The Dynamics of Global Liquidity and Cycles
An In-Depth Analysis with Michael Howell
The year 2025 may witness a significant transformation in liquidity dynamics and asset valuations, as indicated by the various cycles explored in this discussion.
In this post, I want to summarize the intricate relationship between global liquidity and economic cycles, as articulated in our recent episode of Cycles TV featuring Michael Howell, an expert in financial markets and founder of CrossBorderCapital. Author of the substack
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Howell emphasizes the dominant role of liquidity in determining financial market behaviors and highlights the limitations of traditional economic indicators, such as interest rates. He provides a comprehensive framework for understanding global liquidity, its cyclical patterns, and its implications for asset allocation and financial stability. The discussion reveals the interconnectedness of financial flows, debt refinancing cycles, and the behavior of various asset classes, including cryptocurrencies. Ultimately, Howell’s insights underscore the importance of adapting analytical frameworks to accommodate the evolving financial landscape.
Introduction
The notion of cycles in finance has long been a subject of debate among economists and financial practitioners. While traditional economic indicators like interest rates and yield curves are often emphasized, Michael Howell argues that the flow of liquidity through financial markets is paramount. Our video interview delves into Howell’s perspectives on global liquidity and its cyclical behavior, drawing on insights from our discussions on Cycles TV and his book, “Capital Wars.”
Background on Cycles and Global Liquidity
Michael Howell’s affinity for cyclic behavior in financial markets is rooted in his early experiences in banking, particularly at Salomon Brothers, where credit analysis was pivotal. Howell posits that cyclical phenomena are not merely statistical artifacts but rather essential elements shaping market dynamics. He argues that financial practitioners are more attuned to cyclical behaviors than traditional economists, who may overlook the significance of liquidity flows.
Howell asserts that global liquidity—defined as the flow of liquid assets through financial markets—plays a dominant role in shaping economic cycles. He distinguishes between traditional metrics like interest rates and more dynamic measures of liquidity. The latter, he argues, are more indicative of financial conditions and potential market movements.
The Role of Financial Flows
A central theme in Howell’s analysis is the assertion that liquidity flows have become crucial in understanding the modern financial landscape. In recent years, particularly since the global financial crisis, the nature of capital investment has evolved. Interest rates, which historically served as a critical indicator of capital allocation, have become less relevant in a world dominated by debt refinancing.
In the U.S., Howell notes that the staggering amount of debt necessitates annual refinancing on a massive scale. This context shifts the focus from traditional economic indicators to the flow of liquidity and its implications for market behaviors. Howell emphasizes that understanding the metrics surrounding financial flows — such as refinancing deadlines and available liquidity — provides deeper insights into market trends than reliance on interest rates alone.
Analyzing Global Liquidity
Howell’s approach to global liquidity involves a comprehensive analysis of various financial flows, including those from central banks, conventional banks, and shadow banking systems. He constructs a Global Liquidity Index that aggregates data from over 90 countries, allowing for a holistic understanding of liquidity patterns across different economies.
One key finding from Howell’s work is the correlation between global liquidity and the performance of various asset classes. He presents evidence that liquidity tends to lead market movements by a window of three to six months. This insight suggests that tracking global liquidity can offer valuable foresight into potential market behavior, enabling investors to make more informed decisions.
Cycles of Financial Stress and Asset Prices
The cyclical nature of liquidity also intersects with the broader economy in ways that can influence asset prices. Howell discusses how different phases of the liquidity cycle—turbulence, rebound, calm, and speculation—correspond to varying economic conditions and market sentiment. As liquidity moves through these phases, it affects the behavior of investors and the performance of risk assets.
A salient point raised in Howell’s analysis is the relationship between liquidity and asset valuation, particularly through metrics like the price-to-earnings (P/E) ratio. He breaks down the P/E ratio into components that reflect liquidity and profitability, illustrating how asset prices can be influenced by changes in liquidity even if earnings remain stable.
The discussion also highlights the cyclical patterns in financial stress. Howell notes that as liquidity tightens, financial stress tends to rise, which can impact market stability. This observation aligns with historical trends, where peaks in liquidity cycles often precede significant downturns in asset prices.
The Future of Global Liquidity
Looking ahead, Howell emphasizes that the landscape of global liquidity is likely to evolve further. He identifies critical factors that will influence liquidity dynamics, including central bank policies, government debt levels, and the behavior of private sector banks. Notably, the increasing burden of government debt and the potential for monetization of that debt present challenges for financial stability.
As we approach the anticipated peak in global liquidity around 2025, Howell warns of potential financial stress that may arise from the interplay of high debt levels and insufficient liquidity. This scenario may lead to increased volatility in financial markets and necessitate proactive measures from central banks and policymakers to mitigate risks.
Conclusion
Michael Howell’s insights into global liquidity reveal a complex and dynamic interplay between financial flows, economic cycles, and asset valuations. His emphasis on the importance of liquidity as a leading indicator challenges traditional economic frameworks and encourages a more nuanced understanding of market behaviors. As we move closer to the projected peak in global liquidity, Howell’s analysis serves as a timely reminder for investors to remain vigilant and adaptable in the face of evolving financial conditions.
You will find our video discussion just below.
Regards, Lars