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Michael Howell warns the liquidity cycle is peaking, debt risks are rising, and gold and Bitcoin are key hedges against monetary inflation.
Michael Howell warned that the global financial system is nearing the peak of its liquidity cycle, with debt refinancing risks mounting as trillions in cheap, long-dated obligations begin to roll over. The Fed and Treasury are effectively engaged in stealth yield curve control, suppressing volatility to keep the system stable, but this path risks “Japanification” and entrenched monetary inflation. With 80% of global lending collateral-based, stability in Treasury markets has become critical, while China’s aggressive liquidity injections and gold monetization signal a shift toward hard assets. Howell argued that gold and Bitcoin stand out as essential hedges, with Bitcoin’s strategic value rising as an independent, long-term safe asset outside government control.
“Almost every financial crisis, if you look back, has been a debt refinancing crisis in some way.”
“In 4,000 years of recorded interest rate history, there’s no mention of zero rates, until COVID.”
“What they want is yield curve control. They can’t afford volatility in collateral markets because 80% of global lending now depends on collateral.”
“If I’m optimistic about gold, I have to be optimistic about Bitcoin.”
“What would happen if you could only invest in short-dated government debt or Bitcoin?”
“The U.S. may be the cleanest shirt in the laundry, but it’s still in the laundry.”
Howell sees the system entering a dangerous phase where liquidity is peaking, debt pressures are intensifying, and policymakers have few tools left beyond suppressing volatility and monetizing debt. This will drive monetary inflation, erode real wealth, and make hard-asset hedges indispensable. Gold and Bitcoin, he argues, are positioned to benefit most, with Bitcoin in particular evolving from a liquidity-sensitive risk asset into a strategic safe haven in a world of accelerating debt cycles and weakening fiat credibility.
0:00 - Intro
1:12- Big day at Jackson Hole
7:57 - Bessent’s contradictions
14:03 - Yield curve control
18:35 - Bitkey & Unchained
20:16 - AI and global liquidity cycle
35:01 - Stablecoins
38:44 - Obscura and Opportunity Cost
40:09 - Mechanics and future of liquidity cycles
46:42 - Questioning AI productivity
52:18 - China’s influence on liquidity cycle
(00:00) If you look at the last 5 to 10 years, we've labeled that the everything bubble. Fed liquidity was up 350 billion. The broad balance sheet fell by about 250. You've got liquidity and the balance sheet going in opposite directions. We're talking about taking 3 to400 billion out of money markets.
(00:18) Disconnection from financial markets and the real economy. Almost every financial crisis, if you look back, has been a debt refinancing crisis in some way. 80% of all lending worldwide now is collaterally based. Nowhere in that book is there any mention of zero interest rates. So in 4,000 years we haven't had it, but we did have it in CO. It's a form of yield curve control.
(00:37) What they'd like is JPAL to come interest rates. The US may well be the cleanest shirt in the laundry, but you know, hey, it's in the laundry. We are reaching a peak 6 months, 9 months time. We're clearly getting late in the cycle. Stable coin are a great mechanism to buy treasuries, but it basically creates a sort of virtual circle.
(00:53) So it's effectively printing money. What would happen in the world if you could only invest in shortdated government debt or you can invest in Bitcoin? Why was 2024 so depressed? The Chinese were trying to shadow a strong dollar and they couldn't do it. I'm very optimistic of gold. If I'm optimistic of gold, I got to be optimistic of Bitcoin.
(01:13) Michael How, thank you for joining me again. Big day. Yeah, big day today. Big day out in Jackson Hole. Everybody's waiting with uh baited breath to see what Jerome Pal is going to say. I was watching uh I couldn't sleep this morning. I woke up at 3:30 a.m. and just decided to get up and start working and have been watching CNBC and it's been funny watching their commentary.
(01:37) A lot of back and forth I think considering that this meeting is happening today. Um we'll post this on Monday and so I guess the pressure is on to sort of predict what Jerome Pal is going to do. How would you describe his current predicament and what he may or may not do later today? Well, I think it's it's it's clearly a difficult situation.
(02:01) You know, they uh they always say as an old Irish joke that um where they say to travelers, how do you get from here to Dublin? And the answer is uh well, if I was going to Dublin, I wouldn't be starting from here. And I think that, you know, that's pretty much what I would describe the Fed situation is.
(02:20) I mean Jerome Pal is in a difficult situation given the uh the sort of push back or aggressive push back he gets from the administration. Uh I mean that's for sure. U but I think the other thing is that they kind of painted themselves in a corner a bit. I mean on most on most counts rates should be lower than they are. I think he finds it difficult now to probably admit that.
(02:38) Um so there is some resistance but I think you can see within the FOMC uh there is a growing uh willingness I think to cut interest rates. I think given what's going on internationally and uh with rates and maybe as well what's happened lately to the dollar the rally uh the weakening in the US economy. I think there's grounds for for rates to be cut. That's for sure.
(03:01) I think the more difficult question, which is, you know, something I'm sure we're going to dig into, is really what happens to the Fed balance sheet, uh, the Fed operating system, you know, looking at longer term because they've been promising us some information about the new operating, uh, uh, procedures of the Fed for a long time now and nothing's come out. So I kind of expect or maybe maybe think that they're going to do something announce something at Jackson Hole about the new operating procedures that they've been talking and thinking about for some time now. Uh that that may come out in an
(03:31) announcement. But I think the the the more fundamental question is what happens to liquidity and really the size of the balance sheet. And I think that's relevant given the fact that if you look over the first six, seven months of the year, uh Fed liquidity, the amount of money that the Federal Reserve injects into money markets, actually was up 350 billion.
(03:59) Uh even though the overall balance sheet uh itself, the broad balance sheet fell by about uh 250 billion. So you've got liquidity and the balance sheet going in opposite directions. And that's kind of because uh there are you know other ways of injecting liquidity into the system apart from the headline balance sheet um you know number uh and that's things like the treasury general account the reverse repo program uh etc.
(04:19) And they've been actually positively buzzing and actually adding money to markets which is why risk assets have kind of done so well over the last few months. Uh the question is that if the Treasury is insisting on rebuilding that account, their account at the Fed, the Treasury General account which was forcibly run down because of the debt ceiling, if that now is rebuilt in the second half of the year, then a lot of liquidity is going to come out of markets.
(04:43) Now, that's what investors are fearing. I don't think it's going to come to that because I just don't think they're in a position where they can do that. And that's why I say I think the Fed has kind of painted itself into a corner a bit here. Yeah. in terms of choreographing or making the market aware of new operations.
(05:02) Can we dive into that in in terms of what they may or may not change or what the market is looking for them to change? Yeah, I think that a lot of the market talk is really about whether they're going to change, you know, average inflation targeting to, you know, maybe change the nuance of that.
(05:21) Could they, you know, change the symmetry in uh in that in that gold? That could be done. um you know for example I think that that's one of the things that is sort of high on the agenda as a change um there could be more technical things about um uh uh about how their operating procedures are changed I mean that that may be necessary but I would say you know one of the things that may come in and this has been mooted in terms of what the Fed has wanted to do is maybe they're going to announce that they're going to be uh a bigger buyer of Treasury bills in the market uh than
(05:52) they have been now one of the things that was suggested or has been suggested uh in speeches over recent months is that the makeup of the uh Federal Reserve's holdings of government debt the uh the SOM account, the so-called SO account is generally vested in longer duration treasuries. So things like 10-year notes for example, and that's not really um the sort of representative of the average mix of treasury debt uh out there in the market.
(06:23) uh there's as you know there's been a lot of very very short-term issuance uh operating particularly under Yelen but you know Scott Besson's continued that and so the treasury is slated to issue a lot more bills now on the one hand that's uh you know playing to this whole argument about stable coins being big buyers of treasuries in the future and they like bills sure I I go along with that but then the Federal Reserve should be matching if you like in it hold in its sr account u the average uh mix of debt in the market and the moment they're not
(06:55) uh their s account is too heavily weighted to longer duration debt. So what they may do is uh reduce the average by buying a lot of bills. Now that would certainly help the fund take pressure off funding and it will enable the market to get more liquidity.
(07:16) Uh in order to do that they'd have to sort of you know change the rules a bit on what they're talking about uh in terms of roll off of debt. So they could say they're going to continue rolling off uh you know existing existing treasury notes but then they add an addendum to say okay we're alongside going to build up our holdings of bills. So they could do something like that.
(07:34) U you know nothing's certain but I I would be looking for some subtlety simply because you know if you look at the math here if they do rebuild the TGA that we're talking about taking you know3 to400 billion out of money markets and I don't think that um you know I don't think that's a great idea to be perfectly honest. I think you'll see a lot of tensions in markets if that transpires.
(07:58) Yeah, it's uh it's fascinating in many regards both on the Fed side and the Treasury side because Scott Bent very publicly when he was coming into the administration at the beginning of the year was lambasting yelling for hammering the front end of the yield curve and I think he's implicitly had to walk that back and just action speak louder than words are still hammering it and I think uh even explicitly over the course of the summer he has admitted that they will still keep issuing bills on the short end. Uh and then to your point about the Fed's painted itself in
(08:33) the corner, it seems like Jerome's in this position where he doesn't want to seem like he's letting politics influence his decisions. But to your point, if you look at all the ways in which they can inject liquidity, they're sort of out of arrows in the quiver. I believe reverse repo, last I checked, is around 22 billion, down from two trillion a few years ago.
(08:53) Yeah, it's it's right down and you know there there's not much more they can do uh to be truthful. So, you know, what you what you're looking at, I mean, sort of ironically, is you're shifting really from a regime of Fed QE, uh, or whether it's, you know, um, uh, a hidden QE, but the Fed has been the mainstay of liquidity coming into markets and you're shifting to a situation where the Treasury is more and more responsible for, if you like, uh, liquidity easing.
(09:22) Uh, it's taken on the mantle. Now whether that is uh you know invested in the treasury because of the the directions in the treasury general account uh whether it's as well or probably more particularly because of this the changes in the average duration of issuance and this is an important point because you know very generally I mean we we can think of liquidity as being an asset divided by its average duration and think of duration as sort of the maturity of the debt. So if you're issuing uh you know lots of uh of
(09:52) debt at very short maturity uh that quotient that ratio between the asset size or the debt size and its average maturity is going to increase quite dramatically because on average you're issuing uh you know you're replacing a 10-year note say with a 3-month bill. So the liquidity available to the private sector is going to go up enormously.
(10:17) Now that kind of makes a difference as well um for a whole lot of reasons. I mean one is that we live in a world now where collateral uh collateralized lending is absolutely critical. You know latest estimates from the World Bank who have dug very deep into this worldwide tell us that something like close to 80% of all lending worldwide now is collaterally based. I mean that's an astonishingly high figure. But that's the reality.
(10:42) This is how the world has changed since the global financial crisis. Collateral is really critical to the system. And so what you've got to have in terms of uh future liquidity growth uh in other words, future lending growth is a stable collateral base. You can't afford to have the bond markets going ary.
(11:02) Now with that regard, uh you can help that situation really in two regards. One is you can start to issue a lot of very short-term paper. In other words, bills. Uh now I know you know we accept the fact that this is not sort of great long-term planning uh from the treasur's perspective and Stanley Draameiller has you know been on record of saying over the years look these are the numbers that you'd expect to see or this is the policy you'd expect to come out of Argentina and we can't really say that about use Argentina as the as the benchmark anymore but you know what I mean it's a Latin American type uh you
(11:32) know funding process to fund at the short end but you know hey the US is now doing that but one of the one of The uh advantages, if there is an advantage in doing that, is you actually uh you don't absorb liquidity from the market. You actually create more liquidity because you're showing a very short-term bill.
(11:50) And what's more, you help to contain volatility in the collateral markets. Now, that's absolutely critical and that shouldn't be lost sight of. And one of the things that we've seen uh over the last few months which is a wonkish point but you know it's still really important here is that if you depend on collateral for liquidity and credit growth what you need is stability uh in these markets.
(12:20) In other words, you want very low volatility and there is a statistic out there that I look at very keenly which is called the move index which is a measure of the volatility across the treasury yield curve. So, it's bond volatility and if you look at that index, uh it's it's plunged dramatically uh over the course of the last few months. Now, that could be purely coincidental. It could be by accident.
(12:42) I think it's being engineered lower. I think the Treasury and the Fed realize that they've got to get volatility down. Uh if they get volatility down, that's liquidity enhancing. It's good for financial markets. Uh and what's more it keeps hedge funds in the game of buying treasuries because one of the things you will recall Marty is that you know foreign buyers have kind of slowed down.
(13:08) They haven't reversed but they've certainly slowed down their buying of US debt. Uh traditional buyers of debt in the US uh are not really there in size because the yield curve is still quite flat. So there's not really the uplift on sort of buying long-term debt and funding it in the short-term markets.
(13:27) So they're really dependent on the hedge funds who are doing something very technical called a basis trade which means shorting futures and buying cash bonds. Now that's at the margin the big buyers of treasuries and what those hedge funds really require is low volatility in the market. So I think there's an awful lot of volatility targeting going on.
(13:46) um you know that's you know one would have to say a dangerous policy because it can go wrong you know at a moment's noticed uh you can suddenly lose control of volatility volatility can spike but it does show that there's I think a behind the scenes a lot of awareness that liquidity is a critical factor in markets right now yeah and your newsletter from yesterday diving further into this point I want to make a question and then actually two questions first just describing the world collateral multiplier like reducing the volatility um of the yields like gives people more
(14:20) confidence and certainty that the bonds the other the bonds connected to those yields are are good collateral liquid collateral and then the second um the second question I have is are you essentially describing yield curve control without saying it explicitly yeah I think it is I mean it's a it's a form of yield curve control I mean there's there's No question about that.
(14:44) uh I mean they're basically I mean all these operations are trying to uh you know manipulate uh investors in the certain parts of the curve and they they don't want long you know long duration yields in other words 10 year 20 yields to back up very much uh and they'd ideally like uh investors to be in the front end and uh even more what they'd like is JPAL to cut interest rates because if they start cutting rates at the short end of the market the cost of bill finance is going to go right down and that's going to save you know the treasury a lot of money uh in terms of
(15:19) interest payments. So I think absolutely this is what they want and you know if they can if they can ration or or create shortages of longerterm uh debt at the long end of the market in other words you know they're going to starve the pension funds and insurance companies of longer duration government bonds then those yields will be down as well.
(15:39) So I think there's there's definitely uh you know yield curve control. Yeah. And I mean that's the big question in my mind once you go down this path is it complete japanification of the yield curve and if you look over Japan right now they're 30 and 40year are breaking away those yields and is this they're trying to be as implicit as possible but as you're describing it it's pretty clear this is what they want like is this a point of no return in terms of driving demand on the longer end of the yield curve from from farm buyers. Um, yeah. Yeah. I think one's got to put this in context. I mean, we're talking
(16:18) here about the US. We're not talking about a Latin American economy, and it would take an awful long time uh for the US to sort of spoil its reputation here. Uh, the US dollar is still the the the principal safe asset in the world. Um, US treasuries are still the main uh they're pristine collateral. It would take a lot to dent that.
(16:37) And despite the sort of the media which have been jumping on this ridiculous bandwagon to say it's the end of the dollar or it's the end of the treasury market or whatever uh you know as the dollar had a little bit of a wobble earlier on this year. Uh I mean that clearly is not the case but you know reputations I mean the shine can come off reputations.
(16:56) I mean it will take time but I think that you know you're absolutely right to say look we're we're embarking on a journey here and we're treading down a path and that path is not not a very attractive one because it could end up uh rather like Japan uh Japan is now struggling to contain yields that belong into the market uh because they've basically been uh you know been undertaking this yield curve control or manipulation for so long and you can only squeeze a balloon uh you know so much um until it bursts.
(17:24) And that's the problem they're getting into. Now, I think the US is some years away from that, but I think that you've got to be alert to these dangers. And you know, if you look at the pressures on the US Treasury market right now, I mean, paradoxically, they're not really coming from domestic uh laress right now, they're actually coming internationally from pressure on uh Japanese yields and German yields.
(17:50) So, US yields at the long end of the market are actually being pulled up by those factors right now. That's not to say that there couldn't be a domestic problem uh upcoming in the next 2 or 3 years which would actually push yields up. So I think the danger that we've got here as you rightly point out is we're sort of you know moving down a path which is not a very attractive one uh from the perspective of long-term interest rates. Um and this is the dilemma that everybody faces.
(18:14) You know the US may well be the cleanest shirt in the laundry but you know hey it's in the laundry. uh a lot of other countries are in a worse shape we acknowledge but it's not really a you know to keep saying that we're we're the cleanest shirt and everyone else is in a worse situation is not really great salvation here.
(18:33) Uh the problem is debt and we've got to get off this debt problem. Uh and it's not easy. Sup freaks. This rip of TFTC was brought to you by our good friends at BitKey. Bit Key makes Bitcoin easy to use and hard to lose. It is a hardware wallet that natively embeds into a 203 multiig. You have one key on the hardware wallet, one key on your mobile device and block stores a key in the cloud for you.
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(19:44) So, what's next? Tur demester is back with the 2025 edition refreshed for the midcycle moment packed with new data, new insights, and TUR's latest price outlook. Plus, you'll get exclusive access to charting our way through chaos. Tur's new 30inut Q3 2025 presentation explaining why this bull run might be only just beginning and what forces could push it to the next level. Read the first ever midcycle report from Adamant Research at unchained.com/tc.
(20:06) That's unchained.com/tc. And also, if you're using Unchained, you can use the code TFTC for $50 off any of their services. Go check it out. That's like I was describing to you before we hit record. I wrote a newsletter this morning. Basically, just wanted to flag to people, hey, I know everybody's focused on what's happening in Jackson Hole right now, but if you look over at the margin and leverage in the system, nominally, it's at all-time highs. in in real terms, it's right below all-time highs hit in 2021. And then you consider
(20:46) um recent uh industrial inflation prints with PPI being relatively elevated. You look at the Trump administration and the fact that they are obviously looking at this artificial intelligence boom as a national security risk and they want to do everything they can to make sure they win the race against China to get the the predominant AI uh models in US shores or um operated by US companies.
(21:17) And then you look at what's happening in Jackson Hole, likelihood of rates coming down being higher than than it has been in some time. And I'm just wondering with leverage where it is, with markets at all-time highs, like what does this look like moving forward if they lower rates go full QE? um with all these other external factors playing in particularly with AI and the amount of investment that's going to be needed to build out the energy infrastructure to make it possible in the first place. Yeah, I think these are all these are
(21:46) all great points. I mean it puts uh Jackson Hole kind of into perspective because there are there are bigger things out there that we got to be alert to. Um there's a slide you can uh that I've given you you can put up on the screen which is looking at the global liquidity cycle and that kind of puts in or frames you know the issue that we face.
(22:10) Now this is looking at the world the index shown is a black line which is our index of the momentum of liquidity through world financial markets. So this is the amount of of money. It's not this is not M2 or M1 or any of the monetary aggregates. This is money which is flowing through financial markets which is really driving financial asset prices.
(22:31) And what we tried to show there is that there is a a rhythm a pretty standard rhythm of about 5 to 6 years in that cycle. Um and the sine wave that we've drawn on top of that uh was actually drawn up um 25 years ago in the year 2000 and we haven't changed it thereafter. It was done by uh furer analysis for those that are mathematically inclined. uh but it's been sort of uh continued on at the same frequency uh which is that 65 month uh you know tempo and what you've seen over the course of the last uh uh you know cycle movement is we've been absolutely on track so the cycle bottomed in
(23:04) October of 22 and it's been moving up the volatility you've seen is actually largely a China phenomenon and you know I can try and show u you know what um uh what that looks like if you uh if you take a look uh hopefully that slide has changed to uh the advanced economy stripping out China and you get a much much cleaner line.
(23:30) Now we can drill into what's going on in China if you like but I think the the big issue here is that the cycle is basically beginning uh you know to swing um you know to to turn or get towards the peak and that's clearly a critical factor. Now if you put that in as I've shown in this third slide, this is looking at where we are against a normal cycle.
(23:51) Now you know this is not set in stone. So we got to be careful and we're just playing the averages here. But you know the averages are important to watch as a benchmark. And that dotted line is the average cycle since 1970. The average liquidity cycle. And you know our view is that liquidity drives markets. And so you got to be uh aware alert to this.
(24:11) And the red line is the current cycle. Now, you know, we're not we're not turning down yet. We're not that that's not the point. Maybe we've got a little way to go before we reach the peak, but you can kind of see that put in context. Uh this is the situation that we're trying to uh grapple with. Now, uh I put in the earlier slide which was the world one.
(24:33) So adding back China a projection and that projection is showing uh that we are reaching a peak you know maybe in six months nine months time and then we kind of go down and the question is why do we go down and that's an important thing to address. So let me try and address the reason why we think uh things may be going down.
(24:58) Now one of the arguments uh is to look at this slide which is comparing the current cycle shown in orange here with the cycle back in the 1980s. Now uh a lot of your viewers probably won't remember the 80s or or whatever but you know uh that's when I started in financial markets and I remember the 87 crash all too well. uh you know I was at Salaron Brothers at the time and witnessed it sort of front on and basically what you saw was a very similar move to what we're seeing right now.
(25:33) You had uh a Plaza accord in ' 85 which was an attempt to get the dollar down. And just think back to the word accord, Mara Lago accord. Whenever politicians or policy makers talk of accords, they're talking about uh uh sizable exchange rate adjustments and we've had that. uh that allowed uh foreign central banks back in ' 85 and again now to ease policy and that was a factor what drove global liquidity up.
(25:59) Uh it launched a recovery in the world economy, rising commodity prices. We're sort of getting that now. It began to push yields in bond markets higher. We're getting that now. And it was ended um basically in um late 1987 by the Germans saying that they were concerned about inflation and they were thinking about and planning to raise interest rates.
(26:31) Uh the crash stopped them doing that but that was their intention and because of the plaza record and move accords there was set uh if you like trading bans between currencies and between interest rates. So if the Germans moved, the US would have to move. And Treasury Secretary Baker at the time was actually much more inclined to want rates lower. Uh a little bit like, you know, the the the Treasury and the administration are talking to the Fed now, get rates down. That's what Baker was doing at the time.
(26:55) And in the event, um you know, things went arai, investors got spooked, they realized the liquidity cycle was about to end. You can see the dramatic move down uh in that red line at the time and uh that's really what happened that caused the crash. Now uh the orange line is moving up in that direction.
(27:18) So your concerns about you know bubbles and uh and you know high pees are very well said because this is what we expect at this stage of the cycle. We may not be there yet. we haven't had the trigger, but we're getting we're clearly getting late in the cycle. And those are things to think about. So, let's sort of, you know, try and articulate why you could be getting this cycle ending sign.
(27:40) And what I want to do is just to move on uh if I can in this presentation to uh another uh slide. I'm just going to go through these bits and get to uh the bit I want to start with, which is just here. And that's saying that you know this is what we've got to think about in terms of understanding risk in financial markets.
(28:01) And this is looking at the ratio between debt shown here for all advanced economies and the amount of liquidity they've got. So in other words, the ratio of debt to liquidity. Now why is this so critical? The reason it's so critical is that uh debt has to be refinanced. Okay? It's it always has a maturity. So, if you issue 5-year debt, in 5 years time, you've got to refinance that debt or pay it back.
(28:28) The spoiler alert is that debt's never paid back. It's only ever refinanced. So, what you get is a need to refinance periodically. And what this chart is basically showing is that ratio between debt and liquidity. If you get lots of debt relative to liquidity, you're going to struggle to do the refinancing. It's much more of a problem.
(28:49) And what I've shown is that when you get above that threshold of about two times of that ratio, that dotted line, you get financial crisis which we've annotated there and almost every financial crisis if you look back has been a debt refinancing crisis in some way. Uh and that's important to understand. Now if you look at the other side of that threshold when you're very low uh there's lots of liquidity liquidity becomes abundant and its vent is financial assets. It go it creates asset bubbles. Now if you look at the last 5
(29:23) to 10 years uh we've labeled that the everything bubble. Why is that? It's there because you've got excessive liquidity relative to debt for two reasons. I mean one is that every episode of crisis or tension in the world economy be it COVID or be it the GFC policy makers come in and just throw liquidity at the system they need to stabilize it they don't want you know the risk of uh of a credit crisis a serious one so they throw in lots of liquidity and then the other thing they did particularly around the time of COVID was to put interest rates down to
(29:58) near zero levels well that just encouraged everyone to term out their debt and people were basically basically terming debt out uh in 2020 2122 at very low interest rates but they were terming it out uh 5 years later let's say in 26 27 28 and that is now likely to come back onto the horizon.
(30:24) Now you'll see that in this chart which is showing the change in the average debt role and look at that bunching around the end of the decade. a lot of debt to refinance. That could be household debt, syndicated loan debt. Uh that's debt of high yield bonds. That's government debt. Everything sort of you know coming up into that concentrated period. And the reason this is so unusual is that you know when I was at Salomon Brothers in the 80s and early 90s, the Bible that everyone look looked at and read was a book called the history of interest rates by Sydney Homer. uh uh and that book uh which is sort of the bible of
(30:57) interest rates goes back uh I think 4,000 years nowhere in that book is there any mention of zero interest rates so in 4,000 years we haven't had it but we did have it in co uh even negative rates in fact as you'll recall and that's why it's so unusual and that's why we're kind of recovering from this mess because basically that incentivized everybody to take on more debt and term up their existing stuff and this is the problem that we're creating. So what you're getting is this debt roll.
(31:26) The other thing that I'm going to say which kind of hooks into your point, your very good point about AI is that a lot of the liquidity that we've had in the system over the last 5 years or so has come through the big tech firms in the US who have generated vast cash flows. Uh they haven't invested them particularly. They've basically kept them in treasury.
(31:47) They've been out there in the money market seeing if fueling liquidity. But now the the tech spend is is eye wateringly large. I mean from the latest figures I saw uh the tech companies are spending a billion dollars a day uh on uh new capex uh in AI or whatever.
(32:09) So you're talking about over a 2-year period probably as much as two trillion sorry it's a trillion dollars of new capital spend. And that is clearly money that is coming out of financial markets. you know, you know, money that's anywhere must be, you know, somewhere. And uh the fact is if it's uh in the real economy, it's not in financial markets. Uh and that's the reality.
(32:31) So you get to this slide that I've just put up here and that's saying this is the problem that everyone's got to start thinking about. This is the debt liquidity cycle. At the heart of the system is this collateral um you know stability requirement uh which is saying that you know the US Treasury market is absolutely key here.
(32:49) We've got to have a stable Treasury market. That's why you've got the Fed and the Treasury geared up I think to maintaining volatility, a low volatility. And the way that you can understand that is to look uh at that lefthand wing which is how debt is converted into liquidity because basically you need high quality debt to create liquidity and what it's saying is that the repo collateral markets are absolutely central here and you got to look at things like the move index or the uh or sofa spreads and here are sort of just two examples. This is looking at uh sofa spreads. So this is saying you know is there a shortage of
(33:28) good quality collateral in the system or a lack of liquidity and this is showing when you get spikes. Now there's been a lot of a lot of spikes or a lot of activity uh in the last 12 months. So you can see that you know if this is uh if this is looking at the uh pulse of a uh of a patient in a hospital you can see that they're getting pretty excited here and you know they're moving up towards a coronary or whatever it may be. But, you know, this is the thing. The Federal Reserve is onto this and they're trying to keep these rates down as best they can by changing bank
(34:00) reserves. Uh, and that's why I think that it's going to be really, really tough to rebuild the TGA in the next 6 months without there being a serious problem. So, I trust the Fed is up to this is onto this. And so, that's why I think there needs to be, you know, some fundamental change in their operating procedures.
(34:18) And here's the move index just to show what's been going on. And you know, um, I've been arguing this point about move volatility coming back into this range and there being a target. And I was accused, I think, in one of the financial newspapers, maybe it was the FT a few days ago, of sort of launching a conspiracy theory.
(34:36) I don't think it's a conspiracy theory. It's just a fact. I mean, makes absolutely every sense in the world for the Treasury and the Fed to target volatility because hedge funds are key buyers and the collateral markets are critical. So why not? So, you know, that's the story and that's the risks that people face, I think. Yeah. But we're not over yet, you know. Um the the fat lady hasn't sung.
(35:00) No, it's uh I'm sorry for interrupting, but it was it's very interesting having you walk through that. It's making some headlines and uh thoughts I've had become much clearer. You mentioned stable coins earlier. Obviously, the expedience with which the Genius Act got passed here in the United States makes a lot of sense in retrospect considering they're looking for buyers of the of the bills.
(35:29) But then on top of that, as it relates to um Bitcoin and stable coin specifically, I I think another change that's been made this year that many people still aren't paying enough attention to is the um sort of uh the elimination of SAB 121, which had some very strict and um reserve requirements for any bank that was going to hold Bitcoin, or other altcoins, and they changed that to SAB 122.
(35:53) Now, banks can take Bitcoin as collateral if they want. And going back to your point of um the the system is very collateral dependent. It seems like they're trying to open up as many gates as possible to stuff new types of collateral into the system. Yeah, I I think that's right.
(36:14) I mean I think the the you know the thing is that stable coin are a great mechanism to buy treasuries to buy bills in particular to help fund the treasury but it basically creates a sort of if you like from a the treasury's point of view a kind of virtual circle and you know the reason for that is that if you think back to uh to sort of monetary economics uh you know what happens is if a credit provider uh basically buys a government debt any government debt they monetize the government debt So it's effectively printing money and you know the fact is that if you're issuing lots of bills uh or shortdated debt that's really attractive to credit providers um and
(36:49) this is what the banks essentially hoover up. So what you can see in the data right now is that the growth of uh looking at the growth of bank balance sheets it's being driven uh a lot by purchases of government debt. Uh this is monetization. So you know what we're doing is we're embarking down the route of monetary inflation.
(37:08) I mean these are the fears that everyone's got and that monetary inflation is ultimately going to come through in terms of devaluing uh people's wealth or just increasing the cost of living. And so what you need is dedicated monetary inflation hedges and that means gold it means bitcoin etc.
(37:28) And I think that you know the whole I mean bitcoin in my view is definitely the future. Uh and I think that the US officially has to endorse that pretty quickly uh before somebody else does. And I think that you know if you if the US wants to maintain control of the global financial system and the dollar it makes every sense to get on board with Bitcoin pretty quickly.
(37:46) Uh because you know if uh what would happen if China did for example um I think that would be it would be important to get that uh you know to get that staking quickly. completely agree and I'm just looking for a tweet that sort of validates exactly what he just said. Luke Roman has been paying attention to the sort of squabbbling between the US and China specifically and he tweeted out, I'm not sure if you caught this headline this week, but it seems like China wants to get a digital yuan stable coin out there. and Luke just posited earlier this morning. So, what happens when China launches 0% yielding yuan stable
(38:25) coins backed by finite gold to compete with 0% yielding USD stable coins backed by infinite T bills? Will the reaction of the USD stable coin proponents mirror the 7-minute ads guy from something about Mary and I think he's alluding to are they going to have to back it with Bitcoin? Yeah, very sensible. I mean, he's had some great some great calls in the past.
(38:44) Yeah. So, freaks this was brought to you by our good friends at Obscura. Obscur is the first VPN that can't log your activity by design. Instead of empty promises, Obscura fully embraces the Bitcoin or don't trust verify mantra. They can't log your traffic even if they tried. Obscura believes that user data is toxic waste.
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(40:00) It's a great way to recalibrate your life and begin thinking in SATS. Go check it out at opportunitycost.app. That's opportunitycost.app. one I I want to take a step back and just just you having been in the markets for decades and looking this going back to the the scene wave the 65month trends what's driving that is it is it more sociological like human nature or is it mechanical based purely off the duration of of debt that's issued is it mechanical it's it's a great question I mean I can't I can't do the the question justice with a with a decent answer but my answer is that uh if you look at the
(40:40) uh the the frequency of that cycle, it pretty much is in line with the average maturity of debt um in the world economy. So, you know, the average the cycle run fluctuates with a 5 to six year frequency and that's pretty much the average maturity of debt out there about 5 to six years. So, that would kind of make sense. So, it's a debt refinancing cycle. Yeah.
(41:06) And that was just I had a hunch that was going to be your answer. And if that is the case, like do we have to reth like is there the potential to rethink how we're issuing debt to rethink duration? Does it make sense? Or is this just the way? Yeah.
(41:24) Well, it would basically say that, you know, if we're if we're changing the tenor the average tenor of debt out there, we're going to change the average tenor of the cycle. So, you're going to get shorter cycles if uh if we're doing more uh you know, more debt issuance. And that you can you can see the logic in that how that would work is if the treasur is always issuing you know 3 month 6 month bills uh they're always going to have a big problem every 3 to 6 months when you effectively get a roll or if that if that debt is bunched and you get a roll.
(41:47) Yeah. And then now my mind's wandering too like does this like the reintroduction of patient capital like long term like did like you mentioned it earlier too like this transition to hard assets. Is this how it happens? you just have a sort of not even asymtootic but you just have a accelerating sort of market turnover because you're getting shorter and shorter on the curve as you as refinance the debt that at some point the system needs to transition to something else. Yeah, I think I think that makes sense.
(42:21) You know, I I also think that, you know, an interesting thought experiment is just to say, well, you know, what would happen in the world if there were only two assets that you could invest in? Uh you could only invest in shortdated government debt or you could invest in Bitcoin.
(42:40) Uh you know, what would what would happen? And you could see under that situation that um you know, you would get uh you would get Bitcoin moving with the financial sector 100%. Um and whenever there was expansions of liquidity uh investors would basically take on more risk and put more money into Bitcoin. Uh and so you can see Bitcoin being highly highly proyical with the liquidity cycle.
(43:01) Now the reason I cite that is that you know a lot of people look at macroeconomic fundamentals in other words what's happening in the real economy to judge what's happening in the equity markets. Uh right now what you've got is a situation which is a great paradox is that there doesn't seem to be any cycle in the real economy. The economic data is kind of blowing two or three different ways.
(43:24) No one really knows are we in a boom or a bust or whatever it may be. Uh but if you look at the markets they're performing uh just as if it's a very very normal cycle. And I I'll demonstrate that because I think it's an interesting point to to ponder. And uh let me just um try and show you what I mean by that.
(43:44) And this means sort of coming back to uh in fact this diagram. So if you think about the the cycle here. So let's put that into a framework and think about the asset allocation cycle which I'm about to show um here. So this is showing that schematic cycle. So what you have uh on the left hand side is what asset classes tend to do well as the liquidity cycle is evolving and on the right hand side we basically describe the phases of the liquidity cycle as we understand them.
(44:17) Now what this broadly says is that in the upswing of the cycle you want equities. This is traditional asset classes and I'll you know Bitcoin is a risk on asset so it generally does well when you're in the upswing and in theory it should do not so well if you're in the downswing we haven't had a lot of evidence of a downswing of late but u you know we'll see uh commodities around the top then cash on the way down bonds at the trough and this is how that translates into different asset classes and different industry groups now uh bear Bear in mind what I just said about the fact that
(44:54) there's no business cycle or we it's very difficult to perceive a business cycle right now because the data is blowing in so many different directions. No one really knows is it recession is it recovery who knows but if you look at the cycle of market the market cycle it's absolutely normal.
(45:12) So if you're in the rebound stage of the liquidity cycle, so think of assets on the left and industry group sectors of the S&P let's say on the on the right hand side. If you're in the rebound area which is the early phase of the cycle. So that was basically 2023 or thereabouts uh you know maybe to mid 24 then you were looking at uh equities doing well, credits doing well, commodities not so well, bond duration forget it bad.
(45:38) As you move towards calm, you want equities. You want to start to migrate your credits more into commodities and stay away from bond duration. Uh and then you can see how that cycle migrates from left to right. And then if you look at industry groups, then you say, well, in rebound, what I want is just I want cyclicals, but I really want tech.
(45:58) That's that's the strong outperformer. U then you get to calm. Tech still does quite well, but you start to get financials coming through and energy where you look at, you know, the yield curve steepening as you'd expect. Now, commodity stocks are beginning to get a bid. Uh, you know, financials around the world.
(46:17) Look at, you know, European banks have been on fire. Um, you know, JPM's up quite a lot in the US already. Stalled a bit lately, but I mean, it's had a good performer over the last 12 months. Uh, regional banks are doing pretty well again. So you're looking at, you know, financials, uh, energy, commodities doing well.
(46:36) So this is, this seems to be a really, really normal cycle when it comes to, uh, market movements and liquidity. But you can't pick that up from, uh, the real economy right now. Yeah, there seems to be a very stark disconnection from financial markets and the real economy, at least here in the United States.
(46:54) And you have the Silicon Valley crowd really beating the drum about this AI wave being a boon to productivity. And that's why we're seeing um profit margins increase without any new hiring at at uh a bunch of the the mag seven companies particularly um Meta, Google, Microsoft. And I I think that's what's making me cautiously I don't just cautious generally. I don't even want to say cautiously optimistic.
(47:25) Is is that real or is it a bunch of people with very high incentive to beat that drum um trying to will it into existence? And I think that's something even within the Trump administration, I think David Saxs and others that are more tech forward within the administration are saying, "Hey, we have this window of opportunity to really take advantage of this um this step change improvement and productivity uh across the economy.
(47:53) " And I think that's a lot of people are we're just in this extremely uncertain period of time due to um where we are from a debt situation where the liquidity is and and then on top of that you have this compounding external factor of this new technology. Yeah. Yeah. I guess Marty B what I'm saying in a way is to look if um if the financial markets have got no strong connection with the real economy uh what you're getting is potentially a threat because you're getting as I said a trillion dollars uh coming out of the markets in in over the next well this
(48:26) year and next year because of uh tech investment spending and that's that's a lot of cash. There's a lot to chew on here because it's uh having only been observing financial markets uh very closely since the great financial crisis like I've seen a couple of these cycles and to my point earlier it does seem like things are accelerating in the uh the cycles are are shortening 08 um to I guess you go to the European credit crisis in the early 2010s then obviously COVID 2020 banking crisis of 23 and now here we are today. It seems like we're in a precarious situation yet again trying to think through this of where it
(49:10) ends. And so in terms of Bitcoin, that's something I wrote in the newsletter this morning too. like if more and more people are observing these cycles compressing um and getting more extreme in terms of the response to any downturn in terms as it relates to money printing and debt issuance.
(49:32) I wonder Bitcoin being 16 years old, like does the muscle memory um get to a point where if there is another downturn that people wake up and say, "All right, it's obvious that something's wrong in the traditional financial system with these boom and bust cycles. This alternative here in Bitcoin uh is completely separate from that in many regards.
(49:56) uh and historically it's been a risk-on asset. Do do you see it potentially transitioning to risk off? I think that yeah, I think it's a very interesting point. I think the thing is is that look um you know the the the plain fact is that um you've got a trend and you've got a cycle to contend with. And I think there is a liquidity cycle which which essentially uh is driving the ups and downs shortterm in Bitcoin makes a lot of sense because it's a very liquidity sensitive asset because it responds to monetary inflation and that's what we've got through the cycle. But we've got a trend, an exponential
(50:33) trend which is basically debt driven which means that uh over the long term just because of interest rate compounding uh not least the fact that you've got a primary positive primary deficit as well adding to that debt burden but the interest payments and the primary deficit mean that debt is growing exponentially. Um liquidity has to keep pace with that.
(50:56) So we're I mean what people are not really understanding as far as I can see is that what has really changed postcoid uh in particular is that the debt burden is just growing at a much much faster pace. Uh and it's really difficult particularly with Asian demographics and the need for defense spending uh etc to actually to re that in in any way shape or form.
(51:21) So what you've got to do is you've effectively got to monetize that or at least keep pace with liquidity and therefore you've got to have monetary inflation hedges in your portfolio and that's why Bitcoin makes so much sense in the long term. And what I would say on top of that is it's a strategic asset. So that kind of lends it way to your point about being you know is it going to be accepted more as a safe investment? Yes, I think it will be for sure.
(51:45) But is outside of the domain of uh of central banks and governments. Uh absolutely. Uh but you've got to think about the growth of Bitcoin in terms of both the you know intensive margin and the extensive margin. And in terms of the intensive margin, let's call that the liquidity cycle.
(52:05) And let's call the extensive margin the fact that you've got more and more and more people who are going to embrace this asset over time. And that's what's going to give it a lot of its trend growth. So I think if you look at it in those two through those two lenses uh you get uh you can put it into context more easily. Yeah, it's a fascinating time to be alive. It's uh I've said this many times in the last few months it's equally unnerving and exhilarating because of everything going on. Uh the unshroen ground. Yeah, really is.
(52:35) Um, in the last uh the last topic, you mentioned it in the beginning. I me meant to follow up or forgot, but I think it is um it is something that could be worthwhile. You you alluded to China's sort of influence on the liquidity cycle. Um not necessarily throwing a wrench, but obviously having an impact in a certain way.
(52:55) What What is China doing that's Let me let me just shift on to what's going on in China and I'll um I'll lead to that. Um, okay. Let me just swing out of here. This is through the bond markets to where we are. Dollar, China. So, in terms of China, uh, this is looking at the Chinese bond market. Every bond market tells a story.
(53:23) And what you've got here in the Chinese bond market, uh, yellow line or orange line is looking at 10-year yields and the black line is the term premium or risk premium on Chinese bonds. The fact that the black line is going down and it's pulling down. The orange line is saying that you've got a big rush for safety in China. Investors are basically going for safe assets.
(53:41) Now, that black line which had been going down is stabilizing. And that stabilization is a good thing because it's basically telling us that we probably have reached a floor in yields. And what you're seeing now is probably a switch of assets among Chinese investors uh into more risk assets. So the Shanghai index has begun to pick up quite noticeably.
(54:03) Now the reason that that is going on is that um uh if I can shift to my next slide, this is what China needs to do. So this is the debt liquidity ratio in China. And what I said is that uh if you uh if you look at different countries, they need stability in their debt liquidity ratio. If you've got a very high debt liquidity ratio, you've got refinancing problems in your debt markets and you face debt deflation effectively. That's what China's got. That's what the bond market has been telling us. So they've got to
(54:35) get their debt liquidity ratio down. You do that in one of two ways. You default your debt. No financial system can afford to default debt because debt is collateral. So you can't do that. You've got to increase liquidity and so they've got to start printing money and that's broadly what they've been doing.
(54:54) This probably this chart is a better one to show it. This is looking at the amount of money going through Chinese money markets and you can see the increases and decreases in that. Basically what they've done is they've had two or three goes of actually injecting large amounts of liquidity into their markets.
(55:16) I've shown a year-on-year change because there is huge seasonality in Chinese money markets to a very large extent because China is still very much an agricultural economy or has large agricultural elements and so there's a lot of seasonality in terms of the money flows in the markets but you've still got that that issue. So I've looked at it cleanly here in yearon-year changes.
(55:36) uh why was 2024 so depressed because what was happening was the Chinese were trying to shadow a strong dollar and they couldn't do it and what they've done really since the beginning of 2025 is to throw the towel in helped by the fact that the dollar took a little bit of a rest bite so they put a lot of liquidity into markets that is important uh we need to see them keeping that up um the last four weeks have been a little bit mixed so it's difficult to know the direction, but I was very encouraged at the beginning of the year.
(56:06) I'm still moderately optimistic, but the Chinese market has been a strong outperformer this year, and it may end up being one of the strong market, strongest markets, uh, for the year as a whole. Uh, this is just looking at the evidence of what they're doing.
(56:24) But I want to show this chart and the next one as a conclusion. This orange line is really what you've got to try and monitor. This is the yuan gold price. Uh the black line is the yuan US dollar cross rate. Now everyone in the market seems to be focused on the black line. Uh and you know they like the stability that you see there around you know 7.
(56:45) 1 7.2 7.3 uh remmbb per US dollar. Uh that's fine. Okay. But behind the scenes, you've missed a lot of what's been happening in the gold market and sha the the Chinese gold price has absolutely skyrocketed. Uh now gold everywhere I know has gone up, but the key point here is that I think this is a deliberate move because it reflects the monetization that's going on in the Chinese economy and China is the world's biggest producer of gold. Uh they uh they obviously are accumulating gold internationally. they buy it, you know,
(57:19) everyone, anyone that wants to, any government that's selling, the Chinese are normally uh buying it. Uh so they're accumulating gold. Uh as a Chinese citizen, you can hold as much gold as you want, but you can't export it. Um so it's a natural hedge for people uh in terms of that economy.
(57:39) And the Shanghai gold market is really the leader now worldwide. Uh it's the marginal pricer. So if you want to know what's going to happen to the gold price, in my view, what you need to do is to understand what the dynamics in the Chinese monetary system, the fact they're monetizing and devaluing their real assets against uh sorry, devaluing uh paper money against real assets. And a real asset here is gold.
(58:01) So they want to get, you know, paper money debts down. They print lots of money to do that. And what you see that evidenced through is a rising yuan gold price. Now, our view last year was that that had to get to a minimum of 24,000 yuan uh to make any dent or scratch in the debt problems uh that China has. And it's got there.
(58:24) They've held it there lately, but I think it's going to have another jump up. So, I'm very optimistic of gold, and if I'm optimistic of gold, I've got to be optimistic of Bitcoin. So, that's the backdrop. But whereas the Federal Reserve has its major leverage on the financial systems worldwide and on financial assets, China's people's bank has its major leverage really on the real economy because the Chinese economy is so controlled by the PBOC.
(58:49) And secondly, it's got a big economic footprint worldwide and regionally. And this chart, the next one shows movements in Chinese liquidity against world liquid uh world commodity prices. Uh the orange line is Chinese liquidity. We've extrapolated that is shown as an index of liquidity impulses.
(59:10) So that's showing uh data from 2004 onwards. The orange line is just showing there's a potentially another big inflow coming. I mean that's partly guesswork or projection, but that's what I think is going on. And the black line solid is all commodity prices of the CRB index and the dotted black line is X energy. So just to show there's no, you know, bias with oil prices, but that shows the picture.
(59:36) So what it says is if you're going to get uh a lot of Chinese liquidity expansion, you're going to get commodity markets up, but you're going to get the gold price up. But that's quite consistent because gold typically moves about 6 to9 months before commodity markets do. Uh and that that's what we're expecting. Yeah.
(1:00:00) And I imagine terrorists are really accelerating this and throwing gas on this fire as well cuz Yeah. Because the Chinese economy is suffering really badly. Um you know from the tariff he hikes. Yeah. And then and that's the way I understand it like the the capital flows historically up until recently is we with Triffin's dilemma hollow out our manufacturing base export it to the rest of the world buy their goods and then they take the cash that we buy those goods with and pump it back into our financial markets and that there's some disruption in that flow right now too.
(1:00:31) Um, yeah, again, equally unnerving and exhilarating, uh, if you like to nerd out about this stuff. And Michael, I can't thank you enough for spending an hour on your Friday, uh, early evening to, uh, to walk through this with me. This is, it's a great question, Marty. Thank you. The pleasure is all mine, sir. This is, um, incredibly illuminating and high signal content.
(1:00:54) So, thank you for putting it together. Um, anybody who's listening to this who's not subscribed uh to Crossborder to Michael's Substack, go uh go subscribe. It's incredible. And it's called Capital Wars. Yeah, Capital Wars. You guys did a collaboration with the Bitcoin layer um team earlier this week, Nick Batia and crew. That was really good.
(1:01:20) I really like the Bitcoin color in that one. Yeah. Yeah, that was a good Q&A. Awesome. Well, I'll let you enjoy your Friday night. Hopefully, we can do this again. Maybe we'll uh maybe we'll meet at the peak of the cycle at some point in the next six to nine months. Yeah, let's hope it's a way off. But anyway, yeah, look look forward to the next engagement party. Thank you. All right, have a good one. Peace and love, freaks. Freaks, thank you for listening to the show.
(1:01:44) I hope you liked it. If you did like it, please make sure you subscribe, rate, review the show. It helps us out a lot. And also, if you like these conversations, I've come to realize that many people listen to the podcast. They don't know we have another sort of layer of this media company. We have the newsletter, the Bitcoin Brief. Go to TFTC.io.
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