Key Takeaways
- The market is heading towards a turbulent phase for risk assets, but it has not arrived yet.
- Media narratives about a looming deep recession do not match current market data.
- Yield curves are expected to flatten due to declining liquidity, opposing the consensus of steepening.
- The real economy’s demand for working capital is pulling liquidity out of markets, affecting yield curves.
- There are two main cycles in the economy: the business cycle and the liquidity cycle, which influence each other.
- Financial markets have a significant impact on economic outcomes, with money moving markets and economies following.
- Global liquidity is crucial for debt refinancing and is defined by the capacity of credit providers.
- The real economy typically lags behind the liquidity cycle by 15 to 20 months.
- Financial assets can predict the business cycle by reflecting investor sentiment changes before economic peaks and troughs.
- Current economic data and market behavior do not support the narrative of an impending deep recession.
- Liquidity cycles are a key driver of market movements and should be a focus for investors.
- Understanding the timing relationship between liquidity cycles and economic performance is essential for forecasting.
Guest intro
Michael Howell is the founder and managing director of CrossBorder Capital, a leading research firm specializing in global liquidity indicators. He pioneered the liquidity cycle framework, which analyzes central bank policies, cross-border flows, and private sector financing to forecast market turning points. His insights challenge consensus views on economic cycles and risk assets.
The market’s trajectory and liquidity cycles
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We are moving towards a turbulent phase for risk assets, but we are not there yet.
— Michael Howell
- Liquidity cycles are a primary driver of market movements and should be closely monitored.
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Although we’re not in turbulence yet, we’re basically moving in that direction.
— Michael Howell
- Understanding liquidity cycles can help predict market behavior and economic trends.
- The current state of the liquidity cycle suggests caution for risk asset investors.
- Liquidity cycles influence both market movements and economic activity.
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The liquidity cycle which dominates market movements is basically inflecting lower.
— Michael Howell
- Investors should consider liquidity cycles when assessing market risks and opportunities.
Challenging media narratives on recession
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The media’s portrayal of an impending deep recession does not align with the actual market data.
— Michael Howell
- Current economic indicators do not support the narrative of a deep recession.
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You look at the data, you look at what the markets are doing, it doesn’t seem to be the case.
— Michael Howell
- Data-driven analysis is crucial for understanding economic trends and avoiding misinformation.
- Media narratives can often exaggerate economic risks without supporting data.
- Investors should rely on market data rather than media reports for economic forecasting.
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The closure of the straightforward moves is gonna lead to the world economy sort of tanking into deep recession… it doesn’t seem to be the case, does it?
— Michael Howell
- A more optimistic view of the economy is supported by current data and market behavior.
Yield curves and liquidity
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Yield curves are likely to flatten due to a decrease in liquidity, contrary to the consensus expectation of steepening.
— Michael Howell
- Declining liquidity is a key factor in the flattening of yield curves.
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The markets are more powerful, and what you’re likely to see is a flattening curve because liquidity is inflecting lower.
— Michael Howell
- The real economy’s demand for working capital is affecting liquidity and yield curves.
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It’s because the real economy is actually accelerating or increasing its appetite to be more correct, it’s working capital demands.
— Michael Howell
- Understanding the role of liquidity in yield curve movements is essential for investors.
- Central banks are not the primary drivers of liquidity changes affecting yield curves.
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The reason for that is not because central banks are tightening and withdrawing liquidity.
— Michael Howell
The interplay of business and liquidity cycles
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There are two distinct cycles in the economy: the business cycle and the liquidity cycle, which influence each other.
— Michael Howell
- The liquidity cycle can impact the business cycle and vice versa.
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There is the economic or business cycle and then there’s the liquidity cycle which you focus on.
— Michael Howell
- Understanding both cycles is crucial for analyzing economic conditions and market behavior.
- The interaction between these cycles can provide insights into future economic trends.
- Investors should consider both business and liquidity cycles in their strategies.
- The liquidity cycle often leads the business cycle, influencing economic activity.
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Money moves markets, and economies are downstream of markets.
— Michael Howell
The significance of global liquidity
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Global liquidity is defined as the financial capacity of credit providers, which is crucial for debt refinancing in financial markets.
— Michael Howell
- Global liquidity plays a vital role in financial markets and economic stability.
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It’s a measure of the financial capacity or the balance sheet capacity of credit providers.
— Michael Howell
- Understanding global liquidity is essential for assessing market risks and opportunities.
- The real economy lags the liquidity cycle by about 15 to 20 months.
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The real economy tends to lag the liquidity cycle by about fifteen to twenty months.
— Michael Howell
- Monitoring global liquidity trends can provide insights into future economic conditions.
- Investors should consider global liquidity when making financial decisions.
Financial assets as predictors of the business cycle
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Financial assets are good predictors of the business cycle due to the relationship between investor mood and economic peaks and troughs.
— Michael Howell
- Investor sentiment changes can signal upcoming economic shifts.
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Investors’ mood sours just before a peak and picks up just before a trough.
— Michael Howell
- Financial markets can provide early warnings of economic changes.
- Understanding the link between financial assets and the business cycle is valuable for forecasting.
- Investors should pay attention to market sentiment as an indicator of economic conditions.
- Financial assets can offer insights into future economic trends and cycles.
- Monitoring investor sentiment can help predict business cycle movements.
