Liquidity, debt, and what it means for equities
In an interview earlier this month, Michael Howell of CrossBorder Capital delivered his analysis of the global liquidity environment and its implications for financial markets. His message to investors was clear: liquidity, not interest rates or economic cycles, remains the true driver of asset performance – and right now, the liquidity tide is rising. But as always, tides reverse.
A buoyant liquidity backdrop – for now
Throughout the interview, Howell’s assessment of current financial market liquidity is positive, and perhaps unambiguously so.
Howell offers several factors simultaneously injecting substantial liquidity into the global financial system:
- The U.S. Treasury General Account drawdown (post-debt ceiling) injected roughly $500 billion into money markets earlier this year.
- A weakening U.S. dollar has indirectly led to monetary easing by foreign central banks.
- China’s liquidity injection, amounting to 10 trillion yuan (~US$1.5 trillion) over six months, stands out as a particularly aggressive move.
- Declining bond market volatility, especially in U.S. Treasuries, has increased the effectiveness of collateral used in the repo markets, enabling more liquidity creation.
Together, these influences have pushed global liquidity to new highs in 2024, a dynamic clearly visible in CrossBorder Capital’s long-term charts. The liquidity trend is accelerating at an estimated pace of US$10 trillion annually – a tide that lifts asset prices, notably equities.
Why liquidity matters more than ever
Figure 1. Advanced economies debt as a percentage of domestic liquidity stock
Figure 1., reveals that at the heart of Howell’s framework is the concept of a global debt refinancing system. In this model, liquidity is not merely about money supply but about balance sheet capacity – the ability and willingness of credit providers to lend against collateral. Most transactions in today’s markets are not new investments but refinancing of existing debt. Howell estimates that fully three-quarters of all market transactions are debt rollovers.
This system depends on harmony: liquidity needs debt as collateral, and debt needs liquidity for refinancing. When that balance breaks – either through a surge in debt without enough liquidity to support it or vice versa – crises or bubbles emerge.
Howell posits that historical crises, from the global financial crisi (GFC) to the Eurozone meltdown (Figure 1.), are best understood as breakdowns in this liquidity-debt equilibrium.
The calm before the storm? Timing the cycle
Using a proprietary global liquidity cycle model (complete with a sine wave drawn back in 2000 and left unchanged since), Howell suggests the current uptrend in liquidity began in late 2022. If history holds, Howell estimates the current liquidity cycle should peak around early 2026.
That peak could mark a turning point, where the enormous volume of debt refinancings coming due between 2026 and 2028 begins to absorb liquidity, creating refinancing tension and destabilising markets. Howell projects a staggering US$40 trillion in global debt rollovers by 2027 – a sharp increase of US$4 trillion year-on-year at the margin.
The risk according to Howell: rising credit spreads, repo market stress, and asset price dislocation.
Collateral mechanics and market health
In the interview, Howell urges investors to pay close attention to collateral market health –something often overlooked by equity-focused investors. Bond volatility and repo market spreads are critical indicators. Both have come back into normal ranges recently, thanks in part to behind-the-scenes interventions by the U.S. Federal Reserve and the U.S. Treasury.
This, he believes, is no accident. Howell argues that authorities are carefully managing liquidity, using tools such as:
- Buybacks of off-the-run Treasuries
- Reverse repo account drawdowns
- Shifts in Treasury issuance toward short-dated bills, which increase monetary liquidity due to their higher turnover rate
This last tactic – dubbed “Treasury QE” (quantitative easing) or “fiscal QE” by some – effectively monetises the U.S. deficit through short-term debt issuance.
Banks and even stablecoin issuers, Howell notes, love this structure because it matches the short-term nature of their liabilities.
Strategic vs. tactical: Implications for asset allocation
With liquidity still strong and the cycle in its late upswing phase, Howell sees equities – particularly tech, financials, and small caps – as continuing to benefit for at least another quarter or two.
However, he sees clear signs that investors should start rotating toward commodities, especially as China continues its monetary stimulus. The correlation between Chinese liquidity injections and global commodity prices is “unambiguous,” according to Howell. As China stimulates its economy, expect to see commodity markets – energy, metals, and possibly food – respond forcefully.
As the cycle turns toward 2026, Howell suggests investors gradually de-risk portfolios. Defensive equity sectors like consumer staples, pharma, and ultimately long-duration bonds may become more attractive as liquidity begins to tighten and volatility returns.
Inflation hedging in an era of monetary expansion
More provocatively, Howell challenges the prevailing view that we are in an era of financial repression. Instead, he argues we are experiencing monetary inflation – a much more destabilising dynamic. According to Howell, policymakers are no longer suppressing rates; they are actively monetising debt to sustain government spending.
If he’s right, then strategic asset allocation should tilt toward hard monetary assets including: Gold, Bitcoin and Residential real estate. These are, in his words, the “dedicated monetary inflation hedges” of the modern era.
Watch what they do, not what they say
Howell’s final piece of advice for investors might perhaps be the most important: “Watch their hands, not their lips.” Central banks and governments may say one thing, but their actions – particularly in managing liquidity via fiscal channels, backdoor QE, and repo support – tell the real story.
The liquidity cycle – not GDP, not earnings, not Fed rhetoric – should be the compass guiding asset allocation.
At the moment, liquidity is still expanding, which is supportive for equities in the near term. According to Howell however we are late in the cycle – and markets may shift into a blowoff phase before 2026. Howell also believes commodities are set to gain traction, fueled by Chinese stimulus and structural supply constraints.
As 2026 nears, expect volatility to return as debt refinancing pressures mount.
If Howell is to be believed, the party’s not over, but it’s time to plan your exit.
Michael Howell is founder and managing director of London-based, CrossBorder Capital.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
