MacroVoices #545 Michael Howell: Warsh vs. The Markets

Michael Howell, founder of Cross Border Capital, presents an analysis of global liquidity cycles as the primary driver of asset market movements. He explains that the global liquidity cycle has peaked at the end of 2025 and is now rolling over, with the growth rate of liquidity falling despite absolute levels remaining elevated. This cyclical pattern—approximately 5-6 years in duration—last bottomed in late 2022 and is expected to reach its next bottom around mid-to-late 2027, though concertina effects could accelerate this timeline. Howell emphasizes that liquidity decline is currently driven by strong real economies crowding out financial markets rather than central bank tightening, explaining that all money must exist somewhere—if it's in the real economy, it's not in financial markets.

The discussion pivots to China's divergence from global liquidity patterns. China has maintained tight liquidity policies to defend the yuan against a strong dollar, creating debt deflation and weak inflation. Howell argues China must now expand liquidity significantly to address its debt burden through internal devaluation while maintaining external currency stability via capital controls and state bank coordination. This expansion is reflected in renewed gold purchasing and represents the key driver of current gold price movements. Howell correlates PBOC (People's Bank of China) liquidity injections directly with gold price movements, noting that the yuan-denominated gold price is the proper metric to watch since China is now the marginal pricer of gold globally through Asian demand.

On asset allocation and market positioning, Howell explains a framework showing the liquidity cycle leads the economic cycle by approximately 15-18 months. Currently positioned between liquidity peak and economic peak, this environment favors commodities while requiring defensive positioning in financial assets. He categorizes market regimes as calm, speculation, turbulence, or rebound—with current conditions representing speculation characterized by high volatility and poor return quality. The asset allocation cycle suggests equity markets should be scaled back in beta exposure, with particular attention to rising bond yields and the gold-oil ratio, which he argues is mean-reverting and historically stable around 20x.

Howell addresses the political tension between President Trump's desire for lower rates and Fed Chair Warsh's likely need to raise them. He argues that markets, not central banks, ultimately control interest rates through the long end of the yield curve. Strong nominal GDP growth (6-8% range), driven by fiscal spending, AI investment, and deglobalization effects, is pushing bond yields higher independently of Fed policy. The 10-year Treasury could test 6% yields in the near term. The Treasury faces difficult funding choices, potentially increasing reliance on bill issuance (short-term debt) from current 22% of outstanding debt, which could reach 30% as seen in the early 2000s. This would harm the dollar and boost gold.

On precious metals specifically, Howell argues gold has bottomed and offers compelling upside, driven by both China's historic debts and the West's future debts requiring monetization. The gold-oil ratio analysis suggests that if gold is supported around $4,000/ounce and maintains its historical 20x ratio with oil, this implies $200/barrel oil prices, or $135/barrel at 30x ratios. He notes silver's outperformance of gold as a confirmation signal for sentiment turn, and advocates for energy stocks as particularly attractive given rising oil prices and commodity demand from strong global growth.

On the Federal Reserve, Howell presents evidence that rates must rise, citing the 85% accuracy of the 2-year Treasury yield as a predictor of policy rates and the current elevated 2-year yields. Chart analysis shows the pattern resembles late 2021-early 2022, when the S&P dropped 25% and Bitcoin fell 75%. He expects at least six more months of intensified Fed tightening before any inflection point.

The trading desk segment provides technical analysis confirming bullish positioning in equities with S&P 500 at fresh all-time highs, though the NASDAQ lags significantly and remains net short. The desk identifies gold's steep right-tail skew as favorable for bull call spread construction, wheat positioning as vulnerable to Black Sea supply disruption, and uranium showing early signs of trend reversal after months of stagnation.