Michael Howell on liquidity, central banks and the 2025 crypto bull run

Transcript

GM good morning welcome to the milk Road show The Daily crypto show that's as rare as hearing don't worry I already did the dishes I'm your host Jay Hamilton and 2025 is not really starting the way we all expected we've been talking about this everything bull that is all these things are lining up for this incredible year ahead historically q1 is one of bitcoin's best quarters so what what what gives what's going on well the answer Iz in understanding some macro what's going on with currencies what's going on with bonds some big picture items that are really having an effect right now so in order to understand that we brought on one of the great experts in the macrospace that's

Michael Howell founder of crossb capital A Global Research firm that monitors credit liquidity conditions Capital flows in over 90 economies across the world you have probably seen their charts all over Twitter you've probably seen them in our newsletter we share their liquidity chart frequently so it's a big big exciting day to have Michael join us today before we jump in we just need to take a moment to hear from our sponsors who make the show possible meet odos the defi aggregator that makes your token swap smarter faster and a whole lot easier tired of trading like it's 2019 odos finds the best prices for your swaps across 900 liquidity sources and 14 blockchains so you always get more

bang for your crypto Buck whether you're swapping setting a limit order or just avoiding gas fees like the plague oos has you covered it's like having a genius Traer in your pocket minus the coffee addiction join three million wallets already using odos to power over six billion in monthly trades start making smarter swaps today at milroad docomo Michael welcome to milk Road Show great to be here lots to talk about exciting times I'm I'm glad you're bringing the energy today because you know I'm I'm a little bit worried this uh what's this this current pullback even though in my head I know structurally nothing is changed and I'm

still feeling quite bullish on this year it's it's always a little concerning when we have a pullback like this what's what's causing the market to have such a slow start to 2025 well I think the fact is the markets never stand still and uh they also never move in a straight line and I think I rather think this year is going to be a little bit of a roller coaster ride there's a lot of uncertainties around and I think if you pinpoint two or three of those number one is what is the incoming Administration in the US going to do you know first of all about um uh fiscal spending but actually more importantly about the funding question how is that spending going to be funded and that's got to be a big big question for the US financial markets not least because

Janet I Janet Yellen uh the uh the well still the incumbent treasury secretary basically cheated if you like I mean that's probably um uh impolite way of saying that she did a lot of funding at the very short end of the market which actually helped produce quite a lot of liquidity and was one of the reasons that the S&P and Bitcoin were actually pretty good last year uh so I think there's there's that point I think the other thing that we got to think about is um what's happening in China uh that's a major uncertainty the Chinese bond market is um looking pretty volatile right now yields are collapsing and that's telling you something about the debt deflationary environment the economy is facing and if there's another thing I think to throw into that uh the

whole mix the other big uncertainty and probably perhaps in many ways the most threatening is that from about mid year you start to get this debt maturity War coming through and the debt maturity War just to pinpoint what that is that's basically the debt that was issued during the covid time uh when interest rates were very were very low near zero a lot of Corporations and governments termed out their debt they issued it or you know was issued with maturities that are starting to now come to fruition around 26 27 actually they're beginning about mid 25 so a lot of that debt that was issued at that time during Co is now coming up for Renewal and that's going

to take a lot of liquidity on the markets so these are the facts we got to look at so does this concern you this current pullback or do you think this is just natural market cycle and everything's still looking good for the rest of this year well I think you got to Divine you've got to Define shortterm and longterm on this and um markets always moving Cycles that's for sure and I think we're at a point where the cycle is not looking let's say in the near term that attractive there are a number of uncertainties I mean our view anyway was that 2025 would see a peak in the liquidity cycle was clearly a challenging fact by itself and liquidity

is one of the main drivers of uh asset markets in general but particularly crypto and uh certainly Bitcoin so we've got to pay attention to that so number one you were seeing a peak anyway uh number two as I said these other uncertainties have come through and I think to focus on maybe a couple of those I mean one is what is the Federal Reserve doing and I think you've got to uh answer that question by looking back and trying to understand what they did last year now we can look at a chart and try and understand what they were doing and if you take a look at chart seven uh the put forward that was called usfed we entitled it not qeqe what that is is basically telling us is that behind the sort of rhetoric of the FED doing so-called QT uh what

they've actually been doing in reality is injecting liquidity into markets and what you can see here is the year-over-year change in the liquidity that the Federal Reserve has been injecting uh into US money markets now clearly this is against the head LED claim that they're doing QT but you know beneath the surface they've actually been pushing liquidity in now that's a kind of wonkish uh yeah to understand that is slightly wonkish because ultimately every item on their balance sheet is not liquidity creating so they can they can shrink the balance sheet but actually liquidity can still go up and that's what's been happening and Scott Besson has been very clear in saying or accusing J palal of

electioneering and saying that a lot of these moves are actually trying to get Biden reelected so we've got that agenda or that fact but you can see from that chart that the FED impetus if you like is kind of running out a road now as we shift in towards 2025 and that line is going down and that's got to be a question over the rest of the year is whether the Federal Reserve explicitly now goes into a QE mode I think they're going to have to at some stage but they're not going to do it in the next couple of months so we've got to take that into account then I think the next thing you need to look at is basically what the treasury was doing what Janet the treasury was doing now this is again a wonkish concept but just because it's you know wonus doesn't mean to say it's

not not important and if you look at the next slide which is uh entitled US Treasury not yield curve control yield curve control this is saying they're doing some unconventional yield curve manipulation now what that means in practice is that they're issuing a lot of debt at the very very short end of the market so they've been issuing oneyear bills or bills up to onee maturity they've been issuing very short-dated coupon debt like one two threee uh notes and they've done that instead of issuing longer term coupon debt around the sort of 10-year maturity which is more normal and what that is is that's a way of actually increasing liquidity in the system it's technical I'm not going to go into it now but

let's assume it's let's accept it's happening and that's what you're seeing now again that coincided with Biden's reelection or attempted re-election one would say and again it looks as if the treasury was up to some tricks and if you add these two numbers together you get the following slide which shows the overall impetus of both the fed and the treasury in terms of what they were doing to the markets now if you see the course of that graph which is looking at uh year on-year changes interestingly a lot of that impetus is explaining the big mve in markets that we've seen in the last uh 12 months and that is fading I mean there's no question about that uh so far uh if we extrapolate that chart forwards it's basically going down back

to zero and what you've had in 2024 is a very unusual combination of an S&P that's up 25% and a gold price that's up 25% that's kind of unusual now bitcoin's clearly moved with gold uh because it's a monetary hedge but what this is really underscoring is that what we're looking at is a pure liquidity phenomena here markets are driven by liquidity and what we've had is a lot of liquidity going into the system that is questional we're questioning that over the rest of this year so uh let me pause there and say you know number one is policy in the US is not going to be as benign most likely than it as it was last year so what we would want to see

here is and what's interesting about what you said is the you don't expect the us to start any QE Q QE QT whatever you want to call it but some form of liquidity providing you don't expect that to happen in the next few months but you think that they have to do that at some point in 2025 are you confident that they will do that at some point and is that do we need that to happen in order for the markets to have a good year well I mean the answer is that we will get that because we have to get that am I confident of that I'm 100% confident of that the question is what I'm uncertain about is the timing and the reason that I'm confident of that is

that if you look and let me maybe uh try and do this with a with another slide it's on slide 15 which is looking at it's looking at a ratio between debt and liquidity in the world economy now let me just sort of maybe start on on page one and say look what we've got here is a situation where the world economy is suffering under a burden of debt okay I think everyone accepts there's too much debt in the world and in fact if you look at the complexion of financial markets the reason that financial markets are different today than what textbooks tell us is the textbook tell us that uh Capital markets are there to raise new money for investment spending well long gone of

those days I'm afraid you know very few corporations in the west actually use Capital markets to raise money these days Capital markets are there to refinance debt it's all a debt refinancing mechanism now if you're in the Tex world of cap Apex and raising money for capex interest rates are important because that's the hurdle rate for your investment but if you're rolling over debt it's rather like rolling over a a mortgage refinancing a mortgage it's not really the interest rate that really bothers you what you need is the role you've got to get that otherwise you're homeless and the same with corporations they don't get the role or governments they don't get the role they're bankrupt so they need that role and what you need for that is balance sheet capacity in the financial system now who creates that capacity or

who governs or controls set capacity is the central banks they're the ones that uh that will determine whether the banking system ultimately will expand or contract and more generally the financial system expands or contracts now to talk as the Federal Reserve has Loosely done uh in the past to say we need to shrink our balance sheet back to Historic Norms of Circa uh whatever the figure think of a number a trillion two trillion whatever they say is complete Madness I mean what they have to do is to recognize the debt problem and they have to write they have to increase the balance sheet par pursue orasure it with the amount of debt and the debt is accumulating we know rapidly because a lot of people look at debt GDP ratios and say look these things are going to

the Moon which they may well be but the main metric the most important metric is not debt GDP it's debt to liquidity because debt has to be rolled over and refinanced and that's what this chart is telling you now if you look at this chart what it explains is for advanced economies going back to 198 looking at annual data it's the ratio between total debt and liquidity take liquidity to be the capacity of the financial system to roll that debt over now when you get that ratio at a high level you get refinancing crises and those refinancing crises are Illustrated on the graph and I would venture that every single financial crisis that we can think of uh going back over that period is basically

a refinancing crisis uh whether it's the Leman crisis in 2008 whether it's the 19978 Emerging Market crisis whether it's the Eurozone banking crisis or whether it's the 19 2019 rather uh repo crisis in the US which I haven't labeled but effectively all those crises are about refinancing inadequate liquidity relative to the debt role if you're on the lower part of that diagram below the dotted line that's when you get asset bubbles because liquidity is above what's needed to roll over debt so there's Surplus money in the system and we've come through a period of abundant liqu quy as you can see and a lot of that was helped by the fact that during the covid crisis interest rates were slashed to near zero and so debt was

turned out by corporations and governments uh towards the back end of this decade in other words uh what that saying is that you know debt was reissued in let's say 2020 2021 22 and it was issued uh to matur in 26 27 28 whatever actually that debt maturity war begins about the middle of this year it's coming back now the reason for citing this and the reason for me mentioning central banks is that central banks control the liquidity pool what we need is a debt liquidity ratio that is below that dotted line the projections show that assuming the central banks do nothing what's happening to that debt liquidity ratio is going up because a lot of that debt maturity wall is coming

in for repayment and so central banks have got to be alert to that unless they want financial markets to crash or to uh uh you know to have volatility they've got to be accommodative so all this talk about continued uh QT is this complete nonsense in fact uh they're going to have to do something and that's what central banks normally do I mean QE is not a new invention it's been there since you know you know if eternity ever since central banks have been there that's what central banks do that's their job they expand their balance sheets so so this so what we're seeing on this chart on the far right side and for those listening on the podcast the you're showing the projection of what will happen to the debt liquidity ratio if the central banks don't get involved

if they don't do some sort of QE and so basically what's that showing is it's showing it's it's it's an upward line it's showing that it's going to intersect with the the red dotted line which is basically that do not go here danger zone don't cross this otherwise we're just going to enter another financial crisis which every Central bank's entire job is to avoid a financial crisis you're essentially saying they have no choice like they that's why you're 100% confident that the us is going to do something you just don't it's the timing that you're you're saying it's not just the US is everyone is going to have to do this but the Federal Reserve is the most important Central Bank and they will doing they they will do it now let me give you I mean this is the uncertainty is when

right not if is when and that's why markets are going to be volatile the other side of when is clearly very very bullish for financial assets and for assets like gold or Bitcoin that are dedicated monetary Hedges now I want to show you another uh reason that this is going to happen is if we take a look at uh maybe slide six which is going back to China now China is the other elephant in the room that I mentioned and you know you want to treat China with great caution near term because if you look at this chart what it's showing is a chart of the Chinese bond market at the 10-year bond Benchmark bond in China and you can see uh towards the right hand

side of that graph that the orange line which is the yield is collapsed uh in the course of the last few weeks last four or five weeks you've had uh you know something like uh uh you know what a 200 basis point Sorry 200 20 basis point drop in yields which is uh given the fact that we're not skirting with 1.6% Chinese yields uh you know what we're probably historically used to in Japan that's quite a big move and the reason that's happening is that China is seeing debt deflation now the reason that China is seeing debt deflation is that China has a problem and that problem is called the US dollar and China has always tried to Shadow the US dollar with the Yuan currency China is effectively a

dollarized economy and is trying desperately in the medium- term to get off the dollar hook but it can't uh in the short term and as the dollar goes up the Chinese are compelled or feel obliged to basically move up with the US dollar the strong dollar is putting huge huge strain on the Chinese Financial system and it's causing the Central Bank The People's Bank to extract liquidity as rapidly as it can from the money markets to try and hold the currency up now the more that it squeezes domestic monetary conditions the more that the Chinese economy suffers and the more the Chinese economy suffers the more investors pile into government bonds because they are the safe asset and

hence yields and government bonds drop so this is an ominous sign and is telling us there is debt deflation now that cannot go on and as you rightly say central banks are in the business of protecting their financial systems uh China's Central Bank is no different and what will have to happen at some stage is China must devalue or there has to be some deal done with the US whereby uh China is able to uh expand liquidity significantly now that may come in the form of a deal that allows China to devalue against gold and that will allow the dollar maybe to go up against gold as well while maintaining a Yuan US dollar cross that's not far away from where we are now but ultimately that

backdrop is one of increased monetization now I am confident that monetization is occurring the medium term because it has to China needs this desperately uh because they're suffering debt deflation the us will have to face that uh Prospect not just because of the debt maturity wall but because if you extrapolate forwards the US government deficit is likely to remain large despite the best efforts of Elon Musk and Co it will remain large and that debt is broadly speaking uh such a burden it will have to be monetized so you're going to get monetization in the medium term and therefore what you come back to is a view that says you know we may get more High Street inflation

that's not necessary I mean I think that actually caveat could be uh that if you see a policy of drill drill drill as Donald Trump promises oil prices may stay depressed and in that environment High Street inflation may not may be lesser a problem than people think but you will get monetary inflation monetary inflation is not High Street inflation Bitcoin and gold are not Hedges against High Street inflation they are hedges against monetary inflation against devaluation of paper monies and that's what ultimately you're getting now with that in mind the question is you know what are we seeing now in the in the markets and what does that mean for things like Bitcoin well if you take a look at chart 16 what that's showing is

the long-term relationship and this is you know again maybe a wonkish graph for people that are not used to this but this is looking in logarithmic terms of a chart of the Bitcoin price on the leftand AIS in in log terms against the pool of global liquidity in dollars along the bottom and what the two black lines that go through the orange dots which are the data points show is there's a fairly meaningful relationship between those two things and in other words Bitcoin is or has a compelling and strong relationship with liquidity and I think liquidity is going up because monetary inflation it's monetary inflation in other words and debt has to be monetized now if you look at the

following chart that shows where we are in terms of a relationship ship that we've explored closely looking at the data between Bitcoin and Global liquidity and let me just explain this because it's a critical thing to understand and what it's showing is the orange line is is Bitcoin and it's the six week change in Bitcoin now why have I chosen six weeks the reason for choosing that is that it takes the noise out of the data you know Financial assets are noisy uh they jump around obviously on a daily or hourly basis but what you want is try and get some idea of the underlying movements the underlying Trends and I've choosen chosen six weeks could have chosen four

weeks or five weeks or seven weeks or eight Lees but I chose six so uh that's either right or wrong and then what I looked at is equivalently the same movement in global liquidity shown in black but the difference here is the global liquidity Series has been shifted forward by 3 months which is 12 13 weeks so what you can see here is there seems to be a lead time a consistent lead time on that data now without going into the uh the sort of mathematics of of all this uh because there's there's a lot of math behind this but if you look at the following chart which is probably the simple way of understanding this this is a a a mathematical relationship that is estimated statistically from models and

it shows the response of the Bitcoin price to a liquidity shock and the data along the bottom the timeline along the bottom is measured in weeks and what that's showing is that the peak responses seem to line up almost exactly with that previous chart now this is a a sophisticated or whatever robust but sophisticated methodology uh it's using what is called in mathematical statistical PS Vector Auto regression model and it basically shows that there is a very nice plausible uh and consistent relationship tradeoff between Global liquidity and Bitcoin so it's saying that absolutely it is one of the

critical things to understand when you're when you're looking at Bitcoin what we did is we explored the factors that go into driving Bitcoin and we put those together in a pine chart which is shown in the following slide and what that says is that if you decompose the systematic influences on bitcoin you basically find these elements now let me just explain those because I think they're important to understand age clearly great great the yeah this is clearly with the intention of saying that Global liquidity is the major driver in the short term there is clear uncertainty about the path of global equility for the reasons I've said China

and the FED are the big big players and we're not sure what they're doing in the in the short term but in the long term they're going to have to come to the party big time and that's why these Hedges are critical to have in portfolios what drives Bitcoin is a combination of global liquidity which this is the systematic the non-noisy bids so I've got to you know one's got to accept that there's noise on top of this but systematically the signals that one can extract show that Global equility is about you know something like two fths or 40% of the of the factors you've also got other elements in there now the other elements uh of note are first of all the gold price and what that's basically telling us is and

this may be an influence that also doubles up on liquidity but if the gold price is strong you also tend to see Bitcoin being strong so the two tend to move together and that rather odd component that you see there which is the ratio between gold and Bitcoin is something that again which may be slightly wonkish but it's if you're a statistician you'll see there's something which is called an error feedback mechanism going on now what I mean by that is that what happens if the gold price goes up by 100% And Bitcoin only goes up by 10% you'd say that gold is overshot so what you've got to do is to look at the equilibrium relationship between them and what that component is saying is telling us is that gold and

Bitcoin tend to move together they correlate closely but sometimes one gets out of line with the other so there's got to be an adjustment back so one of the things that you've seen for example in the last few weeks is that gold has been falling but bitcoin's been going up now actually in contrast the reverse happened about 3 months earlier gold one h a Bitcoin didn't so there's an interaction and that's what that term says so you've got to look at this feedback effect and then the last impact is investor risk appetite and that's to say that you've also got to bear in mind that uh maybe to an extent rather unlike gold or unlike alternative assets uh Bitcoin does perform like a risk asset and therefore there's an element to say

that if you know investors are spooked by geopolitical events or whatever it may be or bad inflation numbers like any other asset is going to come down or go up accordingly and therefore risk appetite is also an element but that's only about you know one one fifth of the of the input so these are the factors that are important and you know what it's saying is that uh you know broadly let's say four fifths of the influences outside of normal asset markets uh one definitely is related exactly to as I say through risk risk appetite yeah I love love it's so helpful to see a chart like this to simplify what is the systematic influences on bitcoin and it's

interesting to me that Global liquidity 40% feels low to me on global liquidity I I would have thought it would be higher than that but I guess the gold price and the gold BTC ratio are also quite tied to Global liquidity as well so maybe that's where those factors come out but bear in mind this is the breakdown of influences it doesn't say what the multipliers are so in other words that if you get as you look at that if you look at that previous chart you'll see there that you know a 1% shock uh to liquidity can cause much much bigger increases in the Bitcoin price so liquidity may go up 10% but Bitcoin can go up 50% okay so I know you don't have a crystal ball and I know you

can't predict the future but I'm going to ask you to to to do your best for us what where how do you see the rest of 2025 playing out what's your thesis take us through maybe quarter by quarter well I mean that's a that's a big ask but I think the first the first quarter maybe the first and second quarters could be quite tricky because I think this is where you'll face a lot of these uh where you'll confront a lot of these problems I think there is a question mark from midyear generally because of this debt maturity wall but hopefully by about mid year we may get some clarification about what the Federal Reserve and maybe what the treasury going to do and I would surely think by mid year we're going to get further

insight as to what's happening in China so I would say that the first half year to my mind is going to be a lot more uncertain you know my strategy in my investment strategy is longterm I mean I definitely own monetary inflation Hedges like gold or Bitcoin uh I think these are uh fantastic assets to hold in the very short term I mean I'd be thinking much more of you know being a lot more conservative and maybe looking at something like a two-year note but I mean that's only because I think there could be some narsist happening in the short term and in terms of you what am I doing tactically uh I'm thinking that you know if I can pick up Bitcoin below 70,000 uh I'll certainly do that I may be you know that may be a long shot to hope for that but I think it's a

volatile asset class and maybe it comes back but that's what I would be thinking uh that's not a prediction but that's just a tactical you know Line in the Sand what do I think Bitcoin can do over over the medium term I mean you know I've been on records several times I think on a three-year view I think it could easily be 250,000 so you know it's I think the trend is definitely there and people ought to own it I'm there's no question about that because monetary inflation is here and what average investor and maybe what's you know the a average Joe out there doesn't understand is that the funding environment is so dire for governments that they've just got to monetized look at the fiscal deficit I mean how often do you see 7% fiscal

deficit in a in America you don't you don't see that very often I mean this is a big funding issue this has got to be funded the tax base is squeezed dry spending is going up because of Defense because of welfare payments Etc you know the Social Security fund will be will be you know emptied by I world you choose your number but I mean it's upcoming in America so and and you're not you're not the first person to say uh Bitcoin could go as low as 70k and that would be an incredible buy if it went that low I I mean obviously may maybe it does maybe it doesn't but I think the the point that you're making which is really a point that I want all of our our viewers and our listeners to hear is be prepared for a lot of volatility through this

next quarter possibly second quarter as well do you think that there's a possibility so you seem to have this midyear Mark in your mind is there a possibility that Trump moves faster than that and things happen within within the first 30 days of in office with the first 100 days of his office or is there a reason why you really have that midyear Mark well I think the I mean the reason for the midyear Mark is that the Federal Reserve is going to have to do something uh I think in the in the near term it's G it's going to have to be clear bessent has got to be clear about how he changes the funding arithmetic I mean he's been he's been very critical both of JP palal uh and of Janet uh you know accusing Janet of effectively operating policy for an Emerging Market

rather than the us as he you know I mean both he and you know even dran said that the sort of numbers that are coming out of the treasury are sort of more akin to a Latin American economy although we got to be careful what we say here because clearly Argentina has tged this act up significantly but you know th those are the risks and you know the big question is when you start to get funding I mean funding is going to I mean you're looking probably by about Q2 of seeing some serious funding questions emerging because you're getting the tax payment system of tax receipts are really going to come in strongly around April time so you've then got May June to think about and that's when funding is going to start to come through again uh or going to call call on the market so he's got

to be clear about whether he's going to go down the bill route still whether he's going to fund at longer term uh maturities as he's promised and that that's one question and then I think the other question which is a much much bigger question is you know what is the Federal Reserve do about QE does it restart I think it's got to that's my view if you look back at the repon markets which is really what this is all about at the end of the day the repo markets are seeing increasing tensions if you look at sofa rates which is basically the the the headline or the anchor interest rate in the system not fed funds it's really sofa rates that's the key thing they're the repo rates and they're blowing out relative to Fed funds that spread is widening uh

systematically or continuously if you start to see big jumps in that spread between Sofer and fed funds it tells you there are funding tensions in the markets we've had a notable number of those uh through 2024 but interestingly 85% of the jumps in that spread the worrying jumps in that spread occurred since July of last year so you're seeing an increasing number and that's telling us that things are getting tighter so the FED has got to start thinking about this pretty seriously uh sooner rather than later so those are issues then I think if you stretch this out longer term uh Scott besson's been very clear that what he would like to see is some reset in the global uh Financial

architecture uh talking maybe in terms of a brettonwoods 2 now uh I don't know what shape that would take but my view would be that ultimately out of that because it's in everyone's interests and needs is you're going to have to have some form of monetization and I think that means a much higher gold price now if you get a higher gold price you're going to get a higher bitcoin price but let's see yeah it's uh I mean it it it all sounds great that the challenge that with with all investors is just knowing how to H how to time it and and when this is all going to happen and it's really it's really nice to have you on the show Michael because you really point out how

how many of these big government Central Bank factors are impacting the markets and a lot of us don't pay attention to that on a regular basis which we really should reason why you guys should follow cross Gorder capital on Twitter we'll make sure we put the link in the show notes Michael thank you so much for joining us today thanks for your time it's been an absolute pleasure that's great yeah I mean take a look at Capital Wars our substack which is um maybe a good routine yeah for sure we'll also put a link to that in the show notes as well it's a it's a great read thanks for listening in everybody have a wicked awesome day as always if you liked today's episode please hit subscribe cribe and make sure you follow us so you

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