TONY GREER: Good afternoon, everyone. Welcome to the Real Vision Daily Briefing for March 25th. I'm Tony Greer, editor of The Morning Navigator. I'm going to be joined very shortly by Michael Howell of Crossborder Capital, live from Oxford in the UK, who has got a really interesting angle on markets. First, I want to go over and speed round fashion what has gone on this week to get everyone caught up to date.

First, yields are flying. US 2Y yields ran from 1.94% last week to close around 2.3% this week. Fed balance sheet ticked up this week. Breakeven five-year closes at 3.7%, a new high for the move, super inflationary alongside this commodity bonanza.

We're seeing Bloomberg Commodity Index up 5% this week sidebar with a strong dollar once again. Oil up 8.5% to 113. Natural gas up 15% to 555. Aluminum up 7% vaulting off moving average support. Gold up a couple of percent to 1950. Grains up a couple of percent working their way towards the high.

The S&P up 2%, driven by a two and a half retracement bounce in FANG stocks toward their resistance levels. The heart of the great rotation, we had the VIX fall to a low for the move at 21. The oil and gas, E&P, industrial metals all rallied over 6%. Homebuilders fell 8% behind 10% slides in Lowe's and Home Depot. Tech was in the middle, very, very mixed.

Now let's get to a little bit more deeper analysis with my man, Michael Howell. Michael, talk to me today. How are you doing? All right?

MICHAEL HOWELL: Pretty good, Tony. Thanks.

TONY GREER: Good. Good. I watched your interview with Slash Benington, my man, and I was really, really excited and drawn into how you look at the markets. You're totally driven by liquidity. Do you want to talk a little bit about how Crossborder looks at the world first, and then we'll go over a couple of specific questions about the markets?

MICHAEL HOWELL: Sure. Yeah, for us, the key thing is liquidity. We track liquidity across what is now about 90 central banks or economies worldwide. The whole methodology actually began many years ago, probably 30 years ago or more.

When I used to work for Salomon Brothers, the US investment bank, their tracking money flow was critical for understanding the fixed income and forex markets. And we just extended it globally. And we basically make assessments of stock markets as well as fixed income and forex markets. It's as straightforward as that. Money matters. Money drives markets.

TONY GREER: Got it. You're talking about the effects of collateral, margin leverage, look at how everything is affected by liquidity, and that's what's driving the markets, right?

MICHAEL HOWELL: Yeah, absolutely. Spot on.

TONY GREER: Brilliant, brilliant. Well, let's open up with a discussion that's topical about what's going on in Real Vision and what's going on in the world. Today. US 10Y yields bounced to as high as 2.47% today, they're about to threaten the downtrend in Raoul Pal's chart of truth, which as you know, it probably is that four-decade downward channel in 10Y yields. Michael, do you think that we are going to break through to the upside this time? Or is this just another Treasury selloff to fade and we should be accumulating them here on the dip?

MICHAEL HOWELL: I think if you look at the fixed income markets, generally, they're following a script. And that script is basically a very standard script. And there's a chart I think I've got which you can take a look at which is looking at the US Treasury market. And the US Treasury market if you split it into two components, first of all, if you look at a measure of the slope of the term structure, which is basically looking at the 5Y 10Y spread, that spread has absolutely collapsed in the last nine months.

On top of that, what you've got is the convexity of the curve, which is a measure, if you like, of the slope of the front end, the bulge in the curve how much investors are discounting the Fed raising rates, that shot up. You've got like the blades of a pair of scissors which have crossed. In fixed income speak, that cross is what you might call a death cross for the credit markets. Why is it a death cross? Because basically two things are going on, which are very bad.

The first thing is the cost of refinancing for a corporate which tend to refinance around the three- to five-year tenor, three- to five-year area has gone up enormously, that cost is rising fast. The second thing is the flattening of the back end of the term structure is a bit of a wonkish concept, but hang in there with me. What that's showing is that term premia are basically shrinking fast.

And that's saying that the appetite among institutional investors for safe US government Treasury bonds is escalating, it's skyrocketing. They don't want to take risk. They're basically shuffling down the risk curve to the safety of Treasurys. The combination of those two things, the higher cost of refinancing for corporates, and less appetite for risky debt is basically telling you there's an upcoming credit problem.

And that's what you've got to start looking at within the fixed income markets. What have you seen in the fixed income markets in the last nine months? You've seen everything you'd expect to see. Number one, you've seen convexity rise. In other words, investors are discounting an aggressive Fed.

Number two, the appetite for risky debt has collapsed. In other words, the yield curves are flattened. Number three, volatility in the fixed income markets has jumped, hence the move index spiking. And number four, you're beginning to see spreads in the corporate credit markets widening, Bang, bang, bang, those are four things that the stock market's going to start worrying about.

TONY GREER: Very interesting and so well encapsulated. We've seen the high yield ETF, HYG curl over, the spreads are widening. Do you think that could be a center of concern right there, Michael?

MICHAEL HOWELL: I think it is. Yeah, I think there are upcoming credit problems because I think once rates start to go up, you've got a refinancing issue in the markets. One of the things that many investors and many academics, for sure, don't seem to take into account is that the modern financial system is not a new financing system. It's a refinancing system.

What we've got to do is we've got to fund or refinance or rollover this whopping pile of debt in the world economy. What is it now? $300 trillion of debt, okay. You got a five-year average life of that debt, that $60 trillion of debt to be refinanced every year. You need balance sheet capacity to do that, and balance sheet capacity means liquidity.

Risk in the system is largely controlled by the Federal Reserve. If you take a look, for example, at the S&P 500, the movements in that, and look at the Federal Reserve's liquidity injections, as you can see from the chart, there is almost a one for one movement. Now, I know that [?] very accurately that the Federal Reserve balance sheet has increased this week. That's true, it has, but the net liquidity injection by the Fed has actually fallen. And that's the key point.

What the chart shows is the effective amount of liquidity that is going into the market. Now, look at that almost one for one movement between the two series. Now, the question we're going to ask is what happens as the Fed starts to pull more liquidity away from the system? And the Federal Reserve has actually said they fessed up to the idea that they're going to start shrinking the balance sheet as well sometime later this year.

That's bad news for the markets. You cannot have a situation where liquidity is being pulled away in an environment where there's whopping amounts of debt to refinance.

TONY GREER: Okay, so we're facing a situation at some point down the road soon where the Fed is likely to pull liquidity away right after we just had the S&P navigate a bit of a crisis heading into the March 16th FOMC meeting. It fell 13% from its peak and has since bounced about 10%. The damage hasn't been terrible, but the rotation out of technology stocks, not the NASDAQ, into bear market territory briefly.

And then in my opinion, was saved by a dovishly postured FOMC meeting. In your opinion from where we are, from that point in the stock market trajectory, Michael, with this liquidity tightening coming, I don't want to lead the witness, tell me what you think of the S&P.

MICHAEL HOWELL: I think this is just a bear market bounce. I would expect the market basically has a 15%, 20% fall from here, then the authorities are going to have to come back in to start pumping back liquidity. Effectively, what you're seeing increasingly in the world economy is the financial markets are driving the real economy, not vice versa as the textbooks tell us.

The financial markets are very important, and you can't let them spin out of control. And that ultimately, we think is likely to happen because of all these parameters like shrinking balance sheet, rising rates, increasing credit problems, etc. Now when I first started in the markets over 30 years ago, the one datapoint that everyone used to fix on particularly in the fixed income markets was unusually housing starts, okay.

Nobody really pays a lot of attention to that. But that was the absolute key focus. People would scram. Look at the housing, the US housing number. What's happened today? You got another month of down, four months down, great lead indicator, it's telling us a lot about what's happening in the real economy.

Take a look at the University of Michigan survey, which I think the final numbers came up for March today. Again, what you're seeing is weakness being projected for the US economy in the future over the next three to six months. That survey is not bullish. A lot of other evidence is really compounding on that. I think the backdrop doesn't look great.

Now, if you take a look at the long-term US liquidity cycle, what you'll see is that a ominous cyclical shape, which is indicating that cycle which is shown, if your viewers can see it, with a black line, we've just embroidered that with a same way to show things are pretty regular in truth. What that's showing is that liquidity is likely to be dipping with some floor around let's say mid-2023.

Has the COVID crisis change that cycle? Well, it's changed it a tad, but not very much. It may be pushed it out 12 months, it's maybe increased the amplitude but the whole cyclical form is still pretty much there. And that downswing is telling us, you're going to get further yield curve flattening, probably an inversion, and that will lead on to credit problems, and it will lead on to a much weaker real economy.

That's the headwind that the equity markets are basically facing. Now, you're going to know what you can throw in. I don't want to be the source of bad news here, but one's got to be realistic. Let's face the facts. What about the oil markets? Now some experts are talking oil up to $200 a barrel.

Now what I can show you is illustrate the fact that if you look at global liquidity, which is a data series which is taking that US number and adding all the other big central bank's liquidity sources worldwide, so including China, Europe, etc., to the US, and you look at that against oil prices inverted, which is shown as the blue line on the chart as a rate of change, what it shows you is that this spike that we're seeing now in oil markets is going to be sucking liquidity out of the system.

Now, why is that? Well, I think you can come up with a number of reasons, but two of those just by way of throwing it in to the argument, one is that it cost you a lot more to pay for oil now, so that money is going to come from financial markets into the real economy to basically feed transactions. And if it comes out of financial markets, it's not buying stocks.

The other factor is that oil and commodities are a source of collateral in the lending, in the credit markets. Now, if you get heightened volatility in these markets, as you know, you're going to get margin requirements increasing, and therefore credit will start to shut down. Another reason why financial liquidity comes down.

And we're just projected what could happen based on past experience for that spike in oil prices. Bear in mind, we saw it before in 2008. What foreshadowed the stock market crisis in 2008 was actually a big spike in oil then to levels of just a little bit above where we're seeing now, I think, what was it, $147 a barrel?

TONY GREER: Yeah, exactly. Well, that was a really interesting read through because my being a little bit of devil's advocate, just to have the conversation about a prolonged stock market selloff, I can see bright signs in the markets. Now, they are bright signs by commodity sectors that are obviously set up to have great years, but they're super small weightings in the S&P.

I could see how it could net-net be a negative drag on the performance of the S&P. But I still see a lot of money coming into the commodity space. And it was interesting to see you highlight how exactly higher energy prices could actually translate into less liquidity. That's something I haven't thought about. I have to think about that a lot broader.

My question is, as we-- this is a concern that I always have, with the Russia-Ukraine crisis going on now, we're sanctioning entire nations, we are blatantly obfuscating goods and things like that around the world. Is the global funding system going to make it through this, Michael, without a major hiccup or do you think that there could be a bond dislocation lower or some real tremor that the markets will have to deal with?

MICHAEL HOWELL: I reckon there won't be a major problem, but I think there could still be a hiccup. And the reason being is that if you look at the parallels, go back to Lehman in 2008. That was a forced impairment, but it was at the core of the system. And what you've got now with Russia is a forced impairment in the credit markets, but it's in the periphery of the system.

It will cause a problem. There are problems out there. What is Warren Buffett's, one of his favorite sayings is when the tide goes out, you see who's swimming naked. And that's going to happen again when this thing starts to unravel. Now, it may take a month to six weeks for this thing to entirely unravel, but we'll see who is exposed.

It may not be a problem, but I would suspect that given the alacrity which credits been turned off to the Russians, there will be problems somewhere in the commodity markets, or somewhere out there in the credit markets. That's an issue we've got to face. That is a problem.

In the longer term, the funding markets are pretty fragile. And they're pretty fragile because the way the system has unfolded, particularly since 2008, is the Federal Reserve is sitting behind the global financial system increasingly, and that system is being fed with liquidity. And if the Federal Reserve is turning that tap off progressively, as we've seen, because of the inflation bogey in the US which we know is a serious one, then you've got to raise questions about the integrity of the funding system. There may well be problems. And that that's our concern.

Now you can throw back at me, well, what about China? Isn't that going to come to the rescue? That is the new cavalry, they charge in and bail the world out as they did in 2008-2009. I'm not so sure. China is clearly critical in this whole equation. And if you look at the relationship between China and the world business cycle, you'll see a chart which can demonstrate how important China is.

And what we basically show in the chart that your viewers can see is the Chinese credit cycle, which we've extrapolated going forward from their current moves, and the world business cycle, which is the world PMI index, a little bit like the US ISM survey, but this is for the world, what it shows is a remarkably close correlation.

And I think the heads up to interpret this is to say, look, the Federal Reserve is critical for financial markets, but China is critical for the real economy, the world business cycle. One controls business money in the real economy, and the Fed controls money in the financial economy. And this is the real economy outlook. While commodity markets are up running now because of supply constraints, there may well be a second-round impact coming later from demand if China keeps the current course.

And I think the big question we've got to ask to try and understand China is what is China up to? What is it doing? Now, the interesting, I'm not an expert on geopolitics, but if you look at China, there's some fascinating data which is around which basically shows or endorses this idea that China is also shutting off the money tab, which is shown in a bar chart that we can put up, which basically shows China's PBOC, the People's Bank of China, and its money market operations.

And it shows here what's happened over the last few weeks. Now, I've highlighted there the day of the Ukraine invasion. Now you can look at this chart, and you can read it in many ways. I'm not a geopolitical expert, but it's interesting to ponder on this one and see what actually happened. The Ukraine invasion is marked there on 24th February, and you can see the liquidity injections that the PBOC made.

Now, were they prepared for that? Don't know. Debate? Interesting question. But they certainly stuffed Chinese markets full of liquidity. In that period of five days, 1 trillion renminbi or yuan was injected into the markets. What's that? $160 billion. And then against the negative wave of criticism about will China support Russia, etc., in the following five to six days, it was all taken out again.

Now, maybe China's markets didn't need a support, but they certainly didn't get any more liquidity. And you can see what's happened since, just fluttering of small amounts of liquidity. Is China easing? No way does the evidence tell you that. A lot of people keep saying, oh, China's easing, China's easing. This is hope over experience over reality. There's no evidence they're doing it yet.

TONY GREER: Very interesting. Now, do you think that-- I want to hear your thoughts on inflation and I'm wondering if prolonged inflation will potentially change your view on China tightening and even on the trajectory of US tightening. But I see a setup for a prolonged bull market in commodities largely based on we're seeing a lot of prices, especially in base metals flying away to all-time highs.

If you drill down into their inventories, they are falling to all-time lows. We've got extremely low