We’re big fans of Michael Howell, and he has been very right with his recent liquidity calls and increasing stock markets, gold and bitcoin prices, so anything written here shouldn’t be viewed as criticism, but checking if there is any confirmation bias on taking on his view.
Michael Howell’s liquidity framework is primarily made up of:
- FED Liquidity
- PBOC Liquidity
- Crossborder Capital Flows
- Interest Rate Volatility
Michael Howell still sees continued monetary debasement, requiring hedges such as Bitcoin and Gold. However, there are some possible problems with this view.
Firstly, parts of his view come out of the peak globalisation/post-GFC/QE period of low inflation. During this time inflation and bond yields were low, and central banks feared deflation, and hence continued with QE. If we are reversing some of that, with the millennials increasing the working age population in the US, India being a growth engine which unlike China does allow it’s citizens to participate and grow wealthier more, and less globalisation, we may be entering a period in which central banks do less QE. This may mean that governments do more fiscal stimulus, but this may keep flowing into goods and commodities rather than financial assets as it has in the past.
Similarly, if we are headed to a more inflationary period, central banks won’t actually need to do as much to prevent deflation from making the debt less payable as the natural inflation, and better yet if it comes also with growth, naturally erodes the debt. The post-70s disinflationary period meant that interest rates continually trended lower, leading to more zombie companies and slower and slower growth. But if inflation prevents central banks and/or the markets from keeping interest rates low, we will actually have proper/more regular recessions and creative destruction, and while this period will be painful, it can actually lead to the opposite effect of higher growth.
This period was associated with low economic and wage growth and high asset growth, especially in technology, bitcoin and crypto emerged out of this period. The reversal could mean higher economic/wage growth, but lower financial asset growth.
Previously, he has also touted a rising China and flagging U.S., but the deflationary and demographic bust in China and more isolationist policies of the U.S. along with changes such as oil fracking means that we may be entering an extended stronger dollar/U.S. outperformance in the real economy, rather than just markets. This means that the U.S. debt may actually start to look more payable, even at higher interest rates.
More near term, Howell see’s the recent move in Bitcoin as a response to liquidity, however if we look at Bitcoin against Taiwan Semi Conductor, we can see that it might be just following the recent tech/AI/immaculate disinflation narrative. So if goods inflation is actually starting to increase again, yields may also start to increase, and we might see a repeat of the 2022 period where both TSMC, Bitcoin and the markets sold off. Likewise he see’s the breakout in Gold as a response to liquidity, however, there have actually been outflows of the GLD gold ETF, and price action may be better attributed to central bank buying as well as Chinese retail investors looking for options outside of the falling real estate market.
