# What Is Bitcoin Telling Us? | Michael Howell, Macro Analyst *Author: Ryan Sean Adams, David Hoffman* *Published: Oct 26, 2026* *Source: https://www.bankless.com/podcast/what-is-bitcoin-telling-us-michael-howell-macro-analyst* --- Ryan Sean Adams: [0:04] Michael Howell is one of my favorite macro analysts. He's the author of Capital Ryan Sean Adams: [0:07] Wars and the Capital Wars sub stack of which I am a proud subscriber. Love it. Read every post. He's the person I think most of finance and macro quotes when they talk about global liquidity and they say those words. Welcome back to Bankless, Michael. How are you doing? Michael Howell: [0:24] I'm doing very well. Very good to be here. Ryan Sean Adams: [0:26] Okay, so Michael, you were last on Bankless about a year ago. This was November 2025. And I talked to you at that time, you said liquidity growth. It seemed like it was peaking, at least the growth side of things, that crypto was late cycle. That proved right. That proved prescient. Crypto indeed was very late cycle at the end of 2025. And then I followed your work for the past year or so. And you've said we were in this speculation era, but we are moving closer and closer to late stage of speculation. I know you have four eras. We'll get to those a little bit later. But the speculation era is ending, that turbulence is coming, that global liquidity, it won't fully bottom until the second half of 2027. And then I saw this post. That has been your base case. And then I saw this post on Friday of this week, where you took kind of a second look at Bitcoin as an asset. And I know in the past, you've called Bitcoin a bellwether asset for global liquidity. So it's an important indicator as well as a kind of a, you know, an asset in and of itself. And you said this, that Bitcoin may be an early warning that the liquidity tide is beginning to turn. In your post Friday, and with everything that's happening in Bitcoin right some of that price recovery, what do you think Bitcoin is telling us? Michael Howell: [1:48] Well, I mean, I hesitate to say that it's actually signaling an upturn in liquidity because I'm not sure that it is. I'm not 100% sure of that. And what I was trying to argue in that post was that, liquidity drives Bitcoin, but there are clearly feedback effects. And it may well be that we're getting information from the stability of Bitcoin that's telling us a lot about the liquidity environment. Now, the question is, does that help? Well, it does help because liquidity tends to move in clear cycles. And it tends to move in cycles of maybe five to six years. So the plain fact is that if you've got to turn in the liquidity cycle that other data is maybe not fully reflecting yet, but Bitcoin is, Bitcoin could be saying, well, actually, we're entering now the early stages of what will turn out to be another two to three-year bull market. So we've got to be alert to that possibility. Now, I raised that point really. Michael Howell: [2:46] With evidence of what the Federal Reserve is doing. And the problem with judging the Fed is that so many people judge the Fed in a sort of textbook way of maybe looking for a pre-2008 GFC lens. So it's all about, in most people's estimation, setting Fed funds rate. And that clearly is not the case. And it hasn't been the case for the last 15 years. And it's not the case going forward. And what I was also trying to add in that piece is that maybe, Kevin Walsh has actually rethought policy as well. And we're actually entering not a new regime, but actually a new, new regime that this is actually an evolution from the post-2008 environment, where the Fed was using QE quite actively. What they're doing now is they're basically acting alongside the treasury. They're actually trying to manage, explicitly manage the repo collateral markets. And if you listen to some of the statements that Walsh has made, particularly in the presser after. Michael Howell: [3:50] The last FOMC meeting, he was pretty explicit that they want to maintain an ample reserve environment for the banks. Now, I think you've got to put that in context and you've got to look back and say, well, when did they make a big error last? And the big error they made was almost exactly a year ago when they basically decided they wanted to shrink the balance sheet. And the Federal Reserve went ahead and slashed bank reserves. Now, you've got to remember in the whole equation of central banking, the one number that the Federal Reserve and central banks control exactly is the level of bank reserves. They have some control over interest rates at the short end of the market, but they have precise control over the level of bank reserves. And if they decide to slash bank reserves, in other words, to reduce the overall level of money market liquidity, then you will see a fallout in other areas of the market. And maybe they weren't expecting the scale of the fallout that we saw. And if you recall, repo spreads, in other words, SOFA less Fed funds target, for example, spiked significantly, saying there were shortages of liquidity in money markets during that period. The Fed blinked, and it blinked quickly and acted. And what they did is they introduced yet another acronym. Michael Howell: [5:14] R&P, Reserve Management Purchases, which is another form of QE, quantitative easing. I mean, of course, they say it's not, but I mean, it plainly is. If it's yellow and quacks, it's a duck, and this is a duck for sure. And they basically, again, boosted the level of bank reserves. Now, if you look at the data, and this is a sort of long-winded answer to your question, but if you look at the data over recent months and weeks, bank reserves, i.e. money market liquidity are pretty much flatlined. Michael Howell: [5:44] And this is telling us that the Fed looks to be pretty closely managing that. And I think on the other side, looking at the collateral markets, so you've got repo, in other words, the amount of liquidity in money markets reflected in repo rates. And then you've got on the other side, what's happening to the collateral markets, the stability of collateral. And it seems to me that's exactly what the Treasury is trying to fix. And everything that Besant is doing, contrary to what the media suggests, I mean, the media are well off track on what he's doing, but he's not trying to push down the level of yields necessarily. He's trying to reduce volatility in the market. And generally, Besant's doing a great job because he's retiring what are called off-the-run treasuries, in other words, stale and liquid treasuries, often at 60 cents in the dollar, which is a great deal for the US taxpayer and replaces those with sort of shiny new debt. And that debt tends to be shorter duration. And overall volatility in the system is being contained. But I think what you've got is that you've got two targets there. Number one is low bond volatility. And. Michael Howell: [6:57] At ample levels. Now that is being played out against the backdrop where the bond markets want or expect Fed funds to rise. Kevin Walsh is giving them that. He's throwing meat at the bond markets in that regard, but at a relatively slow pace. So the scale of tightening that you've been seeing in the system is nothing like as pronounced or as rapid as we saw under the Powell Treasury, especially with the Powell Fed. Ryan Sean Adams: [7:22] So here's how I read your post on Friday, answering the question, like, what could Bitcoin be telling us? And this is just a possibility. And I don't even know if it's your base case now, Michael, but you do indicate that it's a possibility. It seems like Bitcoin could be telling us that we might have a shorter, more shallow turbulence period, and that the rebound period might actually occur a little bit faster than you thought. I think you had targeted this rebound period to sometime in the second half of 2027. But Bitcoin could be telling us that Fed and Treasury interventions mean that rebound happens actually a bit sooner than that. And you said that you were looking at the price of Bitcoin in the 70K number. If Bitcoin can hold 70K, that might be meaningful towards the case that you just illustrated. Is that the correct way to interpret this? Michael Howell: [8:22] And is this- It's 100% correct, but I would say it's not my base case. Ryan Sean Adams: [8:27] It's not your base case, all right. Michael Howell: [8:28] I think the base case is still where we said. What I'm saying is that this is something, this is a cause for rethinking and one has to monitor these things. Michael Howell: [8:39] If you get Bitcoin holding above 70,000, if you see more evidence that bank reserves are being managed and maybe even being pushed up, then I would, happily change my view and expect to see liquidity picking up. I think the other thing that you've got to factor in is why is liquidity really falling down, in the system right now. And I mean, make no bones it is, you know, financing has become a lot tougher for many institutions wanting to raise money. The yield curve is flattening, despite the fact that I think the consensus view, the 100% consensus view at the beginning of this year was that the yield curve was steepened. It's actually been flattening as much as we thought because of this turn. And you've got, you know, evidence of credit spreads beginning to blow out. The Russell 2000 is probably in a bear market as we speak. So all these things are telling us that liquidity conditions are tightening. But it's not that tightening, not because central banks are tightening particularly aggressively. I mean, there are clearly steps in that direction. But as I've tried to suggest, what Kevin Walsh is doing is probably doing tightening at half pace in many cases. Michael Howell: [9:51] The reason that liquidity is going down is because the economy is growing so fast. And you've got to align that up with what the bond markets are saying and the bond markets are clearly yields are rising in response to, to fast nominal GDP growth, not to any deterioration of fiscal finances, as much of the media, ill-informed media, seems to be suggesting. This is all a growth story. Ryan Sean Adams: [10:15] We'll get back to Bitcoin because there's more to discuss there. But since you brought up bonds, maybe let's turn towards bonds for a minute and explain yields to us. Why are long duration yields on bonds going up? Because I've heard multiple explanations for this, including the popular explanation that this is debasement, that this is the U.S.'s fiscal situation finally catching up to it. This is bond vigilantes saying enough is enough, and they're driving up long duration yields. Why do you think yields are going up? Michael Howell: [10:49] Well, let me answer the question. I mean, I put a slide up to try and understand this. And what it does, I mean, let me just say, preface that by saying, look, once we start talking about bond markets, a lot of people's eyes glaze over and it becomes very wonkish stuff. So I'm going to try and make this as straightforward as I can. Ryan Sean Adams: [11:09] You know what? Before you do, Michael, I just want to pause and ask listeners to pay particular attention to what Michael says with bond markets, because I would have agreed with you that bond markets seem very wonkish, seem very esoteric outside of the main character feature of most markets and what investors care about. This year, though, I would argue that bonds are kind of the main character. Cost of capital. David Hoffman: [11:34] Bonds are at the center. Ryan Sean Adams: [11:35] And they're at the center. I mean, we were talking about it so much on a crypto podcast. So if investors are going to pay attention to bonds, probably the year 2026 is the year to pay attention to them. So listen to what Michael says very carefully. Let's listen. Michael Howell: [11:49] Okay. Yeah. And the other thing that I would say is, as another preface to this, is that, Bitcoin is a very long duration asset. And that means it's very sensitive to changes in treasury yields. So if you start to see treasury yields stabilizing or coming down, you would expect to see Bitcoin doing very well for one reason. Apart from other reasons, it may do well as well. So that's why it's important. Now, what you can see here is the US treasury yield broken down into its two main components. The black line is looking at rate expectations as measured by the implied terminal policy rate that is embedded in the term structure. Michael Howell: [12:36] The orange line is something called the term premia, which is the key way to evaluate bonds, which is looking at the risk premia that is attached to bonds and compensates investors for holding duration risk, i.e. Interest risk over the term or horizon of the bond. Now, what I've tried to argue is that if you look at what's driving yields higher, it is the rising black line, not the orange line. The orange line for much of the last couple of years has kind of gone sideways. There's been volatility recently, but you can't say that there's an upward trend in term premia. What there is an upward trend in is rate expectations. Now, the question to ask is, what in turn drives rate expectations? And rate expectations tend to be driven by the underlying level of nominal GDP growth. Now, what I'm going to do is to go on to another chart. But just before I do that, I'm going to show you a second one, which is this chart, which is looking at bond term premia across the world. Now, the other thing to scotch is the whole idea that what's going on in the U.S. Is a big deterioration in U.S. fiscal health. I mean, sorry, let me correct that. Michael Howell: [13:52] The bond markets are picking up a big deterioration in U.S. fiscal health. There may well be a deterioration, but the bond markets are not that worried about it, certainly at the moment. And what this chart is indicating is what's happening to term premier across the world. And the bright red line is looking at what's happening in the US. And US term premia, rather like German Bund term premia, and rather like Chinese government bond term premia, are basically low and if anything, falling, not rising. The rising term premium are in areas like Japan, Britain, and in France. And if you look at the headlines in France, there's little reason to doubt why they've got rising term premium. But it's certainly not the case in the US. And this is not about any deterioration in fiscal finances or any loss of faith in the Trump administration or Bessand or whatever. This is all about strong economic growth. So let me just try and show that chart. The chart that I'm just putting up now is comparing nominal GDP growth in the US, which is a four-quarter moving average of NGDP growth, and 10-year risk-adjusted treasury yields. Michael Howell: [15:06] Is basically the interest rate component, the black line in the earlier chart, graphed against the underlying growth rate, nominal growth rate in the economy. Those two lines match almost exactly. What they're telling us is that yields are high simply because underlying interest rates or policy rate expectations are high, and that's high because of a strong economy. So this is the question that is really driving bond markets and bond investors right now. It's not any concern about fiscal finances. In France, it may be. In Britain, it may be. In Japan, it may be. But in America, it's not yet. David Hoffman: [15:44] Can you tell me, Michael, why people frequently say that there just isn't demand at the Treasury auction? Because what I'm hearing from you is that that's simply just not true whatsoever. But I've been hearing it across Twitter, financial markets commentary, even debates with Secretary Besant when he gets interviewed, that the demand for bonds, for U.S. bonds at the auction is very, very weak. Why are people saying this? What you're saying is that the demand is actually very, very strong. Michael Howell: [16:14] Well, I'm not saying that demand is strong. What I'm saying is that it's not a factor that is causing yields to deteriorate or yields to rise. Term premia are basically compressed flat and, if anything, falling. Now, that's not to deny the fact that if you look at the bid-to-cover ratios, they're falling in the auctions. I mean, that's for sure, but they've previously been very high. But, you know, there may well be fewer buyers out there. And, you know, what we know is that a lot of those buyers are concentrated among hedge funds anyway. So you may have a concentration of demand. Can't argue against that. But I don't think the evidence is there that you're seeing a big deterioration in term premia. I mean, if you were seeing a big deterioration in term premia, measures like straightforward measures, like the 10-5 spread in the bond markets would be going up, not falling. And it's falling at the moment. Michael Howell: [17:09] So that's telling you that term premia are going down. David Hoffman: [17:11] Another question that I have is that with the rise in yields, with the bond yields going up, this means that the debt that the United States government has to pay is more expensive, more expensive debt. Does that accelerate debasement in the future because the debt has a higher interest rate? Does that mean that the United States government is going to have to print more, issue more, debase more in order to eventually pay their debts? Michael Howell: [17:37] 100% correct, yeah. I mean, it will. David Hoffman: [17:40] Yeah, and will that flow in? How will that come back into liquidity or is that just like something that just doesn't really actually show up acutely in the market? Michael Howell: [17:48] Well, I think it does show up. And I think one of the things you've got to start thinking about is what is liquidity? How can you define liquidity in a practical way? And the way that we tend to think about it is if you think of a ratio, if you said liquidity is approximately equal to net assets divided by their durations. So in other words, if you see an increase in the net asset holdings of the private sector because of government issuance of debt and you're issuing at a lower average duration, then you're going to be seeing a liquidity expansion. And that's pretty much what's going on. So what you're seeing in the system. Michael Howell: [18:28] Going forward or even now going forward is that government debt issuance is increasing. A large part of that is at the short end of the market. So there is deliberate rationing by Besant of longer-dated coupons. And the average duration, because it's a bill, not a longer-dated coupon, is falling. So that liquidity quotient, if you like, is getting goosed from top and bottom. You're seeing lower duration and a bigger increase in assets. So it's clearly liquidity positive. Now, what I would argue is that a large part of that is actually going into the real economy right now because it's funding government spending. But it's still liquidity. It's still a liquidity expansion. What we, from the experience we've had, and this is sort of treading relatively new ground because these are new features, but what we can see is that does Michael Howell: [19:17] have or has had a positive impact on Bitcoin itself. Ryan Sean Adams: [19:21] I want to contrast your take on bonds with a piece I read recently from Ray Dalio. He wrote a piece last week published on LinkedIn called The Numbers Behind the Bond Bear Market. And I think he makes this case. Basically, his summary is that 2027 is going to be a bad year for bonds. I believe you are starting to take the opposite on that view. He said this, the bond bear market probably has a long way to fall still. 2027 looks more concerning than 2026 and 2028 looks riskier still. And his case was this, if I understood him correctly, Michael, that there's just a lot of supply coming on the market. When you take a look at kind of the rollovers of long duration, converting to that shorter duration. When you look at all of the treasuries Ryan Sean Adams: [20:13] That need to be issued and all the bonds that need to be issued, and also the hyperscaler bonds and capital competing against treasuries that have to be issued. And then you take all of that supply that's coming in the market in 2027 of new debt, U.S. denominated debt. And then you take a look at the demand sources, which is like traditionally we'd have foreigners buying large quantity of bonds. And he makes the case that demand is actually going down as well. And so if you have more supply, decreased demand for bond purchases among investors, then you're going to get yields rising in 2027. Now, I'm trying to understand your case versus his case, because I think at some point, you might both converge on the idea that, yes, debasement is the long-term future. But there's some disagreement as to what happens more in the short term, 2027 and 2028 era. Can you clear this up? Like, what do you think you believe differently than, say, someone like Dalio making the supply-demand case? Michael Howell: [21:18] Well, I would just say the markets, they're moving straight lines. And I'm definitely there in the long term. I think bonds are an unattractive long-term asset for investors. But I think in the short term, they're actually maybe a safe haven if this liquidity downswing continues, okay? Now, I haven't read Ray Dalio's piece. I would imagine that how he's getting there is by saying that, number one, there's more of an inflation problem than we envision in the economy, and that nominal GDP growth is not simply going to stay where it is, elevated. It's going to accelerate more, but that's really driven by faster inflation. I don't know if that's his argument, but it could easily be. I disagree, but we'll see what happens. The second factor is that he's arguing that, probably implicitly arguing, I don't know, that the US or US treasury assets and the US dollar are no longer safe havens. I would disagree with that very strongly because I think, what is the alternative? I mean, do you want to put money in? You've got basically two other choices, possibly three, if you include Chinese government bonds, but let's make that too complicated, so let's not go there. Japanese government bonds or European government bonds, I would include in that both France, the French and German bonds, Do you really want to risk putting money into the euro, given what's happening on the streets right now? Ryan Sean Adams: [22:45] I don't know if you would say this, Mike, but I think his alternative would be a debasement hedge, something like a gold, maybe in some small portion, maybe a Bitcoin would be the alternative to this. Michael Howell: [22:55] Fair enough. But I mean, let's be realistic. I mean, the bond markets are massively bigger. And if you're going to make asset allocation shifts, you simply can't put that amount of money into Bitcoin. It would be wonderful if you could, or into gold. The market's not illiquid enough. The fact is you've got to deal with the bond markets. The bond markets are massive. They're very, very liquid. And if investors want to shift asset allocation into safe assets, they have no alternative. I mean, the reason that, you know, come back to another point, which is maybe a different rabbit hole. The reason that the US has a whopping great trade deficit is not because US industry is uncompetitive. It's the fact that US finance is so super competitive. Everyone wants to use US financial markets to put their investments. And this is the reality. You've got no alternative. You simply can't put money in many other places. It'd be great to put it into Swiss francs, okay? Fortunately, it's a tiny little market. It'd be great to put more into gold. Again, illiquid. You can't really do it. You've got to, the US treasury market is the main vehicle, the main sink for these funds. I mean, look at China's whopping great trade surface. No one's going to convince me they're not putting money into treasuries. They may be doing it surreptitiously through, you know, offshore agencies in Belgium or wherever, but they're definitely buying government bonds because they can't put it anywhere else. Ryan Sean Adams: [24:13] Now, does your outlook with Dalio, would you say, tend to converge on longer-term timeframes? So if we stretch beyond, say, the one to three year and the five year, and we get to something like the multi-decade long, would you sort of agree, yeah, you know, debasement hedge, gold, something like that, why own any bonds? Michael Howell: [24:32] Yeah, I think that, I mean, I'm sure that's the, I'm sure it's a similar argument. I haven't read his piece, but, you know, I think it makes absolute sense. I mean, you just got to look at the period of, I mean, we talk about debasement, but, you know, broadly speaking, I mean, ever since, you know, Richard Nixon closed the gold window back in 1971, you've effectively had free-floating currencies and ongoing debasement, or certainly accelerated debasement, maybe one would say. And if you look over that period, basically, treasury debt, federal debt, has increased at an annual clip of about 8.5%, okay? If you look at global liquidity, that has increased at an annual clip of a tad over 8.5%. If you look at the gold price, the gold price has gone up a tad over 8.5%, okay? So all these things kind of line up. The S&P has delivered a return a little bit better than that, maybe near a 9.9.5%, I accept. But look at bonds. You're looking at returns of significantly less. 10-year treasuries have basically given you a return of near a six, and five-year treasuries near a five. So they're a long way short. This is compounding rates per annum. Michael Howell: [25:43] So why is the future going to be different from the past? All these politicians are doing is kicking the can down the road. We're not talking hyperinflation here. We're talking about inflation rates that are a few percentage points above where policymakers are targeting. And after all, when was the last time the Fed hit its 2% inflation target more Michael Howell: [26:03] than five years ago? Let's get realistic here. David Hoffman: [26:05] Do you think the government inflation numbers are actually accurate to what reality says that they are? Is there a gap between real inflation and government reported inflation? Michael Howell: [26:17] Well, I would have thought so. I mean, my personal inflation rate, although I live in Europe, is way above where the official numbers are. And it is, and it always has been. So I don't know. David Hoffman: [26:27] How do you account for that? Why is that true? Michael Howell: [26:30] Well, because I think that, I mean, I think there was a deliberate bias in these figures. Anyway, I think it's in their interest to keep, obviously, to keep inflation low. I mean, once you start to target something, I mean, the targets become meaningless. I mean, that was something I think was called Goodhart's Law, wasn't it? And that probably is the reality. So I think that that may be an explanation. But you've got, again, without being too disparaging, Kevin Walsh's committees and the idea of looking into the CPI stats is another way of fogging the whole question, I think. But let's see. David Hoffman: [27:07] Do you have an actual measure for real inflation in the United States? Michael Howell: [27:12] I'd say the real measure is the consumer confidence survey. I mean, that's what low consumer confidence is telling you inflation is a problem. David Hoffman: [27:20] Yeah. I think a lot of people are freaking out because of the rising rates, rising bond yields that have that we've just haven't seen these level of bond yields in 20 plus years. And I think when you compare bond yields to the reported inflation numbers, like we have five and a half percent bond yields, but reported 3.5 percent inflation, maybe that seems high. But there's an account on Twitter that I follow which posts the price of a ribeye steak from their local butcher, and it has done so every single month for the past 10, 15 years. And if you look at inflation there, it's upwards of 10% in America. Now, if that was the real reported rate, we don't really know what the real numbers are. But comparing the bond yields of 5.5% compared to potentially real inflation of 8% to 10%, all of a sudden bond yields don't look so scary anymore. Michael Howell: [28:11] Yeah, I think that's true. And I think if you start to look at the tips market, where the inflation-protected securities are yielding 3%, I mean, that's not a bad deal, actually. It's very, very rare that you can make 3% real in financial markets over the long term, and the US government is underpinning it. So that's not a bad deal to take, I think. I don't want everything in tips, but I mean, it's not a bad hedge. Michael Howell: [28:35] I'd be looking at that. I mean, I have looked at that. Ryan Sean Adams: [28:37] I would love your take on the current economy, like just a level set, because I'm hearing a lot of different voices look at this exact same numbers, exact same economy and come away with different conclusions. So if somebody were to ask me kind of, you know, what are the highlights of the economic situation today? And, you know, in 30 seconds, 90 seconds, I would say equity is running hot. I would say high inflation. I would say nominal GDP is also hot. I don't know, five, six percent. I would talk about long term bond yields continuing to rise. I know you've compared this to a period in the 1980s of nominal economic growth, but if you were to give a 90-second drive-by of this economy, what would you say? What would the highlights be? Michael Howell: [29:27] Well, you can't dispute the fact that there is a K-shaped economy, okay? That's for sure. There's a lot of people who are being left behind, but that's true not just in America, that's true globally, okay? Yeah. But if you look at the drivers of what's happening to growth, the big fiscal deficit and the AI capex spend are clearly big drivers of America right now. Now, what I've done is I've put on the screen a chart which basically looks at the evolution of the business cycle and of the liquidity cycle. And if you look at the comparative data, you get a pretty good sense as to where we are to position ourselves and maybe why this economic data is doing what it's doing and where we are in that cycle. Now, what this diagram is basically illustrating is the red line is looking at the notional liquidity cycle. Michael Howell: [30:18] The yellow line is looking at where the real economy is. And you can see that this is sequential, that the liquidity cycle leads the real economy by roundabout, on average, maybe 18 months. Now, what tends to coincide is when the liquidity cycle is going down, which is what we argue right now, what you also see is a real economy that is accelerating. Michael Howell: [30:43] So in other words, as the red line drops, the yellow line starts to go up. And that's telling us these cycles are moving differently. They're virtually anti-cyclical. And what that really tells us is the simple fact that all money that is anywhere must be somewhere. So if it's in the real economy, it's not in the financial markets. And if it's in the financial markets, it's not in the real economy. Well, let me evidence in this upcoming chart what that really looks like. And what you can see on this chart are two lines, an orange line, which is measuring our global liquidity cycle, and the black line, which is the world business cycle. And what you can see is, first of all, they're completely opposite. So when the liquidity cycle is high, the real economy worldwide is in a slump. And similarly, vice versa, when the real economy is booming, liquidity is very tight. And that's what we're basically looking at now. The liquidity cycle is going down while the real economy is picking up. And it may not feel in certain areas that that's the case. Michael Howell: [31:52] You know, that's what the economic data is saying. That's what business, this data here is business confidence data. That's what business confidence data is saying. And, you know, it's difficult to dispute that, even though I know, Michael Howell: [32:05] parche, you know, what consumers are feeling, that it doesn't always feel like a strong economy. Ryan Sean Adams: [32:10] So how would you map that to your four different regimes? So if we're in an era where liquidity is going down, at least the growth of liquidity, because if you look at the global liquidity watch chart where you plot it, it's up only, of course. So the thing that kind of, sometimes it's down, I should say that, but the thing that changes is really the rate of growth. And so if we're in a regime where global liquidity is, the rate of global liquidity change is going down, but then also the economy is running hot. So Main Street is running hot. What does that imply across your four different regimes? So you have rebound, calm, speculation, and turbulence. That puts us in what era? Is that the speculation type era? Are we late in the speculation phase? Are we moving towards turbulence? And what assets are key in this era and will be the assets really to hold across these phase changes? Michael Howell: [33:08] Again, with the caveat that the liquidity cycle may be, may have a lesser cyclical downturn this time than maybe we've seen historically. With that caveat, and I say I'm still on the fence on that, so I'm not sure myself. But if you look at what we're seeing, you have these four regimes, turbulence, rebound, calm, speculation. I mean, the names give you some generic idea about what goes on in each phase. But if you align on the diagram that I'm showing right now of the two cycles, the theoretical liquidity and the theoretical re-economy cycle. If you're in the turbulence phase, that tends to coincide with basically very fast economic growth or even the peak in the economic cycle. The rebound phase for liquidity, and that is a phase when equities generally do pretty well. I mean, to be clear, the upswing of the liquidity cycle, equities normally do very well. They outperform all other asset classes. And typically you would see things like technology really being a very strong performer in the early stages of that. Now, that rebound tends to occur when you start to see a very noticeable loss of economic momentum, not yet recession. The calm phase, the next up in the liquidity cycle, ironically or paradoxically, is the phase of the liquidity cycle where you're actually looking at recession or coinciding with a recession. Michael Howell: [34:37] And then you get speculation, which is the phase that we've been in for many, many months. And we may now be ending, but let's see on that. The evidence will have to be, you know, the evidence is a little bit mixed. But if I go back to the. Michael Howell: [34:50] Chart that I just put up on the actual data, you'll see there that in that orange line, the global liquidity cycle, there is the latest data, which is in September picks up. Now that pickup is almost entirely due to what the Federal Reserve did in September. Michael Howell: [35:08] So what I was saying earlier on is it looks as if the Federal Reserve is deliberately targeting money market liquidity. This may be a temporary effect. We don't know. But it's really a question of what's this space. Now, which asset classes should you own in these regimes? To go back to the traffic light diagram that I'm putting out now, this is basically illustrating ideal asset allocation. Asset classes are shown on the left. Industry groups are shown on the right of the chart. The traffic lights are. Michael Howell: [35:43] Tell us when to invest and when not. You read them as green go, red stop, and amber proceed with caution. And what it says is in the rebound area, you want to take a little bit of risk, but you want equities and credits predominantly. In calm, which is what we were in for much of the last two years, you want equities, you want commodities increasingly, you don't want bond duration at all and you want to be taking some money out of credits. In speculation, which is the phase that whether in or is just ending, it's dominated by commodities. You don't want credits and you basically are top slicing equity exposure and maybe putting a toe in the water in terms of bond duration. And then turbulence, which is the upcoming phase in all likelihood, because this thing tends to be moved clockwise, you tend to find that you only want bond duration and you want to be, you can move back into. Michael Howell: [36:38] Credits when the yields look attractive, but you don't want commodities and you don't want equities. And then you look at industry groups, which is shown on the right-hand side of that diagram. Technology is the winner in the upswing. Financials around late cycle. Energy commodities generally as you're peaking and doing the immediate downswing, and then defensive through most of that downswing period. And therefore, that would be my asset allocation. And again, if you look at small cap, large cap, small cap tends to do well in the upswing and large cap tends to outperform in the downswing. Michael Howell: [37:12] So that's how I basically argue it. Ryan Sean Adams: [37:14] And how about crypto assets across these regimes? Michael Howell: [37:17] I think the crypto, I think you've got to take into account that crypto is both, A real asset, in other words, it will relate to what happens in the real economy and a monetary inflation hedge. So, you know, a pure monetary inflation hedge would presumably be Bitcoin, but then the rest of the crypto universe is going to be much more like a real economy asset and probably would move more like technology stocks. So I think that you would, I mean, I would say, therefore, that Bitcoin should outperform crypto in the downswing of the liquidity cycle, but the rest of crypto, altcoins or whatever, would be outperforming Bitcoin in the upswing. Michael Howell: [37:55] So maybe you just do that with an Ethereum Bitcoin spread or something. Ryan Sean Adams: [37:58] Now, if I've read your work, Michael, correctly over the last year or so, you seem to have indicated that this speculation phase has lasted a little bit longer than you thought it would originally. And I'm wondering if that's the case. And if so, why? And maybe you could give the case for why it could persist even further. For instance, we'll contrast kind of some of your position with the AI bulls out there who will tell you and will say that AI is still just getting started. We're still early. Michael Howell: [38:33] Great point. I mean, I wouldn't say that speculation has lasted longer or less than normal. I mean, we're basically coming up to the normal time span for a speculation zone. Ryan Sean Adams: [38:44] Which is about 12 months or so? Michael Howell: [38:46] Yeah, between 9 and 12 months. So it's about that sort of normal phase. I think that what we've got is the response of equities to that has been unusual. And if you look at the chart that I just put up, what I'm showing here is world PE multiples and reported earnings per share, okay? The earnings per share data is lagged slightly, so they coincide with what's happening to world PE. And the world PE is shown as a change on 12 months earlier. Now, if you look at what is going on in bond markets, bond markets are responding, I would say, in an absolutely normal, orthodox way to the liquidity cycle. It doesn't look any different from normal or a standard cycle in terms of bonds. Commodity markets are performing exactly as you to expect relative to where we are in the real economy cycle. And so, you know, to be out of bonds this year and in commodities was a fantastic trade. So that particular element has worked. What has been a lot more difficult has been the equity, play the equity element, which is the transition phase. And if you look at this diagram, what it's showing is what happens to PE multiples. PE multiples tend to come down basically at the end of the cycle, not surprisingly. And that's largely because bond yields go up, right? So in other words. Michael Howell: [40:08] P multiples are responding in the same way that bond markets are responding to declining liquidity. So tick that box. That looks very normal. What is not normal is if you look at the dotted line, as best I can, I've tried to show that the dotted line, and this is purely for world earnings per share, so it's not specifically US, which is even more exaggerated, is that the earnings cycle has come through later and in bigger size than normal. Michael Howell: [40:37] And that is the anomaly. Now, the question to raise, and so, for example, to be specific, if you look at technology, technology has had two legs. It's had the first leg when it was acting like a long duration investment. So, as bond yields were falling and liquidity was being injected, long duration investments like tech outperformed early in the cycle. That bit was clear. But what you're now getting is a second leg where, although P multiples are coming down in tech, what you've also got is a huge earnings kicker. Now, the question to ask, and I'm not expert good enough to answer this, is that is that dotted line increase simply an anomaly, so it's out of step temporarily? Are we going to see, permanently high or sustained high growth in earnings over the next few years? I can't answer that question, but I would say everything else in this framework is working like clockwork, but that's the anomaly. And that's why equity markets have maybe gone on longer than we would suspect, have suspected, and particularly why the big cap tech stocks have basically lifted the market. Outside of that, you kind of struggle to find strong outperformance. A lot of international markets are doing pretty much what Russell 2000 is doing and entering bear market territory. Ryan Sean Adams: [41:57] I see. So you're saying that the P compression that you'd expect to see according to the cycles is playing it exactly as you would expect to see it. The difference here is the earnings. The P is far higher. And that P being far higher is like mag seven allocated. It's tech allocated profits for sure. Ryan Sean Adams: [42:15] So there's some huge outperformers there. Another question I think that has plagued AI bull investors is this idea that rising yields on treasuries could increase the cost of capital and pop the AI bubble, if we want to use the bubble term, for instance. So we had a core weave scare last week, which is kind of a neocloud provider, and some bond investors were pricing a 50% probability that core weave could default on some of its debt over a five-year period of time. So things like this start to scare AI debt markets, particularly as yields continue to rise. Now, I guess that's not your base forecast that yields will continue to rise that much more in the months to come or into 2027. But do you think that this is a catalyst that could prick the AI bubble? How much are you paying attention to this? Michael Howell: [43:11] Well, I mean, almost certainly it's a risk because if you've got a lot of funding to do and you've got a background where funding is becoming more difficult, then, you know, as the famous Warren Buffett saying is, when the liquidity tide goes out, you see who's swimming naked. And this is the reality that it tends to be high yield borrowers that often get squeezed in this environment. And that's the reality. Now it's not only the fact that you've got a lot of, tech debt issuance to come. You've also got government issuance, which is pretty hefty. And it's not just the new issuance, it's the gross book the government's got to refinance and put strain on markets, which is telling. Michael Howell: [43:56] Add to that, I mean, without being too overly pessimistic, you've got the debt maturity wall aspect, which is the debt that was termed out during the COVID years coming back into the market. And that was a result of near zero interest rates that was set by policymakers, foolishly in my view. That encouraged a lot of borrowers not just to take up new debt, but actually to turn out the existing debt into the back end of this decade. And that's now coming back into the system. So there's an awful lot of funding demand. So absolutely, that's the case. But to return to the Ray Dalio point, my argument would be is if you're getting these financial stresses, the asset to own is government debt. And that's what, you know, it may be that spreads widen, credit spreads widen, but that's both the combination of government yields falling or staying where Michael Howell: [44:46] they are, corporate yields blowing out. David Hoffman: [44:48] There's a conversation out there that is another question that is plaguing AI investors. And because AI has gotten so big, it's kind of impacting anyone who invests, which is how big of a deal is AI from the perspective of the investor? So every once in a while, humans find this technology that breaks things, breaks rules. Now, we know that AI is at least a little bit of a deal. It's at least a little bit of a deal. It could be a very, very, very big deal. And it's such a big deal that it just breaks all investment models because the returns on AI, the revenue generated by some of the leading AI companies, the economic boom because of the AI technology is just so large that all previous models just don't break. Now at some point, finance has gravity, there are laws of physics here, we can't just go up forever. What are you paying attention to, Michael, to kind of give you grounding as to how big of a financial anomaly the AI investment cycle is? Michael Howell: [45:51] Well, it clearly is an anomaly. It's equally the case that it's a revolution. AI is going to transform the world economy. There's no question about that. I think if you look back at history, there are very few of these sort of major seed changes in terms of the impact that technology will have. I mean, one can look back and say, well, you know, the internal combustion engine was clearly one. I mean, air travel would be another jet engine. The washing machine, curiously, is actually a huge productivity booster, invention of glass, all these things. And I think AI is sort of in that realm. We're looking at a major change to the whole dynamics and growth of the world economy. But that's very different from saying the financial markets will benefit from that. And I'm always thoughtful about what happened when we saw fiber optic cable, the boom in that, whatever it was 20, 25 years ago, with a company called Global Crossing that was the darling of Wall Street at the time. It was a major, major new issue that hit the street around about the start of the millennium, if I remember rightly. And what you saw within five years, Global Crossing was in Chapter 11. And the reason being is that fiber optic prices collapsed by 80%. And that was not envisioned in terms of their original prospectus. But that's what happened. That's competition. That's capitalism writ large. Michael Howell: [47:16] Roaring tooth and claw or whatever. And we saw that process unravel or the whole capital market process unravel. But the fiber optic cable is still there on the ground. We're still great beneficiaries of that. And I think the same with AI, that's the risk that you run. And there's competition, not just from other, you know, US AI producers, Michael Howell: [47:40] there's also competition with China. Ryan Sean Adams: [47:41] We've talked around this earlier in the conversation, Michael, at least you brought it up and you're talking about kind of Besant and Warsh and sort of how they were managing things. There's been this term called Treasury QE. I know you've discussed it. And there's also, of course, Besant has been doing some bond buybacks lately. So that's been a force in the market. I think there was a quote out there. He recently called himself the house. I don't know if you agree with that or how accurate that is. But I'm trying to get a sense of what Besant and Warsh are doing. Maybe whether it makes more sense to view them as a system, both of them interacting together or as independent entities. But what is this idea of Treasury QE? And what is the whole Fed and Treasury system? What are we driving towards? And is this actually money printing or is that to come later? --- *This article is brought to you by [NEAR](https://www.bankless.com/sponsor/near-1785257427?ref=podcast/what-is-bitcoin-telling-us-michael-howell-macro-analyst)*