Markets Are Misreading A Late Cycle Liquidity Crunch | Michael Howell
Michael Howell of CrossBorder Capital explains that global liquidity is in a late-cycle 'speculation' phase moving toward 'turbulence,' driven not by central bank tightening but by the real economy absorbing financial liquidity. He argues that yield curves are poised to flatten, commodities are late-cycle indicators, and risk assets face increasing headwinds despite media narratives of imminent recession being overstated. He outlines how Treasury QE via bill issuance, debt refinancing walls, and the liquidity-vs-real-economy dynamic shape asset allocation across crypto, equities, bonds, and commodities.
Summary
Michael Howell opens by establishing that the global liquidity cycle — which he argues dominates market movements — is inflecting lower. He uses a four-season framework (calm, reflation, speculation, turbulence) to describe where markets currently sit: in the 'speculation' phase, analogous to autumn, which precedes the more dangerous 'turbulence' phase. He contrasts this with media narratives predicting deep recession from geopolitical shocks like the Iran conflict, arguing that economic data — ISM new orders, Philly Fed, cyclical vs. defensive stock performance — suggests genuine economic strength, not collapse.
Howell draws a critical distinction between two pools of liquidity: financial sector liquidity (his focus, measured by the balance sheet capacity of credit providers including shadow banking and repo markets) and real economy liquidity (closer to M1/M2). He argues these two pools are nearly out of phase — when the real economy accelerates, it absorbs financial liquidity, tightening conditions for risk assets. This is the core of why strong economic data is actually bearish for financial market liquidity in his framework.
On the Treasury and Fed side, Howell explains that the dominant policy shift has been from Fed QE to Treasury QE — specifically, the issuance of short-duration bills instead of long-duration bonds. Banks buying bills constitutes monetization of fiscal spending. He also highlights that the Treasury appears to be directly targeting the MOVE index (bond volatility) through buyback programs, swapping off-the-run coupons for on-the-run bills to stabilize the collateral ecosystem. He notes that each 10-point rise in the MOVE index correlates with approximately $28 billion in additional Treasury buybacks.
Howell explains that liquidity can be conceptualized as an asset pool divided by its average duration — so shortening duration by issuing more bills expands liquidity even without growing the total asset pool. He addresses the Fed's reserve management purchases (RMP), which some called 'not QE,' arguing it was effectively QE insofar as it injected reserves to stabilize spiking SOFR spreads at end of 2024.
On the future of monetary policy under a potential Kevin Warsh Fed, Howell is skeptical that the Fed can meaningfully shrink its balance sheet. He argues the bond market is five times larger than pre-GFC, dealer capacity has halved, and the interbank market has been replaced by collateral-based secured lending (LIBOR to SOFR transition). The Fed's role, he argues, is now fundamentally to serve as guardian of the sovereign bond market. He raises the possibility that deregulation (e.g., relaxing ESLR requirements) could expand private sector liquidity before any Fed balance sheet reduction.
On interest rates, Howell challenges conventional thinking by noting that in a world where the government is the primary debtor, raising rates actually increases transfer payments to the private sector — a potential stimulus rather than contraction. He shows that term premiums are falling globally even as front-end rates rise, which he interprets as increasing demand for safe assets amid tightening liquidity — the opposite of what most media narratives suggest.
For asset allocation, Howell maps the liquidity cycle onto asset classes: equities do well with abundant liquidity, commodities peak at the cycle top (where he believes we currently are), cash outperforms in the downswing, and government bonds do best at the cycle trough. He projects liquidity will bottom around 2027. He shows that crypto (his basket: 60% Bitcoin, 30% Ethereum, 10% Solana) is the most liquidity-sensitive asset and is leading indicators of global liquidity with roughly a 13-week lag. He concludes by noting that four indicators — the economy, bond markets, equity sector rotation, and liquidity — are all aligned in confirming the speculation phase, with turbulence likely ahead.
Key Insights
- Howell argues that the global liquidity cycle is currently in a 'speculation' phase — analogous to autumn — which historically precedes a 'turbulence' phase that is deeply negative for risk assets, with the cycle projected to bottom around 2027.
- Howell contends that financial liquidity and real economy liquidity are nearly out of phase: when the real economy accelerates and absorbs money for working capital, financial market liquidity declines — meaning strong economic data is actually bearish for risk assets in his framework.
- Howell argues that the dominant U.S. liquidity stimulus has shifted from Fed QE to Treasury QE, defined as the issuance of short-duration bills rather than long-duration bonds, which banks then buy, constituting indirect monetization of fiscal spending.
- Howell defines liquidity as an asset pool divided by its average duration, meaning that even without expanding the total asset base, shortening duration through bill issuance expands financial system liquidity.
- Howell claims the Treasury appears to be directly targeting the MOVE index through its buyback program, with data suggesting each 10-point rise in the MOVE index corresponds to approximately $28 billion in additional Treasury buybacks to stabilize bond market volatility.
- Howell argues that yield curves are poised to flatten — not because central banks are tightening, but because rising real economic activity is absorbing financial liquidity, pushing up short-end rates while falling term premiums pull down the long end.
- Howell argues that falling term premiums globally signal increasing investor demand for safe government bonds, which he interprets as a sign of rising systemic risk and tightening liquidity — the opposite of what mainstream media narratives suggest.
- Howell contends that the Fed cannot meaningfully shrink its balance sheet to pre-2008 levels because the federal debt market is now five times larger, dealer capacity has roughly halved, and the interbank lending market has been replaced by collateral-based secured lending.
- Howell argues that rising interest rates in a government-as-primary-debtor world paradoxically act as a stimulus rather than a contraction, because higher rates increase transfer payments from the government to the private sector, which are then monetized via bill issuance.
- Howell identifies commodities as late-cycle assets, arguing that rising commodity prices are the mechanism that ultimately destroys financial liquidity at cycle peaks, citing the historical example of the Salomon Brothers and Phibro merger during the commodity-driven 1970s cycle.
- Howell presents crypto — specifically a basket of 60% Bitcoin, 30% Ethereum, and 10% Solana — as the most liquidity-sensitive asset class, with global liquidity serving as a leading indicator approximately 13 weeks ahead of crypto price movements.
- Howell suggests that commercial banks face structural disintermediation, with shadow banking and private credit replacing traditional lending, and stablecoins potentially replacing deposit-taking functions — raising the possibility of a future financial system where banks play a much diminished role.
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