Massive Liquidity Shock Coming; Brace For 'Wrecking Ball' Warns Economist | Michael Howell
Speakers
Michael Howell
— Founder, CrossBorder Capital
Summary
Michael Howell warns that global liquidity is tightening, driven by strong real economy demand and a shift toward tighter monetary policy. He expects a stronger US dollar, rising long-term bond yields, and significant pressure on risk assets. To navigate this environment, he recommends defensive positioning in short-duration Treasuries, TIPS, gold, oil, and broad commodities, while cautioning on Bitcoin and equity markets.
- Global liquidity peaked in late 2025 and is slowing down, leading to tighter financial conditions.
- The Fed under Chair Kevin Warsh wants markets to tighten, pushing the dollar up and bond yields higher.
- A 10-year Treasury yield target of around 6% is projected, reflecting strong nominal GDP and sticky inflation.
- Gold remains a medium-term bull play due to China's internal yuan devaluation and future Western debt debasement.
- Oil is extremely cheap relative to gold; mean reversion could drive crude toward $200/barrel.
- Bitcoin is directly correlated with Fed liquidity and is expected to suffer as liquidity tightens.
- Investors are advised to shift into short-duration government debt, TIPS, and commodities for inflation protection.
- Wall Street may be range-bound in 2026 but faces growing downside risk as liquidity tightening intensifies.
Ideas
US Dollar to strengthen further
Global liquidity is tightening as the Fed signals it wants markets to tighten for them. A stronger dollar is a direct consequence, driven by capital flows into US assets, US tech leadership, and policy expectations. The dollar is in an uptrend and is very likely to strengthen further, presenting a risk of a 'wrecking ball' for world markets.
Long-term yields heading to 6%
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.
Tighter liquidity will crush Bitcoin
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.
Equities face rising downside risk
US equities are likely to be range-bound in 2026 as authorities avoid aggressive tightening, but the risk of a significant decline grows as liquidity conditions tighten further, potentially leading to a drop similar to the 2022 25% fall later this year or into 2027.
Oil set for medium-term surge
Oil looks very cheap relative to gold, with the gold-oil ratio far above its long-term mean of 20x. If gold stays elevated, oil must catch up toward $200/barrel. Strong economic momentum, deglobalization capex, and higher commodity demand support medium-term oil price upside.
Gold elevated by global debasement trends
Gold will remain elevated in the medium term due to future debt debasement in the West and China's internal yuan devaluation policy, which drives strong Chinese demand for gold as an inflation hedge. The great debasement is still to come, supporting gold at levels like $4,000/oz minimum.
Add commodities for inflation hedge
With inflation embedded and a deglobalization process driving duplication of supply chains and defense capex, commodity prices are set to rise. Investors should add commodities as inflation protection.
Move to short-term Treasury bonds
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.
Buy TIPS for inflation protection
In an environment of embedded inflation, Treasury Inflation-Protected Securities (TIPS) are an attractive defensive asset. The TIPS market is yielding over 2%, which offers a pretty good real return when inflation is persistent.
