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

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.

He doesn't see Euphoria in the equity markets already?

Clear and Concise! . Thank you.

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?

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?

USD stronger, oil and copper down. Should big liquidity injection do the opposite?

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

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 .

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.

and then a virus came...

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!

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.

This was filmed 1 day before the city lockdowns in China started.

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.

Michael Howell is simply the best.

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.

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?

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..

EM to benefit from exposure to Chinese supply chains? Ummm….. 500 million people in China under full / partial quarantine...Might have to disagree there...

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

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.