Global Liquidity Revisited

Published on
February 7th, 2020
28 minutes

Global Liquidity Revisited

The Expert View ·
Featuring Michael Howell

Published on: February 7th, 2020 • Duration: 28 minutes

Mike Howell, managing director at CrossBorder Capital, breaks down the mechanics of the adage "money moves markets" in this deep dive into global liquidity, asset prices, and market cycles. Howell examines the role that the Fed and other global central banks have played in the rise of the current liquidity-driven bull market through the lens of current and historical data. He then breaks down the implications of his thesis by asset class and geography, including his forward outlook for major asset markets. Filmed on January 22, 2020 in London.



  • KB
    Kevin B.
    19 February 2020 @ 09:08
    Can someone explain exactly how Central Bank liquidity is transmitted to the markets? I understand QE as simply the purchasing of Treasury Bonds on the open market by the Fed. While that puts money in the hands of bond holders how did that change the liquidity? They obviously had money to buy those bonds to begin with and while I know primary dealers are obliged to buy treasury bonds, given the current immense appetite for safe assets it doesn’t seem that they would have difficulty finding a buyer if the Fed wasn’t there. Also people talk about QT drawing liquidity from the system but (according to Raoul’s repo dive) QT didn’t actually involve the Fed selling bonds. It just let them mature without rolling them over. How would that reduce liquidity What am I missing ? Thanks Kevin
  • CW
    CC W.
    17 February 2020 @ 19:02
    If this guy is talking about dollar/gold then I agree. But talking about dollar in a vacuum is not really a good investment advise.
  • dp
    david p.
    17 February 2020 @ 18:26
    He doesn't see Euphoria in the equity markets already?
  • RK
    Roger K.
    17 February 2020 @ 16:50
    Clear and Concise! . Thank you.
  • AN
    Arno N.
    16 February 2020 @ 21:43
    Michael, great and crystal clear interview: -I always have issues understanding the transmission mechanism of this liquidity as everyone calls the beast by the same name but there are in my opinion very different kinds of liquidity: -I agree that rates indeed don't matter that much and that it's much more about peoples willingness to take risks and availability of capital -On the otherhand, a few simple charts: bank reserves compared to growth in credit assets over the long term shows that there is basically zero correlation. And I would in my opinion agree. People go to a bank, they want a loan and if bank has risk appetite they go and look for money in the repo market. How would you describe the liquidity transmission mechanism (and how it finally reaches equity markets) or do you have some sources to guide me to?
  • dm
    david m.
    12 February 2020 @ 19:24
    Hi Mike, Always enjoy your take on things. In your view, what are the odds of the "Federal Reserve" expanding into buying non-traditional assets and getting into muni's, or student/auto loans via CLO's/ABS's after the next downturn? I guess it would depend on the severity of the downturn? Also a good way to introduce the inevitable MMT?
    • MH
      Michael H. | Contributor
      13 February 2020 @ 22:05
      Bernanke’s speech to academics in January 2020 gives some clues I suspect. He argues strongly against the Fed messing with its inflation target and instead favours continuation of forward guidance and QE. Problem with latter is that as we know it reduces ‘safe asset’ pool so logical to make a deeper dive into other assets. What to buy becomes hugely political decision, there is a guy in the White House who just relishes making those decisions!
  • JS
    J S.
    12 February 2020 @ 20:55
    USD stronger, oil and copper down. Should big liquidity injection do the opposite?
  • DG
    David G.
    10 February 2020 @ 18:03
    If the Fed is expanding their balance sheet isnt that removing safe assets out of the market? The Fed buying Treasuries lowers their supply whereas the Fed shrinking its balance sheet should increase the amount safe assets
    • MH
      Michael H. | Contributor
      10 February 2020 @ 22:29
      Correct. However, experience shows Fed liquidity is the more powerful factor. Right now there should be less dispute because both Treasury issuance and the Fed balance are expanding at a combined around 7% pa
  • ag
    anthony g.
    10 February 2020 @ 13:25
    10 year yields are not going to 3% .... in my humble view, probably the other way actually from where they are now. Otherwise useful stuff .
  • MH
    Martin H.
    10 February 2020 @ 00:52
    Liquidity is a fundamental of the currency used to value an asset. Supply and demand for the currency is as fundamental as supply and demand for the asset in pricing any asset.
  • js
    john s.
    7 February 2020 @ 06:18
    and then a virus came...
    • DH
      Daniel H.
      7 February 2020 @ 07:22
    • CD
      Colin D.
      7 February 2020 @ 13:49
      I have must respect for Mike Howell but this feels like one of those times where the lag between filming and publication undermines the message. It would be great to have a flash update from Mike on how recent events are impacting his thinking.
    • CD
      Colin D.
      7 February 2020 @ 13:49
      must = much!!
    • AP
      Adam P.
      7 February 2020 @ 19:12
      Colin D, That's a great idea!
    • MH
      Michael H. | Contributor
      7 February 2020 @ 22:51
      - [An update] True we’ve been overtaken by unexpected events, but the real question comes down to whether this is a buying or selling opportunity? I still feel that policy makers are inflating another asset bubble and there is still some way to go. Monetary stimulus always has more effect on asset markets that the real economy. The money had to go somewhere and where depends partly on the financial plumbing and partly on investor psychology. Three things are still worth noting: (1) the size of these CB stimuli are ‘huge’. China on Feb 2nd injected RMB1.2 trillion or half of what the Fed has done since last August, but in one day! (2) cross-border capital flows remain high, which argues against a major sell-off and (3) investors are generally downbeat, with this being one of the most unloved bull markets ever! I’m happy to be a contrarian and still argue that, virus or no virus, gold goes up. It’s the best way to invest in monetary disorder.
    • BM
      Bryan M.
      9 February 2020 @ 05:32's the best way to invest in monetary disorder. What a great line!
  • JO
    Jeffrey O.
    9 February 2020 @ 03:42
    Mike, thank you for your interview and updated comments. I always enjoy watching you explain the logic behind your views and the succinct recount of the crash of 1987 was illuminating. Unfortunately, I have to disagree with your view that the market economic effects of the corona virus are behind us. I have a friend who owns a construction business in the US and he sources many materials for his building projects from China. Yesterday (2/7/2020) he had a conversation with one of his Chinese suppliers and asked when he could order additional materials for a build project. His supplier said he didn't know when his factories would start up again and it would probably be months from now. His workers are doing office work from home, but the government is not allowing them to go to work in the factories due to regional quarantines. In any case, even if the goods were produced, many of the bulk cargo shipping ports on the coast of China are closed. Ultimately, my friend will have to find alternate materials suppliers for the time being. I'm glad you addressed the effect of Chinese Lunar New Year on the Chinese business cycle. Most people don't realize that Chinese factories basically shut down for a month and a half from December through January to celebrate the Lunar New Year and allow workers to go home and spend the holiday with their families. Its a lot like Christmas and New Years vacation for elementary school children in the US. Businesses that deal with China usually order extra materials before the New Year in preparation for this period of low to no production. I think many businesses have not reported experiencing major supply problems yet because they are still working through their large Pre-New Year material orders. Once these orders begin to run out, more and more businesses will be forced to halt production of goods all over the world. Fiat, the European auto manufacturer, is a good example of this. The knock-on effects of an extended Chinese factory shutdown could be brutal for the world economy. I had not considered the extent of the dis-inflationary effect of Chinese production on the world economy and what the removal of such a dis-inflationary effect might have. I agree with Raoul Pal that buying long dated bonds (like 30 year US Treasury Zero coupon bonds) is a good way to profit from the probable market dislocation coming in the near future, but this strategy has risks. Namely, inflation and interest risks. Mike, thank you for your contrarian view as it helps me to identify risks to my investment positions. Best regards!
  • DB
    Daniel B.
    8 February 2020 @ 23:32
    thanks Michael. You seem to be one of the better contributors on Real Vision, not that there's a lack of good ones. It sort of really made me think 'the markets respond more to liquidity than they do the economy'. Seems kind of f..ked up ha ha but if that's what we're working with, that's what we're working with.
  • FB
    Frank B.
    8 February 2020 @ 21:52
    This was filmed 1 day before the city lockdowns in China started.
  • JM
    Jim M.
    8 February 2020 @ 17:36
    I may be wrong and if I am I stand corrected and apologize but hasn't Michael been warning about lack of liquidity for a couple of years? I don't understand this given that policy makers around the world (The Fed especially) have made it clear that they are hell-bent on keeping asset prices afloat.
  • KO
    Kieran O.
    8 February 2020 @ 10:42
    Michael Howell is simply the best.
  • GG
    Gary G.
    8 February 2020 @ 04:18
    EEM is heavily weighted in China, where the virus is. The emerging market dollar index is breaking out. How is EEM a long play? DXY is still moving higher despite the Fed trying to contain repo and had a solid close today. Is strong dollar not deflationary? Oil and copper are down recently. These look like deflationary conditions to me, not reflationary. Also, if capital is coming back to US from Japan and USDJPY skyrockets, how can that be bullish gold? Correct me if I am wrong.
  • JB
    James B.
    7 February 2020 @ 15:52
    Hi Micheal, Great to hear your views as always! One question - do you think the liquidity injections undertaken this week by the PBoC will mean the worst of the impact of the virus scare on markets is behind us?
    • MH
      Michael H. | Contributor
      7 February 2020 @ 22:35
      That would be my view for markets, but economies will take longer
  • DP
    David P.
    7 February 2020 @ 20:33
    That said, I love RealVision..Amazing content. And even this interview guest is great. I'm sure if he were interviewed today, he might have a different perspective..
  • DP
    David P.
    7 February 2020 @ 20:32
    EM to benefit from exposure to Chinese supply chains? Ummm….. 500 million people in China under full / partial quarantine...Might have to disagree there...
  • PU
    Peter U.
    7 February 2020 @ 13:01
    the efficacy of monetary policy is extremely limited at this stage. IMO, doubtful we see a materially stronger or noticeably stronger US or global economy by Q2 or even in 2020
  • JA
    John A.
    7 February 2020 @ 12:53
    I really think people discount the deflationary effect an asset bubble can have. Between the velocity of money going down and the leverage out there, a credit risk caused by an external event is not impossible. Powell in my eyes hasn't yet had his "whatever it takes" moment. I think he is trying to avoid going lower out of concern that they will be out of options should things turn worse. Could inflation be the end game? I think the inflation they keep looking for is the asset valuations themselves. Wage growth is struggling to tick up at 3.5% unemployment rate. The money is trapped in financial markets, only able to escape thru loans into the real world which takes back more cash than it lends out. Defaults will see that money not come back, but get destroyed from poor investment. If that happens, deflation is the first thing that happens. Maybe the government response causes the inflation they are looking for, but that comes after the initial crisis.