From "Everything Bubble" To "Everything Bust"? Michael Howell on Liquidity In 2025 & Beyond

Episode Summary

Executive Summary: Michael Howell argues that global liquidity is still supportive for risk assets, but the pace of liquidity growth is slowing as U.S. Treasury funding shifts, the Fed’s toolkit for “hidden stimulus” is running out, and China’s weak bond market signals debt deflation. He remains bullish long term on stocks, gold, and Bitcoin, but warns 2025 will be a harder, late-cycle year with rising risk of a correction if liquidity momentum fades.

Main Topics: Global liquidity is still positive, but momentum is slowing (Priority: 5/5): Howell says liquidity should keep rising in 2025, yet the rate of increase is decelerating due to fading U.S. support, debt refinancing needs, and weaker conditions abroad. He emphasizes that markets are forward-looking and may feel stress later in 2025. U.S. Treasury and Fed have provided hidden stimulus (Priority: 5/5): He argues that the Fed and Treasury have supported markets through reverse repo drainage, TGA usage, bank term funding, and heavy bill issuance that shortens duration and effectively monetizes deficits. He calls these mechanisms “not QEQE” and “not yield curve control.” Debt refinancing, not debt-to-GDP, is the real macro risk (Priority: 5/5): Howell rejects debt/GDP as the key warning metric and says the crucial issue is debt relative to liquidity because debt must be refinanced. He warns that the COVID-era maturity wall will absorb liquidity from mid-2025 onward and could trigger stress if liquidity is insufficient. China is the biggest near-term macro uncertainty (Priority: 5/5): He describes China as a debt-deflation problem with collapsing bond yields and falling PBOC liquidity injections. In his view, China eventually needs a large monetized fiscal response, but for now it is prioritizing yuan stability versus the dollar, which is tightening conditions. Dollar strength drives U.S. exceptionalism and pressures the world (Priority: 4/5): Howell says the strong dollar attracts capital into U.S. assets while squeezing foreign central banks and emerging markets. He sees the dollar as a 'wrecking ball' for global growth and a key reason U.S. markets have outperformed. Bitcoin and gold as monetary inflation hedges (Priority: 4/5): He argues both assets are driven by global liquidity and serve as hedges against monetary debasement. He views their rise as part of a broader inflation-of-money rather than consumer-price story, and says dips in Bitcoin should be bought for the long term. Cycle positioning: calm phase, but late in the bull market (Priority: 4/5): Howell says most markets are still in a calm phase, not yet in turbulence, but the bull market is maturing. He expects more speculative excess can still develop, though risk appetite is beginning to roll over globally.

Key Arguments: Liquidity is measured as funding capacity, not just trading liquidity; funding liquidity drives market liquidity and asset prices. Central banks, Treasury funding choices, and cross-border capital flows all contribute to global liquidity. The U.S. has benefited from hidden monetary/fiscal support: reverse repo runoff, TGA drawdowns, bank term funding, and short-duration Treasury issuance. Debt crises happen when refinancing needs outrun liquidity, not because debt is simply high relative to GDP. The U.S. Treasury’s heavy bill issuance has suppressed yields and distorted recession signals and inflation expectations. The next major liquidity test begins around mid-2025 as the COVID-era debt maturity wall rolls over. China’s weak bond market and falling PBOC injections indicate debt deflation and a likely future need for large-scale monetization. A strong dollar tightens global conditions, hurts emerging markets, and keeps foreign central banks from easing aggressively. Gold and Bitcoin are preferred long-term hedges against monetary inflation and currency debasement. The U.S. equity market can still rise in 2025, but the environment is becoming more fragile and late-cycle.

Data Points: U.S. Treasury debt refinancing need: About 30% of $28 trillion marketable debt in 2025 - Howell says incoming Treasury Secretary Scott Bessent faces a large refinancing challenge. Hidden U.S. stimulus estimate: About $5 trillion - He estimates the combined effect of Fed/Treasury liquidity maneuvers as sizable hidden stimulus since the COVID era. Fed liquidity contribution: About $2 trillion year-on-year at recent pace - Howell says Fed liquidity-generating actions averaged roughly this amount during 2023-2024. Treasury bill share of total debt: 22% - He says bill issuance is above the normal 15-20% range and helps keep funding very short-dated. Normal bill issuance range: 15%-20% - He cites this as a benchmark for Treasury funding composition. Reverse repo facility: About $150 billion remaining - He says the facility has been drained from trillions and is now nearly exhausted. SOFR spike count: 77 days this year; 34 since end-October - He points to rising money-market tension as a sign that liquidity stress may be building. Yield suppression estimate: 150 basis points - He argues Treasury funding choices have suppressed the U.S. long end of the curve by this amount. Implied inflation break-even after adjustment: Near 3.25%-3.5% - He says adding back yield suppression makes the inflation signal much higher than the visible TIPS break-even. Chinese liquidity needed to reach equilibrium: About 30% expansion - He says China still needs substantial liquidity creation to normalize debt-to-liquidity conditions. Global liquidity cycle peak forecast: Late 2025 - His model still points to a peak later in 2025, though possibly with a weaker-than-expected rise. Risk exposure cycle: About 9-10 years - He says world investor risk exposure follows a longer cycle than the 5-6 year liquidity/refinancing cycle.

Pivotal Quotes: "Enjoy the party, but dance near the door." — Michael Howell: His shorthand for staying invested while recognizing late-cycle risks. "It's all about debt refinancing." — Michael Howell: He uses this to explain why liquidity matters more than headline debt ratios. "The dollar is a wrecking ball for the world economy." — Michael Howell: His view on how dollar strength tightens global liquidity and pressures foreign markets.

Implications: Listeners should expect a still-supportive but more fragile 2025: U.S. assets may keep rising, yet liquidity momentum is fading, China remains a major risk, and hedges like gold and Bitcoin look increasingly relevant if refinancing stress emerges.