Michael Howell: "QE Is Coming Back, Big Time"

Episode Summary

Executive Summary: Michael Howell argues that the market’s 2023 rally was driven primarily by improving financial-system liquidity, not just earnings, and that liquidity should keep rising into 2024-2026. He says the Fed is effectively easing via bank backstops, reserve targeting, and balance-sheet mechanics, while China, Japan, and Treasury issuance dynamics also add support. His broader thesis: structural monetary inflation and heavier government debt financing will favor stocks over bonds.

Main Topics: Liquidity as the dominant driver of asset prices (Priority: 5/5): Howell defines liquidity as the flow of cash and credit available for asset purchases, not rates or broad money supply, and argues it is the key determinant of risk-asset performance. Fed liquidity, reserve targeting, and hidden easing (Priority: 5/5): He says the Fed is still formally doing QT, but effective liquidity has risen through discount window/BTFP lending, TGA movements, RRP drain, and operating losses, implying a form of 'not-QE QE'. Treasury issuance as liquidity support, not just drain (Priority: 4/5): He argues that large bill issuance can recycle money from the reverse repo facility, expand collateral, lower volatility, and support liquidity if money funds absorb the supply. Inflation falling, PE multiples rising (Priority: 5/5): Howell contends that equity markets are driven more by P/E multiple expansion than earnings, and that declining inflation and rising liquidity justify higher valuations. Global cycle bottoming and a rebound regime (Priority: 4/5): He believes the world economy and markets are in a liquidity-led rebound phase, with cyclicals, semis, housing, and eventually banks likely to benefit. China, Japan, and cross-border capital shifts (Priority: 4/5): He says the PBOC is likely to re-accelerate liquidity injections, Japan is also adding liquidity, and capital is shifting toward Asia, which supports global liquidity and emerging markets. Long-term fiscal dominance and renewed QE (Priority: 5/5): Howell argues that aging, defense spending, and rising deficits will force central banks back into explicit QE and some form of yield-curve control to finance governments.

Key Arguments: The 2023 equity rally was mainly caused by a rise in effective liquidity, especially in U.S. bank reserves and broader global liquidity. The Fed’s balance sheet alone is misleading; effective liquidity must subtract the TGA, reverse repo facility, and operating losses. The March banking stress and prior gilt-market turmoil pushed central banks to prioritize financial stability and stop letting reserves fall. Treasury bill issuance can be liquidity-neutral or even liquidity-positive if it comes out of reverse repos rather than from private-sector cash. Bond volatility matters because it changes collateral haircuts; lower MOVE supports more liquidity and easier financing. Falling inflation increases equity valuations because the P/E multiple expands; markets are more sensitive to inflation and liquidity than to earnings alone. The world economy appears to be bottoming, and liquid global conditions should favor cyclicals, semis, housing, and eventually regional banks. China is likely to ease again because its economy cannot sustain weak growth and high unemployment without more liquidity. The medium-term regime is structural monetary inflation, implying upside for stocks, crypto, and gold, but not for bonds. If the Fed does not supply sufficient liquidity, the financial system’s debt-refinancing structure could trigger a crisis.

Data Points: S&P 500 performance: about 20% higher - Used to illustrate that Howell’s January liquidity call was correct NASDAQ performance: far above S&P 500, described as 'way more' - Example of long-duration assets benefiting from liquidity Fed bank reserve behavior: flatlined from about Oct. 2022, then rose in Feb.-Mar. 2023 - Linked to gilt crisis, SVB/CSFB/First Republic stress, and Fed support MOVE index peak: 200 - Peak volatility in bonds; Howell said 150 used to feel crisis-like in his career MOVE index current level: circa 100 - Lower bond volatility supporting easier collateral financing US 2-10 Treasury spread: -93 bps - Ultra-inverted yield curve cited in discussion of term premium and liquidity Term premium on 10-year Treasury: about -1.75% - Howell argues this is highly distorted and could move back toward zero Treasury bill issuance planned: well in excess of $1 trillion - Quarterly refunding expectations; could help drain reverse repo balances Fed Treasury holdings now: about $5 trillion - Current effective Federal Reserve Treasury holdings referenced in long-term QE discussion Fed Treasury holdings by 2033 (CBO): more than $7 trillion - CBO projection cited as evidence of coming QE Fed Treasury holdings by 2033 (Howell estimate with 5% defense spending): almost $10 trillion - His higher long-term QE projection Inflation pass-through peak: 31 months in 2021 - Indicated inflation shocks were becoming embedded Inflation pass-through latest print: just over 11 months - Shows rapid disinflation and supports multiple expansion Historical inflation sweet spot for CAPE: around 2% inflation - Regression of CAPE versus inflation suggests best equity valuations near 2% inflation Global liquidity cycle peak forecast: 2026 - He expects a multi-year liquidity upcycle to continue until then China liquidity growth recent pace: about 5% increase in six months, down from nearly doubling every six months in 2012 - Used to show modern PBOC easing is more controlled than a decade ago Regional capital flows: US inflows losing momentum; Asia inflows rising - Evidence of capital shift toward Asia U.S. foreign ownership of debt: about one-third - Howell argues foreign demand may weaken, increasing reliance on domestic buyers/Fed Defense spending scenario: 5% of GDP - Would require much higher debt issuance and greater Fed balance-sheet support Liquidity cycle lead time to economy: about 15 months - Used to argue the economy is bottoming after prior liquidity troughs

Pivotal Quotes: "Liquidity matters. It's the most important thing for investors to watch and track." — Michael Howell: Core thesis for why markets rallied and how to interpret future asset moves "We're moving into a new era. The COVID crisis was a watershed in many ways. But it was a watershed in terms of the policy decision of how government spending was funded." — Michael Howell: Explains his long-term view of fiscal dominance and renewed central-bank balance-sheet expansion "The financial system is a refinancing system for debt, not a new financing system for capital expenditure." — Michael Howell: Central premise behind his warning that insufficient liquidity can trigger crisis

Implications: Investors should watch liquidity, bond volatility, and Treasury issuance more than headline rates. If Howell is right, risk assets and cyclicals can outperform for years, while bonds face limited upside and fiscal/monetary dominance grows.