MICHAEL HOWELL | Supreme Court, War, Warsh, & China Risks Equals Gold!

Gold and Market Liquidity Insights

Introduction to Gold Valuation

• The speaker expresses a bullish outlook on gold, suggesting that its fair value can be assessed against federal and world debt levels.

Discussion with Michael Howell

• Gary Bow introduces Michael Howell, an expert in analyzing global liquidity flows, emphasizing the current market's uncertainty and mixed signals.

• Howell highlights the importance of understanding liquidity cycles and their implications for investment decisions over the next 12 months.

Supreme Court Decision Impact

• The conversation shifts to a recent Supreme Court ruling against Trump tariffs; Howell notes it is not bullish for markets but remains uncertain if it's bearish.

• He mentions that while the ruling was selective, there are still alternative measures available to authorities despite this decision.

Market Reactions to Tariff News

• Following the announcement, gold and silver prices have increased; Howell suggests this reflects a narrative around debasement rather than fundamental market drivers.

Concerns About Deflation from AI

• Investors worry about potential deflation due to AI advancements; however, Howell believes liquidity issues are more pressing than AI's impact on deflation.

• He argues that we may be at a peak cycle moment, indicating a possible inflection point in market trends.

Historical Context of Market Cycles

• Howell draws parallels between current market conditions and past bubbles (e.g., Japanese real estate), asserting that mean reversion is likely to occur again.

Current Market Dynamics

• There is significant capital movement away from tech stocks towards resources and hard assets, despite overall calmness in market indices.

Market Trends and Federal Reserve Actions

Current Market Reallocation Trends

• The speaker suggests that the current market reallocation is not just a temporary blip but a potential theme for 2026 and beyond, emphasizing the cyclical nature of these phenomena.

• There is a noted shift from technology stocks to resource-based investments, although the tech index (e.g., NASDAQ) has not yet shown significant declines.

• Resource sectors, particularly mining, are perceived as undervalued compared to underlying metals, indicating potential for growth despite inherent volatility.

Investor Concerns and Fed Chair Nomination

• Increased investor volatility has been observed following Kevin Worsh's nomination as a hawkish candidate to succeed Jerome Powell as Fed chair, with expectations of no further rate cuts or easy money policies.

• The speaker believes that while Worsh may project toughness to Congress, his actual ability to implement significant changes will be limited.

Challenges Facing the Federal Reserve

• The speaker argues that Worsh's capacity to shrink the balance sheet significantly is constrained by recent experiences in liquidity management within U.S. money markets.

• A notable decline in Fed liquidity inflows caused disruptions in repo markets, prompting the Fed to initiate new reserve management purchases akin to quantitative easing (QE).

Debt Market Dynamics

• The discussion highlights excessive debt levels post-Great Financial Crisis (GFC), with U.S. federal debt increasing fivefold while dealer banks' trading capacities have halved.

• Potential turmoil in government bond markets poses risks that the Federal Reserve cannot afford; thus, maintaining a large balance sheet becomes crucial.

Interest Rate Implications

• The speaker expresses skepticism about reducing the balance sheet due to credibility concerns for the Federal Reserve each time it must intervene in financial distress situations.

• While there may be discussions around cutting interest rates by approximately 100 basis points under Worsh’s leadership, questions arise regarding their actual impact on income distribution between government and private sectors.

Interest Rates and Economic Uncertainty

The Complexity of Interest Rates

• The discussion highlights the ambiguity surrounding interest rates, questioning whether lower rates will stimulate or slow down the US economy.

• It is noted that while areas like housing may show clearer effects, the overall economic impact remains uncertain.

Geopolitical Tensions and Market Reactions

• A shift to geopolitical concerns is introduced, focusing on US military buildup near Iran and joint exercises by China and Russia in the same region.

• The potential for war raises questions about its second-order effects on markets, prompting speculation about investor behavior.

Expected Market Responses to Conflict

• In the event of conflict, it is anticipated that the US dollar would strengthen while commodity prices could surge.

• Historical trends suggest gold prices might rise due to increased tension in regions like Iran, serving as a barometer for market reactions.

Historical Context: Lessons from 1935

• A historical cartoon from 1935 illustrates concerns over securing critical minerals necessary for armaments before World War II.

• This serves as a reminder of how nations raced to secure resources during times of impending conflict.

Investment Insights During Crisis

• Reflecting on past economic conditions during crises, investing in critical minerals could yield significant returns even amidst widespread financial distress.

• There’s an expectation that capital flows will increasingly favor mining stocks and strategic mineral investments as risk assets become less appealing.

Stock Markets and Wartime Dynamics

• The conversation touches upon how stock markets often react during wartime; they can serve as predictors of conflict outcomes while generally rising amid government spending increases.

• It is suggested that equity markets reflect monetary inflation driven by government expenditures related to military actions.

Geopolitical Risks and Market Liquidity in 2026

Geopolitical and Liquidity Concerns

• The speaker identifies geopolitical risks as an ever-present concern for markets in 2026, suggesting that while liquidity issues are not yet critical, they are trending in that direction.

• A disconnect exists between rising debt levels and the available liquidity in the system; this gap must be addressed to avoid financial crises. If liquidity decreases while debt increases, it could lead to significant market disruptions.

Importance of Debt Refinancing

• The necessity for refinancing existing debt is emphasized; without sufficient liquidity, refinancing becomes problematic, potentially leading to a financial crisis. This situation can arise if central banks tighten monetary policy or if liquidity is diverted elsewhere.

Asset Allocation Cycle Insights

• The speaker introduces an asset allocation cycle that reflects investment strategies based on economic phases: equities during upswings (risk-on), cash during downturns (risk-off), commodities at peaks, and government debt at troughs. Understanding these cycles is crucial for strategic investment decisions.

• Current positioning indicates we are nearing the peak of the cycle where commodities dominate; however, a transition towards cash is anticipated soon as liquidity indicators suggest a shift may occur within months.

Global Economic Cycles

• The global equity cycle exhibits cyclical movements over five to six years, aligning with average debt maturity durations worldwide; this suggests we are currently experiencing a low inflection point following a peak around late 2025. China’s unique economic position is noted as critical for investors focusing on gold and precious metals.

Regional Economic Analysis

• In terms of regional analysis:

• The U.S. economy appears advanced in its cycle and may be entering a speculative phase; thus, reducing equity exposure is advised.

• Resource sectors remain attractive investments despite overall reductions in equity holdings across various sectors like technology and finance. Emerging markets show similar patterns but lag behind developed economies like the Eurozone by one step in their cycles.

Cyclical vs. Defensive Stocks: Understanding Market Dynamics

Overview of Business Cycle Indicators

• The discussion begins with the distinction between cyclical and defensive stocks, highlighting their relationship to the world business cycle as represented by various economic indicators like the US PMI and surveys from Japan, Germany, and the UK.

• A graph overlays cyclical stock performance against defensive stocks, referencing Stanley Druckenmiller's assertion that market internals are more predictive than economists' forecasts.

Economic Insights and Market Behavior

• The speaker emphasizes that current data indicates a strengthening business cycle, noting that robust economies do not always correlate with strong financial markets due to capital allocation differences.

• A chart comparing global liquidity with the real economy shows inverse relationships; when one surges, the other typically declines, indicating shifts in investment focus between real economy and financial markets.

Capital Expenditure Trends

• As economies recover, funds shift from financial markets back into working capital for investments such as CapEx (capital expenditures), which is currently on the rise due to demands from sectors like AI.

• The decline in liquidity suggests an uptick in economic activity driven by increased CapEx funding needs.

Central Banks and Economic Outlook

• While some central banks are tightening policies marginally (e.g., Australia and Japan), this does not significantly impact overall economic trends; rather, a stronger real economy is driving changes.

• This positive outlook for commodity markets aligns with late-cycle investment strategies as demand increases.

Consumer Sentiment vs. Economic Data

• A question arises regarding consumer sentiment contrasting with stronger economic data; despite positive indicators, consumer perspectives remain negative due to job losses attributed to AI advancements.

• Structural changes within the U.S. economy contribute to a K-shaped recovery where asset holders thrive while those losing jobs struggle financially.

Future Growth Projections

• Government spending is expected to boost economic output moving forward; while growth may not be explosive, it remains decent based on recent data trends.

• There’s optimism about reviving consumer spending alongside improving economic conditions; however, industry remains a larger user of liquidity compared to consumers.

Understanding Liquidity Cycles: China vs. US

Overview of Liquidity Cycles

• The speaker discusses the importance of understanding liquidity cycles in both China and the US, highlighting a chart that illustrates these cycles.

• Data presented is in index form, reflecting rates of change and underlying momentum related to liquidity growth through a complex algorithm.

• In the early 2000s, China's liquidity cycle closely aligned with that of the US, although China's was more volatile due to efforts to align its financial system with the dollar.

Breakdown of Recent Trends

• A significant breakdown in alignment occurred around 2013, leading to distinctively opposing liquidity cycles between China and the US.

• The shift coincided with China's decision to stop using reserves for purchasing US Treasuries and instead start buying gold, marking a pivotal moment in their economic strategy.

Implications for Gold and Global Markets

• The speaker suggests that current market dynamics may be more influenced by China's actions regarding gold than by global debasement concerns.

• While global debasement could become an issue later on, it is not currently driving market trends according to the speaker's analysis.

The State of Cryptocurrency Amidst Changing Liquidity

Current Crypto Market Conditions

• A chart analyzing Bitcoin shows it is currently underperforming; this includes data from Bitcoin, Ethereum, and Solana as a composite measure.

• Changes in global liquidity are shown as a lead indicator for cryptocurrency prices; crypto is identified as highly sensitive to liquidity conditions.

Predictions Based on Liquidity Trends

• The speaker warns that weakening liquidity conditions could signal trouble for cryptocurrencies, indicating they may act as an early warning sign for broader asset classes.

• As central banks tighten policies amidst stronger economic conditions, other asset classes may also feel adverse effects similar to those seen in crypto markets.

Signals for Transitioning Investment Strategies

Monitoring Signals for Cash Movement

• A question arises about what signals investors should look for when considering moving assets into cash given current market conditions.

Importance of Understanding Liquidity Conditions

• The speaker emphasizes that understanding liquidity conditions is crucial but acknowledges it can be challenging due to data accessibility issues.

Bond Markets and Their Connection to Liquidity

Analyzing Bond Market Dynamics

• Discussion shifts towards bond markets which are closely linked with overall liquidity conditions; changes here can reflect investor sentiment towards riskier assets versus bonds.

Term Premium Insights

• The term premium indicates risk premiums demanded by investors holding bonds; strong liquidity typically leads investors away from bonds toward riskier investments.

Understanding Global Liquidity and Market Dynamics

The Current State of Liquidity

• Discussion on the perception of a global debasement trade, contrasting it with tightening liquidity conditions as indicated by the term premium.

• Introduction to the yield curve as an alternative indicator for assessing liquidity, highlighting its complexity and mathematical nature.

• Observation that the yield curve inflection tends to follow changes in liquidity with a lead time of about nine months.

Predictions on Risk Assets

• Anticipation that the US yield curve will peak and inflect lower around mid-year, suggesting caution regarding risk assets during this period.

• Notable correlation between predicted market volatility and upcoming midterm elections.

Crypto vs. Gold: Diverging Trends

• Examination of the contrasting performance between crypto markets (slumping) and gold (stabilizing), raising questions about underlying market dynamics.

• Stability in bond markets contradicting claims of significant debasement; only Japanese term premiums are trending higher.

Understanding Chinese Influence on Markets

• Analysis indicating that global liquidity is tightening due to a recovering real economy, which is drawing liquidity out of systems.

• Inquiry into why gold prices are rising despite tightening liquidity; suggests influence from China's monetary policy.

Chinese Monetary Policy Impact

• Presentation of data showing substantial daily liquidity injections by the People's Bank of China (PBOC), amounting to approximately one trillion USD over the past year.

• Explanation that Chinese investors are seeking inflation hedges through gold due to restrictions on crypto investments following recent regulatory actions.

Gold Price Dynamics Explained

• Chart analysis indicating targeted increases in gold prices within China, reflecting strategic monetary policies aimed at boosting gold's value.

• Discussion on how real interest rates inversely affect gold prices, noting a disconnect since 2023 labeled as "the great debasement," which may actually be attributed to Chinese economic factors.

Gold Market Dynamics and Global Economic Trends

The Role of Central Banks in Gold Accumulation

• A significant portion of gold is being taken from the private sector, indicating a shift in market dynamics.

• Governments worldwide are monetizing their debt, which is a long-term trend; however, this isn't currently driving the gold market.

• The immediate driver for gold demand is central banks purchasing physical gold, particularly China encouraging its populace to invest in gold as an inflation hedge.

Historical Context and Future Predictions

• There’s potential for retail and institutional investors to return to holding substantial amounts of gold, reminiscent of the 1970s when portfolios typically included 10-15% in gold.

• Current conditions mirror those of sustained monetary inflation seen historically, suggesting a return to higher gold investments.

China's Economic Strategy and Its Impact on Gold

• China faces challenges with its debt-to-liquidity ratio similar to Japan's historical issues; high debt levels strain financial systems.

• Japan has managed its situation through aggressive monetary policies; China is beginning this process but has further to go.

International Monetary System Shifts

• China aims to create an alternative settlement system independent of the US dollar, which will take time and effort.

• For credibility in its monetary system, China must accumulate significant amounts of gold since it lacks an international bond market.

Concerns About US Debt and Global Economic Stability

• The US debt nearing $40 trillion raises concerns about sustainability without austerity measures amidst rising unfunded liabilities due to aging demographics.

• With no current recession or war yet high spending levels akin to wartime conditions, questions arise regarding future economic stability.

Economic Challenges and the Future of Gold

The Burden of Aging Demographics

• The speaker discusses the significant challenge posed by aging demographics, emphasizing that politicians are currently unwilling to address this issue.

• Kicking the can down the road is seen as the only viable option, leading to increased debt and a larger balance sheet for financial institutions.

Liquidity Expansion and Its Implications

• The hope of reducing the Fed's balance sheet is described as unrealistic; liquidity will continue to expand, which is bullish for precious metals.

• Current market conditions reflect China's debasement, contributing to rising gold prices.

Future Projections for Gold Prices

• The speaker predicts that gold could reach $10,000 an ounce later in this decade and potentially $15,000 by mid-next decade.

• Long-term projections suggest gold prices may soar to $35,000 an ounce within 25 years due to ongoing monetary inflation pressures.

Investment Strategies Amid Economic Trends

• Emphasis on investing over the long term in assets like gold as a hedge against inflation; current economic policies necessitate spending due to welfare state obligations.

Key Takeaways and Resources

• Viewers are encouraged to explore resources related to metals and mining through Substack at metalsanders.substack.com.

• Michael Howell shares his insights on liquidity cycles and recommends buying gold during market weaknesses.

Connecting with Michael Howell's Work

• For further engagement with Michael’s research, viewers can visit Capital Wars on Substack or glindexes.com/crossbercap.com for institutional services.

• A book titled "Capital Wars" provides deeper insights into liquidity indexes and their impact on markets.