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 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.'

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.

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.

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.

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.

The strong economy and sticky inflation will push long-term Treasury yields significantly higher, with a 10-year target around 6%. The yield curve is flattening due to tightening liquidity, and yields must rise from current levels, making long-duration bonds unattractive.

Cyclical value stocks, resources, and energy sectors outperform in the speculation phase of the liquidity cycle as the real economy gains traction and commodity prices rise.

Cyclical value stocks, resources, and energy sectors outperform in the speculation phase of the liquidity cycle as the real economy gains traction and commodity prices rise.

Treasury QE (shifting issuance to bills) is providing liquidity that may lead to stabilization in Bitcoin prices in the short term, as shown by a correlation chart.

In a long-term monetary inflation environment, good quality equities with pricing power are essential because they can pass on cost increases and should be held as core holdings.