MAX WIETHE: Hello, everyone. Welcome to Real Vision Live. For Real Vision, I'm Max Wiethe. I'm joined today by Michael Howell, the Chief Executive Officer of CrossBorder Capital. Michael, thank you so much for coming back on Real Vision.

MICHAEL HOWELL: Great. Hi, Max. Great pleasure to be here. Thank you.

MAX WIETHE: All right. So we're going to be talking all things global liquidity. You are well known. You've been on Real Vision before talking about why you think liquidity is the most important macro variable. For everybody who might not be as familiar with your outlook, can you give us a brief overview of what global liquidity is, what it means to you, how you measure it, and why you think it's the most important variable to focus on?

MICHAEL HOWELL: Sure. If you look back over the last 12 months, the one number you'd liked to have known is the picture for global liquidity. Global liquidity has empowered markets over that period. That's why stock markets are recording highs. That's why Bitcoin is going up. That's why commodity prices are rising. Effectively, what we're seeing is this tide of liquidity.

How do we measure liquidity? Liquidity is a global phenomenon. It's not money supply, as some people would suggest. It's much broader than banks. It looks as if all credit and all savings flows that the private sector worldwide essentially has to play with.

If you look at that, there's a chart that we can flash up which basically looks at the growth of global liquidity over time. Global liquidity now is a figure of about $160 trillion. It's likely, by end 2021, that will reach about $180 trillion. That represents about 200% of world GDP, and to give you an idea of how fast it's grown, about 20 years ago, that was 100% 1 times world GDP. So it's clearly outpaced very significantly.

Now, one of the things that you can say about this growth of liquidity is that China has played an increasing role, and that's one of the features I want to bring out. Because China's role in global liquidity is absolutely critical certainly now but also looking into the future. China now represents about 29% of the total pool of liquidity, and it's outstripped the US which is about 22% of that total pie. US dollar liquidity is probably more important, but China is coming, and we don't take the view that China is a basket case that's going to derail. China is a real threat to everybody in the West, and the irony in this whole picture is that, when the US and the West basically began this pivot towards Asia and China, in the 1970s, by empowering China industrially, they ultimately weakened the West financially, and that's really the critical point.

MAX WIETHE: OK, and so when you say that China is the dominant force for global liquidity, what does that mean? Why does it matter where the liquidity is coming from?

MICHAEL HOWELL: Well, it matters because China is basically controlling its pool, and China's control means that it can direct liquidity into certain areas. Now, what's more than that is that the yuan can be empowered as a currency in use, and I think that a lot of people would diss the idea that the yuan is ever going to eclipse the US dollar. But I would just say, just wait and watch. And if you look at the history of the US dollar, people would have made the same claim about the US dollar not really outpacing sterling, in let's say 1913, before World War I. Basically, within four to five years, the US dollar was the dominant currency worldwide.

Why was that? Basically, there were two reasons. Number one was a World War, whereby British banks were not allowed to lend internationally anymore for obvious reasons. And number two was because a lot of trade, munitions or food or whatever, was basically in US dollars. And the US started a trade finance industry almost from scratch, and that trade finance use of dollars basically meant every other country had to hold dollars in their portfolio and use dollars.

Now, the Chinese are the world's biggest importer and exporter. It would be just a flip of a switch or a pen stroke that would cause China to switch from denominating in dollars to denominating more in yuan, and they could use Chinese banks to actually develop a trade credit industry very, very quickly. On top of that, if you look at how China is growing, its economic model, it depends very much on exports, and it depends a huge amount, obviously, on infrastructure.

Now, how does infrastructure get paid for? Fixed income financing, bond markets. What has China just done in the last couple of years? It's opened up its bond market, and the bond market in China is drawing in global savings.

That's one key thing. The Belt and Road Initiative, as people talk about, is alive and well. That's a major conduit of Chinese future growth.

The second thing is looking at trade and trade finance, which I touched on, but equally think about the digital yuan. The digital yuan is here, it's being used, and that will allow peer-to-peer transfers within a Chinese trading zone, and that Chinese trading zone will probably extend into Central Asia. So what you've got is clear economic and clear financial threats coming from China's increasing control of liquidity and its role in global liquidity.

MAX WIETHE: Well, and as well, if you look at the political climate, it doesn't strike me that the US-- if you make that analogy back to World War I, where the UK banks were not allowed to lend. There's nothing that extreme coming down right now, but certainly, the narrative is more towards US firms potentially being limited in their ability to deal with China and to deal with the rest of the world. Whereas, Chinese firms are being encouraged to go forth and multiply.

MICHAEL HOWELL: Exactly, very similar analogy.

MAX WIETHE: OK, but this chart that you showed before of global liquidity over time is very helpful. But there's another way to look at it which is your global liquidity index, which I think helps put it into context how much-- where we are in a shorter term. So I have the chart up here of your global liquidity index. How do you calculate this, and what is it showing for you?

MICHAEL HOWELL: Yeah. It's an index that basically uses that same data set. It looks at the momentum in liquidity. It has a slightly different weighting system. So it's actually created mathematically, but basically, what it tries to show is the importance of different parts of the whole liquidity pie. And what the index is demonstrating is why liquidity, or how liquidity, matters principally for financial markets.

Now, we tend to look at the role of liquidity through, if you like, through different lenses. The total flow of liquidity tends to impact the fixed income markets, and it primarily drives the yield curve. The yield curve is probably the most important number I think to look at in terms of most financial variables.

The yield curve was actually a device, if you look at the history of it, it was originally devised back at Salomon Brothers in the 1970s. And it came out of the demise of Bretton Woods, where up to that point, basically, the finance industry looked at different yield tenors as being separate markets. The Salomons and Marty Leibowitz, who was head of research at Salomon Brothers, said, look at the curve as a continuum. Look at the yield curve and the term structure.

What drives that term structure is liquidity, and if you get more liquidity going into the system, you'll see the yield curve steepening. And if liquidity leaves the financial system, the yield curve will flatten. And that operates via term premium, a slightly wonky idea, but that's what's happening. What you're seeing now in yield curves worldwide-- and I believe there's a chart that you can see there which is somewhere around about I think the slide eight or whatever in the pack I sent.

What that demonstrates is that there's a very clear connection between the flow of liquidity and the yield curve. And that is almost a cast iron relationship that has worked on the chart visibly for 20 years. We run that right back to the 1960s and '70s, it's absolutely intact. At Salomon Brothers that was a key factor that traders would look at. They'd look at liquidity flow and try and understand how the yield curve and the fixed income markets were moving.

So number one is the flow of liquidity. That's definitely telling us that yields are still going up, and the yield curve is steepening. Which must be great news for cyclicals of value stocks, and it's not a great time for growth stocks. So that should really empower that part of the financial markets.

The second thing to think about is effectively the mix of liquidity, the quality mix of liquidity. Liquidity has good parts, and it has bad parts. The good liquidity is what's created by the private sector through basically profitable operations or by profitable lending. That's good liquidity.

You also have a slightly, let's say, a bad liquidity. It's not necessarily all bad, of course, but it bad liquidity which comes out of the Federal Reserve or central banks. And we think of it in good and bad terms, because that's the impact it has on currencies.

So if you get lots of good liquidity in the US, private sector is generating lots of cash flow, the dollar's going to be strong. Again, the Federal Reserve coming in and printing lots of money, the dollar is going to weaken, and it's that balance which really drives the movement of the US dollar. And I believe there's a chart, which we show there, which is a little bit later, maybe it's the following chart, which we look at what we call forex risk, and that is measuring the differential between private sector and central bank here, Federal Reserve liquidity.

Now, what you can see is that indicator is charted alongside the DXY index as a rate of change, and what that basically illustrates is that the forex risk measure, in other words private sector minus central bank liquidity, is a very, very good lead indicator of the future dollar. And what it's saying is that the dollar is coming through a period of moderate weakness. Now, the problem that the dollar has is the starting point, and in terms of our view of how things are unfolding, one of the things that we would highlight is the capital flow picture, because that also impacts on what the currency will do.

Now, the problem that the US dollar area has is that we've just come through a decade, where there's been huge demand for dollars for a number of reasons. We've seen that historically before. We've seen these sudden bouts of dollar demand. We saw it in the 1980s with Japanese insurance companies coming in to buy the dollar, when there was deregulation of the Japanese financial system. We saw it in the mid 1990s with the Asian crisis, where basically the dollar was the main safe asset, which Asians poured into their savings, but if you like safe haven demand.

What we've seen in the last decade is a lot of demand for dollars three principal reasons. Number one was you've got the eurozone banking crisis, from 2010 to 2012, which meant a lot of capital fled the eurozone into the dollar. Secondly, what you saw was the anti-corruption drive in China of Xi Jinping, and what that meant was capital just fled China into US dollar assets. Thirdly, what you've seen is regulation through Basel III Solvency II, which have actually increased the demand for safe assets, and the obvious safe asset is US dollars.

So we've had a decade where there's been unprecedented demand for US dollars. So the dollar's coming off a high, and basically, we think that will dissipate, and therefore, that's another reason why you've got problems looking forward for the dollar. That's not necessarily bad news for financial markets, after all, because financial markets do well, if the dollar's moderately weak.

You've also got evidence that foreigners are starting to bail out of treasuries, and I think there's evidence I put in a chart there which is showing that we've had, in the last four or five years, about a trillion dollars of net selling of treasuries by foreign holders. So all these things are weighing down on the dollar. So our view of the dollar is about the relative flow of liquidity.

And then if you come to equity markets, equities, if you like the third asset, is all about the positioning of liquidity within portfolios. Now, many people talk about there being a bubble in equity markets. There may be bubbles in certain areas, but they're certainly on a bubble overall.

And if you look at the relationship we focused on which is the total value of all equity holdings divided by the pool of liquidity, that ratio is actually at pretty medium levels. It's about 0.5. If you go back to Y2K, the tech bubble around year 2000, that got up to about 0.85. And if you look at the global financial crisis 2007-08, it was about 0.71.

So at 0.5, we don't seem to be stretching things too far. US is a little bit more stretched than the other markets, but not dramatically so. But I think the key point to make about equity markets in general is that how much they sold off a year ago. There was just so much cash on the sidelines, and that's been added to by central banks, as we know. So hence more money, financial asset prices go up.

MAX WIETHE: OK. So there's one thing I noticed is a lot of people have been talking about this recent dollar strength as just a simple result of real rate differentials. And that you're getting rising rates here in the US, and that's going to pull in capital. It seems like you take a more nuanced view of what drives capital flows and what drives dollar strength. So why is real rate differentials not enough?

MICHAEL HOWELL: Well if you look at-- OK. If you go back and analyze currency movements, and I've tried to make real rate differentials work as a driver. They just don't. They tend to be a lagging indicator not a leading indicator.

People are working to prove me wrong, but I must say, I've never found any evidence that they work. What really matters is flows of capital, and it's fair to say that, if you look at the recent performance of the dollar, the dollar has gone up, but isn't that to do with the fact that the US economy is doing rather better than the eurozone right now? And consequently, there's more, as we would say, good liquidity being created. It's simple as that.

The problem out there is that somebody's got to fund these whopping great deficits, and that may be good, old Federal Reserve. And the issue is that the Fed's basically come up to the plate for 2/3 of the debt issuances we've seen, and maybe they're going to be called upon for more. So I think the problem looking forward is you've got this mix which is not exactly a great mix of the dollar. It may be good for the US economy overall, but it's not necessarily good for the US currency.

MAX WIETHE: OK. Well, I want to talk a little bit about risk exposure. So we've got a picture of liquidity, and you touched on positioning and exposure a little bit. But you have another chart on chart 13 which, I must confess, I need you to translate for me.

MICHAEL HOWELL: Yeah. OK. What that does is that, basically, the chart that I previously alluded to, which was total equity holdings divided by the pool of liquidity, is a very straightforward, simple indicator. But markets are a little bit more complex than that, and you've got to look at other asset classes. So the chart that you're looking at is basically looking at a mountainscape of all asset holdings worldwide. Now, through the miracles of technology, we can get this data now very speedily, and for certain countries, we can get it daily with about a two-day delay. So we can update and refresh these numbers very quickly.

So what we do is we look at the positioning of equities or risk assets in general within portfolios, and that really is a good guide as to, if you like, valuation or likely performance. And basically, what that data shows is the positioning of investors worldwide in risk assets. Now, you can read that as equities, and it's taken relative to safe assets, so you can take safe assets to be cash and government debt. So what that barometer that you're looking at on the right-hand side basically is looking at is that barometer of risk positioning in markets.

So that's if you like a good guy to risk-on and risk-off, but actually where investors are currently putting their money. So we tend not to think about surveys, because investors don't always tell the truth. They talk about aspirations. We look at where they actually put their money, and that's really the key thing.

Now, if you look at the chart closely, you see another line on that which is looking at world economic growth. And the remarkable thing about that chart, or the two lines, is that asset allocation is remarkably pro-cyclical. So investors tend to put more into risk assets-- i.e. equities when the economic cycle is picking up-- and they basically take money out of equities and put it into safe assets, like government debt and cash, when the economy is turning down.

Right now, economies are turning up. Therefore, you want more equity exposure. And there's another set of charts I think that we've got maybe in the next slide on which shows those particular risk appetite or risk positioning indicators for the four big markets-- the US, eurozone, Japan, and the UK.

Now, if you look at those none look particularly stretched. Wall Street, despite the highs, equally doesn't look that far out of line. UK looks positively cheap on this positioning chart. It's been left way behind by Brexit and the original COVID concerns. It's lagging seriously, but it's going to catch up at some stage.

And what those charts in each four of the cases highlight is the extreme pessimism and risk-off that occurred a year ago. These were just numbers off the scale, and that's why it was very clear at that time, this was a great, great buying opportunity a year ago. You can still make money out of stocks now, but clearly, there's a lot of water is under the bridge, but there are opportunities.

It's not a time to sell medium term in equities. However, one of the concerns that we do have is that the strength in economies right now, and you can see that in the latest ISM releases at the beginning of April, is that the momentum in the American economy is basically very, very high. That will be pulling liquidity out of financial assets and stocks and bonds, and it will be pulling it into working capital and maybe spending on the high street. Those factors are likely to cause a wobble in Q2, Q3 of this year.

Now, our, sort of if you like, our view or profile of the year has been to say that we were bullish in the first quarter for all the reasons about bounce back of