Markets rally, but Michael Howell says liquidity clock still ticking

The latest rebound across gold and parts of the equity market may look like another burst of risk appetite, but liquidity strategist Michael Howell is warning investors not to confuse a temporary reopening of the money taps with the start of a new global liquidity cycle.

Howell, founder of CrossBorder Capital, argues that recent moves by the US Treasury and Federal Reserve have postponed rather than removed the pressure building beneath financial markets. His bigger concern is that a strong global real economy is increasingly competing with financial assets for capital, leaving the underlying direction of global liquidity weaker even as policymakers provide short-term support.

That distinction matters after an extraordinary few days in markets. Bitcoin has jumped almost 20 per cent from recent lows, gold has climbed to a three-month high and Wall Street finished higher on Friday, although the S&P 500 and Nasdaq still recorded weekly losses. The US dollar has fallen sharply as investors reassess Washington’s attempts to contain rising government borrowing costs.

At the centre of the move was US Treasury Secretary Scott Bessent’s decision to at least double some buybacks of 10 to 30-year Treasury securities, after long-term bond yields surged. The 30-year Treasury yield touched 5.34 per cent this week, its highest level since 2007.

Howell believes markets may have focused less on the relatively small size of the purchases than on what Washington’s willingness to intervene says about future policy.

“What did this signal and why is this important?” Howell said in the podcast. “It signaled the fact that I think… what the US authorities are prepared to do is essentially print money.”

That is stronger language than the US authorities themselves use. Treasury describes the operations as liquidity-support buybacks designed partly to improve trading in older securities, and the scale remains tiny against the roughly $32 trillion Treasury market. The Federal Reserve also characterises its current purchases as reserve-management operations rather than quantitative easing. Since January, however, the Fed has bought almost $250 billion of Treasury bills, including about $160 billion of reserve-management purchases, while its balance sheet has risen to about $6.7 trillion.

Howell’s argument is more subtle than saying the latest Treasury buyback itself constitutes another round of QE. He believes Washington is increasingly financing itself at the short end of the bond market while maintaining abundant banking-system liquidity, allowing commercial banks to absorb Treasury bills as their balance sheets expand.

He calls the broader mechanism “Treasury QE”.

“If banks buy government debt, banks’ balance sheets expand,” Howell said. In his interpretation, government borrowing is therefore increasingly being accommodated through monetary expansion within the private banking system rather than through conventional central-bank QE.

There is evidence supporting part of Howell’s reading of the policy direction. The Fed remains committed to an ample-reserves framework, with reserves around $3 trillion, while the Treasury General Account stood close to $960 billion in mid-August. The New York Fed has also acknowledged that changes in the Treasury’s cash balance can produce substantial swings in system liquidity.

But Howell sees the present boost as tactical.

“My guess would be that this is a tactical postponement,” he said, arguing that seasonally favourable US liquidity conditions during August are likely to become less supportive towards year-end. The crucial test, in his view, will be how aggressively the Fed offsets that tightening.

That fits closely with Howell’s latest published global liquidity work. On August 11, CrossBorder Capital said global liquidity had risen slightly but was broadly flat, describing conditions as supportive but “no longer improving”. By August 18, Howell’s assessment had hardened: nominal global liquidity remained high, but momentum was continuing to fade and asset markets were becoming increasingly dependent on calm funding conditions.

This is the part of Howell’s argument that sits awkwardly beside the current market rally.

The rally itself does not necessarily disprove his thesis. Financial markets respond to changes at the margin. A sudden indication that US authorities are willing to supply liquidity can drive Bitcoin, gold and equities higher even while the longer global liquidity cycle is approaching a peak.

Howell is particularly reluctant to extrapolate the latest Bitcoin rebound into a new sustained liquidity boom.

“Am I bullish on the real economy and commodities? Yes, I am. Am I negative on liquidity globally? Yes, I am,” he said. He acknowledged that the Fed could offset the pressure temporarily but argued that doing so becomes progressively harder when economic activity itself is drawing money away from financial markets.

His proposition rests on a simple phrase he frequently uses: “All money that’s anywhere must be somewhere.” If capital is increasingly required to finance factories, AI infrastructure, defence spending, energy investment and government deficits, less is available to support ever-higher financial asset valuations.

It is an unusual problem because Howell is not forecasting a conventional recession.

Quite the opposite.

In a note published on August 14, he argued that worldwide nominal GDP growth is running at its fastest pace in more than two decades. In the United States, he estimates trend nominal growth at roughly 7 to 8 per cent, well above current 10-year Treasury yields. If that relationship begins to normalise, long-term yields have further to rise.

That creates what might be called the bad-news-is-good-news problem in reverse. Strong economic growth can sustain corporate earnings while simultaneously making bonds more competitive with equities and raising discount rates across almost every asset class.

Howell therefore believes investors should worry less about an earnings collapse than about valuations being repriced by the bond market. His modelling suggests a US 10-year yield around 5.5 per cent could push global equity price-to-earnings multiples down by roughly 10 per cent, while a substantially larger rise in yields would produce a much harsher adjustment. Those are Howell’s estimates rather than market forecasts, but the mechanism is conventional: the higher the risk-free return available on government bonds, the harder expensive equities have to work to justify their valuations.

The complication is that Washington appears reluctant to allow that adjustment to happen too quickly.

Bessent’s enlarged Treasury buybacks initially pulled long yields lower, but much of the move was subsequently reversed. Reuters reported that investors increasingly regard the intervention as temporary relief rather than an answer to America’s fiscal position, with federal debt now exceeding $40 trillion.

For Howell, suppressing long yields does not make the underlying pressure disappear. It simply determines where it re-emerges.

A reasonable probability framework would put roughly a 55 per cent chance on the current global liquidity reprieve continuing long enough to support Australian equities and the Australian dollar intermittently over the next several months

If policymakers keep short-term liquidity plentiful while financing more government spending through Treasury bills, he argues that the adjustment could instead appear through faster money growth, inflation and a weaker US dollar.

That helps explain why he remains structurally positive on gold.

Howell also attributes much of gold’s recent strength to China rather than Washington. He argues that expansion of the People’s Bank of China’s balance sheet amounts to an internal weakening of the yuan behind China’s capital controls, with Chinese demand increasingly setting the marginal global gold price.

Bitcoin is different. Howell regards it as considerably more sensitive to the global liquidity cycle, leaving it more vulnerable if his expected decline in liquidity eventually overwhelms the present US policy support.

That produces an unusually divided outlook: bullish pressure on gold and commodities, potentially further upside for Bitcoin and equities while liquidity remains available, but increasing risk to highly valued financial assets if bond yields continue climbing.

For Australia, a reasonable probability framework would put roughly a 55 per cent chance on the current global liquidity reprieve continuing long enough to support Australian equities and the Australian dollar intermittently over the next several months, a 30 per cent chance that rising global yields and persistent inflation produce a more abrupt risk-asset correction, and about a 15 per cent chance of a stronger liquidity expansion that extends the rally substantially. Australia is particularly exposed to the middle scenario because the RBA already has the cash rate at 4.35 per cent and says another increase is “quite possible”, while markets recently put about a 50 per cent probability on a November increase. Higher US and global long-term yields would make it harder for Australian borrowing costs to fall, with heavily indebted mortgage borrowers, property and rate-sensitive shares the obvious channels of transmission. The offset is Australia’s commodity exposure: if Howell is right that strong nominal global growth favours the real economy and commodities, miners and resource exporters could fare considerably better than long-duration growth and property assets.

The important distinction, then, is between liquidity level and liquidity direction.

There is still plenty of money in the global system. Howell’s own latest figures say so. What he questions is whether the amount available to financial markets is continuing to increase.

For the moment, Washington has given markets another dose of liquidity and investors have responded accordingly. Bitcoin’s surge, gold’s breakout and the weaker dollar show that markets have heard the signal.

But Howell’s warning is that the bigger cycle has not necessarily turned.

The rally could have further to run. The test will come when seasonal US liquidity begins tightening and the Federal Reserve has to decide how much money it is prepared to put back into the system.

If Howell is right, that decision, rather than the latest movement in stock prices, will tell investors whether this is the beginning of another liquidity-driven boom or merely an impressive rally near the mature end of one.