CrossBorder Capital

Global Liquidity Latest: It’s A Big, Beautiful ‘V’

Conference call with Michael Howell

Michael Howell gave a bullish presentation focused on how their liquidity models, which have been developed over the last 40 years, have been showing a clear V-shaped recovery - expecting risk assets to soar through the huge liquidity inflows. This liquidity is going into retail deposits, so it seems poised to go straight into the real economy. Expects the liquidity cycle to soon peak and the dollar to start to roll over. Bond performance, which has been quite resilient in recent months, should deteriorate. Meanwhile, equity valuations still look low relative to the pool of liquidity and prospective heavy bond issuance. Since the early 1990s there has been a strong correlation between liquidity levels and equity performance.
There is no evidence of the PBoC in China directly easing, which Michael believes is to maintain the Yuan-Dollar cross, but Chinese liquidity is nonetheless rising. Contrary to public belief, capital flow data shows that funds are in fact flowing back into Emerging Markets. We are about to see a major steepening of the yield curve over the next 6 to 12 months across G4 economies, driven by rising inflation and high bond issuance. Therefore, rate rise expectations are beginning to build. If yield curves are steepening shouldn’t the dollar be strengthening? - Michael shows charts to disprove this. Huge amounts of money flowed into the US following GFC looking for safe havens, mainly Treasuries and AAA corporate debt, whilst the anticorruption initiative driven by Xi Jinping forced money out of China and to the dollar. These inflows are no longer happening and explains why the dollar is peaking, which will be good news for risk assets, most notably commodities and Emerging Markets.
On gold, as it is a monetary and liquidity phenomenon, it really comes down to two players - the Fed and Bank of China. When these two powers ease the gold price traditionally rises; given that the US is easing but China isn’t we haven’t seen much movement in the price yet. As China starts to ease, which is inevitable, expect to see a much higher gold price.
On equities, the unprecedented sell-off in March has created an enormous opportunity. We have seen a huge expansion in liquidity with very low positioning to risk assets. With yields rising and the dollar falling, investors should be moving away from growth to value stocks. Very bullish on the outlook for European markets which are not at a premium. The Chinese are looking to move away from dollars expect them to go into Euros, and the huge upcoming Euro government bond issuance looks an ideal opportunity. For anyone wishing to read around the subject, Michael mentioned his book, ‘Capital Wars: The Rise of Global Liquidity’.