Title: The Global Liquidity Cycle Has Peaked — Prepare for Turbulence! Michael Howell Show: Triangle Investor (interviews, host Lucian) Guest: Michael Howell (founder, CrossBorder Capital; author of "Capital Wars") Date: 2026-09-09 URL: https://youtu.be/sR8fFcqLPU8 Length: 29:27 Note: YouTube auto-transcript pasted by Stephen. Fillers (um/uh/you know) and stutters removed; auto-caption names corrected (crossber capital -> CrossBorder Capital, Walsh -> Warsh, Jackson Hall -> Jackson Hole, Bessant -> Bessent, boons -> Bunds, sofa rates -> SOFR rates, fungeible/funible -> fungible, somebody Lynn -> Lyn Alden, depth -> debt, born market -> bond market, pantoime -> pantomime, requification -> re-liquefication); "Pache/PCH" kept as spoken (unclear); the data website is transcribed as heard ("glindexes.com" [sic]); wording otherwise verbatim.
00:00 What we're living in is a world where capital markets have changed their structure and maybe changed their role. And if you pick up a finance textbook, a finance textbook would tell you that a capital market is there to raise new capital for new investment projects. Now, that doesn't really happen very much anymore because there's not an awful lot.
00:21 I mean, okay, PCH, the AI capex [music] boom, but that's really been a sort of an anomaly in recent history. [music] Hello everyone and welcome to another edition of Triangle Investor Interviews. I'm your host Lucian. And before I announce my guest, just a quick reminder of a disclaimer. This interview and all my interviews are not a recommendation to buy or sell any shares, products, or services.
00:53 Always do your due diligence and consult with your financial adviser. Today I'm joined by Michael Howell, founder of CrossBorder Capital and author of Capital Wars. We will discuss Japan bond market, the US surpassing 40 trillion in debt, global liquidity and what the next major liquidity event could look like.
01:14 Michael, delighted to have you. You are for the first time on the show. Welcome to you. >> Well, thank you, Lucian, to be here. >> Thank you so much, Michael. Maybe we should start with Japan. That is a pretty hot topic recently. Japan may be the most important pressure point in the global bond market right now with 10-year Japanese government bond above I believe 3% for the first time since 1996.
01:41 My question to you, what happens to the global liquidity if Japanese capital finally starts coming home? >> Well, I think there are a couple of things to say there. I mean first of all we need to answer why yields are going up. And the other fact is what is the importance of Japanese investors and the so-called yen carry trade.
02:03 The yen carry trade is a bogeyman that has spooked a lot of investors for a long time. And in my view it's nothing like as perilous as maybe people make out. I'm not saying it's unimportant but it's not really the dominant feature. And I think one needs to step back and look at what the bond markets are doing and what the bond markets are telling us and maybe cut through a lot of the, let me say, nonsense that you're reading many times in the media or the press.
02:27 Journalists have got the message really wrong I think about the bond markets. And let me just sort of try and explain what I mean here. If you look worldwide, and this is not just a feature of Japan or the US or even Europe, it's actually very widespread. All countries are suffering the same phenomena.
02:47 It is not simply because government debt levels are rising, although that's clearly a fact. The main reason that bond yields are going up is because real economies are actually growing pretty rapidly. And what we're looking at around the world and particularly in the US is the fastest rate of nominal GDP growth since the mid 1980s.
03:08 Now you start to think about that statement. And that's a big statement. I'm not saying that real economic growth is at that pace. I mean, clearly it isn't, but real economic growth is still quite decent. The fact is that inflation pressures are rising and together with relatively good activity growth, you're looking at what is called NGDP, nominal GDP, rising at a fast clip.
03:31 And that is true in Japan, it's true in the US, it's true in the Euro zone to a lesser extent. It's true really worldwide. The only country where you can't say that is occurring is in China, and in China bond yields are going down, not up, and that clearly is an anomaly which we can touch on.
03:47 So I think we need to get back to the fact that strong economies are driving the bond yields higher and these strong economies probably deserve higher interest rates, but clearly policy makers don't want to take that step or they're reluctant to do so. >> That's a very good point. Just quick followup.
04:08 If the yen carry trade unwinds violently, could Japan become a liquidity absorber rather than a liquidity provider? >> Well, clearly it's possible, but I think the fact is that the Japanese bond market is largely a self-contained market. I mean, it's owned predominantly by Japanese investors.
04:28 And I accept the point that it may well be the case that Japanese insurance companies or some government pension funds may be forced to liquidate foreign holdings and move money back. But I don't think that's going to be a sudden event, certainly in my estimation. I mean clearly the traction of rising domestic yields is a magnet, will pull capital.
04:48 But I wouldn't be looking at the US bond market as a concern here. Japan is clearly a big investor in the US, but it's a whopping great investor in French bonds. And if you want to be worried, start looking at the spread of OAT bonds, French bonds, against German Bunds. That's starting to rise and that may have something to do with Japanese selling.
05:10 But I think that generally speaking, the yen carry trade is a bogeyman that's been exaggerated by the media. It's nothing like as big as it used to be going back 20 years. I mean then it was a massive trade but it's less so now. >> Yeah, agreed that it is exaggerated and it's more of a headline driven topic. But there is one topic in the air as well and that is the 40 trillion question. The US has now crossed 40 trillion of federal debt, but the headline number isn't what worries me personally. My question is, is the real
05:44 danger the interaction between the debt stock, refinancing requirements and the rising term premium? >> Well, in short, yes. I mean that clearly matters, and I think that the fact that we all need to acknowledge, and maybe policy makers in the US have already acknowledged this, is that what we're living in is a world where capital markets have changed their structure and maybe changed their role. And if you pick up a finance textbook, a finance textbook would tell you that a capital market is there to raise new
06:16 capital for new investment projects. Now, that doesn't really happen very much anymore because there's not an awful lot. I mean, okay, Pache, the AI capex boom, but that's really been a sort of an anomaly in recent history. Capital markets are there really to refinance existing debt. And as you acknowledge, we've got an awful lot of debt out there, not just in the public sector, but in the private sector, too.
06:39 So, the point about debt, unlike equity, debt needs to be refinanced. And the term of debt tends to be around 5 to 6 years, which is actually one of the reasons that you tend to find a 5 to 6 year cycle in global liquidity, because it reflects this refinancing need of the debt markets.
07:00 Now, with that backdrop, therefore, you've got to understand that what really matters in financial markets in this refinancing world is balance sheet capacity among financial intermediaries, and that's really the key thing. So looking at the plumbing, or the so-called plumbing, of the market is crucial, and sort of things like what the Fed funds rate is going to do is really irrelevant these days.
07:25 I mean it's a big pantomime when the FOMC, the Federal Open Market Committee, meets and decides what US Fed funds rate will be. But does it really matter in the modern world? I don't think so. And you've also got the sort of the paradox here that, as you allude to, US debt is 40 trillion. Now the interest bill on that debt is clearly eye-wateringly large, and the fact is that that's a direct transfer of income from the government sector to the private sector.
07:52 So that's an income boost. Okay. So if you raise interest rates your interest bill goes up and your income transfer to the private sector increases. So paradoxically rising interest rates actually boost or help spending in the real economy. They don't detract from it. And that's why the whole world has become topsy-turvy, or has reverse polarity.
08:13 There are a lot of anomalies out there that we need to understand and that is one of them. So it's really about the plumbing and understanding how the wholesale markets work that is really crucial, and to come back to this point that it's already a debt refinancing world. Now the one last statement I'd make about that is that despite what the media basically scream at us, governments always fund themselves.
08:39 Okay, they can always do that. They force funding onto the private sector. They may well crowd out the private sector. That's not a question. They may well force rates higher. That's not a question. But they will always get funded, particularly if you're a major reserve currency like the US dollar. >> Yeah, again good point.
08:58 But Michael, could we reach a point where the Treasury needs lower yields so badly that the monetary policy becomes subordinate to fiscal policy, essentially forcing financial repression? >> Well, I mean, spoiler alert, it's already happening. And I sort of react against the idea of financial repression because that doesn't really describe what's going on.
09:20 I mean, it's an interesting headline or banner, but the real question is monetary inflation, and that's really what's going on. It's not so much that governments are holding yields down. I mean, they are to some measure, but we're not looking at yield curve control per se.
09:37 If anything, we're looking at a more subtle direction, which is what we call yield volatility control. And that's how you can understand many of the moves that Treasury Secretary in the US Scott Bessent is doing. I mean these tiny little tweaks through Treasury buybacks, which is sort of getting into the weeds of the markets, I admit.
09:57 Those are so small they're not going to influence yields but they will change the volatility background, and we can come on to this, but because hedge funds are major leveraged buyers of US treasuries, volatility really matters. So these things are worth considering.
10:15 But the main point I want to leave you with, and this is not just a US phenomenon but it's a template that's being copied worldwide now, is that the funding is going on at the front end of the market. In other words, governments are not really selling so much long-dated debt. Okay, which is what they should really be doing.
10:33 They're selling very short-term debt, particularly bill finance, treasury bills, things that have maturities of 3 months or 6 months. Now the question is why are they doing that, and the answer is because they can, and the other reason which makes it easy is the banks, private banks, have a great appetite for this type of debt.
10:56 Now without getting too complicated let me just explain why that mechanism is important and why it works. So if you've got a government sector that is spending lots of money, okay, as the US government or the European governments are doing, what's happening is that bank accounts, private sector bank accounts, are clearly increasing because of this rising spending level.
11:19 Now banks have to balance their balance sheets by definition. So they're always on the lookout for assets that will match in duration or maturity terms those bank deposits, and bank deposits are considered to have relatively short maturity. So if you buy correspondingly a treasury bill or a very short-dated government debt, you what is called duration match that bank deposit, and so the banks have huge appetite for that.
11:49 Now then if you think through what is happening therefore, if you're funding government spending not through savings, which is the bond financed, but you're funding it through private banks expanding their balance sheets, that's money printing. Okay. What you're doing is you're financing spending through increasing the size of the banking system, printing money in other words.
12:13 And in other words, or put it yet another way, it's not the Federal Reserve that's doing the QE this time. It's private sector banks doing the QE for the US Treasury, and that's why we call this Treasury QE, and it's basically a model that is being adopted by default by country after country after country.
12:32 Japan is doing a lot more funding at the short end of the market. The UK is thinking about that. It will occur almost without question in the Euro zone. So these are things we need to consider, and that's money printing, and what happens if you print money, you get inflation, and isn't that why the gold price and to some extent bitcoin are going up? The answer is yes. >> Yeah, of course it's a form of liquidity pumping. If you are right that the liquidity cycle has peaked, walk us through the next liquidity event as if
13:04 we were watching it happen in real time. What breaks first, what moves second, and what tells you the authorities have finally intervened? >> Okay, I think there's a number of things to say there. One is why are we looking at global liquidity? We look at basically the flow of money into markets, and our view is that money drives markets, all markets, real economy and financial, and asset prices go up because there's basically more money and more liquidity in the system.
13:34 So that's why we look at it. Money is fungible. So in other words, it's a global concept. So that's number one. Secondly, has it peaked? The answer is that we look at the growth rate, the underlying growth rate of that liquidity cycle. It tends to move in five to six year cycles as I indicated, and we have seen a peak in the growth rate.
13:53 It's not to say that liquidity is falling in absolute terms. It's not. It's still inching higher. But the point is the growth rate has slowed quite noticeably. And you're starting to see some of those pressures occurring already in markets. And one of those is clearly what's happening in the bond markets as a signal of that.
14:13 I mean, that's a typical late cycle sign. Now, why is it happening is perhaps a third question to answer. Is it because central banks are tightening, and the answer is generally speaking not. The reason that liquidity is going down is because liquidity has two uses broadly. One is in financial markets where it normally sits first of all, and the second is in the real economy, when you get strong real economies needing liquidity to expand. Okay.
14:42 And that's the reason that you've got this particular configuration going on right now. Now, it's very normal in financial markets to actually see strong bond markets, in other words strong bond prices, falling yields, at a time when the real economy is weak and things like commodity prices are collapsing. Equally, you see the opposite.
15:03 It's very strong commodity markets associated with rising bond yields. So, that part of the story is absolutely correct right now. What we're seeing is weak bond markets. We're seeing that because economies are strong, and we're seeing rising commodity markets again through the reason that real economies are strong. Equity markets kind of sit in the middle of that, and they get their valuations, in other words their P/E multiples, more from the financial sector, and they get their earnings clearly from the real economy.
15:31 So they're straddling two horses and the question is you've got to make sure they don't fall off. And that's the danger, and the more that bond yields rise, the bigger the danger that we've got. Now, what comes now, maybe a long-winded answer to your question, is what do the central banks do? And the answer is that they are very reluctant to tighten at this stage of the cycle despite the fact that you've seen inflation pressure start to move up.
15:59 And it would be very normal for central banks to prudently start to gradually tighten policy. The problem is that they can't really do that without adding further pressure to the bond markets and disrupting financing. Now, what I said right at the beginning is the most important thing in financial markets is not so much what the level of Fed funds rate is.
16:22 It's basically the plumbing and the supply of liquidity within the system. And one of the things that you see in the US, or you can monitor, is basically liquidity in the money markets, and that's really a crucial thing. The Federal Reserve plays a key role there. But listen to what Chair Warsh, the Fed chair, said both at the Jackson Hole meeting and then earlier at the FOMC presser.
16:47 He said that what's critical is maintaining liquidity in the money markets and making sure bank reserves are adequate. And that's because we're in a refinancing world. Okay, it doesn't really matter too much if they raise Fed funds rate. Arguably, that could even be a good thing. And it could even, ironically, extend this cycle for longer, because it will mean that the bond markets perhaps quieten down insofar as higher Fed funds may cause term premia to come down a tad.
17:15 Now, this is getting lost in the weeds of the bond markets. I don't really want to go down that path. But the fact is that, don't focus too much on Fed funds. Focus on the liquidity backdrop. And I would argue that central banks are reluctant to tighten. They may be forced to do that because of the strength of economies and the risks of inflation, but they're buying themselves time.
17:39 And that's really the key thing to think about. >> Got it. Let's take a black scenario into consideration. What would the first, let's say, 72 hours of a genuine global liquidity crisis look like in the markets? Would we see the dollar surge, treasury yields fall, gold fall initially, of course credit spreads exposed, or something completely different? What's your take here? >> Well, I think the question to come back to is what is the funding background? If you start to think that the axis of crisis revolves around debt being refinanced, in other words a
18:15 debt-liquidity nexus, you've got to understand how that process unravels. And the paradox at the heart of modern finance is that debt needs liquidity for refinancing. Okay? But liquidity needs debt, or good quality debt, for borrowing or for lending, because a lot of lending is collateralized.
18:40 Something like 77%, this seems a very precise figure but it's come from the World Bank of all places, of all lending worldwide now is collateralized. In other words, it has some form of security attached to it. So in other words, if I post a treasury bill or a treasury note to a dealer bank I can borrow against that, and the statement is I borrow after a haircut.
19:07 So, in other words, if I deliver a bond for $1,000, I might get a haircut of 2% on that, which means I can basically borrow 98% and I can keep leveraging that. So, you could actually argue with a 2% haircut, you get a 50 times collateral multiplier, and that's how the system tends to function. So what we're sitting on is overnight funding dominated by the repo markets, which are probably something in America alone of something like $14 trillion.
19:37 So these are big sums and they're overnight. Now think of what happened in the Lehman crisis back in 2008-09. That was dominated by overnight financing and the fact that Lehman and others couldn't get this overnight financing. Now we're saying, well, the world hasn't changed, the world's got more complex and these markets have swollen even further.
20:02 So we've got to go back and say what would happen in that instance, and the answer is you get a blowout in the repo markets. Now we think that this is really crucial to understand, and we monitor this debt-liquidity nexus very closely. It's not debt to GDP that matters, which is what economists tend to throw away and say, "Oh, well, the debt to GDP of Japan is 400% or of China is 350 or America is 200," or whatever the numbers are.
20:29 Well, so what? That doesn't seem to matter. Japan has had a 400% ratio for a long, long time and it still survives. What matters is debt to liquidity, because debt needs to be refinanced. So if you look at past financial crises, they occur when the debt-liquidity ratio spikes upwards, and you can see that traced through history going back to the Asian crisis or even before that.
20:51 These are instances where debt liquidity, that ratio, matters. Now if you look at the repo markets, watch for spikes in repos. So look at things like the SOFR, the secured overnight financing rate in the US, relative to Fed funds. See if that spikes up, and also look at the volatility of collateral, which means looking very closely at things like the MOVE index, which is a measure of bond volatility in the US across the curve, very much akin to the VIX index but for bonds. Those are two crucial indicators,
21:25 and you'd see bond volatility jumping significantly, and you'd start to see as well the repo market spike and probably credit spreads blowing up. These are all the things you need to look at. >> Understood. We've spent years being told that cash is trash because inflation erodes its purchasing power. Could the next phase completely reverse that trade, making cash king again because the opportunity cost of holding cash collapses during the liquidity event we discussed here? >> Well, the answer is yes and no. The answer is that
21:59 basically in the short term, in a financial crisis, you want cash. You want to hold as much cash as you can, because cash is king in that situation, because people have become very illiquid. In an illiquidity crisis, what you, I and everybody else does is we hoard liquidity. We don't want to lend it because it's too risky.
22:22 Counterparty risk goes up and so you basically hold on to what you've got and put it into the most secure form. So that's why you get these liquidity crises which can implode within the system, like a sort of black hole in a way in the cosmos. Now if you start to think then longer term, and you bear in mind the paradox, going back to the paradox of finance, what you have is that, going back to my debt-liquidity nexus, new credit rests on the integrity of old debt. Okay. And this is
22:56 the point about our monetary system. It's a ledger-based system revolving around credit. So new credits are backed by the quality of old debts. So the fact is that you simply cannot allow debts to default, because if you allow debts to default the whole credit system disappears, and that's what modern economies rest on.
23:20 So central banks are there not really to fight inflation or not really to create employment. They're there to maintain the integrity of debt markets. And you often see whenever there's little wobbles in the debt markets, the central banks suddenly move away from their previous remits and go all in to protect the debt markets.
23:37 And that's what they've got to do again. So what you saw in 2008-09 during the GFC, what you saw during the COVID crisis, what you saw a little bit before that in the repo crisis in 2019 in the US, is the central banks come in fast and they provide liquidity. They print money, right? They make sure the system re-liquefies.
24:01 In a re-liquefication, you want as much risk as you can take, because risk assets tend to reprice upwards very, very dramatically. Things like gold move very quickly. The dollar will go down after an initial spike, but the dollar will go down. That will be part of the mechanism. Gold will go up. Bitcoin will shoot higher, etc etc.
24:21 So you want these hedges. >> Yeah, I'm glad you mentioned gold. My final question actually goes, I want to pick your brain here. How do you see two things going forward? First precious metals, gold and silver, and second the big indices, Dow Jones and S&P 500. Where do you see them? How do you see them? Let's say in the next 6 to 12 months.
24:46 >> Okay. Well, 6 to 12 months is a tricky prediction because there's a lot of moving parts. My view for this year, which, I'm not going to say it's been 100% accurate so far, is I thought Wall Street would be largely range-bound this year because I thought the bond markets would suffer.
25:08 So in other words the P/E multiples would come down, but because the real economies were so strong you get a big earnings boost. Now to some extent that's been true, but actually the net of it has been the earnings have been so strong, particularly in some of the tech names, that the market has generally gone up.
25:26 Now I still hold the view that what the administration wants to do is generally speaking to hold the market up, and I think they'll try and do that as best they can, and that's why I think that looking at liquidity is crucial, because they're trying to manage that liquidity backdrop. They may fail of course, and we've got to remember that we're late cycle.
25:45 So these risks are mounting the whole time. But what they're trying to do is to keep the plates spinning, if you like, in this game, and to try and make sure that liquidity provision is there. And I wouldn't look at Fed funds rate as a guide to that. I'd look at things like the SOFR rates and look at whether they're spiking, or bond volatility, or these type of measures.
26:05 So that's what I would think they would broadly do. So best guess is you get a continuation of this range-bound market. Bond markets, I think bond yields have got to go up more. If you look at the pace of nominal GDP growth really worldwide, not just the US but Japan, Europe as well, bond yields are about 100 basis points, that's one percentage point, below probably where they should be.
26:30 So there's got to be a lot of upward pressure. Governments will try and keep them suppressed as much as they can, but generally speaking I think there's this general tendency to go up. Commodity markets should continue to rally because of strong economies, and that leads us back finally to the question about gold and maybe cryptocurrencies.
26:49 I think the answer is, look, the answer is that there may well be wobbles if monetary policy tightens in the gold market. I'll accept that, but the important question is, would that be a selling opportunity or a buying opportunity? And absolutely 100% this is a buying opportunity. If gold comes back, buy it. Now I've said that gold is a monetary inflation hedge, and Western central banks ultimately are printing money.
27:13 The reason they're printing money is that we know that debt is going up. As Lyn Alden says, nothing stops this train. Absolutely correct. There's no way they can get off this debt binge, because no politician anywhere in the world is holding their hand up and saying we need austerity. Austerity cannot exist in a world of capital wars where you've got an ongoing economic fight with China and maybe a military fight with Russia.
27:40 It just doesn't work. You cannot afford austerity. Governments have got to keep spending, which means debt goes up, which means liquidity has to rise with debt. Liquidity is fungible. So it basically rises in the long term, and that's why gold, which is the perfect monetary hedge, goes up, and why Bitcoin continues to rise probably as well.
27:57 So these are the things I think to consider. And the final thought is which country in the world has the biggest debt problem, and the answer is China. China has to print money and the Chinese love gold. That's all you need to know. >> That's a very strong closing and I agree. Michael, before I let you go, how can people reach out to you, buy your book? Tell me more.
28:24 >> Well, the book is available on Amazon. It's called Capital Wars. I mean it's a little bit dated because I wrote it before COVID, but the broad principles still apply, and there is a sort of forward-looking area there which is not bad I think, looking back 5 years ago. The other is that there is a Substack called Capital Wars, same name, which is available, where we basically write three, four times a week on developments in financial markets and provide data to clients, and then there's another tier
28:56 which is for institutional investors, particularly those that like data and want data to analyze. We cover over 90 financial systems worldwide with very deep data, and we've been doing that for well 30, 40 years. So we've got huge databases, and that's available on a website called glindexes.com [sic]. >> Ladies and gents, that was Michael Howell.
29:19 Michael, thank you so much for coming to the show. Great chat and let's do this more often. >> Great. Thanks for listening. Enjoyed it very much.