The Liquidity Squeeze | Michael Howell On Funding Pressures, China’s Gold Yuan Devaluation, and Trump Admin’s Tariff Endgame
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Explore how nuclear energy can play a role in your portfolio at vanek.com slash NLR Jack. So glad to be joined once again by Michael Howell of Cross Border Capital. Michael, welcome back to Monetary Matters. Hi, Jack. Great to be here. Looking forward to it.

Me too. Michael, you study everything when it comes to liquidity. So that's in terms of central banks, that's in terms of cross-border capital flows and private market credit creation. What are you seeing in terms of global liquidity and how is it impacting your view on asset classes? As you may have noticed, Michael, the stock market, particularly the U.S. stock market, has entered a little bit of a wobble here in 2025.

Yeah, exactly, Jake. I mean, the issue is that momentum is being lost in liquidity. Our indicators are certainly indicating an air pocket. We've been seeing that

pretty much since the start of the fourth quarter of last year uh there's been a little bit of a pick up uh you know in the last two or three weeks that that's for sure but the real worrying thing is what happens to the trend over the rest of 2025 and we've we for a long time in foreshadowing the fact that this year would be a year of some uncertainty and volatility and

One of the reasons for that is we weren't really too sure what the Federal Reserve's long-term intentions about QE were. And secondly, that comes in the face of what is a significant hurdle for markets, which is this upcoming debt maturity wall, which is really starting to hit from the middle of this year, which refers to the refinancing of all

of all the debt that was turned out during the COVID crisis at low interest rates, that's going to have to be refinanced. And that will take a lot of liquidity to do that. Do you think it will be able to be refinanced without any hiccups? Because, Michael, the credit markets have just been humming. There's tons of deals being done and the credit spreads are very, very low. Do you think that can continue? I think it's unlikely. I think it's unlikely because this is not just a U.S. corporate phenomenon. It's a global debt phenomenon.

And if you want a sort of gauge of the upcoming problem, take a look at slide 27. You'll see that this refers to the debt liquidity ratio for the world economy. Now, why do we look at the ratio between debt and liquidity? Because that's the meaningful statistic to watch since we're in a debt refinancing world. There's huge amounts of debt out there. Financial markets are no longer

financing new capital raising, they're financing debt refinancings. And all the textbooks tell us that capital markets are there to finance new capital spend. Nice idea. Interest rates, therefore, are important as a cost of capital. But we're not in that world anymore.

There's not a huge amount of capital spending going on, certainly up to now. Clearly, it may change if all this talk about defence spending and infrastructure spending are real. But at the moment, capital markets are focused on financing our huge, huge mountains of debt. And what you need for that is balance sheet capacity. It's not interest rates that matter. Think of the example of a home mortgage. If you don't get the roll down on your home mortgage, you're homeless.

And that's really the reality for debt holders or debt issuers worldwide. They'll default unless they can roll. And what that chart is basically illustrating is the ratio between debt and liquidity.

Now, if you look at the chart in detail, what you'll see is that the ratio is stable over the long term. It averages about, well, effectively approximately 200%. So the amount of debt relative to liquidity is two to one. But the point here is that liquidity is being used to roll the debt. And if you get too much debt relative to liquidity, you get refinancing tensions.

which pushes you in the upper half of that diagram above the dotted line and that creates financial crises. So our contention is that every financial crisis in the last 30 years or so has ultimately been a debt refinancing crisis. If you're below the line where you've got lots of liquidity relative to debt, you tend to see asset bubbles and we've just seen a big asset bubble which you might say is tech or crypto or whatever one chooses, the everything bubble maybe. But what

What we're seeing is that that ratio is beginning to pick up and that ratio is picking up on the basis that liquidity continues its trend, but it takes into account the increasing amount of debt that needs to be refinanced. And that's really the issue. So we're moving back into an uncomfortable situation where you're starting to see more and more tensions.

beginning to emerge. Now, to foreshadow that, I want to show another chart, which is admittedly just focusing on the US. And as I've stressed, this debt problem is a global one, not just an American one. But if you look at slide 21, that's looking at what's going on in US money markets right now.

Now, this ought to be a wake up call for the Federal Reserve. And let me just sort of sift through what's going on here. This is looking at the so far, which is a repo rate, less Fed funds spread. And the tram lines on the diagram indicate where you'd expect the normal range to be. And what we keep seeing is a blowout increasingly above that upper tram line.

Now, if you look at the if you make updates and where you get the pickup in volatility is about the beginning of 2024, around the sort of, let's say, two thirds of the way into that chart. But basically something like 70% of all of those extreme readings in the so far

Fed funds spread have occurred since July of last year. So you're looking at increasing tensions. Now, the Federal Reserve should be paying attention to that and they should be taking less liquidity out of financial markets. And therefore, we've got to start to look for a world where QE begins to restart. Now, there is no indication they're going to do that.

In fact, there's every indication that may not because the Federal Reserve speaks about containing the size of the balance sheet, either keeping a cap relative to GDP, which is nonsensical, or even worse, actually going back to historic sizes of the balance sheet back in 2008 or slightly beyond that. This is madness.

they need to set the balance sheet size relative to the debt burden that is being faced, particularly the refinancing burden that's being faced. And if we drill on to where

reserves are money market liquidity there's a chart again a little bit further towards the front which is slide five which is looking at what's going on in terms of U.S bank reserves now what that chart is indicating to try and explain this in detail this is looking at the flows of money through U.S money markets and it actually happens to end up as bank reserves

If you go back to 2009, Ben Bernanke, the former Fed chair, said in 2009, the way to gauge Fed balance sheet policies is through the size of bank reserves. And what we're seeing here is bank reserves, as you can see, fluctuating. But the dotted line on the orange and on the red, dark red lines are indicating our expectations here.

through the back end of 2025. And you can see there's a falling away. Now, before I explain what goes into the falling away, let me just describe the chart in more detail. The orange line is actual bank reserves. The darker red line is a one standard deviation displacement that we put there to capture the tail in the distribution of bank reserves, which takes into account the vulnerable, more vulnerable, smaller regional banks in the US, like the SVBs.

And the lighter red or the brighter red dotted line that is linear is our estimate of adequate reserves or minimum levels of reserves in the system. You see that trends higher over time, as it should do. You'll see also there's a step down in that

line around August of 2024, which refers to the change in stress test rules for banks, which gave the banks a little bit more leeway. But around July of this year, prospectively, our expectations for the dark red line fall through the minimum reserve threshold. And that is a danger point.

The Federal Reserve cannot allow that to happen, because otherwise there'll be a serious rupture in US money markets. And that's our expectation, or that's our fear, let's say, unless something happens. So they've really got to address this problem pretty soon.

So when the Federal Reserve does quantitative easing, it expands its balance sheet and quantitative easing is QE. So that increases the reserves, which are the liabilities of the Federal Reserve and the assets of the commercial banking system. And with that, those newly created reserves, it buys assets, treasuries and mortgage-backed securities mainly. And...

So the Federal Reserve has been doing the opposite, quantitative tightening or QT since 2022, and the federal balance sheet has shrunk. Bank reserves peaked at $4.2 trillion, about there. Then they now are at $3.25 trillion. So they've declined by a trillion dollars.

You estimate that if it goes meaningfully below $3.2 billion, so $50 billion more, which is pretty close, that there are going to be a rupture in money markets. Tell us why. Tell us about the work you've done. And do you think the Federal Reserve agrees with you? Well, I think the first thing to say is the Fed, on the one hand, claims that it wants to avoid, I mean, not unreasonably, another 2019 repo crisis.

And they were very alert to that. And they are looking very closely at measures which show the sensitivity of bank reserves and how vulnerable bank reserves are. But it is a question whether some of those, let's say, statistical measures are actually going to be timely in terms of recognizing this problem. And if you look at what the money markets are currently saying, they're suggesting that there are already tensions in the systems.

Now, you can, as we've done through relatively straightforward math, try and work out what bank reserves will be because you know how some of the elements in the Federal Reserve balance sheet will actually change. And when we're talking about liquidity injections, we're thinking about the whole sort of gamut of Fed moves. Now, we know that they're doing supposedly QT, but QT is

is defined rather strangely under this Federal Reserve regime or under this Federal Reserve chair as solely being referring to the roll-off of treasuries and mortgage-backed securities from the balance sheet. So, you know,

Okay, fair enough. That's one definition, but it wasn't the definition that used to be used, particularly under Chair Bernanke. And Bernanke said that the way you judge the balance sheet move for the Fed is to look at bank reserves because bank reserves are liquidity. And that's a measure of the amount of liquidity in US money market, which really are the heart of the system.

Now, if you drill into this, you can say that actually, although the Federal Reserve on paper has been supposedly doing QT, in reality, it's been injecting liquidity into the system. So if you look at that bank reserve chart, what you'll see is actually over time, it's tended to trend higher along with that minimum level of reserves that we cited.

Now, more to the point, if you look at the elements that the Federal Reserve has been playing with outside of conventional open market operations, they have imparted a significant stimulus to the economy. And I want to turn to that because that's another problem that the new administration faces. And if you look at slide 20, you'll see a chart there that we've put together.

which is looking at the hidden stimulus that basically affected the US economy. And it's this roll off that I would now venture is really affecting the risk appetite in the market, because what it's been doing is imparting a slowdown on the world and the US economies. Now, let me just drill into what's here. Let me stress a hidden stimulus. This is coming on top of what we

No, it's a direct stimulus from lower interest rates last year, the interest rate cuts that the Fed made and the huge fiscal deficit.

This is extra, right? It's not what is publicly recorded or talked about, but it's real. The orange area is what we loosely have called not QEQE. So it's basically quantitative easing, but it's not what the Federal Reserve would now fess up to be as quantitative easing. What it refers to are things like the reverse repo facility, the rundown of that, that come down from about what, two and a half trillion to barely 150 billion QEQE.

Latest readings and other things like the Treasury general account, things like the operating losses of the Fed, factors like the bank term funding program, etc. At the peak, that orange area at the beginning of 2024 was giving a stimulus of about $2 trillion, effectively more liquidity into the economy.

The red area was even bigger, and that was the effect that we've termed not yield curve control, yield curve control, which refers to the change in the funding dynamics or the calendar of issuance under Janet Yellen at Treasury to basically change the funding dynamics of the US deficit. And something like

57% of all deficit funding since the end of 2022 occurred through the bill market, through treasury bills. Very unusual.

And this is something that Scott Besson has already complained about, saying it's imprudent policies. Stan Druckenman at one stage referred to these policies as being more akin to Argentina than the US. But we can't really say that now because Argentina is getting its act together pretty fast. And what that is doing is giving extra stimulus. Why?

Because you can crudely, or crudely is wrong, you can generically define liquidity as the asset size divided by its duration. So if you reduce the duration of an asset, in other words, going from a coupon of 10 years to a bill of three months or six months, you're automatically increasing liquidity in the system.

Another way to think about that is that in terms of holding an asset, but there's more balance sheet space given or available if you hold a bill rather than a coupon bond, because essentially requirements, regulations will actually force you to

hold other assets against something which is more liquid or potentially more volatile, like a coupon bond. So you get far more balance sheet space if you're buying bills. So that's liquidity enhancing. And then thirdly, if you think about who buys these bills,

Mostly it's credit providers like banks and banks will buy bills with alacrity because they want to duration match their liabilities and their liabilities, particularly from a very loose fiscal regime, are coming in with a big increase in bank deposits. So they are big, big buyers of bills.

And why is that a problem? Because that's direct monetization of the deficit. And Milton Friedman, the arch monetarist, will be turning his grave looking at these figures. So what you're looking at here is a significant monetary loosening through these policies.

The red area in that chart refers to an estimate of dollar duration. So it's not purely one for one in terms of its stimulus effect. But think of it as a wealth effect. It's imparting a huge stimulus to the US economy. Now, you can loosely call this hidden stimulus a presidential put.

And as Scott Besson has hinted, I mean, he suspects this was an attempt by Jay and Janet to actually get Biden reelected. It was a huge hidden stimulus to the economy. Why do it then? You can see the cyclical nature of that stimulus. And it's now come right off. So it was six trillion. It's now under a trillion. That big fall off in 2020.

in the application of liquidity is causing the US economy to slow down. And if you look at the prior slide in the PACA century, what you'll see is there's a R estimate of what is happening to world GDP. Now, this is an AI-based analysis. This is using lots of different inputs. It goes into the hop. They go into the hop of things like GDPR.

currencies of trade sensitive economies, commodity prices, credit spreads, everything gets sort of dumped in there. And the model, the algorithm basically tries to associate that with what it knows about GDP growth.

And what you can see here is on a daily basis, there's a very significant step down in the data during the second half of December 24 stabilizes a bit and then takes another lurch down in around the end of January. But what we've done over that period is to lose about 150 basis points of growth in the advanced economies. So this is world growth for the developed world, in other words, and exclusively emerging markets in this case.

But basically what that's saying is that growth is slowing down. And it's my view that that is why you're getting

this air pocket in market returns because investors are not willing to take more risk in this political uncertainty, but more particularly economic uncertainty. And it's only going to get worse because what we know, the administration is doing a lot of its spending cuts and doge to the front end of the economy. It's happening now, not later. And therefore you're bound to get some slowdown in GDP just by simple math. Now,

The cynic in me says, well, why not? Isn't that what they want? Isn't Trump too much more about, or Trump too and Bess one, 1.0, all about the bond market, not about the stock market? And what they want is funding costs to be brought right down.

and so our economy. And the fact is that we know that the memory of voters is pretty short. Therefore, you've got to start blaming the previous administration quickly for what's gone bad on the economy. And I think that this would be wonderful timing for the midterms to get the economy revived again, you know, sometime from '26 onwards. And therefore, you know, you get the last two years of the presidential term with great economic numbers and a great market. But maybe it's not good until then.

So you think that President Trump and Secretary Scott Besant would not mind for there to be a recession because borrowing costs would go down and their focus on the bond market and not a recession and not the stock market and nothing makes borrowing costs go down, risk-free borrowing rates go down, then a recession. Correct. That's my view. Yeah. I think they kind of welcome that. I think that if you listen to the rhetoric that's now coming out of both Besant and Trump, they're warning people that the economy is going to roll.

And that's what we're seeing. And, you know, although, you know, the Atlanta Fed survey, the GDP now, you know, has been criticized for being, you know, the latest print being bad. I think actually forget about the level, think about the direction. It's very, very clearly turning down lower.

And that's what we've got to start to recognize. Will it be a recession? I don't know. But certainly there's a lower growth path being signaled. As AI demand surges, nuclear energy is making headlines, driving tech's biggest companies to turn to nuclear power to meet growing energy needs. The VanEck Uranium and Nuclear ETF, ticker NLR, has provided investors with comprehensive exposure across the nuclear energy value chain for over 15 years.

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And I think what has gone down a lot more than growth is growth expectations. So it is forward looking. But what about in the Fed Atlanta GDP Now model that has caused real growth, basically projections to be negative? What exactly is it? Because I mean, I know tariffs have been...

Some of them implemented, I believe, against China, against Canada and Mexico. I think they're not going to be implemented in full force until April 2nd. And so far, President Trump has proposed tariffs, implemented them, and then pulled them back one or two days later. And a lot of uncertainty has been injected and then pulled back from the market. But ultimately, I think the market is concluding these tariffs are coming on April 2nd, and they will be bad for real growth because either costs will go up or people just won't buy things. And so real growth could...

go down and maybe real GDP could even contract, i.e. a recession. What do you think? And how bad do you think tariffs will be for the economy? Or you don't think they'll be bad at all? I don't know. I don't want to put words in your mouth.

Well, I'm not sure. I mean, I've long had the view that the tariff thing is much more a negotiating tool rather than a strict revenue raising mechanism. It may raise revenue, but I don't think it's a point. I think what Trump and the administration want is for China and Europe to build factories in America. That makes a lot more sense. Clearly, in the event of any military conflict,

the US is in control of those factors and that output, that's for sure. But actually, one could actually even argue that the more integrated these economies, the less cause for military conflict anyway. I mean, that sounds like a great deal. So, you know, that would be my reading of this. So I don't think they're necessarily going to have a, I mean, the uncertainty is going to have a negative effect on the economy. I'm not so sure the actual implementation will be, because I don't really think we're necessarily going to get there, or in terms of sort of full tariff, that

that part of a deal negotiation. And that was after all what, you know, if you go back and read the art of the deal, which is sort of the Bible on truck policy, this is really what he's indicating.

Right. He's talked about how he wants to do them for negotiations and how he cares, give him leverage. He also has talked about it as a revenue raising tool. But I think he also just likes tariffs and he would be happy if they had a tariff rate. I don't think it's pure. I don't think Trump, he may be semi bluffing, but he is not fully bluffing like he does. But so, Michael, you think if let's say a 20 percent tariff actually gets enacted against Canada, Mexico and China,

What do you think would be the impact on the stock market and economic growth? Not just not talking about rumors or he puts it in and then he takes it back the next day, but actual full scale tariffs, full stop. What is it?

I mean, the history tells us that it's not going to be positive. I mean, that's for sure. I mean, we know from the history books the dangers of going down this route such as Smoot-Hawley in the 1930s. I mean, absolutely. We've got to acknowledge that. As I said, I don't think it's going to be, you know, full Smoot-Hawley. But I think that, you know, on the other hand, you know, any step in that direction is clearly negative. But I think

But what I would argue is this is coming on top of probably maybe more important dynamics. I think we can't lose sight of the fact that there was a big, big stimulus, cyclical stimulus last year. You know, people speak about US exceptionalism. It clearly is US exceptionalism, and I'd be the first to admit that. But on the other hand, there's also a big cyclical element coming in here. And that was what went through last year. And it was a very clever policy by both Jake Powell and Janet Yellen to stimulate the economy in the way they did.

Michael, you've got that chart about not yield curve control, yield curve control about Treasury Secretary under Biden, Yellen. She issued a greater percentage of Treasury bills rather than coupons. So she was borrowing short-term rather than long-term. And Scott Besant, before he became Treasury, was a huge critic of that alongside Sam Draculmo, as you said. I think about a month ago,

treasury secretary Besson, now that he's got the job, he went on Bloomberg and said that we're a long way from boosting longer term debt sales and that rejigging US debt sales will be quote unquote path dependent. In other words, he's going to do a very similar policy to Janet Yellen's of having a higher bill share. At least that's my read of it. And if your treasury wants to correct me, I'd love to speak to

Yes, absolutely right. He's boxed in. There's not much he can do. He simply can't shift to a lot of coupon issuance because it would certainly absorb a huge amount of liquidity, which is already getting scarce in markets. And it would seriously crash the markets and the economy. So I don't think he can do that. He's boxed in. I mean, the trouble is that the Yellen policy, clever as it was, is subject to a nursery. You can't change it overnight. Now, I think Beston does want to change.

And I think there are avenues to do that. But the way you do that is to get yields down at the long end of the market. And there are a number of ways to do that. One is to control inflation. And he does keep stressing the fact that ever since the Trump administration has been in, oil prices are lower, energy costs are down. That's clearly a major factor.

factor and that will help the bond market. But above everything else, as you say, a weaker economy is the salvation of the bond market. And that's what we're beginning to factor in now. You can start to see term premium giving up some of their rising trend.

interest rate expectations haven't really cracked yet, but they could easily do. So, you know, our view is you really want to be in the mid-duration bond area to try and get to gain benefit from that. Now, there is another element that he can throw in, and that is this whole issue or question about should US gold reserves be revalued?

and my view is they certainly should because the us is out of line relative to other major economies with the exception of japan i think japan also doesn't revalue gold but the us needs to sort of catch up with uh with others uh the fact that gold reserves are held or uh in the accounts at 42 spot 2-2 is a legacy of 1973 when they were last revalued

Revaluation has occurred in US history. You know, we know it happened under Roosevelt, it happened under Nixon. You know, why shouldn't it happen under Trump? There's a great opportunity to do that. And what's more, it may also sort of square the circle.

because it gives the treasury a huge windfall gain depending of course on what level they revalue to but if they revalue over three thousand dollars an ounce you could easily see a one trillion dollar net gain for the tga which would you know save on coupon issuance it would create scarcity of coupons

And that would cause yields to fall back. And that would be a wonderful virtual circle for refinancing US debt. So why not try that? Seems a win win. The other thing that comes through from revaluing gold is that also could form part of a deal with China.

And this is maybe gets straying onto the realm of. If Scott Besant is going to do the same treasury issuance policy as previous treasury secretary Yellen, why is the not yield curve control stimulus fading? In other words, what happened to the two traders? Why is the red bar shrinking into oblivion if this current policy of bill issuance is the same?

Well, because what's happening is it's not changing. I mean, the bill, the proportion of bills and the proportion of coupons stays the same. So there's no net change in dollar duration. If you get a further increase in bill issuance relative to the proportion of the deficit, yeah, there will be.

Got it. That makes sense. So it's about the rate of change. And for an example, people think, okay, Trump, he's going to extend the 2017 Tax Cut and Jobs Act, which a lot of the benefits to households are actually going to end in 2026. He's going to extend that tax cut. That's going to be a stimulus. You can make the argument, it actually is just

current keeping things at the exact same. If you want to do more similar, you have to have even higher tax cuts. And let's say if President Biden got reelected instead, and he did not extend those tax cuts, that would have been a net contraction. Yeah, second derivative. Yeah, exactly. Yes, this matters in market second. That makes sense. If you look at some, the concept or consider the concept of debt to liquidity ratios,

As I said, you can look at it worldwide. That's the chart I showed up earlier on at the beginning. But you can also think of it at a national level. And if you look at different economies, what you find is the debt liquidity ratios for the US, for Europe, for Japan, all pretty stable in the long term. They mean reverse, which is what you'd expect.

What about China? Well, the same happens in China. But if you look at China right now, there is a significant shortfall because there's way, way too much debt relative to liquidity. In fact, to get back to equilibrium in China, you'd have to increase the amount of liquidity in the system by about 30%, which is a big ask. And the Chinese haven't been injecting liquidity for some considerable time because of the weakness in the yuan. They've been trying to target a stable yuan.

So how could you square the circle? One of the things is that if China needs to devalue the yuan, what does it devalue against? Is it necessarily the US dollar, as everyone thinks?

I don't think it is. I think they could devalue against gold. In other words, to devalue paper money against real assets. And that would actually be one way of solving the debt problem because you're actually devaluing paper money against real assets. Now, if they did the 30% devaluation of the yuan against gold, that would push the yuan gold price to 26,000, which is up from 20,000 right now. So 26,000 Chinese yuan, you remember. Yeah.

not dollars, 26,000 yuan. Currently it's about 20,000. What would that mean? Because clearly the gold price, the yuan and the dollar triangulate. So if you assume that dollar yuan, dollar renminbi is pretty much where it is now, that would equate to something like a $3,600 an ounce gold price. So it's substantially higher.

I don't think that's impossible. And I think that that would be a win-win situation for all sides. The question clearly comes is, does the administration want to help China in that way? But it could be part of a serious deal, let's say that.

And that would enable China to do to revalue gold. I mean, help revalue gold as well. And it would help the US Treasury in that same act. So that's what I would be thinking of. Now, Chinese liquidity is very important. And China has for a long time, I'm talking about the last couple of years, been squeezing liquidity because of the weakness in the yuan. And that's caused a lot of volatility in Chinese financial markets because it's meant volatility and liquidity.

But what we're beginning to see now are some signs that China is wanting to address that. And that's why I think we may be seeing the beginnings of a deal beginning to unfold. We don't know that for certain. And clearly, it's one of these things we've got to watch. But, you know, never say never here, because this could be a big item.

And we know that Scott Besson has already hinted mysteriously that he is going to revalue the assets on the US balance sheet for the benefit of Americans. Now, what could that really mean? Well, I think if you look at the assets on the balance sheet, you've got gold, which would be a big win. You've got the GSEs, Fannie and Freddie. They can be prioritized. That's another win. It seems an obvious thing for them to do.

There's the land real estate the US government owns, which is predominantly, as I understand, 70% military. And you've got the Parks Department. Well, assuming that you don't want to do very much with military land or the Parks Department, it really comes back to Fannie and Freddie.

and the gold stock. So if he's talking practically about doing something in the next 12 months, maybe this is what he's thinking of. And of course, if you did that, it would be hugely beneficial to the bond market, which is why I say Trump, too, is much more about bonds than is about stocks. I mean, stocks may get a win for gain from that, but it's really about a bond

I got a question about gold revaluation. So gold is on the U.S. balance sheet, I believe not the balance sheet of the Federal Reserve, but actually the U.S. Treasury, the U.S. government at, you said, $44, whatever it was in 1973. The gold price has obviously swooned higher, close to $3,000. But on paper, it is still at that $44 balance.

But that's just the carrying value. Everybody knows, Michael, that the price of gold is at $3,000, not $44,000. If someone's working at a bank and they're deciding whether or not to buy U.S. Treasury debt, they're probably sophisticated enough to understand that the value that the U.S. government has in gold is a lot higher than

if the gold was valued at $44? Isn't it just a stroke of the pen type thing? And a comparison that comes to example of like, let's say Berkshire Hathaway bought a lot of Coca-Cola shares at $1 in 1990. The carrying value, the paper value of that would be $200 million now. But the actual value, if it sold it, was way, way higher. So there's an accounting reality, but then there's the economic reality. So is there any change to the economic reality or is it just...

adjusting the accounting reality to match the economic reality. Well, it's an interesting point to ponder, but it will certainly mean that the Treasury won't have to issue so much coupon debt. So you could argue that markets are perfect in the long run, and they've already discounted all this, and that should be contained in the yield base of the US market. But I would say that that

that's in a perfect world unfortunately we don't live in a perfect world supply and demand is important and the fact is if we don't issue coupon coupon securities uh to the life insurance industry uh or to the banks or to the pension funds they're going to be starving coupons and they're going to bid up what's already there in the market because they have to buy and these are the dynamics of flow of funds so it may well be all paper and it may well be an accounting uh

fudge, but the reality is that it's there. And you're right to say that it's not the Federal Reserve that owns this stock.

But it is true that the Federal Reserve has an item on its balance sheet, which are gold certificates. And those gold certificates would increase in value substantially. The fact that the Federal Reserve does not own the gold means that that money has to go directly into the Treasury general account and it can't go anywhere else. It can't go into the Fed's reserves, for example. So this is a pure windfall for the US Treasury and the US Treasury will basically use that or should use that to reduce its coupon issuance.

that is the effect it will have. And, you know, we may live in a perfect world, but I would still think yields would go down substantially if that happened.

But Michael, sorry, are they selling the gold? Because if they're selling the gold, they're getting money into the door. But they have gold on their paper, which they say is $44. Everyone knows that it's actually $3,000. So it's literally 70 times greater than the paper value. But now they just have recognized the reality that the gold is way more valuable. Where's the actual money in the door that's not going to have to be borrowed from the coupon? If you're trying to get me to sound cynical, it's just they're printing money.

But I mean, but, but it's, it's money that maybe has a value because that money, uh, is, is effectively gold bite. I mean, the fact is that if you, if you lived in a world where, uh,

where paper money was directly backed by gold, okay, what you've been looking at is you've been looking at a world where the value of gold hasn't changed. It hasn't been moved up commensurate with the market. So all we're doing now is getting gold to catch up with that. And therefore there's a windfall gain that someone has to get. And ultimately it's the treasury that gets it. The treasurer's account then gets commensurately increased.

So it is an accounting phenomenon, but it works. That makes sense. Thank you, Michael. You were saying something about China. So China could attempt to revalue the yuan against gold, so increase the value of gold in yuan, which therefore could devalue it relative to maybe other fiat currencies in an indirect way. Sorry, what else were you saying about China? What we've got here is a world that clearly is changing.

in a number of respects, but the trends in terms of the gold market have been set in place for some years. And that basically, whether it is a recognition by the Asians of the value of gold, whether it's a growing distrust of the US to hold on the US dollar, I don't know. But the fact is that what we're looking at is huge demand coming out of Asia and maybe other countries as well for buying gold bullion.

And you can see that in a number of ways. Now, one of the things we've seen increasingly in the COMEX market is physical settlement being demanded. And that's true in the silver market too. Many people argue that's all to do with the threat of tariffs. I wonder whether that is the whole story. But we're getting that phenomenon. The Bank of England, which is a major player in the London gold market,

and has basically been active in leasing gold, now has to supply or provide gold as those contracts are being, as gold is demanded in settlement. And the bank of England doesn't seem to be able to supply that gold with the speed that it should do. There are stories in the silver market that it's taking six to nine months to settle

a silver contract in the futures market, which should be pretty much instantaneous. And the Bank of England has actually warned that it will take six to seven weeks to actually supply the bullion for to settle those contracts. Now, the excuses that they've come out with, which is ludicrous as they may sound, are all to do with the fact that you actually have to physically move bullion from the vaults of the Bank of England to Heathrow Airport and then fly it across the Atlantic for settlement.

And they cite traffic problems as being one of the reasons they can't deliver for six, seven weeks. Now, as ludicrous as that sounds, well, OK, there we are. There you have it. And that would suggest that there's actually something going on in the bullion markets that we don't fully understand. And I think there is increasing demand out there for physical bullion by a lot of investors.

When I first started these markets back in the mid 80s, Swiss private banks had something like 15% of their assets in gold. They've now got probably less than 1%. So you can see that we could easily move back to a world where gold is a much, much bigger feature in terms of investment portfolios, and it should be. Now, why is gold so important here?

if the Chinese are controlling the momentum of gold or the momentum of the market and China is accumulating gold, it would kind of be in their interest as well to revalue it. As I said, there may be the makings of a deal here because China needs to stimulate liquidity significantly in its economy. We may be seeing that. And what I'm going to show you is a chart which basically begins on slide 23.

and it looks at the Chinese bond market. Now, bond markets contain a huge amount of information and I've always been sort of schooled maybe coming from Salomon Brothers with the view that bond markets never lie. Certainly they contain a lot of very valuable information if you break them down. And what we show here is the Chinese 10-year government bond.

in orange, the yield on it. And the black line, which is on the right hand scale, is the implied term premium on that bond. The dotted line is simply a 50 day moving average. What that shows is that in late 2024, the yield on the Chinese government bond plunged, as you can see, as it sort of fell off a cliff. And that was basically when China was suffering debt deflation.

when the PBOC had to tighten significantly and try to protect the yuan, and yields collapsed

And that collapse in yields wasn't because of rate expectations dropping, it was because term premium collapsed. And term premium collapsed because there was a huge demand for safety in China, and the government bond is the safest asset. So there was a huge demand for the safe asset. What you're now starting to see is a sign that that is reversing. And you're beginning to see the yield of the 10-year bond moving up,

And that is commensurate with a rise in term premium. Now, that rising term premium has coincided with a rally in the stock market, initially led by technology stocks, but I think it's going to be wider. And what you've also seen is a statement or a speech by Xi Jinping, the supreme leader in China, is stalling the values of capitalism.

and being applauded from the front row by reinstating Jack Ma, the technology entrepreneur. Now, that seems to be a very symbolic statement by the Chinese, and they like those sort of statements.

And I'm old enough to remember back in 1992 when one of Xi's predecessors, Deng Xiaoping, the then Supreme Chinese leader, went on a southern tour of the capitalist states in southern China and came out with a slogan, you know, to be rich as glories.

that basically foreshadowed a significant increase in Chinese economic activity and the markets. And this may be a similar thing. Now, what you can see from the next slide is signs that China is beginning maybe to increase liquidity injections. And I say maybe beginning because this is early signs. This is its...

It's injections into money markets. These are daily liquidity injections. They include what I've said there is ORRP, which is an outright reverse repo,

which is a new program they introduced since November, which is sizable, which is about, I think, between $300 and $500 billion. But that's also in the mix. So it looks as if they're doing something serious for the first time. Now, if that chart is difficult to read, if you look at the next chart, that shows a longer-term view of the People's Bank's balance sheet.

And what you can see there is a very sizable flip flop between December, January and February, where you see that spike down in the black area at the top. The red line, by the way, is a six month annualized change. And you can see there was a huge sort of downdraft in liquidity.

as they try to protect the yuan. And now they've decided to add more liquidity. And this upward spike is maybe indicating this is going on. Now, why is that significant? I think it's significant because

They probably want the yuan. They want the economy revived. But maybe if they put so much liquidity in, what you're going to get is a much weaker yuan. But as I say, read that against the gold price, not against the dollar yuan rate. Now, the following chart that you've got in the pack is looking at the yuan in orange there against gold.

And that is showing that that's, you know, basically testing 20,000 yuan. And the black line is the US dollar Chinese yuan cross rate. Now, I think it's the orange line that's important here, not the black line. I think the black line will come quietly if the US agrees to some revaluation.

But what you've got here is the two biggest players in the world have probably got it in their interest to revalue against gold. And that's why I think it's significant. China would help China get out of its debt problem, and it would help the US finance its future debt load. And that's why I think it's well worth looking at these factors. And I think gold is certainly a long-term buy. And if you want even further proof of that, look at what's happened to debt

treasury debt over the last 25 years. Treasury debt, the stock of treasury debt, has increased by 9.6 times, if my memory serves me correctly, since year 2000. The gold price has increased by just over 9.6 times. Now, is that a coincidence or not?

And I think that for the long term, we're in a world where debt is being accumulated because of Social Security and Medicare. Trump is not going to relax on those programs. He said that. But that's what's really driving debt in the longer term. Then you've got a rising gold price.

So, Michael, you've been a bull on gold in total, but particularly a bull on gold relative to Asian currencies like the Japanese yen or the Chinese yuan. And you've said that in December. You said that many times in our interviews over the years. And that call has worked out beautifully. Just looking at the price in yuan since 2022, it bottomed at about 12,000 yuan to one gold ounce.

And now it's, as you say, a little bit over 21,000. And even in December, the price of gold is up, you know, like 8% to 10%. So congratulations on the good call. And you still think that the price of gold relative to yuan will go up. And explain how that actually makes a difference to credit conditions. So Michael, long before either of us were born, there was...

uh credit conditions were controlled by the supply of gold in the country and people say well jack michael may have been bored before 1971 but actually i that that then was the dollar dollar standard and then the dollar standard was on gold and that's a totally different thing like the i'm talking about hardcore gold standard like 1920s and you know before world war one um where there were multiple countries on gold standards and if a country was if it was nine

non-competitive, gold would flow out of the country, forcing central banks to raise interest rates. And this is why, like during the Great Depression, and I'm just thinking of your home country, Michael, because you said, again, I remember reading a month ago in the Financial Times, this article, and it seemed like it was 1925 instead of 2025 about gold fleeing the Bank of England. And I was just thinking, Michael, like, isn't it such a great thing that now when gold leaves the Bank of England,

the Bank of England doesn't have to hike interest rates to 9%. And if they go into a depression, they have to hike them even more and be counter cyclical. Like, isn't it good? I think, you know, to show my somewhat Keynesian credentials, like I definitely think it's a good thing that we are not on the gold standard anymore. And

like we don't live in a gold standard anymore. So like if the gold price went to $5,000 or if it went to $1,000, how would that materially impact credit conditions? Like how would it impact, you know, deal flow in the leveraged loan market, the CLO market? How would it impact credit creation, credit cards, mortgages? Like I, you know, in the 1920s, it totally was, you know, one to one or five to one with the money multiplier. But like, how does this actually impact credit conditions and liquidity in China and in the US if gold price goes up?

Yeah, all great questions. I addressed a lot of this in a Substack post I did on Capital Wars a few weeks ago. And basically, there are two very interesting questions really to pose. I mean, one is, will gold be revalued or will it go up in price? Therefore, the official US gold stock will be revalued. If it's revalued, and we can debate what the level is, but I

I think I said in that article, let's assume it's revalued at over $3,000 an ounce or thereabouts. The market would clearly expect that it's going to go further. So if you've done it once, why don't you do it again? That's not a reasonable point. So I think there'd be huge demand for gold. But then there's a question which says, does the administration then get the Federal Reserve to start targeting gold? I mean, if we were in a gold standard, what would happen would be...

gold would be targeted at a set rate. Now, one of the things that the British, I mean, by the way, the British don't own very much gold. They've flogged most of it under the socialist government last time around. And the gold that they're now talking about shipping is other people's gold that they're effectively storing for them.

But even in the 19th century, when Britain really pioneered the use of the gold standard, it had a very, very small gold reserve. And all it needed to do was to change interest rates to keep a stable gold price. And that was really the lesson of the British gold standard in the 19th century. So America doesn't really have to accumulate gold to actually run a gold standard. It needs to target the gold price. Now, will the Federal Reserve do that? The problem is, if you're targeting the gold price, you...

raising interest rates if the gold price goes up above a certain level called the gold points and you're cutting interest rates if gold comes down below a certain point. And what you're trying to do is to avoid monetary inflation and avoid monetary deflation in particular

The problem with that is that in the context of a debt burdened economy where you need more and more liquidity to roll over debt is actually a net financial squeeze. So what I said in the article is that if they go down this route, you absolutely cannot have the Federal Reserve targeting a level for the gold price. They could target a trend. They could do something like allow the gold price to increase by 5%, 8% a year. That would be manageable.

I can't believe they do that because speculators could get behind that a bit. But you would probably have to have gold somewhere in the sort of quiver or the armory of central banks, some of the things they monitor. And I think gold has been a very good barometer of monetary excess in the past. And as I've sort of continually pounded the table on, gold is a monetary inflation hedge. It's not a high street inflation hedge.

In other words, you can see high street prices doing very different things because costs change, but it's monetary inflation that gold really is the hedge against. And if you get big increases in liquidity, and as I'm trying to argue, liquidity is going to increase because of our debt burden, gold will move pari-pursue with that. Then what you've got is a rising gold price over the medium term. So that's what they need to do, but they certainly can't afford, they certainly shouldn't be targeting a level for the gold price.

And what do you think is going to happen to liquidity? I think in your models, you say, okay, my models indicate the Federal Reserve needs to not just stop quantitative tightening, which

you probably will do this year, but it needs to resume quantitative easing. It needs to once again expand its balance sheet and so do other central banks around the world. Otherwise, very bad things are going to happen. Again, I'm talking as Michael Howell. Well, the Fed isn't stupid, the ECB isn't stupid. Obviously, they're going to have to expand liquidity, so therefore liquidity will increase, therefore I'm bullish. But what if it doesn't happen? Isn't things

I feel like Michael, in terms of the way you measure liquidity, a lot of it has been non quantitative easing methods such as the reverse repo going down, the treasury general account going down. And then by definition, the treasury, the reverse repo facility, it's very small right now. There's very little monetary stimulus that can be done by a further draining of that reserve. So how do you know other than what if the Federal Reserve doesn't do quantitative easing?

Well, I think we've got a serious problem without any mistake. I mean, that's for sure. I mean, the whole issue is that the Federal Reserve, as I sort of alluded to earlier and certainly in the past, is that all this talk about setting the size of the balance sheet relative to history or relative to GDP is completely bonkers, that we're in a world of debt refinancing. You've got to move the

liquidity, parry pursue with the rising debt burden because you need to refinance debt. And it's the Federal Reserve that controls the balance sheet size of the US and increasingly global financial systems. So the US Fed balance sheet has got to expand. There is no sort of argument against that. There shouldn't be. And when that doesn't happen,

You get a financial crisis and they're forced to expand the balance sheet massively by pumping even more liquidity to paper over the cracks. So this is the world we're in. We're in a ledger-based monetary system where collateral is absolutely important to the system. And you cannot afford to have these problems with collateral. And collateral is predominantly debt. So this is the whole issue we're in. Unfortunately, we're not in a sort of ideal world of a gold standard or whatever it may be. We've long lost that.

Our monetary system is fragile and it's really dependent on central banks. People are going to wake up to that reality. This is it. The whole parameters of markets have changed. And that's why looking at funds flow and liquidity is really a critical element. Money moves markets these days. Now, if you come back to the global liquidity cycle, which is actually on slide three of the presentation, you'll see where we are.

The backdrop is one where you're starting to see, if you look at the latest observations, that we're beginning to see this sort of slowing or loss of momentum in the upswing. Now, normally upswings are fairly rapid.

and they don't have interruptions. This one seems to be having an interruption. And if you look at the reasons for that, it's coming largely because central banks, certainly since the end of September, have kind of been flatlining their liquidity injections. Now, there are reasons for that. The Federal Reserve has been concerned about inflation.

among other things. I mean, they did manage to put, you know, 50 basis point interest rate cut ahead of the election, nicely timed. But aside from that,

They've basically flatlined their liquidity injections through this period, as I've been foreshadowing. A lot of other central banks have done much the same thing, albeit because the dollar's been strong, but they've done it. And so you happen to have this upward impetus. And that's really a question. And China in particular has imparted a major monetary squeeze because of the weakness in the yuan. So these things are kind of not coming together.

What we need to see is a much, much greater impetus looking forward in terms of liquidity. Now, it may be, and it's probably quite likely, that we're not going to see a cycle like the last cycle where you saw a move from the trough right to the peak with a full extent

of the cycle was uh you know unfolded we may be seeing a sort of belly flop if that's the right way of understanding it in terms of the liquidity cycle so we don't go up very much more from here and you get this progressive role that is coming in the face of what i foreshadowed earlier on is this debt maturity wall and that's going to be a problem of soaking up liquidity uh from coupon issuance and you know unless they find some way out of it uh the gold revaluation would be one thing um

that might help get the Fed out of a bind. But clearly, we're in a difficult situation. The Chinese may be trying to ease and they may want to ease, but they've got the constraints of the Yuan ready to sit with. So a lot of it comes down to decisions that Scott Besson's going to make. Does he allow gold to be revalued? And is China part of that revaluation? These are important questions.

Michael, a thought, somewhat a disturbing thought just occurred to me, which is that I think every time the Federal Reserve has done quantitative easing, it's been when interest rates were 0.01% or very basically at zero. And that's because quantitative easing, central bankers view them as an extraordinary tool, something to do only when interest rates are at zero, because you can't do negative rates, that doesn't work.

So the only way to ease credit conditions and to ease monetary conditions is to buy assets and expand the Federal Reserve balance sheet. So, I mean, it's my base case, Michael, to be honest, that the Federal Reserve will stick to that and not do quantitative easing unless interest rates are at zero. And no one in the market thinks interest rates are going to zero. I mean, if you had a call option that interest rates were going to go to zero, you'd probably pay off 50 or 100 or

150 times to one. So do you think that the Federal Reserve is going to break its principle of only doing quantitative easing when interest rates are at zero? Or do you think interest rates are going to go to zero because of some reason? Well, I hope you've got your investment portfolio in mid short duration bonds then because that way you're going to make a lot of money. But the issue is if that's the policy they're going to pursue, I mean, start getting very bearish. That will be

because it simply won't work. I mean, the whole idea of cutting interest rates is trying to stimulate the economy. What we know is in a modern economy where the huge burden of public sector debt exists, actually interest rates are higher interest rates or an income transfer that actually boosts income of the private sector, doesn't deplete it. So in actual fact, you know, in a way, interest rates are not the thing that the Federal Reserve should be looking at from that regard.

What they are is much more a tool of trying to facilitate cheaper funding for the government. I mean, that's the role they're playing. Now, it's balance sheet that's important for financial stability. Cutting interest rates to zero is not going to stimulate the economy at all. What they've got to do is to preserve the integrity of the financial system, which is all about balance sheet story. And they can dilute themselves in whichever way they like.

about that. But that's the reality. You need balance sheet capacity in a debt-ridden economy. And that is what we've got. How can they do that? I talked about, you've written about the Federal Reserve or the Trump administration or both, lowering the supplementary leverage ratio, basically allowing banks to expand their balance sheets beyond a certain level with regardless of risk weight, just in terms of owning super low risk treasuries, there still is a

3% thing. So regardless of how risky it assets, you can't be levered 33 to one, even if all you own is treasuries and loosening that. And then Joseph Lang, our mutual friend has talked about how maybe the federal home loan banks can get access to the discount window or some other way to make mortgages cheaper. I may actually have that wrong, but yeah, just some sort of easing that's not quantitative easing. Yeah.

Yeah, OK, well, fair enough. I mean, these things, they may think about these different avenues, but these are one of changes that may give us a window of a year or so, 18 months, but they don't want to solve the problems. The problem has to be that the Federal Reserve's balance sheet has to expand over the medium term. There's no getting away from that fact. I mean, whether you call that quantitative easing or whether the acronym Department of the Federal Reserve works overtime to think up a new name, whether it's QS for quantitative stability, I don't know, whatever, you know,

It's coming. You've got to have an expanding balance sheet. There's no question around that as far as I can see. And that has a spillover effect into other asset markets. And if you look at the subsequent charts, I mean, if you look at the impact of liquidity on markets, you'll see on slide seven,

and the evidence that how liquidity drives the world wealth in the medium term the orange line is the growth rate of global liquidity we've extrapolated what we think may well happen over the rest of the year in terms of growth rates uh there is the air pocket that we foreshadowed indicated there but we've assumed that you get some recovery in global liquidity over the over the next few months not great one would admit uh but it's enough to probably you know keep asset prices

possibly maintained at these levels. But you can sound from what I'm saying is I've got a lot of question marks over that looking forward, particularly about what we're hearing from the Fed. But that's one thing you've got to look at. And then the other thing is if you look at the following chart, that looks at a more detailed breakdown

of the six week change in liquidity and the NASDAQ index. Now, the NASDAQ index being a long duration investment is very sensitive to liquidity because liquidity is duration. And what this is basically telling us is that the black line is a six week change in global liquidity in our

and our weekly estimates of global liquidity, advanced by 25 weeks. Well, why 25 weeks? That's what the fit is. That's what the statistical analysis shows.

And what it indicates is that basically there may be a balance in markets coming up, little one. But the problem is that those black lines may be trending downwards over the longer term. And that's really the question. There is a clear association between the two. And then if you look at the following chart, there's the same analysis to Bitcoin. That's even closer than NASDAQ. It has a much shorter advance window of about 13 weeks.

i.e. three months, but it shows that movements in liquidity, the black line, advanced by 13 weeks, have a big impact on the price of Bitcoin and cryptocurrencies. I mean, this is the fact that people need to know. I'm bullish on Bitcoin long term, no question, but I'm not particularly bullish near term, aside from maybe a little bit of a bounce that you can see there in the liquidity numbers, because I think that Bitcoin is also a risk asset that needs to be calibrated

alongside other things such as the risk exposure of investors, how that's affecting what's happening to the economy. It's a more general risk asset. And I think if you go on a bit further in slide 14, we actually have a breakdown, which is a statistical analysis looking at a pie chart that basically shows the systematic influences that we found using

a VAR analysis, a vector order regression analysis on the price of Bitcoin. And you'll see there that global liquidity is just over 40% of that. Investors risk exposure or risk appetite is about 20%. And then you've got these factors that come in through gold coming in for this sort of the other third or so.

And what that's really saying, I mean, this is getting a bit technical, but what those gold things are really saying is that gold and Bitcoin move together in harmony over the long term. But sometimes one asset gets ahead and the other one lags and then catches up. So it's what in statistical terms is called an error feedback model or error feedback system. And that's basically what's going on there. So ultimately,

you know look at the the top two parts of the of the pie chart liquidity is there but let's say it's two-thirds liquidity one-third uh risk appetite gold doesn't have that risk appetite element in it so gold is more stable during these periods uh whereas you know what i'm arguing is that part of the reason for the sell-off is not just liquidity

part of the reason as well is changing risk appetite because of weakness in the economy. And that's what investors are really perceiving. And that's why they're starting to shut it down in terms of their stretch in terms of risk assets here. Right. The price of gold has gone nothing but up, but Bitcoin is down. It's actually now below $80,000 as we record this. Michael, so your view on liquidity sensitive assets that go up when liquidity rises and go down and falter when liquidity falls. What is your outlook? Are you still...

bullish how concerned are you getting i i kind of sensed you know i would have already sensed if if you're a massive bull or a massive bear i think i would have gathered it by now so i sense you're kind of in between and you're maybe moving from being a moderate bull to a moderate bear but i don't know you you tell us after after listening to you jack i'm getting very bearish because what do i know i'm a podcaster michael you're telling me you don't think the federal reserve is going to do any quantitative easing ever

then you've got to be really, really bearish. This is all about understanding balance sheets of liquidity. And I think the Federal Reserve has got to do something. I don't think they... I mean, they're foolish to actually tie themselves to a view that says there won't be quantitative easing unless interest rates are zero. Therefore, they're going to have to think of another mechanism, which they call it quantitative stability or whatever they call it, to actually get liquidity into the system. But they've got to start expanding

you know, their balance sheet in terms of their holdings of treasuries and mortgage-backed securities. I mean, there's a lot to unpack in recent Fed statements that does make me nervous. I mean, the whole point about, you know, what they're saying is they're going to start selling off their holdings of mortgage-backed securities.

I mean, hang on a moment. Mortgage backed securities are very long duration instruments. Okay. The simple tenets they're talking about changing the mix of assets in the balance sheet to reflect the big issuance of bills, right? So it means they're going to dump even more long duration stuff on the markets. So if you've got this mortgage backed

tranche being dumped and you've got coupons being dumped at the same time, the private sector is now absorbing a huge amount of duration, which is really liquidity negative. So if the Federal Reserve is saying this, they're talking about what comes to a major liquidity squeeze. I mean, that falls into your account.

make me really bearish. I cannot believe they're making these statements. Yes. So Michael, you know better than me, but has the Federal Reserve in its minutes or its speeches talked about seriously entertaining outright sales of long duration treasuries and mortgage-backed securities? It's been my understanding that what they do is they let it roll off and that they say, okay, maybe we're going to target a no mortgage-backed security portfolio. But as you've written,

the duration of that and the maturity of that can be six, 10 years. And really, there probably will be bonds that don't expire fully until 28 years from now or something like that. Are they actually seriously entertaining outright sales? I thought it was just roll-off. I think it's unclear. They haven't necessarily said it's roll-off, but they haven't said they want to reduce the amount of mortgage-backed securities they hold.

uh if they are saying that's crazy that would that would increase the problem but it's the problem's still there because they are they used to hold they they effectively uh provided liquidity to the system against those long duration instruments and now what they're doing is they're basically removing it so it's a problem whichever way it cuts it may be a more immediate problem if they solve but you know what i'm trying to say is that the question that i'm getting at is

Is the Federal Reserve up to speed with liquidity dynamics? Are they really on top of things? And going back to the statement I attributed to Henry Kaufman, Henry always used to say that the trouble with the Federal Reserve is always behind the curve. Never fully understands these factors that are really dynamics in the market. Now, the Fed has put a huge amount of effort into trying to understand and catch up, particularly after the GFC in 2008-9. But is it...

Is it really there? Would it be making these sort of statements if it really understood the seriousness of the liquidity situation? I kind of question that. So if you detect I'm sounding a lot more concerned, yes, I am.

Am I outright bearish right now? No, but it wouldn't take much to actually push me down that road. And what we've got to understand is what are the factors that really come into liquidity dynamics of the major factors?

It's number one what the Fed is doing. Well, the Fed's not doing anything. At least it's unclear. You know, as I've said before, this is a bit like the Sherlock Holmes story of the dog that didn't bark. The Federal Reserve's not barking here, and that makes me pretty concerned. The second thing is the People's Bank of China.

they matter a lot more to the world economy and world financial markets nonetheless but clearly if they if they're easing that's good if they're not easing it's bad and therefore they need a deal uh with the trump administration i think before they can eat seriously because they need to do something with gold stroke dollar number three is the move index

That's a construct that Harley Bassman invented several years ago, but it's a very, very good tool. I've said before on record that it's a much, much better measure of volatility than the VIX index. It's what investors should be looking at because it really is a measure of how active collateral is in the system and really the effective use of collateral. If you have a high move index, you get a much bigger haircut

on your collateral. And therefore, the collateral multiplier in the system is much smaller. And we're in a world of collateral. So the move index is critical. The move index has come down. And what that shows is how much the move index has come down of late. Now, that's a good thing. The Treasury have helped that by doing Treasury buybacks to improve the liquidity in the market. But you can see there in terms of that move index, this is volatility in the bond market.

my sort of crude way of understanding that is to not one, uh,

the last figure off the index and read that as an annualized percentage. So 100 is like 10% annual volatility for the bond market. And you know, the average is about 70. In other words, 7% annual volatility across the curve. And what you're seeing is the moving that's coming back into a normal range. So that means that the collateral multiple should be improving, and that will help liquidity. But

And the dollar is the fourth factor, and the dollar is probably weakening a bit. So, you know, of these factors, you may have a couple of positive, a couple of negative. But you can see how this situation is evolving. And what really matters above all is what the Federal Reserve is up to. And I mean, I can't predict what the Fed's going to do. Few can outside of the FOMC. But it strikes me as they're not really on the same page as the one that says liquidity has to increase.

And so two things have helped liquidity, falling fixed income volatility and an easing dollar, a decrease in the value of dollar relative to other fiat currencies. And so the move index, I actually think over the past two weeks has gone up a little bit. The dollar has gone down. So I just interviewed Julian Brigden. He thinks that foreigners will dump a lot of US assets. So US assets, stocks will sell off

as the dollar weakens, if that happens, what is the impact on liquidity? Because, okay, the stock market goes down. That's obviously not good for the economy. But if the dollar eases, according to you, that's actually good for liquidity. So what happens if it's good for global liquidity? But I think the problem is from a domestic US point of view, is if money is leaving the economy, the question is, will it be replaced by the Fed?

And that's the question that we keep coming back to. Now, if you look at past bubbles and let's be clear, the US is enjoying a bubble. Bubbles don't burst every day. They take a long time to evolve and then they collapse and deflate.

and US valuations we know are elevated. But it's liquidity which is holding those up. Now, if you look at past bubbles, for example, the Japanese bubble, the Asian bubble in the mid 1990s, the Chinese bubble, particularly in real estate, all those bubbles ended with the currencies devaluing, with foreign capital leaving and on occasions the currency devaluing. Now, what happened in the case of Japan

was that when money left, the BOJ actually began to tighten fiercely, which held the yen up. And that made an even bigger squeeze on the stock market. So that's where you've got this bigger plunge. If you look to what happened in Asia, what happened in Asia is that money left, there was no immediate tightening, but then they realized they had to tighten, but then they couldn't without destroying the economy. And then they had to ease rates significantly and print money. And that was the resolution.

And what you've got in the US is maybe a similar conjuncture. So if I started to see the dollar weakening a lot, I'd get very, very bearish in US assets. And what is your view now on foreign assets, the European stocks, the Chinese and Japanese stock market relative to the S&P, the American stock market? Because recently, most country stock markets have been outperforming the US market by a lot.

Correct. Europe does well if the dollar weakens. I mean, that's for sure. And I suspect that investors have clearly picked up the fact that the fiscal situation in Germany may be improving significantly. So that's probably a good signal factor. In the long term, I still think that Europe has huge, huge problems.

And I wouldn't necessarily want to be in European stocks long term for the simple reason that there are lots of questions about defense. I mean, all the obvious ones, energy supply. I mean, this is not a good place to be. I'm sitting in Europe at the moment. So I think there are serious challenges demographically, taxation wise, spending wise, etc. that would make me nervous as a long term investor.

I think in terms of Japan and China, it really comes down to the same thing. I think Japan is a property in many cases for the strength of the Chinese economy. And so what we've got to look for ultimately is China. But as I alluded to earlier on, I think that China is maybe in the process of picking up significantly. If I was braver, I'd be buying Chinese stocks, but I just don't know whether there's going to be some political statement which stops us buying Chinese stocks or whatever.

Hopefully not. If I was less concerned by that, I'd be buying the Chinese market quite aggressively right now. Right. Well, on our last interview in December, you said some very bullish things about the Chinese stock market. So those comments have obviously aged extraordinarily well because the Chinese market is up a ton. Michael, in the few minutes we have left,

What about non-central bank liquidity, private market liquidity? I referenced earlier the growth in credit outside of the Federal Reserve is actually quite high. In the banking system, it doesn't look that high if you go on the Federal Reserve's website for commercial bank lending, but a lot of that's happening in the

bond market issuance is up in the leveraged loan market. Things are being refinanced in the CLO market and in particular, the private credit market where basically they take institutional investors from insurance companies and university endowments and wealthy people and they channel that money and they make loans. So it's an unlevered

although it often is levered, but it's a less levered form of lending. And I really think that that has played a role in why the economy is so strong and why credit has been available. Yeah, but I think the thing is that there are two options to make here. I mean, one is that we've come a long way in the last decade

two and a half years or so since the bonding of liquidity in late 2022. And we've had a very decent bull market. And a lot of these symptoms that you're, or signs you're pointing to are kind of late cycle signs in any case. This is reminiscent of a sort of speculative mania, or maybe in the last stages of that. Who knows? So I would say that. Second point is that if you look at money flows from the private sector,

It's only if it goes into the financial sector and is used for asset purchase that's good. If you've got a strong real economy and the real economy is sucking out liquidity from financial assets, that's not good for the financial markets by definition. So, you know, a lot of people, a lot of commentators I've heard in the last six months have been saying, you know, get ready for an absolute bumper 2025 because liquidity is going up, you know, looking at these money supply numbers accelerating, blah, blah.

Well, actually, that's the wrong call because money in the real economy, which is what a lot of the M numbers actually refer to, is not a great signal for financial asset purchase. You've got to start looking at money in the financial sector. Financial equities is what we're stressing. And strong economies don't always have strong financial markets, often the opposite.

And if you want to sort of point to what's happening, maybe in terms of looking at world equities or risk assets, look at slide 17, which is basically looking at

the MSCI World Index against an average cycle. So the orange line is the current cycle in the MSCI World Index. The scale at the bottom is basically months before and months after the low point. So the orange line, as I said, is the current cycle. And the dotted line is the average cycle since 1970. Now, if you look at that, you'd say, "Well, hang on a second. We seem to be tracking a pretty average cycle."

And there is an equivalent slide for the US, I think it's the previous one, which looks at the S&P. I mean, not so exact, but you can see the point where you line up the bottom of the market is a new point. But I did the best I can. And that's what we're seeing with the current price of the S&P put in there, latest one. So that's where we are.

And markets may plateau for a while. They haven't really started to come down a bit with that chart yet. But then if you look at the slide just before that, slide 15, what you start to get is a little bit worried about the S&P. This is the S&P scale by global liquidity. If I had to scale it by US liquidity only, it would look a lot more...

will look a lot higher than that. But I've used global equalities because I think actually, you know, there has been a lot of foreign buying, clearly, of US equities. And what this is saying is this looks like, you know, it could inflate more. Look at what happened in Y2K after all.

But we are at extremes. So we've got to be cautious. And what my view is, is that this is going to be a volatile year of inforeshadowing that. It's a year of uncertainty. We don't know where it's going yet. There's a big question mark, not only on what the administration is thinking, but actually more particularly what the Federal Reserve is thinking. And that to me is almost the crucial one.

And what I would be doing at the moment is buying short duration, short mid duration treasury bonds. I'd certainly have gold because gold protects against the instability in the financial sector and arguably a weaker dollar if that transpires. And I think gold is going up a lot anyway, because I think that in the medium term, debt is accelerating.

And there's no other way around that unless Elon Musk somehow magics some solution from Mars. But who knows? So you're relatively in a risk-off position, Michael. Yeah. I mean, we've said to our clients, I mean, you've got to take positions off the table. It doesn't make any sense to hold a lot of risk right now. We're not going wholeheartedly bearish in that sense, but you certainly don't want to buy in this environment.

I take money off the table and keep it in reserve. And as I said, you want to buy something, buy gold and buy short to mid-duration bonds. - And Michael, in our last interview, you said something to the effect of stay dancing, but party near the door, so close to the exit. Are you closer to the door now than in our last interview in mid-December? Are you more bearish than over the past two to three months? - Well, put it this way, if you extend the analogy,

I haven't left the party yet, but I'll put my coat on. Sounds good. Michael, thank you so much. People can find you on Twitter at CrossBorderCap. You are also on Substack and we'll link to your websites. Thank you everyone for listening. A reminder that people can find Monetary Matters not just on Apple Podcasts and Spotify, but also on YouTube. Until next time. Thanks for watching. Remember to check out vanek.com slash NLRJack to learn more about the VanEck uranium and nuclear ETF.

Thank you. Just close this f***ing door.