Michael Howell

Around the peak, you would typically see commodity markets exploding upwards... resource stocks, energy stocks outperforming, beginning to see some evidence of utilities beginning to outperform and investors starting to reach towards stable demand consumer staple stocks. As the global liquidity cycle rolls over from speculation to a defensive posture, capital rotates out of long-duration growth assets and into cyclical value (energy/commodities) and defensive value (utilities/staples) that offer stable cash flows. LONG. Late-cycle and defensive sectors historically outperform as liquidity momentum slows and the real economy absorbs capital away from financial markets. A sudden re-acceleration of central bank quantitative easing could cause growth and tech stocks to resume their market leadership, leaving defensive sectors behind.

As that money comes into the system, it's going into risk assets and is going into gold as a monetary inflation hedge. So, that line likely is going higher. Gold has decoupled from US real interest rates and is now being driven by Asian liquidity. As the PBOC prints money, Chinese citizens and institutions are buying gold to hedge against domestic monetary debasement. LONG. The marginal pricer of gold is now Eastern liquidity, meaning PBOC easing will continue to drive gold higher regardless of what the US Federal Reserve does. If China successfully stabilizes its real estate market and economy, domestic capital might rotate out of gold and back into property or other local assets.

Around the peak, you would typically see commodity markets exploding upwards... resource stocks, energy stocks outperforming, beginning to see some evidence of utilities beginning to outperform and investors starting to reach towards stable demand consumer staple stocks. As the global liquidity cycle rolls over from speculation to a defensive posture, capital rotates out of long-duration growth assets and into cyclical value (energy/commodities) and defensive value (utilities/staples) that offer stable cash flows. LONG. Late-cycle and defensive sectors historically outperform as liquidity momentum slows and the real economy absorbs capital away from financial markets. A sudden re-acceleration of central bank quantitative easing could cause growth and tech stocks to resume their market leadership, leaving defensive sectors behind.

The gold-oil ratio historically averages 20:1. With gold at 4000-5000, that implies oil above $200/barrel. Oil looks cheap relative to gold, and rising liquidity needs from a strong economy support higher oil prices.

Around the peak, you would typically see commodity markets exploding upwards... resource stocks, energy stocks outperforming, beginning to see some evidence of utilities beginning to outperform and investors starting to reach towards stable demand consumer staple stocks. As the global liquidity cycle rolls over from speculation to a defensive posture, capital rotates out of long-duration growth assets and into cyclical value (energy/commodities) and defensive value (utilities/staples) that offer stable cash flows. LONG. Late-cycle and defensive sectors historically outperform as liquidity momentum slows and the real economy absorbs capital away from financial markets. A sudden re-acceleration of central bank quantitative easing could cause growth and tech stocks to resume their market leadership, leaving defensive sectors behind.

The real economy remains strong and is draining liquidity from financial markets, which combined with Chinese stimulus will continue to boost global commodity demand.

The Bank of Japan's reluctance to raise short-term rates while long-end yields rise leads to effective debt monetization, which will cause the yen to continue selling off.

Strong US nominal GDP growth of 6% to 8%, driven by fiscal spending, AI, and deglobalization, will pull long-term bond yields higher, potentially testing 6%.

Gold's rally is driven by the PBOC injecting liquidity to devalue the yuan internally while maintaining the external peg. Chinese retail, locked out of crypto, floods into gold via the Shanghai Gold Exchange, now the marginal price setter. Future Western monetization of debt adds to the case. Buy gold and silver on weakness as monetary inflation hedges.

The TIPS market implies 10-year inflation of around 2.6%, but Howell believes the Fed will not achieve its 2% target and inflation will be higher, making TIPS a good hedge. He calls the 2% target 'fantasy.'

I think the second half year may surprise us in terms of some firmness in the dollar. If we're moving to a risk-off environment, investors will like this comfort of US safe assets. While the US administration may try to talk the dollar down in the near term, structural capital outflows from Asia into the US and a global flight to safety later in the year will overwhelm political rhetoric. LONG. The US dollar will benefit from its status as the ultimate safe-haven asset when the global liquidity downturn triggers broader market turbulence. Coordinated global central bank intervention to weaken the dollar, or a massive acceleration in US debt monetization, could permanently impair the dollar's safe-haven appeal.

Around the peak, you would typically see commodity markets exploding upwards... resource stocks, energy stocks outperforming, beginning to see some evidence of utilities beginning to outperform and investors starting to reach towards stable demand consumer staple stocks. As the global liquidity cycle rolls over from speculation to a defensive posture, capital rotates out of long-duration growth assets and into cyclical value (energy/commodities) and defensive value (utilities/staples) that offer stable cash flows. LONG. Late-cycle and defensive sectors historically outperform as liquidity momentum slows and the real economy absorbs capital away from financial markets. A sudden re-acceleration of central bank quantitative easing could cause growth and tech stocks to resume their market leadership, leaving defensive sectors behind.

Central banks do not control interest rates; markets do. Rising bond yields are a global phenomenon driven by strong nominal GDP, and the 2-year Treasury note has broken above SOFR and predicts higher policy rates. He expects the Fed to hike, not cut, and sees the 10-year Treasury yield potentially testing 6%.

Bitcoin is a very good barometer of US liquidity conditions. As Fed liquidity slows down, Bitcoin suffers. With liquidity tightening and likely to stay constrained, Bitcoin faces continued downside pressure.

With tightening liquidity and a flattening yield curve, investors should rotate into defensive assets. Short-duration government debt offers attractive yields and is a safe haven, looking like a fairly decent asset.