The Liquidity Cycle Is Turning Down (Here's How) | Michael Howell
Why It Matters
A turning liquidity cycle signals a shift from risk‑on assets to defensive holdings, directly affecting portfolio performance and capital allocation decisions for investors and fund managers.
Key Takeaways
- •Global liquidity cycle peaked late 2023, now turning down.
- •Fed's balance sheet not true liquidity gauge; liquidity creating components flatten.
- •Asset allocation shifts: commodities up, tech down, move toward defensive assets.
- •China adds liquidity, diverging from rest of world, influencing gold prices.
- •65‑month liquidity cycle predicts market phases; real economy lags 15‑18 months.
Summary
Michael Howell of Capital Wars explains that the global liquidity cycle, which has driven the three‑year bull market since October 2022, reached its apex in late 2023 and is now losing momentum. Using his proprietary Global Liquidity Index – a $190 trillion aggregate of savings and credit flows across central banks, shadow banks and market infrastructure – he identifies a 65‑month (five‑to‑six‑year) refinancing cycle that peaked around Q3‑2023 and is now turning down, a pattern that typically precedes risk‑asset weakness.
He argues that the Federal Reserve’s balance‑sheet headline figure is misleading; when stripped of non‑liquidity‑creating items, Fed liquidity has essentially flat‑lined and may even contract as the new chair, Kevin Walsh, signals balance‑sheet reduction. Meanwhile, China’s PBOC is injecting fresh liquidity, a divergence that explains recent gold price spikes more than a broad “great debasement.” The data also show a nine‑month lead time between liquidity peaks and market performance, with Bitcoin acting as an early warning indicator.
Howell maps the liquidity cycle onto asset‑allocation phases: the upswing favored equities, the current peak pushes investors toward commodities and resource stocks, and the downturn calls for defensive positions such as utilities, consumer staples, cash, and eventually long‑duration sovereign bonds. He notes that the real‑economy cycle lags the liquidity cycle by roughly 15‑18 months, meaning the broader economy may not feel the slowdown until mid‑2025.
For investors, the message is clear: re‑balance away from high‑beta tech and growth equities, increase exposure to commodities and defensive sectors, and keep liquidity reserves ready for a potential shift into cash and long‑duration debt as the liquidity trough approaches. Monitoring central‑bank liquidity operations, especially in the U.S. and China, will be crucial for timing these transitions.
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