MacroVoices #545 Michael Howell: Warsh vs. The Markets

Episode Summary

Executive Summary: Michael Howell argued that the 5–6 year global liquidity cycle has peaked and is rolling over, with asset-market liquidity likely weakening into 2027 as real-economy strength pulls money out of financial markets. He sees rising bond yields, a hawkish Fed path, and a coming correction in risk assets, while remaining structurally bullish gold, precious metals, and energy—especially as China expands liquidity to work off debt and reprice its internal yuan economy.

Main Topics: Global liquidity cycle has peaked (Priority: 5/5): Howell says the advanced-economy liquidity cycle topped in late 2025 and is now declining as real economic activity absorbs cash and crowds out financial markets. He expects the next liquidity bottom around mid-to-late 2027. Fed policy versus market forces (Priority: 5/5): He argues markets, not central banks, control rates; rising nominal GDP and bond yields are forcing policy higher despite political pressure for cuts. He expects the Fed to tighten further, not ease. China’s liquidity divergence and debt debasement (Priority: 5/5): China is described as the key exception to the global cycle, with tight prior policy, weak growth, deflationary pressures, and a likely new liquidity expansion to devalue domestic debt and support growth. Gold, silver, and the precious-metals setup (Priority: 5/5): Howell is strongly bullish gold, tying its move to PBOC liquidity and Chinese demand. He sees the recent correction as likely over and says silver strength would confirm a broader precious-metals turn. Energy and the gold-oil ratio (Priority: 4/5): He expects oil to rise with the real economy and strong nominal GDP, arguing the gold-oil ratio is mean-reverting and implies much higher oil prices if gold continues higher. Asset-allocation regime: from speculation to turbulence (Priority: 4/5): The market is transitioning out of the broad beta-friendly phase into a more defensive environment where volatility rises, returns get poorer, commodities outperform, and bond yields climb. Trading desk positioning: gold, equities, dollar, yen, crude, wheat (Priority: 4/5): The market desk sees tactical long opportunities in gold, continued equity resilience near-term, yen and dollar inflection risk, crude supported above recent lows, and wheat vulnerable to a supply shock from Black Sea disruptions.

Key Arguments: Global liquidity is the key driver of asset markets; its growth rate, not just its level, matters most for pricing. The current liquidity cycle is a normal 5–6 year rhythm and likely won’t bottom until 2027. Liquidity is rolling over mainly because the real economy is strong, pulling money out of financial markets. Central banks do not set rates in the end; the bond market and nominal GDP do. Rising nominal GDP in the U.S. and elsewhere is pushing long-end yields higher, forcing policy rates up. China is pursuing an internal devaluation: expanding liquidity to reduce its domestic debt burden while trying to keep the external yuan stable. Gold is being driven by Chinese liquidity and Chinese demand, not primarily by Western real-rate dynamics or geopolitical headlines. Crypto responds more to Fed/global liquidity than to PBOC actions, which helps explain why crypto is weaker while gold strengthens. Oil should rise as the real economy strengthens and the gold-oil ratio mean reverts; higher oil would also reinforce inflation and bond-yield pressure. The current environment favors defensive positioning over high-beta risk assets, even if equity indices remain near highs in the short term.

Data Points: Global liquidity cycle length: 5–6 years - Howell characterizes the liquidity cycle as a regular multi-year rhythm. Last liquidity peak: End of 2025 - He says the global liquidity cycle peaked around the end of 2025. Expected liquidity bottom: Mid-to-late 2027 - His base case for the next liquidity trough. Liquidity decline estimate: ~60% through the downcycle - He says the cycle is about 60% of the way through the falling phase. Real-economy lead time after liquidity peak: 15–18 months - Liquidity tends to lead the real economy by roughly this amount. Treasury bill share of U.S. federal debt: 22% - Current short-dated funding share, with potential rise toward 30%. Historical Treasury bill share: 15–20% preferred range; near 30% in early 2000s - Howell says current levels exceed Treasury’s preferred range. Chinese government bond yield: 1.7% - He cites this as unusually low relative to rising yields elsewhere. Gold correction: 30% - The transcript refers to a recent gold correction before the rebound call. GLD current price: Around $405 - Used in the options trade example. GLD target strike: $450 - Patrick’s tactical gold trade targets this level. Bull call spread cost: About $10.50 net debit on a $40-wide spread - Trade construction on GLD October 16, 2026 options. Trade payoff: Roughly 3:1 risk/reward - Risk about $10 to potentially make about $30. SPX short-term upside target: 8,000 - Trading desk sees possible near-term extension if momentum continues. SPX pullback threshold for technical damage: About 400 points - A move of this size could trigger systematic selling. Yen intervention move: 164 to 155 - Dollar/yen dropped sharply after intervention. Yen positioning shift: 118,000 contracts - Largest weekly change noted; about 25% of open interest shifted. Two-year note positioning: 100th percentile - Shows extreme positioning at the front end of the curve. 10-year note positioning: 0th percentile - Shows opposite positioning at the long end. U.S. nominal GDP growth estimate: 6%–8% - Howell’s implied range for current nominal growth pressure. 10-year Treasury yield possibility: Testing 6% - He says this is plausible in the not-too-distant future. Japan nominal GDP: Over 4% - Supports higher Japanese long yields versus suppressed policy settings. Wheat shorts: About 15,000 contracts net short - Large speculators moved sharply bearish in wheat. New wheat shorts: Roughly 11,000 - Indicates fresh bearish positioning before Black Sea escalation. Russia share of global wheat exports: 22% - Highlights supply sensitivity in wheat markets.

Pivotal Quotes: "This everything bubble will inevitably come to an end." — Michael Howell: Opening thesis on bubble risk and liquidity rollover. "All money that is anywhere must be somewhere." — Michael Howell: Explaining how liquidity shifts between financial markets and the real economy. "The market controls interest rates." — Michael Howell: His core rebuttal to the idea that central banks can simply dictate rates.

Implications: Listeners should expect tighter financial conditions, higher yields, and greater volatility into 2027, with defensiveness favored over broad beta. Gold and energy look structurally stronger, while China’s policy path may be the main external catalyst for commodities.