Michael Howell: Federal Reserve Continues To Inject Liquidity Into Markets Via The Backdoor

Episode Summary

Executive Summary: Michael Howell argues that global liquidity bottomed in late 2022 and has been rising since, despite headline QT, because Treasury bill issuance, reverse repo runoff, and Fed backdoor facilities are expanding net money-market liquidity. He says this supports risk assets, especially equities, banks, gold, and Bitcoin, while bond yields/term premia should rise as markets normalize and fiscal dominance intensifies.

Main Topics: Global liquidity bottomed and is now rising (Priority: 5/5): Howell says the liquidity cycle turned in late 2022, with banking stress helping trigger policy responses that increased net liquidity even as the Fed kept a QT narrative. Fed liquidity vs. Fed balance sheet (Priority: 5/5): He distinguishes headline balance-sheet size from true liquidity, arguing that reverse repo runoff, the BTFP, and TGA movements can add liquidity even when the balance sheet is shrinking. Treasury bill issuance and bank monetization (Priority: 5/5): A major thesis is that the Treasury’s shift from coupons to bills is injecting liquidity, especially when banks buy bills and expand their balance sheets, which he views as monetization. Implications for equities, banks, gold, and crypto (Priority: 4/5): Rising liquidity is framed as bullish for risk assets; Howell sees equities and credit benefiting, with banks likely to outperform later as the yield curve steepens, while gold and Bitcoin serve as monetary hedges. Bond market distortion and rising term premium (Priority: 5/5): He argues Treasury/Fed actions are suppressing yields and term premia, especially relative to mortgage-implied fair value, and expects yields and term premia to rise over time. China stimulus and global spillovers (Priority: 4/5): Howell believes Chinese liquidity injections are supporting Asia-Pacific trade and could feed back into global disinflation and commodity strength, though he is uncertain whether China’s stimulus fully works. Economic cycle vs. liquidity cycle (Priority: 4/5): He says the liquidity cycle leads the real economy and that long-duration fixed-rate debt in the US has softened the impact of higher rates, limiting recession risk and supporting a soft/no-landing outcome.

Key Arguments: Liquidity should be measured net of reverse repo, TGA, BTFP, and other facilities, not just by Fed balance sheet size. The Fed can tighten on paper while still injecting liquidity through backdoor mechanisms. Treasury’s heavier bill issuance drains reverse repo and, when bought by banks, becomes bank balance-sheet expansion and de facto monetization. The 2022 liquidity trough preceded the banking stress of 2023, which historically often coincides with turning points in liquidity cycles. Equities, credit, and bank stocks should benefit from a rebound/calm liquidity phase; bond duration is less attractive. Gold is a hedge against monetary inflation, not necessarily everyday consumer-price inflation; Bitcoin may serve a similar role for younger investors. The Treasury market is being distorted, making yields artificially low and potentially setting up higher yields as term premia normalize. Negative term premia globally suggest a shortage of safe collateral and a coming rise in bond yields. China is actively stimulating through the PBOC, which may lift trade volumes and commodities but may also require yuan weakness. The US economy is cushioned by long-duration household/corporate debt and still-loose fiscal policy, reducing recession odds. Banks, especially large US banks, should be watched as a leading sign of expanding liquidity and steeper curves.

Data Points: Global liquidity estimate: ~$170 trillion - Howell says true global liquidity should include all credit providers, money markets, and repo funding, not just central bank balance sheets. US Fed liquidity increase in 2023: ~12% to 15% - He says Fed liquidity rose even though the Fed balance sheet shrank, because net liquidity flows were positive. Global liquidity increase in 2023: ~$5 trillion - He estimates global liquidity rose from about $162 trillion to $167 trillion in 2023. Global liquidity projected increase in 2024: ~$15 trillion - He expects another large rise, which would mark a new all-time high. Reverse repo facility peak: Over $2.5 trillion - He cites the RRP as a major prior liquidity sink that has since been drained. Reverse repo facility current level: ~$600 billion - He says there is still about $600 billion left to drain, which would continue supporting liquidity. Treasury funding mix: ~72% bills - He says Treasury has sharply shifted issuance toward bills this quarter, versus a traditional 80% coupons / 20% bills rule of thumb. Bank term funding program size: ~$120 billion - He describes the BTFP as an important but smaller source of liquidity than bill issuance or RRP runoff. Adjusted Treasury suppression estimate: ~120 basis points - He argues Treasury yields are compressed below fair value relative to mortgage-implied risk-free yields. Term premium backdrop: Predominantly negative worldwide - He says US, German, and Japanese term premia are negative, indicating scarce safe collateral. PBOC stimulus over last six months: ~5 trillion RMB - He says China has thrown substantial liquidity at markets to revive growth. PBOC stimulus index: ~75 to 80 - He says current Chinese stimulus is near prior peaks on a normalized scale, though not yet at the extreme. US consumer liquid assets: ~$18 trillion - He cites this as a major buffer supporting spending and the economy. March timing: March this year - He repeatedly says this is the likely inflection point for QT tapering. Late-cycle QT inflection: Late 2025 - He says the broader liquidity cycle likely peaks around late 2025.

Pivotal Quotes: "The fact is that even though the balance sheet of the Federal Reserve fell last year, liquidity, actually Fed liquidity on our definition, rose by around about 12 to 15%." — Michael Howell: Explaining why headline QT did not mean net liquidity contraction. "The bottom line in our analysis is pretty much to say, look, there's a lot of normal things going on. And there's a number of abnormal things going on. The liquidity cycle looks to us pretty normal." — Michael Howell: Summarizing his view that the cycle is healthy and still supportive of risk assets. "Monetary hedges like gold are not necessarily hedges against high street inflation, but they are hedges against monetary inflation." — Michael Howell: Distinguishing asset hedges from consumer-price inflation hedges.

Implications: Listeners should expect a constructive backdrop for risk assets, especially financials, gold, and Bitcoin, while bond investors face higher yields and term-premium normalization. Liquidity, not headlines about QT, is the key signal to watch.