Michael Howell of CrossBorder Capital on why global liquidity has peaked, gold's rally, and Bitcoin's path forward.
Global liquidity has peaked at $188.8 trillion but the growth rate is rolling over, and Howell's 5-6 year cycle suggests the downturn could last into 2027. A strong real economy fueled by AI capex, the One Big Beautiful Bill, and Treasury short-term issuance is absorbing cash that would otherwise flow into financial markets. Bitcoin's ~50% drawdown from its all-time high isn't a failure of the asset, it's the most liquidity-sensitive asset on the planet doing exactly what tightening conditions predict, with near-term risk skewing to further downside. Gold's rally isn't about debasement (Treasury term premium has flatlined for 15 months), it's being driven almost entirely by PBOC liquidity injections and Chinese private sector buying, with the Shanghai exchange now setting the marginal gold price. Two parallel monetary systems are emerging: China backing its system with gold, the US backing its system with stablecoins, and China's "Notice 42" banning all crypto is a defensive response. The debt maturity wall is unprecedented with US federal debt up 12x since 2000, $70 trillion in global debt needing annual refinancing, and zero interest rates during COVID creating a debt structure that has never existed in 5,000 years of recorded history. Policy is shifting from the Fed to the Treasury, with the Warsh nomination signaling QT continuation while SLR deregulation lets banks drive credit creation. The long-term case for Bitcoin remains intact because central banks will ultimately have no choice but to monetize deficits, and every financial crisis gets resolved with more QE. Watch the yield curve (expected to flatten by midyear as a risk-off signal) and repo spreads for early warnings, with the liquidity cycle trough expected in 2027.
"All money that is 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."
"Bitcoin and crypto are the most liquidity-sensitive assets on the planet and they are a canary in the coal mine for tightening liquidity conditions."
"I'd still be a long-term buyer, even at these levels. But I still think that you can pick it up cheaper."
"Debasement? What debasement? The bond market is certainly not detecting any monetary inflation right now."
"US federal debt has increased 12-fold since the year 2000. Not 12%. 12 times."
"In 5,000 years of interest rate history, nowhere do you ever get any reference to zero interest rates. It's never happened before."
"You've got effectively two monetary systems running in parallel. The commodity-based one for China and a digitally-based one for the US."
"If you get a financial crisis, the only way you resolve it is by throwing more liquidity at the system. Central banks have got no choice but to do QE time and time again. So you want an asset that is likely to hedge monetary inflation. That's gold and Bitcoin."
Michael Howell's 35 years of tracking global liquidity cycles paint a picture that's uncomfortable in the near term but structurally bullish over the long horizon. The debt maturity wall bearing down on the global economy through the late 2020s is unprecedented, and when refinancing stress inevitably triggers the next crisis, central banks will have no option but to fire up the printing press again. Watch the yield curve and repo spreads, be patient through the cycle trough expected in 2027, and accumulate the assets that benefit from the inevitable monetary response.
0:00 - Intro
0:48 - Global Liquidity Cycle
3:55 - Countervailing Forces In The Liquidity Market
8:42 - Fed Policy Under Warsh
12:08 - Bitcoin As A Liquidity Alarm Bell
20:35 - 30K Or 90K For Bitcoin
25:25 - Why China Is Driving The Gold Market
37:27 - The Global Debt Maturity Wall
39:48 - Strong Economy Draining Financial Markets
42:02 - Political Consequences Of The Liquidity Downturn
46:22 - Fed And Treasury Moving In Lockstep
53:06 - Two Competing Monetary Systems
57:17 - Stablecoins And The Strategic Bitcoin Reserve
(00:00) US federal debt has increased, I think I'm correct in saying 12fold since the year 2000. We haven't seen this amount of debt in the system. Bitcoin atal, they're the most liquidity sensitive assets on the planet and they are a canary in the coal mine for tightening liquidity conditions despite all the scorn thrown on the US dollar and the US Treasury market.
(00:19) Treasury T premier has flatlined almost for the last 15 months. Why is the gold market going up? I think that's a very specific reason which is all to do with China might still be a long-term buyer even at these levels. But I still think that you can pick it up cheaper. >> Sup freaks. Before we get into the show, I just want to send a heartfelt thank you.
(00:41) Thank you for joining us and ask for one quick thing. Could you like this episode, subscribe to the channel, and if you like the conversation, join us in the comment section. Michael Al, welcome back to the show. >> Thanks, Monty. 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 Crossber Capital, which is over 35 years of tracking global liquidity.
(01:04) Michael also 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. Um, 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 uh very fitting that we're recording today because it seems like the liquidity cycle may be crescendoing, topping out and uh you wrote a newsletter and publish it yesterday um talking about what's next for Bitcoin 30K or 90K. Uh,
(01:41) and so I think jumping into just the 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 uh 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.
(02:03) In other words, if there's a lot of cash coming in, asset prices are likely to go up. And if money is leaving, uh, asset prices are likely to come under pressure. And what we've seen, um, and you can probably see it on the graphic that we put up, is that liquidity has very recently peaked and is starting to edge down.
(02:23) 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, um, this inflection could be quite serious.
(02:45) Now, you'll see as well that that cycle tends to oscillate with around a 5 to six year frequency. Um, we've had a pretty decent upswing, which has lasted over 3 years. So kind of by rights we are likely to be going down for maybe a similar kind of period and that's uh clearly something to be concerned about if that actually transpires.
(03:07) But we've had a decent bull market in many cases. You know what we've been looking at uh or what one's been seeing over the last 3 years has been absolutely uh you know a blueprint for a normal market. Uh 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.
(03:26) 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. Uh lack of oxygen and we're beginning to roll over.
(03:46) I mean that's the the uh 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 countervalling forces in the liquidity market right now. Obviously um you've written has been boosted by strong PBOC injections, firmer collateral and US dollar weakness, but the Bank of Japan uh QT and lack of liquidity and uh ECB and Bank of England is probably driving us further down. Correct. Yeah,
(04:20) absolutely. I mean, I think the thing to, you know, start thinking about here is why is why are you getting this inflection when you've got what seems to be um actually some some decent news. I mean, one is, as you rightly say, the Chinese are actually pumping money in to their markets. Um, I mean, that's actually a normal thing ahead of the Luna New Year.
(04:42) They normally make markets very liquid, and they've done it again. Uh 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. Uh it's been adversely affected by a huge debt load.
(04:58) And what's more, tariffs or what were tariffs probably still are tariffs in China's case uh are impeding economic growth. So you've got a backdrop which is actually not great for the Chinese economy and they desperately need growth. they're uh you know their their model of society doesn't work if it's uh you know if it's stagnating and therefore that explains why they're actually going for it and actually putting a lot of cash to work.
(05:19) 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. Uh repo rates in other words uh short-term interest rates were spiking above where the Fed wanted.
(05:37) Uh there was a shortage of liquidity. The Fed came in with a new QE measure called reser reserve management purchases and that has actually you know quelled the fire. uh 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 um it's not so much that the Fed could be tightening here.
(06:00) Uh 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 you know 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.
(06:17) And that's really the problem. Yeah, you said it. Um 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 sort of flows or or policies are overfocused on Main Street compared to Wall Street right now? >> Well, I think I mean you got a number of features.
(06:46) 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. Um you know you've got uh 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 shortdated US treasury bills and shortdated notes and that's basically monetization.
(07:14) So in a way that money is being printed not by the fed here but by the banking system to fuel economic growth uh you know basically funding government spending. So you know the government sector and private sector capex and the main engines of economic activity but you know if you kind of look through the last print the Q4 which was clearly distorted by shdowns and whatever else um the underlying tenor of the economy looks pretty decent and you know one would suspect that you know you're going to uh get a figure over the 12 months to end March something of the
(07:45) order of about 4 and a.5% maybe uh for US real GDP growth which is actually a pretty decent clip. So that needs cash to be financed. Um industry needs working capital. It needs money for for capex. On top the treasury is demanding more funding. And so money is being progressively drained out of financial markets.
(08:05) 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, uh you've got a problem uh 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, um, I think, as, you know, the veteran investor Sandy Duck Miller always says, the best time to invest in markets is when you've got a sluggish economy, uh, that central banks basically want to goose upwards. And that's really what we
(08:32) we've had for much of the last 3 years. Now, the economy is starting to gain traction. It's taking, you know, it's just desserts in terms of pulling liquidity out of financial markets. >> Yeah. The um 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 on a show that we do every Monday morning.
(08:57) We'll record after this. But I think if you look at the nomination of Kevin W, many people took the headline of that and said, "Oh, we got a hawkish Fed chair coming in here." Which uh was a surprise to many people. He wants to lower interest rates but continue with QT. He doesn't want to expand the balance sheet too much.
(09:18) But if you look at uh policy particular particularly in the commercial banking uh 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.
(09:44) >> Yeah, I I think that's absolutely right. I think the, you know, 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, evidenced the last 3 years. So, I think that, you know, there's there's logic in what they're doing.
(10:00) I think the problem with that is that we saw what happened at the tail end of 2025 when there was a a withdrawal of Fed liquidity uh because of I mean this is a wonkish comment but because of this jump in the Treasury General account and what that meant was that um liquidity from the Fed kind of contracted by about 250 billion but actually created havoc in the ret in the repo markets.
(10:30) So repo spreads uh blew out uh in a way that was uncomfortable for the Fed and the Fed had to reinvent QE in the form of these uh RMP purchases, reserve management purchases and that was really a you know a way of uh of solving the problem. Now if Kevin Walsh is talking about not billions here but trillions you know dream on there's no way that the system could could accomplish that.
(10:54) 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 backs stop the markets and if you get a situation where there's trouble in the in the Treasury market, um you know, the we face a situation where uh dealer balance sheets have actually shrunk or they've h haveved since the GFC.
(11:21) 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. Uh they need the Federal Reserve and they need a big Federal Reserve balance sheet.
(11:42) The problem that uh is being engineered here or we 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 uh robust policy.
(12:01) So, I think the ability to shrink the balance sheet meaningfully is just not there, whatever, however high on the wish list it is. >> Yeah. And uh I saw some headlines. I haven't really taken the time to dive into it, but it seems like the the repo market is beginning to um lighten up again. People tapping it overnight.
(12:23) I think there was I think something like 18 billion tapped in in repo markets last week or one day last week. And >> I don't know. It seems like there could be some liquidity. It seems like liquidity crunches on. And that's actually a good segue into the Bitcoin part of the conversation cuz it's one thing um I think it's a bit counterintuitive to many people out there.
(12:47) Uh and especially if you're looking at the price of Bitcoin now uh almost 50% off its all-time high that it hit in late October, early November >> last year. are looking at gold, silver, equities markets, and uh Bitcoin seems to have detached and people are really picking on Bitcoin right now saying look, it's not not what you marketed it marketed it to be.
(13:09) It's not a store of value asset, but um I would push back that the properties of Bitcoin, the protocol uh and how it works make it such that if you understand how that works, it is a good store of value. 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 uh liquid markets even though the market cap has come down significantly >> in recent months.
(13:44) But um the ability to basically sell Bitcoin on a moment moment's notice, get cash right away, and then uh 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 on the horizon.
(14:10) And I think what we've seen since late November and especially cross referencing it with um with the work that you do in the GLI, it seems like that may be the case. >> Yeah, I think absolutely. I mean, I I was going to 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.
(14:32) And you know, the whole point right now is that the watch word is rotation. Uh you need to be rotating through the cycle. I mean this is a a dynamic asset allocation. It never stands still. And if you look at how the cycle evolves uh you know eyeing back the the previous cyclical diagram of liquidity, this is aligning that with asset allocation choice.
(14:54) And what it says is that if you're around the peak of the cycle, which we are now, uh commodity markets are really the thing that tends to run. Lo and behold, you've got very strong commodity markets. gold, you know, evidence gold for example, but equally copper, uh, a lot of other u, you know, metal metals moving up strongly as well.
(15:14) Equities kind of precede that. So in the upswing of the cycle, you tend to find equities do uh, you know, probably by far and away the the best asset class and a risk return perspective. And then as that cycle rolls over and starts to go down, uh cash tends to be the best asset in absolute terms reaching the trough, uh bonds then come into their own uh long duration government bonds and then the cycle starts again uh with a uh risk on move um and back to equities.
(15:43) So you see that sort of movement through and what we've seen through this cycle is absolutely that that particular phenomenon. Now, the traffic light diagram that I'm going to show here, um, you know, is really the segue into 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.
(16:04) And what it's divided into are four different regimes. Rebound, calm, speculation, turbulence, which is generic uh descriptions of the phase of the liquidity cycle in each case. Traffic lights are traffic lights. So green is go, red is stop, u amber is proceed with care and you can see in the rebounding calm the risk on phases that you really want equities uh you know full on equities.
(16:29) You want some credits early in the cycle rebound. You want commodities as the cycle matures and by the end of the cycle you want to end up in uh long duration government bonds on industry groups. Uh the upswing the cyclical stage uh is dominated by technology and that's clearly the stage where Bitcoin uh as an asset does best in the upswing of the cycle.
(16:52) Financials do well about midcycle 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 um you know consumer staples are beginning to move or utilities. So that's how the asset allocation process works. Now does that line up with Bitcoin? It does.
(17:12) And I'm going to shift on to uh 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 um that's going to come at the cost of Bitcoin performance.
(17:33) uh notwithstanding the long-term merits of um 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 site but this is evidencing the fact that the orange line which is uh a basket of actually Bitcoin Ethereum and Salana with a 60 3010 waiting uh what that's showing is strong correlation uh between movements in liquidity we look at six week changes here but we've advanced the liquidity data the black line uh forward by 3
(18:09) months to show that uh basically uh Bitcoin atal 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 you run a risk that Bitcoin is going to fall more.
(18:37) Um, and that's an unfortunate feature. But, you know, I'd still be a long-term buyer, you know, even at these levels. But, uh, you know, I still think that you can pick it up cheaper. What's up, freaks? If you've been listening for a while, you've probably heard us talk about BitKey.
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(20:54) Uh 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 what would cause a further drop and a further drop would be basically uh the result uh of tightening liquidity conditions.
(21:20) uh and that could come from not necessarily from a from a Fed tightening although including that would 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 uh you know the Supreme Court's decision uh there's an even bigger federal deficit to fund.
(21:46) and we'll see how that plays out. But generally funding demands are going up and um that will come at the cost of of risk assets. Investors will have to take money out of one area of a portfolio to basically fund another. So that would be the that would be the cause of problems. The the 90,000 is a longerterm 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
(22:21) monetize these deficits. Uh there's no way that uh it could be afforded through typical means of debt issuance uh because of bomb vigilantes around or more particularly because of taxation because we're on the wrong side of the Laffer curve. I mean, nobody really can can sustain higher tax rates. So, it's got to be a monetization in some form.
(22:40) And that, as you know, you alluded to, is probably already happening now anyway. I mean, subtly through the mechanism of issuing lots of short-term debt. Uh, that's a backdoor way into banks uh 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.
(23:02) And the reason for that is that uh you can already see signs in the bond markets that things are not going very well for you know maybe risk assets. And I'm going to show you this chart which kind of denies the claim that many people have been making over the last uh few months that there is a monetary debasement going on which is basically uh fueling the price of gold. And this is this chart.
(23:28) And if you take that in association with the previous one on bit on bitcoin atal those these two charts together basically say you know 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 um you know bit of a sort of super nerd chart but it's basically looking at bondterm premia which makes most people's eyes glaze over uh sometimes even mine.
(23:59) But what this is looking at is the risk premium that investors are forced to pay on holding government pay on holding government bonds. And this is showing um you know 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.
(24:20) But that particular term premier if there was a big debasement and bucketloads of liquidity in the system that would be going up not uh 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 you know now fading safe assets as many people like to say look at that line the bright red line uh you can see that the treasury term premier has flatlined uh you know almost for the last 15 months I mean there's been no change that's been a robust performance now
(24:56) what I would argue is if that's uh if the bond market is so robust it's certainly not detecting any monetary inflation right now so the whole idea that 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 come on to later.
(25:26) >> Well, we can go into later or now you have me curious why why is China driving that? I mean there's the theories. I mean I the theory that makes the most sense to me is that we have this multipolar geopolitical um landscape accelerating at an ever quickening quickening pace. >> Yeah.
(25:50) And I think I mean post 2022 with the seizure of the Russian treasury assets it 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.
(26:20) >> Yeah, I think ab I mean I agree with that 100%. I think that's definitely going on and I think that's a you know 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.
(26:38) But this particular chart that you see here is looking at uh 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 50-day uh rolling average through that, but you can see the upward trend, and this is the year change in their liquidity injections.
(26:59) So, they're basically accelerating their liquidity inflows. Now, why are they doing that? um 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 uh the value of debt. So they're actually if you like destroying their paper money and that is encouraging uh purchases of gold um in particular by the private sector notwithstanding what the official level is doing as well.
(27:31) So if you look at this chart, this is the yuan gold price. In other words, the price of uh gold in yuan and China is driving that process. Uh it's the Shanghai exchange which is the marginal price of gold, no longer COMX or London. And I think that they've been targeting gold at different levels for different at different periods.
(27:51) And you know, we're now getting gold over 35,000 uh yuan or remmbb 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 dollar. Now, if you look at this chart, this is the one that many people site as to why the gold market is experiencing uh this great debasement.
(28:15) And what it shows is the decoupling between the gold price which is in orange here and real interest rates which are 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 but interest rates kind of flatline. So people say something else is going on here.
(28:36) This is central banks basically debasing money. Well, actually, it's China. And this is the gold price again uh 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 uh you know behind private sector gold purchases.
(28:59) 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 uh that needs refinancing and they don't have the liquidity in the system at the moment to refinance that.
(29:20) So they got to inject more liquidity and the two lines on the chart are measuring debt liquidity ratios. Now the reason for looking at this is that um although many other people site alternative measures like debt GDP, our view is that debt liquidity is the crucial statistic because debt has to be refinanced and financial markets are dominated today by refinancing transactions.
(29:43) 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, you know, which is what $350 trillion and uh circle of the amount of debt outstanding and you've got an average maturity of 5 years, that means you've got to refinance about 70 trillion a year on average.
(30:04) Um and that's a huge ask. So basically in China's case, the debt liquidity ratio uh 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 abonomics uh was forced to basically address that problem and it did that through reform and it did that through uh the Bank of Japan buying huge amounts of Japanese government bonds um trashing the
(30:37) currency. The yen has collapsed uh but Japan is dinging 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, you know, as much this year as they did last year or more to get out of the problems.
(30:54) And that's why you've got this monetization going on. Um, that's the microcosm 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.
(31:15) But the other question you ask is what then drives Bitcoin in the future in the long term towards 90,000 or even beyond. And I'd be optimistic as say it's going to be a long way beyond that. Now the reason for that um if you want me to go on is to basically look at what's happening in terms of debt uh in the world economy which I can come to in this chart.
(31:38) 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 uh refinancing existing debts. We 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.
(32:02) In other words, it's issued for 5 years or 3 years or 7 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.
(32:22) So 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 uh relies on old debt as collateral.
(32:49) So you get this sort of vicious or virtuous circle uh it's virtuous until it's vicious and it can go wrong from either way. Either you get credit spreads blowing out uh and term premier changing as the left the right hand side says or you get problems in the in the move index bond volatility or sofa spreads as of last year begin to blow out.
(33:11) 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 um China and this is what the world has looked like. Now this is dominated by the US and by Europe uh you know obviously but basically what you can see in this chart is an equilibrium level of about 200%.
(33:38) And then either side of that you get fluctuations uh 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.
(34:00) 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 co emergency elicited huge liquidity injections by central banks, all the QE uh exercises etc. worldwide uh were engaged. Uh you saw interest rates being slashed to zero or even below that which encouraged more debt ironically and it also encouraged a term out of debt.
(34:29) 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 uh because of a stronger uh pick up in real activity. And so that orange line is starting to go up quite significantly. And as it starts to cross that threshold of uh of sort of harmony, uh you then get into the risk of increasing turmoil as you get into that gray area that we've projected uh through to 2030.
(34:59) 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 you see uh and this is basically the amount of debt that 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 war comes back and that's the
(35:33) risk that markets are running. Now if you get a financial crisis, what is going to happen? 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.
(35:55) And so you want an asset that is likely to hedge monetary inflation. That's gold and Bitcoin and other crypto. >> Sup freaks. This rep is brought to you by our good friends at Ligos Finance, Celsius, BlockFi, FTX. They took your Bitcoin and gambled it away. Ligos can't because they never hold it. Non-custodial lending on Bitcoin's base layer. Your keys, your collateral.
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(37:20) com and use the code TFTCT10 at checkout to get 10% off your new Bitcoin multiig vault. That's TFTCT10 at unchain.com. Yeah, these maturity walls are a bit a bit daunting to look at. And that and that's um I mean having been doing this for decades now, is 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 uh GFC and especially postcoid stimulus, that's one thing I worry about is just the the you look at the 10 year,
(38:01) the 30-year where they are and you think of the the magnitude of debt that needs to be rolled over. Is is this unique in the the history of of your tracking of these metrics? Yes, quite quite simply Marty, it is for for two reasons. I mean one is that we haven't seen this explosion in debt uh before.
(38:22) I mean if you look at uh take the US take US federal debt as this one example. Uh you've had a situation where US federal debt has increased I think I'm correct in saying 12fold um since year 2000. Uh I mean this you know not 12% 12 times u you know even since the GFC I think is up four or five times.
(38:43) Um 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 uh during COVID what happened was that interest rates were slashed to near zero in cases.
(39:04) Some some countries actually went negative. Um and that was a very unusual situation. Now years ago when I worked at Salomon Brothers the book that we were so we used as a sort of bible of interest rates was a book called the history of interest rates by Sydney Homer and that book detailed I think it's four or 5,000 years of interest rate history and nowhere in those pages do you ever get any reference to zero interest rates.
(39:28) It's never happened before. So this turning out of debt and encouragement of debt by policy makers at the time of COVID uh was really unusual and it's caused that skew of debt refinancing. Um 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. Interesting times.
(39:50) You mentioned uh the relative strength in the real economy here in the US. Did last week's GDP print coming in uh 50% below expectations? Does that change your um analysis of what's going on in the real economy or you think that was simply because of the government shutdown um and you didn't have the treasury pumping? >> Well, I think I think it was the shutdown.
(40:13) I mean, this this is a 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, Tankan in Japan, um the EO in Germany, the CPI in the in Britain uh aggregated together by economic size. The black line is the index that I think Stanley Draim Miller calls uh the internals of the market uh which is basically in his view a much better guide than economist to what's going on.
(40:45) And this is looking at the performance of cyclical stocks relative to defensive stocks within the MCI. 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 you know they're on a roll at the moment. So that's suggesting that uh you've got a pretty decent economy coming through.
(41:03) Now what does that mean? And I I venture again to this point that you know 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 uh exactly but they're more or less in sync.
(41:24) And what that's saying is that strong economies don't always have strong financial markets. Um you know particularly if central banks are not doing that much within 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.
(41:41) 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 uh you know, if it's in the on the black line, it's not on the on the orange line.
(42:00) And that's 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 you just look at the numbers and the the cycles and where we are within these the these cycles. And I think uh it's just fascinating reading your newsletter and then juxtaposing it to the headlines and what seems like u I mean we're in a midterm election year here in the United States.
(42:30) Uh the economy is the number one focus of the um the Trump administration. I think beyond the economy, the the uh the state of asset prices for for boomers specifically who are looking to retire. I mean, the voting sentiment in November will be driven heavily with by how the economy is doing and how people's portfolios are doing.
(42:54) And it seems like there could be a storm um on the horizon for the Trump administration or the Republican party if they want to keep the House and the Senate in midterms uh if this liquidity cycle turns over. Um, and it seems like Scott Bessant, um, Donald Trump and his administration are 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.
(43:23) >> Yeah, I think the I mean I think the Wall Street may have a may have an issue. I mean, you know, what I would say is that if you look at what the Fed is doing right now, uh, it's a monetary policy consistent at best with a rangebound market. Uh, is not a monetary policy that's capable of, I think in my view, of actually pushing the market a lot higher.
(43:46) 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.
(44:09) The orange bit is the part that I sort of tongue and cheek called not QEQE which was the sort of sula tabler stuff the Fed did. It wasn't fessing up to uh QE, but it was doing it behind the scenes. Things like the, you know, things like changes in the uh in the Treasury General account, things like um bank term funding programs, you know, things like this latest uh R&P, things like changes in the in reverse repo facilities, all these sort of factors that were not headline QE, but added liquidity is the orange bit. And then
(44:41) the black part is what the Treasury does through changing the tenor of bill issuance. And you know, 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 in risk terms than if you issued a bill. So, in other words, a bond is a lot a longdated bond is a lot less liquid than a short-term treasury.
(45:07) So if they're shifting towards the treasury bill uh end of the issuance calendar or spectrum, then they're actually delivering more liquidity to 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.
(45:27) 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 uh with a six six-month uh lag and that's showing that you should be getting a strong much stronger ISM through this year.
(45:48) 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 Bessant 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 whether it's critical minerals whatever it may be.
(46:22) interesting thing this in the context to um I'm not sure if you caught it but last year Richard Wernern's sort of press tour particularly his conversation with uh 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 um just Fed QE which just pumps financial assets specifically and it seems like the MAGA Trump administration
(46:58) is trying to affect that again via the Treasury going back to the SLR ratio changes and um their focus on resting control of monetary policy from the Fed and creating this sort of unified um policy between the Fed and the Treasury. Um, so it seems like we're meandering into new territory in terms of the and it used to be an implicit independence of the Fed and the Treasury and now they're seem to be um throwing away any implied separation to saying no, hey, we're we're going to try and make it so the Fed and the Treasury are
(47:35) moving in lock step. >> Yeah, makes sense. I think that's exactly what's going on. Yeah. >> Yeah. What um what uh I mean moving away from like a US focus towards Europe and Japan specifically. I mean two different beasts. Um it seems like Europe is not doing well economically. I think they've taken um the posturing of the Trump administration to heart, saying, "Hey, we're not going to put the bill for for NATO and your defense anymore if we don't believe that you're if we're getting back um a commensurate amount of
(48:09) value that we're putting in to this agreement." Uh and it seems like European governments are scrambling to sort of rearchitect how they um defend themselves and how they operate their economies. And then over in Japan, uh it seems like they uh they are trying to defend or not defend their yield curve as much as they were in the past.
(48:34) like you said, they their uh their policy right now is QT and it seems like they have a pretty drastic um domestic u sort of focus right now. And it seems like they recognize that um sort of enabling this global carry trade has not worked out uh particularly well for them and they're they're trying to rearchitect what what they're doing as well.
(49:03) also seems like there's 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 if you want to turn to, you know, Japan, uh I mean, one thing to say is that 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 to make.
(49:23) And that is that 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 premier. Now the term premier has clearly shot up from those sort of low levels that we're looking at back around October of last year.
(49:44) 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 are disappearing fast and I think that that's quite that's welld deserved and you know my view has been always been that you know we're going to see make Japan great again before we see MAGA and I think that's been the deliberate policy if you need a bull work against China's expansion you've got to basically uh enliven the Japanese economy and make it more robust. So, I
(50:11) think that Japan uh you know is definitely a very good area to invest in, I think you're 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 u the yen carry trade, uh the yen carry trade has clearly spooked a lot of investors.
(50:30) I mean, it's the sort of the big bogeyman out there, but I think that you know its impact is much exaggerated. Uh this chart is looking at capital outflows from Asia. Uh and by definition, those capital outflows tend to go into the US dollar. Uh there's nowhere else really for them to go.
(50:48) 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 to through 1919 whatever probably through till actually the uh early 2000s uh that chart was dominated by Japanese capital outflows. I mean that's really the yen carriage trade uh you know in its in its fullness.
(51:15) 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 really need to focus on rather than Japan in my view in terms of impact on the dollar and financial markets. And you know, China, as we know, is running, you know, a huge trade surplus.
(51:34) 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 you know, 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 uh, you know, one of those areas and probably commodities on on top.
(51:55) And I think what that tells tells me is you're getting the world monetary system kind of dividing into two uh very distinct spheres. I'm not going to say uh unconnected. I mean there may well be bridges between them but broadly you've got a Chinese system which is being backed increasingly by gold uh 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.
(52:24) Uh no one trust Chinese government bonds internationally and I always got that as a benchmark. So they need to use a benchmark everyone's familiar with and gold is probably the most obvious backs stop 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 stable coins are the route forward.
(52:44) And so I think what you've got is effectively two two monetary systems running in parallel. The commoditybased one for uh China and a digitally based one for the US and that's how I think they're going to evolve. So the growth of stable coin and then by association other digital currencies are really going to be foremost in uh in terms of understanding the international monetary system in the future.
(53:06) >> Yeah. And I forgot to mention it earlier but uh as it pertains to China driving the gold price and bitcoin suffering uh over the last 6 months as gold is has skyrocketed. I think another key point to add there is that um yet again China has come out and announced that they're banning the use of uh of cryptocurrencies and um there was a report I believe in late November earlier December of the CCP stepping in to one of the provinces and shutting down a large mining operation that many were speculating represented something like 10% of of
(53:42) global hash rate uh on the Bitcoin network. And so >> yeah, this is this is very significant. I mean, the Chinese issued um a notice called notice 42 about two or three weeks ago, which basically doubled down on uh uh on control over crypto. I mean, specifically US crypto. And you know, my point last year was or one of my points last year was that actually stable coin are a huge huge threat to the integrity of the Chinese monetary system.
(54:09) And what they've now done is they've basically outlawed all forms of crypto uh any form of digital currency. It's illegal within China. And uh they are basically putting up a defensive you know great financial wall if you like or great firewall of China to try and protect the economy against this threat.
(54:27) And I think it's a real threat. So, you know, China realizes that, but you know, what is true for China is true for many many other countries and so other countries are going to, you know, feel the heat of US competition on on stable coin. Now I think the sort of the the way the international monetary system is evolving is an interesting one to ponder and I'm not I'm not going to say that I've completely understood it but I would say if you go back to uh a very sort of basic monetary system where one used precious metals uh or banks or
(54:56) whatever in that example um the money you chose determined the payment system. Okay. But in the modern world it's kind of the other way round. 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.
(55:24) Yeah, it's uh it's wild times and particularly if you look at the sort of domestic swabbling on Capitol Hill right now with this Clarity Act bill which um which is essentially a fight right now between the big banks and um crypto upstarts for lack of a better term like Coinbase who want to share the yield that is generated from holding short-term treasuries and reserves for the stable coins with within customers and you Scott Besson and Trump basically saying, "Hey, gentlemen, get to the table, get this figured out because we need to get
(55:56) 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. Um the and that's like when you take this into consideration to that's if China specifically is going pro gold anti- bitcoin and other cryptos I I would like to believe that the United States should view that as an incredible opportunity.
(56:22) 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 um very similar asset uh that is foreign fitted for the digital age where that could be an incredible counter to you know China leading into gold is the US actually following up with something like a strategic Bitcoin
(56:58) reserve. and basically signaling to American citizens via dimminimous tax exemptions, maybe capital gain tax exemptions that that we should be building around Bitcoin as well as the stable coin infrastructure. >> Yeah, I agree. I agree. Absolutely. >> Awesome. Well, um, this has been incredible. Thank you for your work.
(57:19) 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 kind of to round it off in in terms of putting this together and it may come back to the bond markets and sort of judging what's happening to to fixed income is to basically think of maybe two charts and this this may be uh you know a step too far into the weeds of uh of bond market analysis.
(57:46) But this is this chart is a is an interesting one because it basically shows us that you know we can talk gibly about trends and you know the optimism about the long term but it's the cycle that often sort of skewers people and bites them uh in places that they don't like. And this is looking at the global liquidity cycle again in orange but it's also showing in black u the changes in term premium worldwide.
(58:12) Now term premier as we went into the risk premier uh that investors demand to hold bonds over their term. So it's effectively if you like the price of uh of of safe assets uh inverted. So if you basically see a very high um uh term premier uh 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.
(58:37) In other words, risk uh people are starting to price risk uh more aggressively. Now, these two charts, liquidity and the term premium are completely unconnected in the sense they're very very different variables. One's a flow of liquidity and the other is a rate coming from uh in from the term structure.
(58:55) Uh 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. uh therefore there's more odds of default. Therefore, investors are going to be less risk-seeking uh and they're going to start to shift towards safe assets and that's what the chart seems to be telling us.
(59:18) 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 uh the bond market.
(59:37) So this is looking at the spread uh across the term structure. People normally look at 10 two 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 whole uh you know stuff I've been talking about is is correct.
(59:58) What you'd expect to see looking at that chart and eyeballing it is the US uh term structure. In other words, the yield curve should flatten by about midyear. And that would be a pretty good signal, I think, of a riskoff positioning move. Um, 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
(1:00:29) the in the short-term money markets. Uh, that's another sign of things going ary. So, if you want some risk control, I'd monitor those. But, yeah, my 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, liquidity is drying up would be some in some point next year. Correct.
(1:00:57) >> I think that's correct, Marty. Yep. That 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 to discuss all this. I think it's uh incredibly fascinating uh very high signal. And again, I I really appreciate your ability to zoom out, look at everything unemotionally, and just look at the data.
(1:01:21) I think it's very important to be able to do that. >> Well, that's great, mate. Always a pleasure. Thank you. >> All right, that's all we got today. Peace and love, freaks. Thank you for listening to this episode of TFTC. If you made it this far, I imagine you got some value out of the episode. If so, please share it far and wide with your friends and family.
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