The Rising Tide of Global Liquidity Lifting All Assets
Michael Howell's Powerful Analysis and Provocative Forecast - Article #35
In this 12 min article, The X Project will answer these questions:
I. Why this article now?
II. Who is Michael Howell?
III. Where is this perspective coming from?
IV-VIII. What are the top five takeaways from this perspective?
IX. What does The X Project Guy have to say?
X. Why should you care?
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I. Why this article now?
Three weeks ago, I published Forecasting the Economic Storm: Dr. Lacy Hunt's Dire Predictions for a Hard Landing in 2024 and Beyond - Article #29. Meanwhile, the stock market continued to power to new all-time highs. Last week, I started writing an article on some non-consensus views on why the stock market may continue rising and why the economy may avoid a recession. But with the stock market continuing its relentless march higher to another new all-time high, I instead published Market Rules to Remember: Bob Farrell's legacy applied to today's market - Article #33. And then, last week, we received a hotter-than-expected inflation report, which caused one sharp down day, but the stock market has rebounded and is still within one percent of its all-time high.
So, it’s time to give credit where credit is due and cover one of the people who not only correctly called this recent move higher but has been calling the markets correctly for a long time.
II. Who is Michael Howell?
is the CEO of CrossBorder Capital, a London-based FCA-registered, independent research and investment company that he founded in 1996. Howell developed the quantitative liquidity research methodology while he was Research Director at Salomon Bros. from 1986. He was subsequently appointed Head of Research at Baring Securities in 1992. He was the top-ranked “Emerging Market Strategist” by institutional investors for the three years prior to setting up CrossBorder Capital. Howell has worked in financial markets since 1981 and is a regular international conference speaker. He is a qualified US Supervisory Analyst and has a Doctorate in Economics.Howell is also the author of the Substack
, the book Investing in Emerging Markets (1995), and the book Capital Wars (2020) - which is on my reading list for 2024.III. Where is his perspective coming from?
Michael Howell appeared as a guest on three YouTube channels in the past two months, where he was interviewed for over an hour on each:
Debt Monetization Is Coming, Hard Assets Are The Hedge | Michael Howell
6,528 views Feb 12, 2024
Surge In Fed Liquidity Is Fueling Bull Market In Stocks, Gold, and Crypto | Michael Howell
81,235 views Jan 16, 2024
Rising Liquidity To Power Markets Higher Through 2025? | Michael Howell
77,063 views Premiered Dec 24, 2023
IV. What is the top takeaway from this perspective?
Global Liquidity as a Market Driver
Howell posits that global liquidity, the availability of credit and cash flows in the economy, is a more significant driver of financial markets than traditionally monitored indicators like interest rates or GDP growth.
More to the point, Howell says global liquidity drives asset prices, which drive the macroeconomy. This is the opposite of what economic textbooks teach. What has changed that makes the textbooks wrong and Howell correct?
Textbooks tell you financial markets exist to raise new money for capital investment. Howell thinks that's an old story that doesn't happen very much anymore because there isn't a great deal of capex going on in the mature advanced economies. Instead, what financial markets are doing is trying to refinance the existing huge mountain of $350+ trillion of global debt. With an average maturity of five years, the world needs to refinance approximately $70 trillion of debt every year, and what is needed to do that is balance sheet capacity. When dealing with refinancing, interest rates matter a whole lot less because the choice is either refinance at the given rate or not - and not refinancing means either paying off the debt (usually not possible) or defaulting (highly undesirable). And so it is balance sheet capacity, particularly among financial intermediaries, that Howells calls liquidity.
He argues that the influx of liquidity, driven by central bank policies and cross-border capital flows, directly influences asset prices by increasing the purchasing power available in the market. This perspective shifts the focus toward understanding the dynamics of cash flow and its impact on investment, highlighting how excess liquidity often leads to asset bubbles. At the same time, scarcity can precipitate market corrections or crashes.
V. What is another top takeaway?
Debt Monetization and Inflation
The process of debt monetization, where central banks purchase government debt, effectively funding government spending by increasing the money supply, is a focal point of Howell's analysis. He suggests that this approach while offering a short-term solution to fiscal deficits, poses long-term inflationary risks. As more money chases the same amount of goods and services, the value of money diminishes, leading to inflation. Howell underscores the importance of monitoring such policies, as they can erode purchasing power and savings, advocating for investment in tangible assets as a hedge against potential inflationary pressures.
VI. What is a third takeaway?
The Role of Central Banks
Central banks' strategies in managing liquidity levels are critical in Howell's discussions. He views these institutions not just as lenders of last resort but as active market participants influencing the direction of global economies through their policies. By adjusting interest rates, engaging in quantitative easing, or setting reserve requirements, central banks directly impact liquidity levels, which in turn affects asset prices and economic growth. Howell's insights suggest that understanding central bank actions can offer predictive insights into market movements, emphasizing the importance of their role in maintaining financial stability.
VII. What is a fourth takeaway?
The Impact of Liquidity on Asset Prices
As shown in the charts above, Howell's analysis illustrates a direct correlation between global liquidity levels and asset prices across various classes, including equities, bonds, and real estate. He explains that as liquidity increases, it leads to higher demand for assets, pushing up prices, and conversely when liquidity tightens, asset prices tend to fall. This liquidity-driven view of asset valuation challenges the conventional wisdom that focuses solely on fundamentals, suggesting that investors must also consider the broader liquidity environment to make informed decisions.
Howell created a Global Liquidity Index, which is graphed on the following chart and shows that it closely follows a 65-month cycle. He believes the recent cycle low was October 2022, suggesting the cycle peak will occur in the second of 2025. This means that asset prices should be supported by rising liquidity until then.
VIII. What is a fifth takeaway?
Emerging Markets and Global Liquidity Flows
Finally, Howell delves into the relationship between global liquidity and its impact on emerging markets. He observes that these markets are particularly sensitive to changes in global liquidity conditions, with inflows leading to economic expansion but also exposing these economies to risks of overheating and subsequent corrections. His analysis suggests that while liquidity surges can foster growth and investment opportunities in emerging markets, they also require careful monitoring to avoid the pitfalls of rapid capital outflows, which can destabilize economies.
IX. What does The X Project Guy have to say?
First, I want to thank all subscribers - primarily free and some paid - who have signed up thus far. Gaining additional subscribers daily at this point is a strong vote of confidence propelling The X Project forward. Substack tells me that nearly two-thirds of you have a 4-star or 5-star activity rating, meaning you consistently engage with my content - which is excellent! Please hit the heart icon indicating you like the article. The more “likes” I get, the more Substack will promote my content within the Substack community. If you don’t like my content or have any suggestions, please email me at TheXprojectGuy@gmail.com.
Second, I want to point out that I consider Howell’s view to be non-consensus. Most people and most analysts believe that liquidity is being constrained by the Fed’s high interest rates and its stated determination to keep interest rates higher for longer. There are a few analysts who point out the easing of financial conditions or an increased level of liquidity. Still, they cite different measures that are less comprehensive than Howell’s and do not have a strong historical correlation with his Global Liquidity Index. If everyone started expecting higher global liquidity to lead to higher asset prices, then I would be invoking Bob Farrell’s Rule #9.
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