.
Peace and love, freaks.