From "Everything Bubble" To "Everything Bust"? Michael Howell on Liquidity In 2025 & Beyond
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

I'm very happy to be joined by Michael Howell of Cross Border Capital. Michael, great to see you. Welcome to Monetary Matters. Well, great to be here, Jack. Very excited. Lots to talk about. 2025 is going to be, I think, a challenging year. So let's get going. I'm really glad you're here, Michael, because you have been talking about a bull market over the past two years, and that is exactly what we have had. Many people were bearish. You were one of the very few bulls in...

Early 2023, late 2022. So this entire way we weigh up in risk assets, I think your view of liquidities have been very, very informative to what's actually been going on. I guess I want to ask you now, Michael, what is your view on global liquidity right now? And what's your view on risk assets such as stocks for 2025?

I think basically liquidity is going to increase next year, that's for sure, in terms of the supply of liquidity. I'm still pretty optimistic. I think the fact is we've got to recognize is that the momentum of liquidity is beginning to slow down probably quite noticeably. And that's really coming, I would suggest, from two directions. One is that if you look at the impetus that the US is delivering, that's beginning to slow down. Now, what I'm really saying there is

I'm not talking about interest rate cuts. I mean, I don't think interest rate cuts really matter a job, to be perfectly honest. But what we've got to look at is the amount of liquidity that's entering the system, both explicitly from the Federal Reserve and implicitly from the US Treasury. And there are things that we talk about, which we can go into a little bit later, which are things that we've described as not QEQE and not yield curve control, yield curve control.

And those have been, if you like, hidden stimulus. But they've been very noticeable and probably add up to several trillion dollars of liquidity. They're beginning to slow down. I think one of the questions we've got to ask is what new Treasury Secretary Scott Besson wants to do about the funding of the US government when he continues with Janet's policy. I would suggest Janet's errant policy of funding a lot of the bill market right at the front of the curve. And he will need to push

or term out bond issuance towards more coupons later, probably in the term.

And then the other thing we've got is a big challenge that's coming. Starting around the middle of 2025, when the so-called maturity war of debt that was taken on or termed out during the period of the COVID emergency is beginning to come due and it will need to be rolled over. And that's going to sap up quite a lot of liquidity in markets. And I think that's an important thing to understand. Now, on top of those concerns, there are issues such as

China, you know, writ large, China, you know, who knows what's going on there? I mean, the whole economic and financial situation is looking more and more of a mess. And you just got to look at the Chinese bond market to get, you know, kind of spooked about developments. You don't see sudden collapses in the yield base of what is probably the most important bond market in the world, you know, in two or three days. I mean, these are worrying signs. So I think the bottom line is,

As regards liquidity, I'm realistic, but getting a little bit more cautious. As regards markets, I mean, our view is that we're not going risk off yet. We still think it's still a sort of benign-ish environment. But, you know, the way that I've described that is to say, look, you know, think of enjoy the party, but dance near the door. There are clearly risks picking up and one's got to be very aware of those risks.

So let's step back and talk about what do you mean by liquidity? Do you have three factors in your global liquidity index? Central bank liquidity, private sector liquidity, and cross-border liquidity. So the pickup in liquidity over the past two years, how much of that has been from central banks? How much from the private sector? If so, from where? From banks, from non-banks, private credit? And then tell us about what's going on in the cross-border world, which happens to be the name of your firm, Cross Border Capital. Correct. Correct. Okay. Well, let's take each one of those separately.

What you've had is a clear stimulus from central banks. In fact, there's a chart that we can show, which is a heat map, which is basically looking at what central banks have been doing over the course of the last three years. And the tiles in that heat map, the red is probably by definition saying that what we've got is an environment where central banks are actually withdrawing liquidity from markets.

You saw the peak of those sort of red hues on the chart around the middle of 2022.

And then as we move progressively from left to right, you start to see the huge change from red towards green, green being loose or central banks beginning to inject liquidity into the system. And where we are now is a much more benign environment as of the end of November 2034, which is the latest data we've had. But that is really telling us what central banks have been doing. Now, the private sector is...

a little bit of a mixed bag here, depending on which country you look at. If you look at what banks have been doing, banks have been slow to ease, but they're beginning to come to the party. And if you look at loan officers surveys, they've basically begun to turn positive, more favorable on lending really over the last six months. And that's gone very much against the consensus view that was still very much of the view that banks will be withdrawing credit, but they are coming back and they're putting liquidity in.

that's generally a worldwide phenomenon. If we dig into the other element of private sector liquidity, which is the corporate sector and corporate cash flow, that's been particularly strong and noticeably in the US. So US corporations and particularly tech companies are throwing up a lot of cash. Now, part of that is actually an indirect effect

through the US private sector of the very loose Fed policy. And what we've had is not just Fed spending, but we also had a phenomenon which we call not yield curve control, yield curve control, where janitors basically funded the US government, increasing at the short end of the market. Now, the reason for citing that is that if you think about liquidity in broad concept, the way that we think of liquidity, at least,

is to say that liquidity is defined as the pool of assets divided by their duration. So what you can see is an increase in liquidity if assets go up or if duration shrinks. And what we've had in the context of the US is that duration has come down quite noticeably.

So, janitors actually reduced the average maturity of the US calendar, the issuance on the calendar, by about one and a quarter years since the end of 2022. On top of that, there's been massive bill issuance, as we know. So, incoming Treasury Secretary Scott Besson has got a big challenge because he's got to refinance in 2025 about 30% of the

28 trillion of marketable debt in the US economy. So this is clearly a challenge, but that's one of the reasons that liquidity has basically gone up. So you've had that element. The cross-border flow element has also been significant, but it's really been a big significance for the US. And this is something we need to get a handle on because what we're seeing in terms of these cross-border inflows are very large, sustained, but rapidly moving cross-border flows.

basically, buoying up US assets. Now, this is something we've seen before. We've seen this movie. We've seen it in Japan in the 1980s. We've seen it in emerging Asia in the mid-1990s. And we've seen it in China in the wake of the 2008-2009 global financial crisis. And these parties don't end well. Now, I'm going to come on to that later, but let's just stick with the script so far as to what central banks...

doing. Now, if I go to an earlier chart, which is looking at what the Federal Reserve is doing, and this is what we've labeled not QEQE. Now, as people will know, listening to the rhetoric that comes out of the Federal Reserve and the FOMC, the Federal Reserve is supposedly engaged in quantitative tightening. So they're supposedly taking liquidity out of the system. Well, their balance sheet is definitely shrinking, but what this chart is showing

is the amount of increases in liquidity generating elements from the balance sheet. Now, this begins in 2019. You'll see the period of the COVID emergency where the Federal Reserve, these are looking at year-on-year increases in Fed liquidity.

actually increased quite significantly. There was a period through 2022 where the Federal Reserve definitely did take liquidity out of the system. But look at what they've been doing recently, really through 2023 and through this year, where there's been a very significant increase, averaging probably at a year-on-year basis about $2 trillion going in

markets. And this is basically because the Federal Reserve has been doing things like manipulating the reverse repo tranche, changing the Treasury general account, bank term funding programs. These elements have actually been liquidity generating. But that is not the end of the story. And the other thing we've got to think about is the next chart, which is looking at what we call a

again, somewhat flippantly, not yield curve control, yield curve control. And this is trying to assess in trillions of dollars the impact of Janet's change in the funding structure of the US economy. Now, what has happened, and this is somewhat arcane, so you'll have to bear with me, but broadly what's been going on is that a lot of funding, rather than being

down at the long end of the market through 10 year coupons or 30 year bonds or whatever has been done much more at the short end. So it's been done through bills, which are securities that don't pay coupons that basically have a term up to 12 months, or they've been done in one, two, three, five year coupon bills.

Now, the reason that's important is that those bills in a collateral sense or those short dated bonds and bills in a collateral sense have got much, much greater value. So credit providers are much more willing to lend against those.

The other feature is that if you think generally in the markets, who buys those sort of instruments? It's the banks. Because if you've got a very loose fiscal policy and the Treasury is writing checks to the public and the public are building up their bank deposits,

Banks in the US have to find assets on the other side to match those deposit liabilities. And given the fact that a deposit liability can walk out of the door tomorrow, they want short term duration matching. And so these types of securities are absolutely ideal for the banks to hold. The problem is, though, that if you're doing that, by definition, you're monetizing deficits.

Think of a contrast where the Treasury is actually funding the deficit through issuing a 10-year coupon bond that will be bought by an insurance fund or a pension fund, for example, life insurance fund or pension fund, and that will come out of existing savings. It will not be monetized. What's going on now is a lot of monetization going on. And this is clearly a worry. What's more, if you get an unwelcome interest rate spike,

It's going to cost Scott Besson a lot more in the interest bill because he has no control over short-term funding. So these are issues we've got to be wary of.

Next charge is to say, well, add those two factors together. And what does it mean in terms of the stimulus that the US public sector, Federal Reserve and Treasury have imparted to the markets? Now, we all know and we fully recognize what happened during the COVID emergency, where there was a huge stimulus. And I'm not counting here fiscal spending. I'm just looking at two elements. I'm looking at the liquidity impact.

of what the Fed has done and what Janus has done through purely changing the term of borrowing by the Fed. On top of that, you've got to add the fiscal spend, but I haven't done that. This is the hidden element that we're measuring. So there's been a hidden stimulus of sizable hidden stimulus that we're talking about of a magnitude like $5 trillion has gone in. These are big, big amounts. And as you can see from the chart, it's beginning to roll over.

Now, the question is, number one, will the Federal Reserve continue to do not QEQE? Short answer is I think it's difficult for them unless they actually formally stop their so-called QT policy. In other words, they've got to start moving towards balance sheet expansion again explicitly by building up coupons. In other words, if you look at the Treasury General Account, sure, it can be taken down, but it's finite.

And if you look at the reverse repo tranche, that's pretty much exhausted anyway. And then we've got the bank term funding program, which is now rolling off quite rapidly. So at the end of the day, what's happening is the ability of the Federal Reserve to do not is very limited now. Can the Treasury keep going? Well, Scott Besson has been very explicit to say that Janet has spoiled the party and he's, you know,

basically said that what Janet's doing here is running a policy which is akin to an emerging market or Latin American economy. We're going to be careful what we say now because Argentina is now in the luxurious position of being a very good borrower, but running a policy that is more reminiscent of an emerging market than

the US economy. So he really wants to start to push funding from what we can see towards the higher end. That will sap liquidity. His ability to do that, you know, against obviously President Trump's wishes to get a strong stock market,

probably going to raise some tensions but this is what we've got to be wary about that chart is going down now if we move back to the global story and that's you know a little bit later in terms of slide 10 what we show there is the global liquidity cycle and the global liquidity cycle is still in an upswing and you know part what we've just what i've just said about the fed and the treasury

There's still liquidity that can go in, but our concern is that we're getting we're now losing momentum with the dollar being very, very strong. The ability of foreign central banks and foreign governments to ease liquidity is clearly a great challenge. So what we've got is a situation where momentum is likely to be slowing. So that chart, which we've been indicating and projecting, will peak in late 2025.

It may well peak in late 2025, but the black line may not go up to meet where that red dotted line is. In other words, you may get a bit of what's called a belly flop maybe in the swing parlour.

you're going to get a small increase and then a rollover. That's the risk. So number one is there are challenges out there for the US. Number two, there are challenges out there for foreign central banks with the dollar. And number three, what we've got is a situation where more liquidity is going to be used for debt refinancing. And that's something I think is worth thinking about right now because the big bogey that's hanging over markets and what's really troubling

investors, I think, long term is this big debt problem. Now, let's try and focus on the debt. And in fact, the next slide, which is, I think, in the pack I sent slide 11, what that is looking at is some metrics for debt. Now, everybody talks about, you know, these throwaway terms of financial repression. They talk about debt GDP ratios, you know, escalating. If we step back a moment,

Why is a rising debt GDP ratio necessarily bad? You know, that's really a question we need to think about seriously. And why would financial repression, which people mean by financial repression, getting interest rates below the rate of GDP growth necessarily be a solution to all this?

And what I'm really trying to pose in this chart is that those debt GDP ratios that you're looking at here, which people sort of extrapolate to the moon, they're not really telling us anything. Does it matter that debt GDP is

you know 400 in japan or 120 in the us or whatever yeah whatever the relevant figures are you know academics you know you know stand you know dance on top of a pin and say well okay 90 is the critical threshold below that level uh you know economies derail well just look at singapore or look at

Look at Japan. I mean, they keep going. They wake up every day and they still produce stuff. Economies haven't derailed. So debt GDP is not probably the right metric. And what I put on that chart as well is another metric, which is debt to liquidity. But the point that we keep arguing is, look, what really matters in a world of massive debt, because debt's never going to be repaid, of course, is it's got to be refinanced.

And if it's going to be refinanced, you need liquidity. But liquidity ultimately is the balance sheet capacity of the financial system. So if you want to refinance debt, you've got to have that balance sheet capacity. And what the orange lines on that chart show are ratios between debt and liquidity for all these economies. Now, if you look at that, you can see there is some equilibrium level that they're all trying to search out. And

Basically, a mean reversion is underway. You can see the progress that Japan has made. You can see what's happening in the eurozone. So despite the fact that we know that France's debt GDP ratio is exploding, I'm not saying that's a good thing. It looks against liquidity that the eurozone is actually in a much better situation. If you look at China, which I fully admit is in a terrible state,

Against liquidity, the Chinese debt situation doesn't look that bad. Now, notwithstanding that, I would say to get back to equilibrium, China still needs to print or expand liquidity by about 30%, which is still a big ask. But generally speaking, this looks more manageable. Now, if you aggregate this on equities,

you know, a world scale and look at the next chart. This is the key thing we think is important to understand. And this is looking at the ratio of all advanced economies debt relative to liquidity. So what I'm saying here, bottom line is it's all about refinancing. You know, tear up the economic textbooks that tell you

that capital markets are here to raise new capital. You know, what evidence is that? They don't do that. Capital markets are here to refinance debt. Something like three out of every four transactions in global financial markets involve a debt refinancing transaction. That's a big, big change from 30, 40 years ago when capital raising was important. So it's all about debt refinancing. In a debt refinancing world, what you need is balance sheet capacity and liquidity. This ratio tells you what happens.

The dotted line is our estimates of the long-term equilibria, which is basically created by looking statistically at that data. The annotations on the top are referring to

financial crises. If you move significantly above the dotted line, there is a refinancing crisis or a financial crisis generally. And you can see those annotated. If you're below the line when liquidity is abundant, what you see is asset market booms and I'm trying to label those. And where we are at the moment is in a significant lower displacement where liquidity relative to debt has been significantly suppressed

For what reasons? Number one, because following the COVID emergency, there was huge liquidity thrown into markets. The second thing is because interest rates were hammered down to near zero levels, corporations and governments, for that matter, turned out a lot of their debt. So all that comes due now from the middle of 2025 onwards, but it peaks in 26 and 27. And the reason that orange line is rising back

towards that dotted, the broken line in the middle is because you're getting this debt maturity wall starting to come in and that debt needs to come back and be refinanced. And that will suck up liquidity. And that's an important thing to watch.

And that's one of the reasons that we are concerned about the outlook over the next two or three years, because there's a lot of debt to refinance. We're in a debt refinancing world. And if you want to contain this problem, central banks have got to start pushing more liquidity into the system. And the question to ask is, are they willing to do that when the rhetoric that's coming out of the Fed is they seem to want to continue this so-called acute QT policy?

And that's really a big question. Now, what does that mean for the US and for the US bull market? And liquidity is critical in that dimension. Now, if we start to think about what went wrong in Japan,

And what went wrong in emerging Asia, respectively in 1989, 1990 in Japan and in the mid to late 1990s in Asia, it was because a lot of capital went into those economies that inflated bubbles. Their exchange rates were under pressure, but they decided they would monetize the liquidity inflows. And the bubbles burst when, in Japan's case, they suddenly realized they got inflation.

And in fact, Miyano, who was then the central bank governor, which I recall very well, suddenly said one day, we've got we're raising interest rates because we've got service sector inflation. Well, nobody in Japan had ever heard of service sector inflation. It wasn't even in the statistics, but they hiked interest rates and arguably too much and burst the bubble. In emerging Asia's case, the capital inflows were arrested. They reversed because foreign investors got spooked by the big current account deficits that were opened up when the economies were booming.

imports were sucked in, trade deficits widened, and investors got spooked and pulled their money out. Now let's take a look at slide 13, which is what's happening to the US. Why have you got, this is the critical question, US exceptionalism at the moment? Now, Pache, America's great ability to produce,

Technology successes, everything that's good. Okay, I'm not going to decry that. But the fact is, what we're looking at is not just American exceptionalism. It's fundamentally US dollar exceptionalism. And what we're seeing here is a lot of inflows into the US dollar for various reasons.

And what this chart is basically illustrating are capital inflows into the US that we've tracked from the other side because US statistics of ticks data are not fully comprehensive.

A lot of dollar inflows are not booked in mainland US, they're basically booked in offshore centres. And so what we're doing is looking from the other side, from using our database on cross-border flows, and this is showing money flows into the US. And what happened was a significant transformation in the wake of the global financial crisis. First of all, because what we were seeing in that situation was changes in banking regulations,

We got Basel III, we had Solvency II for the insurance funds. A lot more safe assets were demanded naturally after the crisis. And a lot of those safe assets were U.S. treasuries. And so money winged into America.

Then we started to see the eurozone banking crisis that pretty much ended any thoughts of the euro being a major reserve currency. People moved into the dollar. Then we got Xi Jinping's anti-corruption drive, which led to capital outflows from China and money moving into the US dollar. And what we've seen sustained through this period is a significant inflow into US dollars and US financial assets. And if you look at the latest plot, you know,

post Trump's election, it's begun to accelerate again. So money is coming in. The dollar is firm to strong. Everything that Scott Besson is talking about is talking about a strong dollar. That's what his policies seem to be supporting. And if you look at the following chart, it's my favorite metric of the U.S. dollar.

This aligns exactly with what we were just looking at with capital flow. The inflection in capital flow is driving the real exchange rate higher. This is data from the BIS in Basel. This shows the real trade weighted exchange rate. And what it's showing is a trend change. Now, I would argue that uptrend that's occurred since 2008...

is very much intact. It does not seem to be troubled or has been challenged. And it looks as if that dollar is going up further. And that is why capital is being sucked in. If you look at the following chart, here is the warning sign. And this is saying we've seen this movie before. US is again shown top left.

On the top right is Japan. This is the real exchange rate of the yen. And what I've tried to highlight is what happened during the bubble years. Then we see China, lower left.

again what happened during the bubble years in China, then we see what happened in emerging Asia again during the bubble years. And what happened hasn't fully happened in China yet, but it's going to happen, is that you see the real exchange rate rising significantly and then it tumbling. And that's the concern that we've got to think about in the US. What could cause that? Could be the capital leave suddenly because foreign investors get spooked. It could be that

the federal reserve decides to hike interest rates, a number of things. But this is really saying is, and this is what I argued in my book Capital Wars a few years ago, the adjustment of the world economy comes through real exchange rates,

Capital comes into an economy, cross-border flows, the real exchange rate gets pushed up. But governments don't like a rising nominal exchange rate. So what they do is they monetize the capital inflows. They try and keep the currency down. And what happens is you get the expression of that capital inflow coming not through real economy prices so much, but much more in financial asset prices. And that's the adjustment mechanism. And that's what's happening in the case of the U.S. dollar.

Why isn't the dollar going up even more? Because the Federal Reserve and the Treasury are easing, okay, and that's keeping a cap on the dollar, but the dollar is still going up anyway. How could have Japan avoided the bubble by letting the yen spike dramatically in the 1980s, but they didn't want to do that, so they monetized and created a bubble. Exactly the same in emerging Asia, they were tagging the dollar very closely, they didn't want to go up against the dollar, so everything was monetized.

This is the danger we've got. So what we've got to look at is we've got to watch the dollar really carefully because this is the same script. It ain't happening yet.

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Michael, thank you. Thank you for that. There's so much there. I just want to explain a few terms for our audience here today. Janet Yellen, of course, is the current Treasury Secretary. She will be departing and the likely new Treasury Secretary under Trump is Scott Besant. Michael, so I think earlier you referenced the key point of liquidity because people use that word liquidity frequently.

so often, and it has very different use cases. Sometimes people are talking about liquidity when trading. If Apple, they can easily get in a million dollars of Apple in and out very easily. A much more illiquid stock, they have to pay a spread or they sell it over a few days.

I think a lot of times people, the term liquidity can be self-referential. So if we were in a bull market, people say, why are we in a bull market? Well, because there's a lot of liquidity, but it's not as predictive. What I really like about your work is that you attempt to predict liquidity

financial and monetary conditions by looking at cross-border flows, private sector credit conditions, and in central bank liquidity. And you defined your terms really well. And you focus on the ability of why liquidity is important is because it is needed to refinance debt. Debt is very rarely paid off. It is almost always refinanced. And what

When you have a financial crisis, it's because the debt can't be refinanced. If I'm a corporation, I borrow 10-year money at 4%, it's quite rare that I actually won't have enough money to pay the 4% coupon. What really happens is if I owe all the money and I'm not able to renew my loan, that is what causes a financial crisis when companies don't have the ability to refinance. Michael, I would say when I'm looking at...

American corporate conditions, credit is very, very easy. Yes, the risk-free rates such as the Fed funds rate or the 10-year treasury rates are higher, a lot higher than they've been over the past 10 years. But the credit spread on top of that is extremely narrow. I think the investment grade corporate spread in the US is 75 basis points. The high yield spread is close to the lowest it's been since, I don't know, 2006.

Why is corporate credit so easy? Can it be explained by, I guess, you said private corporations are throwing off cash. There have been relatively few defaults. Or can it be explained by liquidity? Well, I think it's liquidity. But I think it's, I mean, just to roll back a second on your terms, we're thinking about funding liquidity. That's what we're measuring. So it's the ability to

of corporations or businesses or households or whatever to fund themselves in markets. So that's funding liquidity.

That's different from market liquidity. Market liquidity is what you refer to as the depth of transactions, the bid-ask spread. Can you transact in size? That's derivative from funding liquidity. So funding liquidity comes first. That drives market liquidity. Generically, if you think of the liquidity of security, you think of the asset size divided by the duration, as I said earlier on. So if you think generically about whether liquidity can increase in the system,

Number one is our assets increasing or number two is duration shrinking or increasing. So that ratio is important to thinking generically about liquidity. But the two measurable concepts that we think of, number one is market liquidity. We have indexes of that and we show that they follow funding liquidity. But everything I'm really saying now is focusing on funding liquidity.

So that's really the key thing. Why credit spread so low, I would argue, is because corporations have got so cash rich. There's an awful lot of cash flow going through the U.S. economy is what we measure. It's one of the reasons the dollar is so strong, because you've got a very healthy cash flow environment. And that's normally a prerequisite to a strong dollar. So everything lines up in that respect.

So your thesis on why liquidity might begin to ebb in 2025 and 2026, how much of it is the fact that there is a lot of refinancing needs for corporations and households? People in 2022 said the corporations need to refinance. We now know they were wrong. So many corporations borrowed

very long term money in 2020 and 2021. And the ones that didn't were able to very easily finance their needs through alternative solutions such as private credit. So the gap wasn't that big in 2022, 2023 and 2024. And the small gap has been plugged. But you're saying there's a much, much bigger gap on the horizon. How much liquidity do you think is needed to fill this gap? And also, is that the only reason that you are thinking liquidity could begin to ebb? Or what are the other reasons perhaps?

Well, as I said, I mean, I think there are a number of challenges. I mean, one is let's think of the supply of liquidity, which is really coming from the banking system, private credit, etc.,

you know, plus the central banks, and I must add in as well, obviously, the US Treasury, what we've said is not control, these things are clearly critically important. But what I was trying to identify was that the Federal Reserve is kind of running out of road in what it can do in terms of the not QEQE concept. They've got to start to shift towards

ending, formally ending QT and get their balance sheet expanded. I mean, it's in my view, it's crazy for a central bank to oversee a shrinking balance sheet when the financial system, which needs to roll over debt and needs an expanding financial liquidity pool. They have to do that. If you look within the markets, you're starting to see increasing signs of tension. And you can see the signs of tension if you look at the spread of SOFA rates over Fed funds.

They should be in a normal range, but they're beginning increasingly to blow out. Now, we know that there are always quarter end challenges. But looking through that, I mean, what you've had, I think I'm correct in saying is in so far this year, you've had 77 days when SOFA rates have spiked significantly above.

outside of a normal range, outside of away from Fed funds rates. But 34 of those have occurred since the end of October. So we're starting to see more and more tensions in the markets. And I think the Federal Reserve has got to start addressing this problem.

you know, pretty quickly. We know the Treasury general account is bloated. It probably needs to be run down. But there are other things they need to do because that's only a temporary respite. And coming back to Scott Besson, he needs to think about whether the Treasury is going to continue to fund through bills. Bills are 22% of total debt now.

The normal range that we've been guided to is 15 to 20. So it's above that threshold. You know, except it's been a lot higher than that. At times it was 40 percent. But that's not a great recipe for funding success. What you need is you probably need to keep the current level running to keep the stock market up. So around these levels, maybe even pushing it out slightly.

But that's not the rhetoric that's coming out of his mouth right now. He's saying that what Janet was doing was actually bad and we ought to be changing towards more coupons. But more coupons will sap liquidity. More debt refinancing will sap liquidity. So where is the liquidity coming from? And then we think, well, maybe somewhere else in the world. But the dollar is a wrecking ball that stops liquidity.

foreign central banks easing so easily. Just look at currencies around the world. You know, how many central banks really want to cut interest rates when their currencies are tumbling against the US dollar? This is a concern. And the biggest problem by far in that regard is China.

Now, I just wanted to say something about China, because China's absolutely important as the elephant in the room here. And it's probably working up to some major, I don't know, catastrophe or major inflection at least. If you look at the slide I put in the pack on slide 16, this is looking at, I think, a sort of worrying development, because what that worrying development is showing is

is the black line is PBOC liquidity injections into the markets. So this is their open market operations and it's a rolling figure and it's something that we've looked at for years. And the way that we understand the Chinese financial system, and it's still basically a state run system where the state owned banks are critical and the PBOC is critical.

to the whole tempo of the economy is if they change liquidity injections, it feeds through significantly to change the tempo not only of the Chinese economy, but also the tempo of the world economy, given China's large economic footprint.

Now, what you can see in this chart is the black line. Well, it's volatile. It goes up and down. But that's Chinese open market operations. They're liquidity injections for the PBOC. But lately, it's come thumping down. And one of the reasons that that's going on is the Chinese are trying to target the yuan against the US dollar. And that's what they've been doing through much of the last few years. When you've got a strong dollar, this really, China is being impaled on the spike of a strong dollar here. And

That's the problem they had. If they want to maintain dollar parity, what they've got to do is to keep tightening monetary conditions. And that's what you see. Now, we've pushed forward that black line by three months.

Now, this is suggesting it may be a predictor. And I'm not trying to forecast here, but I'm just giving a warning. The orange line is our now cast of daily world. And that's done through an AI system. I'm actually looking at tracking commodity prices, credit spreads, currencies, trade sensitive currencies around the world. And it's saying, what does that really tell us about world GDP? And we align it with other now casts and predictions.

and actual data, hard data. And what it's showing is that that seems to move pretty closely, I would argue, with Chinese liquidity injections by the People's Bank. China is an important economy. The PBOC is critical to the tempo of that economy. And if the PBOC is sitting on the brakes, that's bad news for the world economy. And so what we may be seeing here is a slowdown. Now,

Go to the next chart, take a deep breath before you do that and start to contemplate what is going on, what on earth is going on in the Chinese bond market. Now, Wall Street, without any question, is the world's most important stock market and it's become even more so this cycle.

China has the world's most important bond market because it's the world's, let's say, most integrated economy. China trades with more countries than anybody else. It's a big economy, a huge manufacturing behemoth. And what we've got to understand is what's happening in the Chinese system. This is their benchmark 10-year bond. What is going on there? This is falling off a cliff.

And if you look at that, that's not because of rate expectations collapsing.

it's because term premium, the black line, are going down fast. Now, why are term premium going down rapidly against a backdrop where in most other bond markets term premium going up because of all the coupon issuances out there? But in China, they're plunging because people need safety. They came really spooked by what's going on. This is debt deflation writ large. Economies, financial systems cannot stomach debt deflation. There has got to be a change.

And that change must be that China addresses its debt problem and monetizes significantly. Every other economy, Japan, emerging Asia, Scandinavia in the early 90s, America, have all monetized to get out of big debt problems. China is no exception. China is no different this time. It's got to do the same thing. And that means they've got to devalue the yuan somehow. The question is, what are they devalue against?

Is it just the US dollar or more importantly, is it gold? And I think what they're doing is they're devaluing against gold. Now, herein lies the prospect of a deal.

And this is why I think it's important for Trump and Scott Besson to keep the dollar elevated as we go into the front end of next year, because it gives some huge negotiating power. If you're talking tariffs, much better to do that against the background of a strong dollar than a soft dollar. They want the dollar strong, I think, because it gives them huge muscle internationally.

You know, I'm amused by the fact that when Trump came to the opening of the Notre Dame, it was very much like all these, you know, all these European politicians were worshipping, went to sort of pay homage to the emperor. It was extraordinary to watch. And, you know, we've even seen that with the Canadian prime minister immediately coming to see Trump. Trump is important for the world economy in a way that no U.S. president has been for a long, long time.

He matters what he's going to say. And I think a strong dollar is part of that policy, at least in the near term. Despite what Trump says he wishes, I think the strong dollar is there. Therefore, they need it to negotiate. China wants to do a deal, in my view, and that deal will probably be devalue against gold. This may be a maverick view, but let me say that devalue significantly against gold, the yuan.

Try and keep as best as possible the US dollar one cross right near where it is or around where it is. So save face and let the dollar gold price

devalue significantly. Michael, why do you say that the Chinese bond market is the most important bond market in the world? Earlier, we showed a chart that the US debt to GDP ratio is quote unquote, only 125%, which is of course, compared to historical standards, very high. Whereas in China, the debt to GDP ratio is over 270%, 280%. However, I believe a lot of that is state...

the banking system lending to construction firms rather than national debt, but I could be wrong. So why is the Chinese bond market so huge? Because to be honest, I rarely hear about the Chinese bond market, but I and other people have noticed that yes, the Chinese bond market yields have absolutely collapsed as you showed. And at the longer end of the yield curve, Chinese yields are lower than Japanese yields, which really is wild to say.

Well, I mean, to turn it around, why is the debt GDP ratio important? Why is 100%? Why does it matter? Why does 200% matter? Why does 300% matter?

I mean, look at Singapore. I think it's Japan is up there at near 400 percent. These economies keep running. They can keep financing their debt, but it's all about financing the debt. It's not about repaying the debt. I'd come quietly if you say, well, OK, the debt GDP ratio is measuring the debt repayment potential, but that's never repaid. Let's get real here. The can is kicked down the road. No one ever pays their debts back.

Michael, I'll get real with you is that I happen to agree with you. I mean, there were a lot of very smart economists who 10, 15 years ago predicted that if the US debt to GDP ratio hit a certain threshold, I forget, 95%, 100%, 105%, that growth would suffer and that there'd be drastic financial consequences.

That hasn't happened. I mean, I do agree with the late and great Charlie Munger that if you think debt and GDP can go to 20,000%, you probably also believe in the tooth fairy. So I do think there are natural limits. But yeah, broadly, to be clear, my own views, I do agree with you that it is the refinancing capability and that it is about how much money there is relative to the debt rather than debt to GDP. Yeah, I mean, you know, it's the financial system that's going to fall apart. No, it isn't. You know, just think back to, you know, go back to year 1900, okay? Yeah.

What's happened to the dollar since 1900? It's devalued dramatically. I mean, whatever, you know, a dollar in 1900 is probably worth 12 cents now in real terms. OK, fair enough. OK, if we go to, you know, year 2500, what's the dollar going to be? How many cents is it going to be? They're going to keep devaluing it.

Okay, that's the point about paper money. It's devalued. The can is kicked down the road. That's what's going on again now. We've got to be real to that. That's why we keep saying we're in a period now where you've got accelerating monetary inflation in terms of the trend. Investors need monetary inflation hedges in their portfolios. And what better? Things like gold or...

Bitcoin. These are these are you know, these are monetary hedges you need you need to take. But the point is that the big problem out there is China because China is suffering debt deflation. OK, this is when debt really matters is if you're getting debt deflation because you're getting a huge, huge burden on the economy. Economies can't stomach this. And so they've got to get out of that and they've got to print money. OK, like it or not, that means devaluing the currency.

Now, you know, I think there's something going on with the Chinese gold market. Maybe I'm wrong here, but this is the thing to start thinking about. OK, the gold is a monetary hedge. It isn't necessarily a high street inflation hedge. It's a monetary hedge.

And this evidence for the bond market is telling us something really bad is going on. And so, Michael, people here, you know, China would, you know, people might assume that China wants a strong yuan, Chinese yuan. But actually, for exporters, it is quite good to have a weak yuan for China, because that way they can cheaply produce stuff and sell it to the rest of the world. So the U.S. wants a strong dollar where...

the u.s wants a strong dollar but china also wants a weak yuan so doesn't the us and china want the same thing and is trying to to weaken the yuan so for example you know over the past three months the yuan has

weakened from 7 yuan to the dollar to 730 yuan to the dollar. Do you expect that to continue? And also, why is China trying to devalue relative to gold, which some may say is a barbarous relic, you know, which did run the monetary system before, you know, the 1930s, as opposed to devalue it to the current monetary standard, which is the dollar?

Well, I mean, the interesting part is why do economists talk about the barbarous relic? OK, why do governments keep telling us that there's nothing in gold? The gold price seems to keep going up. Gold has been a demonstrably over decades, centuries, millennia, a wonderful monetary hedge.

you know, why are they saying this? I mean, it does what it says on the tin. And the point being is that when we talk about a rising gold price, what we really mean is that paper money is devaluing against gold. Gold is the pole star in the sky, which we should be navigating, you know, our economic and financial futures against. The gold price really stays where it is. Everything else goes down. And that's the sort of the firm point or solid point. Now, if we look at

If we look at what's happening, why does China need to get rid of its debt? Because basically, if you think about this, think about debt, GDP, and let's think about debt liquidity. Now, all money that is anywhere has got to be somewhere agreed. OK, so if it's not in GDP, it must be in financial assets or the asset economy. And therefore, debt.

debt to liquidity actually embraces the debt to GDP ratio. So in other words, think about liquidity as funding both G and funding financial asset purchase. OK, so there's no other money around. You've got those two pools. So debt to liquidity already embraces debt to GDP in many ways. So even if you get no high street inflation and no growth, OK, your debt

value in real terms is still devalued because your financial assets are going up. So you can still afford your net worth is increasing. Debt is fixed in nominal terms. So if I'm sitting on a Bitcoin or a piece of gold, okay, and I've also got a loan to you,

and Bitcoin and gold go up dramatically, my loan to you is still denominated in dollars at the same level, but the assets I've got to offset that go up dramatically. Okay. So my net worth has gone up. And that's why looking at gold is a very good way of actually understanding this process. It's one benchmark. It's a preferred benchmark, but it seems to do the job. So that's why I'm thinking about that.

So devaluing against the dollar is not really going to tell us anything about the worth of Chinese debt, particularly if you've got debt, which is denominated in dollars anyway, because the Chinese have a lot of. Relative to it, for a quote-unquote emerging market, I believe that China...

as a percentage of its debt, a lot of it is denominated in yuan. In terms of a nominal amount, definitely a lot is denominated in dollars. But why not weaken the yuan to 9 yuan per dollar? You think BYD is making a lot of electric vehicles now, that would really get things going and maybe get China out of this debt deflation trap. Sorry, is it because China doesn't want a weak yuan or is it because the US doesn't want a weak yuan?

The first thing to say is that if you take the exchange rate, China really has three exchange rates, notionally. There's an exchange rate which would equilibriate trade, some sort of purchasing power parity thing for Chinese exports. Now, I'll come quietly and say probably on that basis, because Chinese costs are so low, you could actually argue technically that maybe the yuan is cheap. The exchange rate also measures two other things.

One is it measures capital flows. China has, notionally, has capital controls. It's a very leaky system, but they have capital controls. If they took those capital controls off, what would the yuan do? Would it appreciate or would it devalue?

Devalue, maybe? I think it would devalue dramatically. I think everyone else would agree that. So that's one exchange rate, which you've got to contrast with the other one, which is a trade competitiveness one. And then you've got a third exchange rate, which equilibrates the entire economy, because essentially current account deficits are not about trade competitiveness, they're about flows of funds in the economy. That's what we know from looking at macroeconomics. So essentially,

three exchange rates, one which equilibrates the economy, which determines debt deflation. And that, I would argue, the yuan is still too expensive. And that's what the markets are telling us. That's what the bond market is telling us. That's what downward pressure on the yuan is telling us right now. You've got to trade competitors on this one, which I'll come quietly and say, OK, if economists tell me that Chinese, you

you know electric cars are really competitive and the yuan needs to go up i'll come quietly and accept that and then you've got a third one which is all about capital controls now two out of those three suggests to me that yuan has got to devalue dramatically and why don't they they inch towards a lower yuan dollar for the simple reason that there'll be a huge exodus of money wherever they can

through the exchanges because Chinese do not want to see a devalued currency. Why is there huge gold buying going on in China right now? Because they're scared about this prospect. I would, you know, I think this is what all these statistics seem to be telling me anyway, that there's a big, big problem out there. And I think that maybe

the incoming Trump administration wants to hold China's feet to the fire here and say, well, okay, this is what we've got to do a deal. America and China have to do a deal. There's no question about that.

I mean, I wrote about in this book, Capital Wars, a few years ago. This is what I read about. China is a dollarized economy, like it or not. It is hugely dependent on the dollar. It cannot get off the dollar hook, however much it wants. It has ambitions for the yuan, but it's hooked on the dollar. And that's the problem. The great paradox in economics is whenever China's trade surplus expands, the dollar goes up because China is like California, earns a lot of money in dollars.

And it doesn't recycle those quite as efficiently back into the world economy. So you basically get problems in terms of demand and supply imbalances. And that's part of this problem as well.

But, you know, it leads us on to say, you know, what are you invested in the future in terms of the trends? This is not a short term recommendation. It's a long term recommendation. You need to have more gold in portfolios. You need to have more Bitcoin in portfolios from a long term standpoint. Is Bitcoin elevated right now? Sure it is. Okay.

You know, I thought maybe we'd see a correction already. It's a lot of euphoria about it. I'd prefer to buy it when it's lower, but I've got to accept the fact that the trend is up there and that's what we've got to see. We do an analysis and in fact, it's on

Slide 18, which is looking at what drives Bitcoin. And lo and behold, global liquidity is an important factor. And what we show in this chart is, and I'll explain what's going on here. The orange line is the six week change in the value of Bitcoin. The black line is the six week change in global liquidity, balanced by 13 weeks. Now, let me just explain what those two are.

weekly data points are. Why take a six-week change on a five-week, a four-week, a three-week? Purely because, I mean, you can do whatever you want, but this is to take the noise out of the data. There's a lot of noise in economic and financial data. This just takes the noise out and tries to look at the underlying currents, and that's why I've done it. Could I have used an eight-week? Could I have used a three-month? Sure, okay, but I've done six weeks, so hey, what the hell? This is looking at

The 13-week lead time, why 13 weeks? Because statistically, that's what comes up. And I don't know why that's the case, but that's what's going on. And what it's showing is a pretty decent performance.

you know, correlation between these two factors. Looks like liquidity is very important. Now, if you look at the next point, and this is where, you know, statistics, I'm going to breeze over this quickly because it's statistical. But what we've got are two statistical tests of that process. The bars are probably much easier to explain. And what they're saying is this is the correlation coefficient of liquidity against liquidity.

Bitcoin and with liquidity advanced by that time and the impact on Bitcoin is shown in terms of weeks and those are the correlation coefficients you can see it's bunched around I mean there's obviously you know random random noise in that but it's bunched around sort of 11 12 13 weeks and that's what we come up with the black line is something called a Granger causality test which is

Best way to read that is to say when that Granger causality line flattens out at zero, you've got you're pretty much sure that there is one way Granger causation between global liquidity and

and Bitcoin. So in other words, it's driving Bitcoin, Bitcoin is not driving it. And it seems to be a significant process from that time point. Now, this is not a recommendation. This is not saying scientifically this is going to recur in the future. It's saying what we've had in the past. And the next chart says these are the influences that we've worked out on Bitcoin systematically

in terms of the drivers. So this is a statistical analysis we've done. We've done it a few times before. We published it on our Substack, Capital Wars. And what it shows is if you do a variance decomposition of the influences on the systematic influence on Bitcoin, what you find is you get these factors. Now, biggest factor, 40%, is global liquidity. But what we've got to recognize as well is that Bitcoin is also influenced

by investor sentiment. It's a very sentiment driven asset. We know that. OK, but about one fifth of the movements in Bitcoin, the systematic stuff at least, is we ascribe to risk appetite and we measure risk appetite by the changing asset allocation of US investors in general. So things like using surveys, we actually use hard data on asset allocation, but you can use things like investor intelligence or

any of these similar surveys to gauge that. And then the other two elements are basically gold. What that's saying is that the gold price

and Bitcoin are co-integrated. They move very closely together. But actually, interestingly, I won't go into this in detail, but what it's really saying and what those two factors are telling us is statistically there's something called an error feedback mechanism. And what that tells us is that there's an equilibrium level between gold and Bitcoin, a ratio or portfolio allocation that investors are sort of moving towards. And whenever one gets out of line,

The other redresses it. So it's not unusual after you see a big race up in the gold price to see gold suddenly coming back and Bitcoin zooming, which is what we've seen in the last few months. So the fact that gold has gone down and Bitcoin zoomed up is actually this is equilibrium process going on. So what it's saying is intuitively, this seems to make a lot of sense.

as to what's driving Bitcoin. And therefore, you know, this is one global asset that people look at now increasingly. Global liquidity is important. And so we've got to understand these currents about what the Fed is doing, what the US Treasury is doing, what the People's Bank of China is doing. You know, maybe we care a little bit about the European Central Bank, but, you know, they're

they're really making england well i mean that's not even bothering yeah they don't really trouble the score i mean it's you know i mean the bank of england signaled a big change you know after the liz trust budget where it showed that how policy makers will move with alacrity when they need to they switch from a qt to a qp policy overnight when it mattered because the most critical question

for a government is the integrity of the sovereign bond market. Forget all these remits about inflation and unemployment. What really matters is the Treasury market. If the Treasury market goes awry, they will come in quickly to address the problem, which is why I think the Chinese bond market is signaling something really very important right now.

Let's talk about the monetary plumbing and the Federal Reserve in particular. To define a few terms you referenced earlier, the TGA, that's the Treasury's general account with the Federal Reserve. And as they spend, as that TGA goes down, they are spending money and putting it into the economy and or financial system. Then there's the reverse repo facility, which was...

over in the trillions, and that has gone down. And the reverse repo facility is basically a deposit facility that the Federal Reserve has where money market funds can park money with the Federal Reserve and technically, quote unquote, lending the Federal Reserve money by an overnight. The money market funds are buying treasuries and assets and selling them back to the Fed every single day and renewing that. And

What you refer to a lot of the increase in Federal Reserve liquidity, Michael, I think since 2022 has been money coming out of the reverse repo facility, which causes...

general liquidity to go up. And they also put that money into the treasury market. And they can't own 10-year treasury bonds, or most money market funds can't, but they can buy treasury bills. And this is when you talked about Janet Yellen, she issued a lot of more shorter-term debt rather than longer-term debt. And that in itself is, to a small degree,

is inflationary and stimulative to the financial system because a 10-year note or a 30-year bond requires a lot more balance sheet capacity and is a lot more risky than a three-month treasury bill. Earlier when you said coupon, that is basically paying interest. So if interest rates are at 4% and if you buy a 10-year note,

treasury note, you get 4% every year, so maybe $2 every six months. However, treasury bill does not have that coupon. It's a one-year treasury bill, you buy it for $96 and then you redeem it for $100. So it's extremely money-like. And as you referenced earlier, it can be used for collateral because it is a lot less risky than a 10-year note and a lot less volatile. Just a

So, Michael, I might say that the money that has increased liquidity was already there and was already created, whether by the Federal Reserve or fiscal in 2020 and 2021. It has just been drained out of the system. And now I believe the reverse repo facility is, quote unquote, only $180 billion. So you're not going to get that increase in liquidity. And, you know, I might quibble with the terms like...

not shadow quantitative easing because the money was already there. But how is the Federal Reserve going to increase liquidity from here? Because it can't rely on any of these, let's call them tricks and games anymore, where there's trillions of money locked up in a special safety deposit box that they allow to leak out. They have to ultimately create new money. And Michael,

you know the federal reserve has been doing quantitative tightening reducing their balance sheet at what point will they stop do you think they will stop quantitative tightening in 2025 do you think they will start doing quantitative easing in 2025 and and an actual easing of in definitely expanding the money supply and trying to lower bond yields and also i noticed you know we're recording the day after the federal reserve interestingly they they

So they decreased the reserve repo rate by 30 basis points instead of by 25. So it's now at the lower end of the Fed funds floor. So I don't know to what extent is that going to hasten money coming out of the reverse repo facility? Well, I think I mean, to answer the last question first, I mean, the reverse repo is pretty much drained anyway. We're down to about 150 billion dollars.

And, you know, it's been in the trillions, so it's more or less empty. I don't think the move of a reverse repo was to do that. You know, the reverse repo was really the anchor rate in the system. And what they're doing is, I think, trying to smooth over the year end. You know, every quarter end, there's volatility in the money markets and the repo markets. And I think by basically reducing volatility,

the reverse repo rate, they're going to try and keep that volatility down. Good luck with that, but there will be some. But I mean, hopefully they do that. I think that's purely a technical thing. I wouldn't read too much into it. But to come back to the question about will they undertake QE, will they stop doing QT? I mean, my view is I think they have to. They've got to do that. That's a danger point. We've got to be very alert to it.

And I think a lot of the debate over the, you know, during the last FOMC, particularly the presser, was whether the Federal Reserve was hawkish or dovish. And I think, you know, at the end of the day, I'm sort of slightly confused about what the message is. I mean, you know, my view is that, you know, I think Jay Powell is dovish. I think he's dovish on inflation.

I think as my former boss, Henry Kaufman, so succinctly said two or three years ago, that any central bank that uses the term transitory inflation is a central bank that doesn't want to tighten. I think that we've seen that absolutely nailed on over the last few years. They don't want to tighten. I think the fact is that with the economy booming or certainly with asset markets booming, they should be prudent and actually not cut interest rates

And I think that should be the message that Scott Pesant delivers or tries to deliver them. I think that, you know, if I was in their shoes, I would be, you know, showing showing showing Chairman Powell the exit pretty quickly. I think they need a more robust and more hawkish central bank governor in there who's got credibility on inflation. Inflation is not a serious worry, but it's a nagging worry. And I think that, you know,

The markets need somebody serious there to actually address that. Now, on the question about QT and the technicalities, I think the danger is, and this is why I can't really see whether the Fed is trying to be easy or whether it's trying to be loose. I think technically, they seem to convince themselves that liquidity doesn't matter and they need to...

They have to get simply for arithmetic purposes, get the balance sheet down and they had to reverse this QE process and basically get back to scratch with a QT policy. I think that's madness if they keep going down that route. The markets need liquidity. This is the key thing. This is the lifeblood of a financial system. They can't keep doing this.

And we know it has costs and we know it has costs in asset inflation. That's clear. But the fact is, we've got to address the debt problem. And the more that you cut interest rates, the more that you incentivize debt. The reason we got into this mess was really coming back to the door of China.

Back in 2001, when China joined the World Trade Organization and imparted a huge deflationary shock to the world economy because Chinese goods were cheap and they dumped a lot of goods in the West. That was probably a foolish policy to let them in on those terms, but we did it. And as a result of that, central banks panicked. They thought they were seeing deflation

They were actually seeing cost deflation, which is not such a bad thing. And they slashed interest rates to near zero. And what that did is incentivize this huge, huge debt buildup. And we're facing the consequences ever since. We've got to get out of debt. It's really difficult to do it now. So what you've got to do is to roll it over, kick the can down the road. You've got more debt coming because of aging demographics of the welfare bills, Medicare, Social Security, and now defense coming on top of that. And

Ultimately, if they kick the can down the road, that's monetary inflation. I think we're in a monetary inflation world, not necessarily a financial repression world.

There will be financial pressure, but it's really about monetary inflation. And that's why you need to get monetary inflation hedges in portfolios. So, Michael, I want to connect a few ideas. About 30 minutes ago, you talked about SOFR, secured overnight financing rate relative to the federal funds rate. So both are basically risk-free rates. So they normally trade on top of each other. But there is a small, I don't know, five basis point spread, which is nothing to anything else. But for this, you know,

my new mechanics five basis points is actually a lot and i know i mean i know this from joseph wang that roberto pearly he you know five reserve figure he his measures of ample liquidity i.e

if there's ample liquidity, you can continue to do quantitative tightening. All measures, and I don't really know what they are, to be honest, indicate ample liquidity except for SOFR over Fed funds. And that is the one measure that there actually could be close to a time where they have to stop doing quantitative tightening. So perhaps the five basis point adjustment in the reverse repo rate to align with the lower end of the Federal Reserve target range, perhaps that is so the Federal Reserve can continue to do quantitative tightening and they can go see...

And none of Roberto Purley's indicates of reserve scarcity have been triggered. You could be right. That could be some of their thinking. I mean, I think the concern would be as if you think of a pipeline of liquidity, the repo market is really at the front end of that. And this is what so far Fed Funds spread is indicating tensions at the front end of the pipeline. The markets, in other words, Wall Street is really at the end of the pipeline.

the other end of the pipeline. So it will take some time for those effects really spill through or feed through. So this is why we're worried because we're looking at anticipation of future problems. And as I said, sort of right at the beginning, I mean, if you want to understand, you know, Wall Street today or Bitcoin today, what you've really got to be thinking about is not today's events, it's what's really going to happen in nine months time. And this is what we should be focusing on. What does the economy look like? What do markets look like? You know, the summer

early fall of 2025, because that's what the markets are forward discounting mechanisms. They're looking forward. And that's what we've got to try and understand. To my view, or my way of thinking, I think that's where the pressure starts to build, because we've got, you know, it looks like a loss of momentum in terms of liquidity generation. We've got big uncertainty in China, but we've got this debt wall, which is coming up. Now, as I say, I'm not bearish yet, but I'm, you know, I'm inching towards the door, but that's for sure.

But Michael, why does the central bank, the Federal Reserve, have to drastically increase its liquidity again in order for the system to work? Why can't what has been happening over the past two years occur where private sectors are expanding their balance sheet and levering up and banks are buying treasuries and the rest of the world is buying treasuries, but the Federal Reserve is actually reducing its balance sheet or maybe even continue to hold fortuitously?

You know, if as long as there's no reserve scarcity and we don't have a repo crisis like we did in September 2019, why can't JP Morgan and Bank of America and the People's Bank of China or excuse me, you know, the Bank of China, the commercial commercial banks and European commercial banks just buy treasuries and private citizens? Why can't we let the market function? Why does the Federal Reserve have to be back in the game of monetizing U.S. debt?

Well, because I think the I mean, you know, think of it, if the financial system is a super tanker, the Federal Reserve is the pilot or the pilot boat. And it's really steering the, you know, the overall, the overall system. And if the Federal Reserve is going one way and the markets are going the other, that's unsustainable. So I think the Federal Reserve has got to give guidance in some way, whether it's through words, which I'm, you know,

Maybe in fact they overdo that now, but much more particularly in terms of liquidity in the system. If they're pushing liquidity into the system, the system by definition is expanding. If the Federal Reserve reduces liquidity because of the big multiplier effect on Fed liquidity, it's so important. The system runs the risk, isn't necessarily going to happen, but it runs the risk of retreating or collapsing around diminished Fed balance sheet. And that's really the risk. What you need as well

you obviously need collateral to expand. But if the Federal Reserve is reducing its balance sheet, is the pool of collateral likely to expand at the same time? And I think that's, it's unlikely. So it's not impossible, but we've got to look at, we've got to think about risks here and that sort of thing. I mean, there is, you know, around the FOMC meeting,

I mean, it's now, it's a circus, a pantomime. And the Federal Reserve has created this. And it's really, it's almost like going back to Imperial Rome with bread and circuses. The FOFC, the presser is the circus. And the bread is basically forward guidance.

You know, at the end of the day, this is sort of mixing my metaphors. This is people dancing on the head of a pin. What really matters is the amount of liquidity being generated in the system. Debt is the big boker. We've got to refinance debt. If we don't refinance debt, there'll be a financial crisis. You can spot financial crisis sometime ahead by looking at that imbalance. But, you know, the straws in the wind, the things like problems in the SOFO Fed fund spread, that's where you might start to see that early.

If the Federal Reserve doesn't stop doing quantitative tightening in 2025, or doesn't even do quantitative easing in 2025, you said we'll have a financial crisis. What does that mean? Does that mean the 10-year bond is going to spike up in yield? Does it mean risk assets, stocks, and Bitcoin and gold go down very much? Because I think that the US Federal Reserve cares about financial conditions and credit spreads. And if those blow out, they will be attentive to that. They care about that in addition, of course, to their dual mandate of

full employment and stable prices. However, I don't think the Federal Reserve is terribly concerned about a stock market going down a lot, at least from the very overheated levels right now. Or if Bitcoin went to $50,000, I don't think Jay Powell would shed a tear. That's my view. Do you agree? You're probably right. But I think they should be alert to these things because these are all part of the general consensus of what financial conditions or monetary conditions are. They've got to look at this. They certainly should be looking at that.

And it may be that Jay Powell doesn't worry too much, but I think President Trump would definitely worry a lot if you saw all of those gyrations in markets. But, you know, I think that, you know, at the end of the day, we've got to be, you know, alert to these risks. I'm not saying they're going to happen, but I think there are clearly risks out there. What would happen in a financial crisis?

As I've argued before, I mean, almost every financial crisis you've seen over the last few decades has been a debt refinancing crisis in some form. And that's what we're talking about right now. And if you want to look at what happens, take a look at China now, because look what's happening to the Chinese 10-year bond. Yields are collapsing.

Bond prices are spiking higher because people will go into these safe assets. There'll be massive deleveraging. So people will be selling whatever assets they've got. If gold is held on leverage, if Bitcoin is held on leverage, they will go down dramatically as well until the leverage clears. But make no mistake that the solution to all these financial crises is more liquidity going in.

The central banks and the finance ministers do not want the financial system to end, to implode. The only thing they've got to get these things back on the rails again is to pump in more liquidity. How many times have we seen that over the decades? You know, this is not rocket science. This is all they can do. So they've got to pump more liquidity in. So if you think there's a financial crisis coming, I mean, you know,

it's down on the sidelines. But when you go back, just buy these monetary inflation hedges. This is what's going to work in the long term. My view is that global liquidity is going up over the medium term because debt is going up. Debt we know is rising. And Pache, Doge or whatever, Elon Musk and muster up. The fact is that I rather think the Social Security, defense and Medicare are much, much bigger challenges

to him that he can't arrest those trends. And this is the generosity, the welfare generosity of governments in the past few decades. We simply can't afford the bill now of a lot of these systems. America is in a much better position than most other countries here, make no mistake. But, you know, it's got the reserve currency, it can fund internationally. But a lot of other countries are really in a big mess. You start to look at Europe and how's Europe? I mean, the challenges Europe faces are just eye-wateringly large.

They've got aging demographics. They don't know where they're going to get their energy from. They've got to now suddenly start buying debt, but a defense or paying for defense. I mean, these are big issues. And what's more, you know, I mean, maybe a clever thing to do is for Scott Besson to say, well, OK, if you want defense, start buying more U.S. Treasury bonds. Maybe that's the answer. A great deal there.

but I don't want to give him ideas. Michael, so explain where you are, connect these ideas about where you think we are in the cycle, because in the beginning you said,

You'll party on, but be close to the door. And before we started recording, you said that you think the markets are in the calm phase. And I believe there are four different phases in terms of cycles. There's the turbulence phase, the rebound, the calm, and then the speculative phase. So is the speculative phase after the calm phase? Because if we're still in the calm phase and we're not yet in the speculative phase, then that's bullish. And you're saying that things can get way more bullish than we already are. But or is turbulence ahead? Like, where are we in the cycle? And yeah, just...

How do you connect that? Because you say, okay, you like gold and Bitcoin as monetary hedges, but I know you said you think liquidity will increase, but it seems to me, I mean, there would have to be some sort of monetary accident or crisis in order for the Federal Reserve to start quantitative easing again. And I just want to get a sense of your specific time horizons on liquidity and how that specific time horizon on liquidity ties to your view on risk assets and the future. Okay. Right.

Let's be clear, the trend in liquidity is going up over the long term, right? That makes me very bullish of things like Bitcoin. It makes me bullish of the stock market in the long term, and it makes me very bullish of gold as well. So I think all those assets are fantastic assets from a medium term perspective.

We are going to hit problems socially because of the wealth divide that implies, because people that own assets are clearly going to get a lot more wealthy than people that are purely wage earners. That is a political challenge and that is a daunting political challenge. But the fact is that the moment kicking the can down the road pretty much means that.

In terms of the cycle, I think we're in the calm phase right now, but I think we're coming to the end of that calm phase. We're in a more, I mean, you can cite different markets, different asset classes, but there are a lot of signs clearly of speculative froth. There's no mistake about that. But what I say about the calm phase, I'm talking about all markets worldwide. We cover about 90 and the majority are in that calm phase right now. Some are starting to move more speculative, I would accept.

The danger sign where you don't really want to own risk assets is turbulence. We're not there yet, but you can turn from turbulence very quickly during an accident. I mean, just look at what happened in 2008, for example. Right. So you think we're still in calm and we have a speculation ahead. On the one hand, that

you know is is striking to me michael because the s p is already so richly valued however i would say that in the stock market these the assets that have gone up are mostly high quality companies that have just reached absurd valuations they are not in highly speculative companies that you know may not exist in a year i think the stock part you're beginning to see some spec you know speculative names in trashy companies let's so-called i mean in crypto that's uh it is a different story

But I agree, yeah, we have not reached these speculative excesses of mid to late 2021. Yeah, it can clearly go on. As I say, I mean, you know, to come back to the saying, I mean, you enjoy the party, but dance near the door. You've got to be cognizant of what could go wrong. And if you look, there's a slide I've got, which is slide eight, which is looking at the risk exposure of world investors that's well worth thinking about. And what this is basically showing, and this is a global picture, so this is not the US. The US is a little bit

more pointed than this, but this is looking at world investors risk exposure. Now let's just explain how we get that. We get this from looking at flow of funds data and what we're showing is the exposure of investors to risk assets relative to safe assets in their portfolios. Safe assets are government, G10 government bonds and liquidity or cash liquid assets. Risk assets tend to be equities. They tend to be cryptocurrencies. They also include corporate debt and they include emerging market bonds.

And what you can see here is a line, which is the orange line. It's benchmarked at zero, which is a rolling five-year average of asset allocations to those asset classes. So that's risk neutral. If you go above that, 20 units is one standard deviation, 40 is two units of standard deviation. And what that's basically saying is that you get a cycle. That cycle is around

nine to 10 years in terms of risk. It's very different from the liquidity cycle. The liquidity cycle, which is really a refi cycle, is about five to six years. But this is looking at risk exposure. And what you can see is some evidence, and I'm not going to hang my hat on that, but some evidence of a repeating cycle. And we've got to be alert to that. And what also slightly troubles me is that despite all this euphoria in terms of actual positioning in markets,

you're seeing

investors beginning to take money away from risk assets and put more towards SAFE. They're still, you know, net into risk assets relative to their benchmarks, but they're beginning to roll over. So what that's really saying is a lot of the big gains in prices are coming on a very narrow investor base. If the majority of investors are actually moving the other way, what you're seeing is, you know, these spikes in risk assets, risk asset prices are probably on lowish volumes or lowish allocations.

And what's more, this is not a U.S. picture. This is a global picture. So a lot of other markets are more depressed than the U.S. for sure. The U.S. has clearly been a star. And Michael, so the five to six year liquidity cycle, was there a new liquidity cycle that was born in 2022 of the up cycle? And where does that take us? In other words, when would the peak in liquidity be? When would the peak in risk appetite and risk assets, prices, Bitcoin, up?

And of course, it doesn't follow everything to the T, but just to give a sense of what your five to six year model would say. Would it say that the top is in 2025, 2026? Or what does it say? Okay, well, if you go back to slide nine, that's looking at the global liquidity cycle. If you followed that religiously and said, okay, this is what you must do, you would be expecting correction in markets by the end of 2025.

And you'd be certainly paring down your risk exposure kind of a bit before that. I mean, in anticipation of that. That's, you know, looking at this thing in very straight line terms, if that's how it works. So in other words, we've got more liquidity to come in. That black line could well go up. And that's what I've been saying. I mean, I'm not denying that's the case. What I'm saying is you've got

other challenges. And those two particular challenges, number one is the debt maturity wall, which is coming forward, which is something which is not featured on that chart for the simple reason that that's an increased demand for liquidity through unusual circumstances because of the echo effect of the COVID emergency of investors turning up their debt. And now that has to be repaid. The chicken is coming home to roost and all that. So that's an issue we've got to be alert to.

And the other two factors are, number one, are we really certain that the Federal Reserve is committed to expanding liquidity? And it may talk loosely about cutting rates or, you know, it's trying to give an impression it's being a little bit more hawkish. But, you know, I think at the end of the day, they want to cut interest rates. But what does that mean for liquidity? That's the important metric. And I'm not certain, or so certain as I was, that they want to expand liquidity. I'm still unclear about what Scott Besant will do in terms of funding.

But we will probably address that pretty soon in the new year. And then the big uncertainty is China. And I think there are, you know, this could fall both ways. It could easily be that China imparts a huge liquidity boost to the world economy, you know, because it needs to. It needs to get out its debt problems. But at the moment, you know, China is not responding because what's paramount in China right now is the yuan-US dollar exchange rate. They don't want to give that up.

There may be a route, as I've said, around that by devaluing against gold. But who knows? I mean, that's the uncertainty. So I would say, in my view, is keep going for now. Okay, just keep an eye on some of these indicators because they could clearly sour quite quickly. But we are, make no mistake, we are in the late stages of a bull market. That's absolutely, absolutely clear.

The bull market has been running for over two years now.

You know, we've been bullish through that time. You know, thankfully, we've been lucky in that regard. But I noticed a lot of other commentators now starting to get bullish of having been bearish for most of this period. That's what that's what makes me nervous. And, you know, I listen to some of our clients, some of the, you know, some of the investors who have been, you know, with up with traditional managers. And they're saying, well, look, you know, what have my portfolios done over the last three years? I've got to have an average return of 6%.

That tells me they're not going to dive out of markets quickly for the simple reason that they want to stay at the party longer to reap some of these rewards others have been getting. And that's, you know, that's often a dangerous time.

So you think the party will continue, but it's getting a little bit late in the party? I think it's getting late. And I think there are uncertainties there. And we were very bullish coming into 2024. And I'm a lot less comfortable coming into 2025. It's very difficult to say there'll be a big correction because I think there's a number of balls in the air that I just can't predict. I don't know what Scott Besson is going to do. I don't know what the Federal Reserve really intends to do with liquidity. And I certainly have no idea what China...

will do. I know what China needs to do, but I've got no idea what it will do. And that those are the uncertainties. But those are the factors I think to watch. And Michael, how do you think that you know that the dollar is going to go especially given interest rate differentials, basically, the European Central Bank and other central banks are cutting interest rates, while the Federal Reserve is cutting a lot less, and therefore the dollar has is strengthening? Do you are you a bull on the dollar right now for that reason or other reasons? Or you know,

Yeah, I'm bullish on the dollar. I've been bullish on the dollar medium term. I mean, I must admit that I thought that the Treasury would try and weaken the dollar coming into the election.

They didn't do that. So I was wrong on that regard. But I only thought that was anyway, sort of a temporary respite. But the trend of the dollar is clearly up, as you've seen from the charts. I think everyone, everything is sort of is now behind a stronger dollar. I'm not saying that's a good thing or a bad thing. I think that's just a fact. We've got a stronger dollar. The dollar is a wrecking ball for the world economy. We've got to recognize that a strong dollar is not bullish for growth long term and certainly not bullish for foreign markets long term.

Just look around the world, see how many people are struggling and just look at the unfolding political events. I mean, this may be partly Donald Trump coming in, but partly as well, I think it's because of the strength of the dollar. It's putting a lot of pressure on foreign governments. So the dollar needs to change direction. But why is it in the interest of the incoming administration to do that quickly? I just think it's a great negotiating tool for bigger deals.

And you write about how when the dollar is strong, that puts pressure on other central banks, foreign central banks, non-U.S. central banks to tighten policy, which causes global liquidity to go down. Whereas when the dollar is weak, that causes the Federal Reserve to relax conditions, which causes global liquidity to go up.

What's your view on emerging market stocks? I mean, I know India has been on a massive bull market and China did have a speculative boom in September and October has kind of stalled out since then. But what do you think about Chinese equities, Indian equities, as well as other emerging market stocks? Okay.

The two things that drive emerging markets without any question, number one, the dollar, number two, the temper of the Chinese economy. You've got a strong dollar, which is negative. You've got a weak Chinese economy, which is negative. I have no interest in emerging markets right now. It's not a great place to be. And you can see that by looking at the currency tensions that are whipping through these markets. If you look forward, you say, well, OK, the Chinese economy has got to get going.

and they're going to have to monetize significantly, and the dollar needs to adjust in some form, then I'll come to the party and say, then pile into emerging markets. But I'd be really wary about going in now. I think there's no reason to go in now until you see those events. So I think on that score, that's clear. I think the thing to recognize in terms of understanding global liquidity is the whole adjustment process is asymmetric.

If you've got a weak dollar, what happens during a period of weak dollar that we saw really through the 60s, 70s, 80s, 90s, etc.? Through that whole period, you had a background where a lot of foreign governments wanted their currencies to remain competitive against the dollar. And so if the dollar went down, they eased. So you basically got a lot of global liquidity eased.

being generated, particularly outside of the US. And the Federal Reserve was in a position where it probably wanted to pump liquidity into the system at the same time. Maybe that was the cause of a weaker dollar, who knows? But ultimately, what you've got is that period of weak dollar was a huge expansion of liquidity. With the US dollar going up, you're in a very, very different framework. That could unwind because you've got foreign governments withdrawing liquidity unless they accept their currency weakness against the dollar.

What we've been in is a situation where the Fed and the Treasury have eased, so they've taken pressure off. But clearly, if the Fed and the Treasury are easing and other governments are not, then you can absolutely understand why we've been in this period of U.S. exceptionalism. That's not rocket science. It's simply because the only easing that's been imparted is coming out of the U.S., and that's why U.S. capital markets have been so buoyant.

The question is, what could change that? What could change it is the Fed tightens, the Treasury decides that it's not going to be so generous, or the dollar suddenly whips lower because of capital outflows. But as far as I can see, none of those factors are on the horizon near term. But that doesn't mean to say we shouldn't be complacent.

And Michael, what do you think about when I say the phrase the everything bust? Because you recently titled a piece the everything bust. What would that look like of a dramatic repricing of assets downward? You write about how we've kind of had the everything bubble going up. But what would everything bust look like? Well, if you go back to the chart on page 12, that came from the report that we wrote called the everything bust. And I did say right at the beginning of that,

that report, spoiler alert, we don't expect it's going to happen near term. But what we've got to acknowledge is what could go wrong

You know, where is the fire escape? And what this is saying, again, to recap, is this is the relationship between debt and liquidity in a refinancing world, which is the world we're in. You've got to understand that debt needs to be refinanced. The liquidity cycle is a debt refi cycle moving five to six years, which is the average maturity of debt.

And that's that's determines the cycle. But what that ratio is broadly telling us is that when the ratio is below the dotted line,

You've got abundant liquidity relative to the debt roll. And what this tells us is that's when you start to see big asset bubbles. And what we've been in is an unusual situation where you've had a lot of liquidity relative to the debt roll because, A, liquidity came in because of the COVID emergency. B, debt was termed out because of very low interest rates. And a lot of corporations were in a situation where they could do that.

Some didn't need to borrow. Those that did could exercise low interest rates at long term.

And that is coming home to roost because that orange line is going up. Now, that orange line could keep going up and we stop that chart in 2027. It could go into 28, 29, but that's probably too far ahead to look right now. But you can see that this data series is stationary in a statistical sense. In other words, it's mean reverting. It flatlines, but the ratio tends to equilibrate around that level of around 200, 210% or something like that.

Now, we're going back, we mean reverting. That's clearly putting more tensions into markets. Every bubble has coincided with a period where that ratio has been low. We've been through, we've got an everything boom right now, everything bubble, where everything seems to be going up, certainly in America. And in that situation, you can see why, because there's been so much liquidity being created. If you start to go higher on the page and you go above the dotted line,

We're going to get the reverse of that, which is called the everything bust. And that's really what the report was about. We're not there yet. We may be some years away from that, but that maybe is what's coming. Now, what will avert that is central banks keeping that ratio around the equilibrium. So they've got to start managing that. So forget all this stuff about this is what the report was about. Forget this stuff about debt. GDP is meaningless. OK, as far as I can see, you need to do is look at debt to liquidity. It's all about liquidity.

And, you know, maybe I'm a golfer with one club, but at the moment, this is the club you need to get the ball in the hole. It's been a good club over the past few years. Michael, we talked a lot about central bank liquidity. When it comes to the private sector liquidity, how much are you weighting things like initial public offerings, raising money with investment bond offerings, either in the investment grade or high yield market offerings?

leveraged loan market, collateralized loan obligations, as well as private credit, which is not a new thing, but has grown tremendously. And I know that at least when I go to the St. Louis Fed, which has these great

charts online to look at bank credit, they are not including private credit. So when you look at a chart and it can appear as if the bank lending has contracted or is only growing anemically, whereas I don't believe that is the case, that the amount of lending activity in the United States has actually been quite high if you include private credit. So as a statistician and someone who's measuring and adjusting your index to make sure it's accurate, how are you...

accounting for the rise of private credit, as well as the other capital markets activities that are more traditional, such as underwriting bonds and IPOs. It's a very good point. And I think that you've got to say that if you go back before the GFC, people would not have included shadow banks.

in their assessments and clearly everybody does now because we can see that they're important. You know, the problem for financial markets is that financial markets or financial analysts always bear the impression of the thing that last sat upon them rather like a cushion. So, you know, the...

The last problem was shadow banks. Everyone's now worried about shadow banks. The next problem may well be private credit. I take your point. I mean, we look at that. We include a lot of these metrics. But what you've got to think about within the system is the difference between new liquidity creation and mobilizing existing savings. And only some part of this private credit

is actually genuinely new credit. A lot of it is recycled existing savings. And what we're doing is measuring the new

the new liquidity, the new credit part of that increase. So you've also, I mean, the bit that we're not measuring, which in our terms is a savings flow, is obviously part of that equation. But as far as we can see, that bit doesn't matter so much. It's the new credit creation, which is really the critical point. And that has been, in the US case, very buoyant. I mean, that's why, if you look at our private sector liquidity measures in America, they're way, way lower

more strong or stronger than any other country. And it's because you've had, you know, the luxurious situation of a very easy treasury, which is fed

private sector coffers in terms of corporations or banks or whatever, and this private credit phenomenon as well. It's as straightforward as that. And that partly explains the buoyancy of US markets, but also cross-border flows into the dollars, we keep saying, have also been buoyant and they've been monetized or they've been used as well to leverage further. So there's been an abundance of liquidity. So why the Federal Reserve? I mean, the Federal Reserve may claim

They're running a tight policy. I've failed to see that. But they can't be blind to the fact that outside of the Federal Reserve, monetary conditions are really loose. I mean, I'm sure a six-year-old child would realize that.

Yeah. And Michael, my final question is about the Chinese financial system and the People's Bank of China in particular. Your index of Chinese liquidity had been quite high, I think, for a lot of 2023 and maybe the early part of 2024, but it had dipped a lot. And why has it dipped?

And tell us about these liquidity injections that the People's Bank of China has done. Have they gone down? Because optically, the People's Bank of China has lowered interest rates, lowered several different types of interest rates. And they put out all of these programs, supposedly where state and local governments can borrow from the people.

from the central bank and where even investors can borrow money from the central bank at low interest rates to buy Chinese stocks, which I mean, think about that equivalent in the United Kingdom or in the US. That is a pretty drastic step. So tell us, why is your PBOC, People's Bank of China, liquidity index so low?

Well, I think the answer is a number of reasons. I mean, one is that the announcements that have been made have been made about potential fiscal solutions and a sort of whatever it takes mentality to say that, you know, a little bit like dragging in the eurozone, the Chinese are saying they're now going to try and address this problem.

And fiscal policy seems to be the way to do that with some sort of very large package. Now, they haven't really told us the size of that package. We don't know. It's probably a trillion, maybe two trillion. What's needed, I would think, is several trillion. So let's get realistic. If you go back to the US after the global financial crisis, it was at least two trillion. So, you know, let's say in China's case, it's a bigger problem.

Maybe they need $3 trillion. So we haven't had that announcement yet. Also, what we don't know is how it's going to be funded.

Is it going to be funded from existing savings? Well, that's not going to be a solution. What they need to do is to monetize debt. So they've actually got to create liquidity of that magnitude. Now, what that would require is the banks doing the funding. OK, in other words, the banks have to buy the bonds and they have to monetize the system. So that's how it gets into financial markets. Now, have they got the ability to do that? Yes, because the banks have been basically given more capital

a trillion yuan of capital so they can expand their balance sheets and that will facilitate some extra bond buying. So there's clearly intent there. The PBOC has been buying government bonds and they've increased their government bond buying dramatically.

in the last few months in percentage terms, but in absolute terms, it's still quite, they're just scratching the surface. But again, they're showing intent. Now, what I'm trying to say here is that they're showing intent, but they're not really coming up with the goods in terms of the amounts of money. At the moment, we're still scratching the surface in terms of liquidity injections.

overriding that from a tactical point of view. So strategically, there may be there. There's no question. OK, there may be that we don't know, but we suspect there may be. And that this may be a whopping great bailout that's coming. But if they print money along the lines that people are suggesting, make no mistake that Yuan will not go up. Yuan would devalue because this is a big money printing exercise, which is necessary. And this is what

All the markets are telling us because China is suffering debt deflation and a falling real exchange rate. So this is the issue. Classic debt deflation. In terms of what the PBOC is doing right now, which is somewhat contrary to that statement, is that they're trying to protect the yuan, the nominal yuan, against the US dollar.

And they are taking liquidity out of the money markets on a tactical basis, day after day, trying to make sure that the strong dollar doesn't affect them or doesn't affect the yuan too much. Now, I suspect that the holding back on the announcements of big fiscal spending and how it's going to be funded until after Donald Trump's inauguration, until they're clear about what the Trump 2 administration will do,

But as far as I can see, there is a deal, a big deal that needs to be negotiated here pretty fast. The Chinese economy is not in great shape. Everything that we look at seems to suggest it's skidding badly. The bond markets are confirming that.

And I think the strong dollar is maybe a deliberate tactic, who knows, to hold China's feet to the fire. And, you know, to come back to the Capital Wars book I wrote a few years ago, this was really the theme of it. You've got two big economic powers here, too big and too important and too integrated to step aside and ignore one another. They've got to come together and do a deal. And that deal has got to be, you know, one that's obviously agreed on both sides. But America now has all the...

excuse the pun here, trump cards. And it does. And China will have to negotiate in some way, you know, to get this deal done. But China needs its economy to be righted. And that definitely needs some massive devaluation of the currency. Whether that's against gold or against the dollar, who knows? I suspect it's going to be mainly against gold.

And Michael, I haven't asked you about really economics or economic conditions really at all because you're the liquidity expert. I like to ask people what they actually study. But just in the U.S., the inflation has fallen a lot without there being a huge rise in unemployment. So the U.S. economy has outperformed

its global peers, Europe, China, and Japan. You write in one of your reports that China's huge industrial footprint makes a large impression on the world economy. So when the People's Bank of China tightens, world GDP feels the icy blast of weaker demand. What is your economic outlook in the US and Europe? Because

People in the US have been worried about a recession for so long, and so far it hasn't happened. However, if the Federal Reserve keeps interest rates where they are and only does two or even one or even zero interest rate cuts in 2025, as inflation continues to fall, the real price of money will actually go up. So in real terms, the cost of credit and cost of money will be...

much more expensive as inflation continues to go down. So are you I know for a long time you've been fading the recession and that has been a correct to do in the in the US. Do you think the US finally will have a recession in 2025? And also your views on the economic situation in Europe? Thank you. Well, I think in terms of the US, I mean, if you've got a government that's running a 7% budget deficit, and you've got a Federal Reserve that's doing not QEQE injecting liquidity, why should there be a recession?

And, you know, that's been the reality for the last two years. Economists have been derailed by looking far too much faith in the yield curve, which I've always argued, and I did academic research on this, to say it's a failed flaky indicator. You need to look at more robust indicators. And one of the reasons that it's a failed indicator is that essentially the Treasury, through its not yield curve control, yield curve control mechanisms, is basically forcing yields down.

By funding so much at the short end and really creating a scarcity of coupon issues around the 10-year tenor, what that means is that yields have actually come down at different times by 100, 150 basis points. In fact, there's a very clear chart I put in the pack, which you can look at, which is, I think, slide six, which actually looks at the degree of yield suppression that's gone on in the US. And you can see that through these different mechanisms of...

not QEQE and not yield curve control, yield curve control, that basically this has been done. Now, that shows you, and what it's really trying to say is that 1.5 there is saying 150 basis points of yield suppression. Those are our estimates. And that's done through looking at bill issuance relative to other types of coupons and whatever. And what that is telling us is that

there's been this yield suppression, but that's beginning to come down right now. And that's one of the issues that you need to think about. That yield suppression has distorted two things, two important metrics. One is the yield curve. So if you add 150 basis points back to the yield curve, is it upward sloping or is it inverted? It's upward sloping. Great, because that's the reality. So if you didn't have this bias,

by Janet, bias in the yield curve, no one would have ever thought about a US recession. But a lot of economists have been fooled by this data. You put back this yield distortion and the yield curve is telling you exactly what it should be saying. Slowish growth, but no recession. What is the other effect it has? Well, it distorts the TIPS market. Treasury inflation protected securities. Yep. Correct. So if you look at break-even inflation rates with a higher

notional 10-year yield, actually break-even inflation is not 2%, as Jay Powell keeps telling us, okay? It's actually near a 3.25%, 3.5%. And that's probably the reality, which is why you've got these monetary hedges, monetary inflation hedges like Bitcoin and gold in such demand.

Wait, inflation break-evens are at 3%? No, they're just over 2%. But what I'm saying is if you add back this 150 basis points distortion to the long end of the nominal market, you're going to get a figure which is nearer 3.5%. Okay, that's very interesting. That is...

you know, beyond my comprehension to fully get what you're saying, but I think I get what you're saying. So if the actual 10-year yield would be 150 basis point higher, some percentage of that would be an inflation expectation, and that would be measured in the tip show. That's very interesting. This is why term premium in the market is so low and negative. It's because they've distorted it so much they've created a scarcity of coupons.

by doing all this bill issuance. I mean, you know, this is why Scott Besson can call Janet, you know, an emerging markets, you know, Treasury Finance Minister equivalent. I mean, this is what she did. I mean, it's been very clever because it's facilitated. You know, they've been trying probably to goose the economy ahead of the election. Very clever stuff. But, you know, unfortunately, Scott Besson will have to clear the mess up.

And this is a challenge. It may not be that easy. Michael, could you please summarize your views on liquidity and risk assets for 2025 and beyond? Yeah, challenging year, more challenging than the last two for sure. I'm not risk off yet, but I'm certainly moving more in that direction. What would convince me is bigger or maybe less impetus in liquidity, as I say, more evidence of a momentum loss.

And what I'm looking very closely at is what the Federal Reserve is doing. And what I'm also looking at is what the Treasury is doing. And what I'm looking at even more closely is what the Chinese are doing, particularly the People's Bank of China. And those are things which are really going to steer the course of the global liquidity cycle over the next 12 months and will tell us whether ultimately markets keep going up or markets have a significant correction.

And so Michael, you say a challenging year. I'm not going to disrespect you by asking for an S&P 500 target, but does a challenging year still mean a positive year for US stocks and for Bitcoin? Michael Kemp: I think for both of those. I mean, I think that let's take each separately. I think that in terms of the S&P, I think the S&P could, I mean, I can see a situation where the S&P could be up because the liquidity is there. I think in many cases, the US equity market is

really the only game in town for a lot of investors. So I think that that's possible. And the economy, as far as I can see, won't be that bad unless you get a Chinese economy, which really does implode. I mean, there's clearly uncertainties there. But let's say base case, I think it's possible the US market could be higher.

by year end. I'm not convinced by that. I was a lot more convinced in the beginning of 24 would be higher, but I'm less convinced now. But I think it's possible. Okay. So I'm not forecasting a correction, but I think it will be a tricky year. In terms of Bitcoin, my view is very simply that the

that you should be buying the dips in Bitcoin. I don't know how big those dips can be because it's a combination. A lot of it is emotion and it could be sold down significantly. But I think that's a great long-term buying opportunity because I think it's become a global asset. It's a global inflation hedge against uncertainty and monetization. And I think it's going a lot, lot higher.

Michael, thank you so much for sharing your time. You've been speaking for a long time. You're an incredibly smart analyst, and I really like the way you talk about markets. I know many in my audience, probably everybody,

feels the same way. People can find you on Twitter at CrossBorderCap and your website is CrossBorderCapital.com. A lot of what we talked about, we had a chart. So if people are listening to this on Apple Podcasts, Spotify or other podcast apps, they can get that video version by going onto the YouTube channel, which is called Monetary Matters. A reminder that episodes of Monetary Matters come out every Wednesday and Sunday.

During the Christmas season, the holiday season, we might release a few early. So just to get them out there and maybe take a break, but we'll see. But people can find me on Twitter at JackFarley96. Thanks to everyone for watching and until next time. Thank you. Thank you. Just close this door.