B (4:42)

Well, good to be here Ralph. Enjoying, looking forward to it.

A (4:45)

Yeah, look, lots to talk about. Let's start with the global liquidity picture. At top level, where we are from your framework, where we are from your understanding. And then we'll Dylan's dig in some of the regional stuff because there's lots of interesting things going on. Original note this morning about Japan, think that's interesting as well. So at top level, where are we in the liquidity cycle? What are you seeing?

B (5:11)

Well, the answer is we're late. It's not inflecting downwards yet. We're still in an upswing. But you know, we got to remember here that the liquidity cycle is what, 34 months old. That's pretty mature as things go. We got to be thinking of what could be the end game. There's no, I don't, is anything on the horizon that could necessarily disrupt things. But you know, there are clearly problems building and I think, you know, as we look into 2026 and probably beyond, I mean there are factors to think about and to my mind, I mean the two biggest factors, I mean number one is that there's a lot of debt that's got to be refinanced out there because debt was effectively termed out during the COVID crisis, large amounts when interest rates were zero. And that's coming back into markets to be refinanced really from sort of later this year, but through 26, 27. And the other thing we must remember is that strong economies don't always have strong financial markets. And the fact is that you've got US tech companies currently investing, what is it, $1 billion a day in IT and infrastructure and over the course of a year or so, couple of years that's going to take about a trillion dollars out of markets, out of money markets. I mean these are big amounts. So these companies may be seeing decent profits growth but their cash flows are really plunging. And that's got to be a problem for financial markets in particular.

A (6:38)

So let's dig in a little bit to the slowness of this cycle versus others. From our work is like normally the liquidity cycle peaks around the business cycle peak. You know, they're old, you know, related and the business cycle has been super low. If you look at the ISM, it's been below 50. And the strongest correlation to that is rates have been too high for too long. And that has kept the ISM lower than expected, which means it feels like it's elongated the liquidity cycle. So that's one factor that I'm looking at. The other one is the fact that they've been shoving everything into the bills market and not refiing in, let's say the five year sector. That's kept this cyclicality. And I don't know if that structure is changing things because it requires ongoing liquidity as opposed to cyclical liquidity. So firstly the business cycle and interest rates and then whether the structure of where they've been issuing makes a difference.

B (7:36)

Yeah, well I think the, I mean the first thing is we don't seem to have a business cycle. And if you look at almost any economy since the COVID crisis, everything's kind of flatlined. So there's no obvious business cycle around. We can conjecture as to why that may be. Is it because fiscal policy is dominant, whatever, but the fact is there's none. There is a liquidity cycle and that seems to be paramount. And the interesting point is, which I'm sure you'll attest, is that financial markets have responded not to the real economy, they responded to the liquidity cycle. That's what's going on. So we need to understand this, like it or not. I mean it's become the paramount issue in markets as far as we can see. So I think that's true and I think your point that about bill issuance is really critical and the way that we've sort of, I suppose explained this before is to say what you're getting is a transition crudely from Fed QE to Treasury QE and the treasury are basically coming in and issuing a lot of bills. They're starving the market of long dated coupons. So there's not the liquidity absorption that you would expect. People are being forced into the short end. Two things really come from that. I mean, one is that there is lower volatility in markets as a result. And in fact we know the treasury is very keen to actually keep volatility down given the way they've upped these buyback programs. So that's significant. And if you get a lot of bill issuance and short dated note issuance, the banks buy it with alacrity because this is the sort of security the banks like that matches deposit growth. And if the banks are doing that, they're effectively monetizing the deficit. So I think that's the route to a trend increase in liquidity over the medium term. Governments basically have to find ways to fund themselves and what better through this mechanism.

A (9:30)

And do you think that this stops them issuing at the longer end or is it just a delayed process until they can get rates lower? And we'll come into that in a little bit. But is this a structural change that's going to ongoing and because it's bills that that feels like ongoing stimulus and it might change this whole cycle?

B (9:51)

Well, I think the answer is that it continues until it doesn't. And the fact is we know that these things always end badly because they tend to end in inflation and that's the experience we've had in the 1970s. So it's going to go on as long as it, as long as it does and then it will be forced to stop presumably by concerns over an inflation pickup. Now, I think everything they're doing is trying to bury that inflation news by whatever means, fair means or foul. So we're never too sure what the inflation rate is. And I'm always instructed by the fact that one's personal inflation rate is always way, way above what you read in the cpi. So there's obviously a lot of manipulation going on anyway. But the fact is you've got inflating asset markets, which is really testing for the fact that you've got strong monetary inflation. And monetary inflation is not just a cycle as we know, it's a trend. And that trend is accelerating. And I think what the world doesn' realize is that things have changed dramatically since COVID We're in a world of monetary inflation, monetary debasement. It's not, as I keep stressing, it's not one of financial repression, it's one actually, it's worse than that. It's actually monetary inflation. And you've got to start thinking about how to invest in a monetary inflation world.

A (11:04)

Yeah, and both of our hypothesis is long duration assets tend to do very well in that environment. And we've seen that with technology stocks and crypto. Gold has acted very well in this environment, as it should do. And all the signs are there that the debasement is ongoing and it's not going to go away. One of the things that is interesting to me is obviously Trump and Bessant are focused on what they can do with the Federal Reserve. The shenanigans around changing the governor and various board members. Clearly they want to see if they can force interest rates lower. I think personally interest rates are too high versus GDP or you know, whatever your kind of real interest rate measure you look at and that there's room for rates to come down 200 basis points, which allows them to refinance again. Any thoughts on. On the kind of Fed board shenanigans?

B (12:01)

Yeah, I mean, I'm cynical enough not to think it really matters too much. I mean, at the end of the day, I don't think the Federal Reserve really controls interest rates certainly across the curve. I mean, it's rather the other way around. Long term rates tend to drive the Fed rather than vice versa. So ultimately you've got to say, well, okay, what's the fair value for the long term bond? And that has to be related to nominal GDP growth ultimately. So you're talking of something like about 5%. And then you take what is a normal spread between the short end and the long end. What is it, 125 basis points. So that gives you your benchmark for fed funds. So there's not much they can do sort of either side of that and they can dance on the head of a pin and come out with their projections. But in reality, the FOMC doesn't have that much sway. I don't think it's really a signaling tool more than anything else as far as I can see. What matters more is really the balance sheet, what they're doing there.

A (12:58)

Yeah, I mean, although the other side of this is we're all kind of expecting yield curve control in some way, shape or form at some point, just because of the debt refinancing mechanism. And one of the things that's interesting is, and I only read about this this morning, that there is some changes in the Federal Reserve act that may allow them not to pay interest on bank reserves, which would force it into the bond market. That feels like a backhanded way of yield curve control by forcing banks to go further out the curve. Does that factor in at all?

B (13:33)

Yeah, it could be. I mean, I think there's a lot of all these things that they're lining up, whether it be elimination of the slr, the supplementary liquidity ratio, whether it's changing stress test rules, all these things are really trying to get the banks give the banks more capacity to buy government debt. And we know ultimately this is what tends to happen in a monetary inflation. Banks tend to come in and buy government bonds, they monetize the deficit and that's the route to funding. The question is how quickly are we going to get there or how quickly we get there and inflation really becomes the issue. I think they can probably push inflation down over the longer term. And I think there's a lot of factors in there in the equation, as you will know, things like AI, which are probably going to depress consumer prices. But at the end of the day, what makes all this very confusing in a way is that high street inflation is very different from monetary inflation. And you can have a background of strong monetary inflation, but because you get cost deflation, in other words, productivity wins, or cheap Chinese goods, the high streets are less affected for some time. And ultimately investors have got to invest around monetary inflation, the debasement of the currency, much more than what they're seeing in the high street. But it will come through in the high street at some stage.

A (14:49)

Yeah. And it usually comes up as the business cycle picks up as well. If it does pick up, which I think it does. The other thing that's been interesting to me is the shift in how the Fed and the treasury have kind of managed the debasement. It started simply with the balance sheet, then everyone kind of figured out that game and then it turned into this Fed net liquidity game and now it's gone to what we look as a total liquidity, which is including the private sector because they're now using the banks as their main mechanism of debt monetization. Does that make sense to you?

B (15:22)

Makes complete sense, absolutely. I mean I can put up some charts if you, if you want me to. To. Yeah, go demonstrate what. Always love a good chart. So in terms of where are we in the cycle? This is our liquidity cycle, which goes right back to the 1960s and the sine wave. There is something that we fitted back about actually about 20 years ago in the year 2000 to show you've got this five to six year cycle which is I think different to the way that you see it in terms of a four year cycle. But this is based on an analysis of this liquidity data. Now how early or late are we in this cycle? Well, you can see that this is the normal cycle, the dotted black line, the low point is the, is the trough of the cycle and the red line is where we are now. So this, this looks late. I mean we gotta, we've got to accept that it's, we're late in the. So it doesn't mean it's about to end, but we've gotta, we've got to know we're nearer the end than we are at the beginning and that's clearly an important factor.

A (16:25)

Now when do you think it finishes, by the way? My, my view is it's been extended. It normally would have finished sometime this end of this year, but it feels like it's going to push out into Q2 next year.

B (16:39)

Yeah, I mean that's almost exactly where, if I go back to looking at this cycle, that's where we would sort of suggest it's probably going to inflate sometime around about early 2026, thereabouts. Now this chart is the one I use as a parallel to say is there a similar cycle that you can think of and I think back to the 80s as maybe being the benchmark, rightly or wrongly, you had the Plaza Accord, ditto the Mar A Lago Accord. You had rising inflation, you had bond markets yields edging up, you had commodity prices beginning to boom and then you had the crash, which was pretty much triggered, I'm old enough to remember it, but it was triggered by the Germans saying they were thinking about raising interest rates, which spooked Treasury Secretary Baker at the time because the US were really angling for lower rates now. And then the proverbial sh1t hit the fan and investors realized that the liquidity cycle was about to reverse. And that's what happened. Now we could easily be, as this diagram says, a good six months away from that. So watch this space. But we've got to be alert to those factors. Now to come to your point about, and I can always come back to these charts, what's happening in terms of the Treasury. This is what we reckon is going on in terms of the sources of monetary stimulus in the system. And what this diagram breaks down is three different categories. One is conventional plain vanilla qe, which is using the SOMA account at the Fed. In other words, expanding the balance sheet to stimulate, which they clearly did a lot of in Covid. And that's the red area. You've also got, if you like, the backdoor stimulus, which is what we loosely or flippantly called not qe, qe, which is the hidden qe, which is things like the Treasury General Account, the Bank Term Funding program, the losses they're making on interest payments to the banks, and the reverse repo program rundown. That's the orange bid. Now you see those things are kind of exhausted. I mean, they can revive if they decide to change from QT again to qe, but at the moment they're spent. And then what you've got is the black area, which is what we call treasury qe. And that really comes by shifting the duration of issuance from longer dated debt to shorter dated instruments. And the reason that's important is that very crudely, we, we tend to think that liquidity is equal to an asset divided by its duration. So if you are reducing the average duration or maturity of assets out there in the private sector, you must by definition be improving liquidity. And the black area is the impact of this big issuance or wave of issuance of bills and short dated debt through the treasury calendar as opposed to coupons. So you can see it's becoming material. There's a little bit of a lull right now in terms of that stimulus, which may explain why the economy is soft, but it does pick up. And that's why this is a critical point. Now, as I stressed a second ago, the fact is that banks in particular love this stuff. And so as it happens, do stablecoin issuers. They like short dated debt and they like bills. But if any credit provider Buys government debt in whichever shape or form. But they particularly like short dated stuff. It's monetization. And this chart here is looking at the growth of treasury and agency securities among commercial banks in the US relative to disc. Conventional weekly money supply growth. And you can see that there's been this big acceleration in the growth of Treasuries government debt, which is telling you they're monetizing the deficit. That's the main source of monetary growth right now.

A (20:47)

Now, as we know, the liquidity game is a global game. It's not just the us. You wrote this morning about China. I've been looking at China. It feels that China is picking up its stimulus program as well.

B (20:57)

Yeah, I'll show you the. I mean, I'll come back to the. There's a point about Japan which I can come back to.

A (21:06)

Yeah, well, you can go to Japan straight and then we can go to China, if you're next on Japan, because that was interesting as well.

B (21:11)

I mean, I think this is a point to ponder. I'm not going to say I'm right on this, but I think it's a point for people to ponder is that what you've got in Japan is clearly rising yields. And this chart is illustrating the 10 year yield. That's the orange line and the dotted line is our estimate of fair value without all the various encumbrances of what was then Japan called QQE or yield curve control or these factors. So that's where effectively the Japanese long bond or the 10 year bond is heading to. And that rising pressure on yields is clearly something that's spooking investors right now because they say, here we are, 1987 Crash Redo. We're going to get another episode of rising bond yields which scupper the equity rally. Well, that's possible, of course, but then if you disaggregate term premia, which although a wonkish concept, are invaluable when you're understanding bonds because it shows the risk premium on a sovereign government debt. What this chart here is doing is disaggregating term premia in Japan into three different channels. The red line, which is the one that's really been moving, is the ultra long term bond. So nearer the 30 year tenor. So that's been shooting up, right, I mean dramatically since that graph started. And then the other two lines are looking at medium and short term JGB risk premia or term premia. Now the reason that I'm making this distinction is that if you looked at a comparative economy Like Britain or France, to name names, you'd see all three segments of Term Premium moving up together in sort of harmony or disharmony or whatever way to put it. Because effectively, investors right across the curve of all stripes are dumping government debt because they don't want the sovereign risk. In Japan, something really different is going on. It's only the ultra long term debt that's really being seriously dumped. And isn't that a switch from bonds into equities? Because that type of debt is really a substitute for equities. And so people are just saying, look, hey, we've got inflation now in Japan, we're going to be destroyed, wealth's going to be destroyed in the bond markets, the long term bond markets, so let's switch into equities. And that, as we know, has coincided with a big rally in the Japanese stock market.

A (23:40)

Why are the Japanese tolerating it? Because that's the one thing is, look, the Japanese are very smart in how they manage their monetary policy. They understand this inside and out and they've led the world in doing this. They're allowing this to happen for a reason. It's not like they can't stop it. They know how to stop it. So it's happening on purpose. Now one is they want it to flow into the equity market or B, there's some demographic reason or whatever that they're allowing the super long end to rise. Any particular thoughts?

B (24:12)

Well, I mean, I suppose, I mean, I would turn around and say why aren't they tightening monetary policy if there's a serious inflation problem? And I think you could tackle that in two ways. One, to say they actually want some inflation because clearly that would actually help them not just get the economy maybe moving again, get spending up, but it would also get rid of some of the debt burden. So let's not forget there is a positive in a higher inflation from a government's point of view. So I think there's that argument, I think the other one, which is maybe more conspiratorial, but it's one that I quite like, is that actually the Japanese are being told to ease monetary policy by the U.S. treasury. And I think there's a distinct line going on here which is basically saying they want a weekend. The yen has sort of refused to barge or rally through this period despite what seemed to be strong foreign inflows. And I think a lot of that is to say we're trying to put pressure or collectively put pressure on China. And you go back to what I called back a couple of Years ago, Shanghai Accord 2, which was what I then thought was happening in 2022, which was a deliberate attempt to hold China's feet to the fire by deliberately weakening the yen aggressively. And that put a lot of pressure on the Chinese to, you know, on their financial system. So I think there's a lot of that going on. So maybe it's to do with that. But you know, I don't know. I mean, we don't really know the truth in all these things.

A (25:43)

What's the size of this, the long term? Jj Maybe it's just too small, that they just don't care and that they want to kind of, you know, let that market reduce in importance over time and manage it at that at the tighter end of, of the curve.

B (25:59)

Yeah, it could be. But to be fair to the data here, what we look the, the red line is looking at actually right across the long edges of anything from 10 years and above. So there's a, quite a lot of issuance there. But it is those longer dated issues that are really selling off. And that's what I'm trying to, trying to make the point that it's not, it's not the mid duration or short duration stuff that is being affected. I mean it's being affected to some extent, but it's nothing like the gap is huge. And that differential I think tells you it's more about demand than supply factors.

A (26:29)

And are the Japanese issuing a lot of long end stuff or is it just not particularly?

B (26:34)

No.

A (26:35)

So it's not excess supply.

B (26:37)

No, it's a demand feature.

A (26:40)

It's a demand super interesting. And that's one of the reasons, I guess the Japanese stock market goes up as well as you say. Yeah, I think you wrote in a note this morning, I think that's a key thing because you switch the long duration asset for another long duration asset. That is a better prospect, I guess.

B (26:57)

Yeah, I think absolutely right. I mean certainly for mild inflation, equities look pretty good. If you always get high inflation, they're not so good. You want real assets, but this is what you're getting. And in China you've got if you might, the opposite extreme, which is basically saying they're still in debt deflation, but they are emerging. This is looking at the Chinese 10 year bond in orange, the yield. So that's kind of flatlining, but it looks to be breaking upwards, which is important. And I think the message here is that not all increases in bond yields are necessarily bad. They can be good aspects to a rising bond yield. If it's reflecting some sort of economic recovery or monetary inflation coming through. Some other assets can get a lift from that. And the black line is looking at the term premia in China. Now, normally you'd view a falling term premia, as basically saying there's a big demand for safe assets, that investors are piling into government debt, bidding prices up and pushing yields down. And hence the term premia starts to drop. And that's really been the story, you know, over that period since the middle of 2024. But you can see lately that there's been a flatlining and maybe even a breakout of that term premia. And that's important because as background, what the Chinese are doing is they're adding liquidity into their systems. And I think that's, you know, that's a critical thing to understand, and that liquidity is forcing investors out of safe assets, government bonds, into riskier assets like equities. Now, if you look at this chart, which is maybe a step to the side, but it shows what the issue is. Now, in our view, contrary to the conventional economic narrative, what really matters is the debt liquidity ratio, not the debt GDP ratio. I've never really understood what the debt GDP ratio measures, to be truthful, but the debt liquidity ratio is real because debt has to be refinanced. And if you don't have enough liquidity or balance sheet capacity in the financial sector, you can't refinance. Now, if you have high ratios of debt to liquidity, you get financial crises or certainly stumbling economies and stumbling financial systems. And that's what China has really been through in the last few years. It's had way too high a debt liquidity ratio. Everyone recognizes the debt part, but they don't really see that. Actually, liquidity has been quite scarce as well. And that's really been a function of the fact The Chinese have been trying to match a strong dollar and they've been tightening liquidity on that basis. But that's caused them economic woe. And what they need to do is to get that debt liquidity ratio down. Well, you can do it two ways. You can default the debt. Well, fat chance of that happening. Or what you can do is to expand liquidity. And that's really what they're doing. So you've got to think about, put this in context. And this is showing the next chart is showing the growth of liquidity going through Chinese money markets. This effectively is the conduit from the PBoC, the People's Bank. And Chinese data is notoriously seasonal. So What I've done here is look at year on year changes to give you some sense as to what's going on. But it shows that there's a clear stimulus underway as of these year on year changes as of 2025. And that's pretty much coincident with the rally, the strong rally in the Shanghai market. So you're getting this impetus coming through which I think is very significant.

A (30:35)

Does it change much if you do year on year in terms of percentage change as opposed to RMB change? Because it can also look more dramatic over time.

B (30:45)

Yeah, I mean, look at it this way. These are the programs, this is breaking down China, you can see the effect. So if it was a percentage, you can work out the percentage change from this. Probably what this is showing is the various programs and the flows of money that are going through Chinese money markets from the PBoC. So you've got their repo purchases, the new program, which is the black area called the outright reverse repo. You've got medium term lending and you've got overall PBOC liquidity injections and you can see how that's built up. But I mean it's pretty clear that something's going on. They had a brief attempt at that in sort of 23, but they phased it off because of the weakness in the yuan and now they've kept going again.

A (31:31)

The weak dollar allows everybody to stimulate.

B (31:33)

Yeah, absolutely. Look at Europe. I mean, that's exactly the same thing. So what's the end game here? The end game is sort of shown here with our index of Chinese liquidity over the long term in orange. And that's showing with projections, the projection we put in, but it's charted alongside commodity prices where we put the CRB index, annual change in black and the dotted line is the CRB without energy products. Just to make sure there's general truth there. So that seems to show that if you get this big Chinese stimulus continuing and the dotted line is showing the continuation, that should mean that you get stronger commodity markets.

A (32:16)

Yeah. Which suggests a business cycle pickup because China's been missing from the economic equation of the world for a while now because it's been in a debt deflation, I think.

B (32:24)

Absolutely. Yeah, absolutely. And so if you go back to where we are, this is a very normal cycle in that from an asset allocation point of view, from a market point of view, from a liquidity standpoint, everything's normal. What's abnormal is the business cycle.

A (32:40)

Yeah. So just for completeness sake, we didn't talk about what Japan is doing in liquidity terms. We talked about the bond market itself. Is Japan adding liquidity, neutral liquidity? Where are we on that?

B (32:53)

Well, generally it's expanding. I mean, that's for sure. It's been stronger, but generally it's going up. I mean, we tend to think of there being two components in liquidity. One is looking at what the central bank is doing and the other is what's coming out of the private sector. The central bank still seems to be injecting decent amounts of liquidity. What is less strong is the private sector and that is largely a function of two things. One is the banks. Bank lending is beginning to pick up a tad in Japan. But the other thing is the cash flow of the corporate sector, which is largely under a cloud because of the weaker Chinese economy. And Japan is now more and more sort of adjunct or a warrant if you like, on the Chinese economy. So a slower Chinese economy and obviously the tariff impacts generally in the world are putting a sunning to some extent cash flow of Japanese corporates. So that could clearly change. But for the moment that's where we are. Sorry. Japanese liquidity looks pretty good. You know, if you look generally at the world, liquidity conditions in Europe, in Japan and in the US are pretty much. They're all expanding pretty strongly. Europe and Japan have caught up a lot in the last couple of years and they've caught up recently because of the weaker dollar, as you rightly say.

A (34:22)

And they've all got the same debt refinance issue. I mean, everyone's in the same boat.

B (34:26)

Correct?

A (34:27)

Because they've all got the same aging demographics, the same debt issue. And so they're all having to manage it in this kind of global cycle. And everyone kind of knows the game. What is going on with France and the uk because you know, it's shocking me to read and it's probably sensationalist. Oh well, we might need the IMF to help us. I mean, it's like sounds kind of extremist, but what is going on?

B (34:53)

Well, the fact is that both are in a very similar situation as you allude to. I mean, I'm not going to say that Germany is out of that net because Germany equally has a problem in terms of debt. I mean, the great paradox if you look at Europe generally is that the big losers out of the gfc, countries like Italy, Spain, Greece, are the ones that are actually winning right now. And the winners, if you like, the countries that were pretty well off at the time of the GFC, are the ones that are really under the Kosh, you know, countries like France and actually increasingly Germany. Now, what are the problems particularly it really comes down, I mean, part of this is the China effect because there's been a spillover given the fact that Europe is so connected with the Chinese economy and a slower Chinese economy is adversely affecting Europe. But then on top of that, embroidered on top, you've got this debt problem which is really one about far, far too generous welfare state systems. And you will be, you know, you would have read in the last day or so that the German Chancellor is actually talking about paring that down, which, I mean, they have to do it. I mean there's no way these bills can be afforded in the long term. But it's easier, it's easier saying than getting there. As we know now, specifically, what you're seeing in the case of France and the UK is that the debt markets are selling off, yields are rising, they're rising for different reasons than yields are rising in Japan and China. They're rising because of supply issues, not because of demand issues. And it's because you've got this big weight of supply coming in and that's forcing term premia up. And if you look across the curve, it's not simply the long dated term premia that are rising as in Japan, it's everything. So the problem is this is a sovereign debt crisis. Look at the uk. I mean people poured scorn on Liz Truss, what, three or four years ago for what she did, but I mean the latest Chancellor, Rachel Reeves has done that. I mean she's bested Liz Truss easily. I mean yields are sovereign yields in the UK underlying term premia up over 100 basis points in the last 12 months. And this is a big financing cost.

A (37:09)

And what did the bank of England say about this?

B (37:12)

Well, the bank of England, there's not much in truth the bank of England can do. I mean, what are they going to do? You're going to get them to, they can cut interest rates, but then the UK's got an inflation problem which is emerging. I mean, if one country, as you will recall, you know, sorry, the two countries that always used to feature first in any inflation pickup with Britain number one and Australia number two. And Britain is really a bellwether to that process, probably because inflation is sticky and it's picking up, there's not much the bank can do.

C (37:41)

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A (38:59)

So, so what are they going to do about it? Because they're going to have to do something, right? We don't. We're not in a world where we can allow interest rates to become unanchored. And so there's something that either the, the government has to do or the central bank has to do eventually to quell this. And it can't be be unlikely to borrow money from the IMF if it is, it's just another liquidity injection from a different mechanism. But you know, what other answers do they have?

B (39:27)

Well, I think the first thing they'll do is at the upcoming budget they're going to start increasing taxes as best they can. The ability to cut back on expenditure programs is limited because in Parliament the socialist sort of backbenches are voting out any attempt to cut spending. So that's tricky for them at the moment. But it may be that you have to force a crisis to actually get those cuts put in place. And clearly if there is any deal with the imf, the IMF would be the baton that sort of is wielded to actually beat down spending. That's what they would do. The third alternative is the bank of England just basically monetizes the debt, let's not say never for that, because that's almost inevitably what's going to happen in the world.

A (40:13)

That's almost always what happens, right, that that is the chosen path. And by what mechanism would they do that? Yield curve control?

B (40:21)

Well, yes, I mean it could be or they just basically start to buy up. They do another sort of QE program. But you know, these QE programs can be dressed up as support for the bond market in times of crisis as they've done before. So I think that that's the mechanism or they do it, you know, as you, whatever one calls one on one, what label one puts on it. But if you get the banks to try and buy more debt, that's another way. The private banks to buy more government debt, that's another route out. And they could try and loosen up some of the controls there. I mean that's been spoken about. And you will note that it's not just the US which is talking about issuing very short term debt and bills. The UK treasury as well as the Japanese are talking about doing the same thing. So all these governments are sort of seeing what Scott Bessant has done, lit up their eyes and say well what a great idea, why didn't we think of that first? The trouble is it's monetization.

A (41:17)

And yeah, it's been my opinion and probably your opinion too that they're all in cahoots with each other. They all know that the problem they're facing, they're all facing the same problem and they all tend to do the same thing at the same time. When I go back and look at let's say 20, 22, 23, 24, it seemed like they all decided try and raise GDP growth via immigration which then backfired and now we've got the reverse of that. They do everything together really.

B (41:43)

I think that's right. I mean, you know, I mean the immigration problems are becoming really a major issue here for sure.

A (41:51)

Yeah.

B (41:52)

As they are in the face.

A (41:54)

The other big factor in all of this in global liquidity and maybe the big daddy of all is the dollar itself. Now it's been clear that Bessant wants a weaker dollar, the US wants a weaker dollar, the world needs a weaker dollar. Does that continue weaker? Because that makes a, that's a, you know, that's a very important factor in all of this because the dollar is the funding currency of the world.

B (42:16)

Well I, I think the answer like for the Oswald is is yes and no. It depends against what. So this is looking at the, at the, at the trade weighted dollar and this is the way I tend to think about the dollar. Anyway. I like the real trade weighted index that the BIS does and this, this is really showing what I think are the sort of the underlying currents in the dollar. So what you've had, you have the long downtrend in the dollar broken around the time of the GFC and then you've seen this upward channel at the Moment, we're having a cyclical correction in that. In my reckoning, there's no evidence the dollar is. This is the paper dollar is really being undermined. And ironically, if you look at the following chart, which is looking at net inflows into the dollar, they still seem to be very strong. There's no evidence that we can find in the data that money is leaving the dollar and this to be 100% accurate here or complete. This is not looking at the U.S. data, the TIC data, which is notably rogue and not that accurate. This is looking at what all other countries are saying they're actually putting into the dollar. So presumably it may have biases, but it's a more accurate read as to what's going on. And it looks as if money is still flowing. You can see what happened after the GFC 2010 and after the Eurozone banking crises. Money, a lot of money flowed into the dollar. And that's really been a mainstay of the US market still there. So I think that if you look at the paper dollar, I think that that still looks reasonably robust. I accept the point 100% that I think the administration wants to get it weaker, but I think it's a bit of a challenge for them to get it weaker given these dynamics. But I do think they want to try and talk it down. And that's the evidence that one gets. Yeah.

A (44:08)

And I think on a cyclical basis, I don't think, or at a, you know, the full Plaza Accord, nuke the dollar basis, we just don't have that much stress in the system. And listen, I think it's over 50% of, well, of world debt is in dollars. A weaker dollar allows people to refinance their debts. So it tends to be cyclically weak. To allow this mechanism to happen allows everybody to stimulate, do what they need to do. That ends up being the debasement of currency. Even though you get dollar inflows, people get confused by this. It's like, no, the dollar's still fundamentally strong and is gaining as the world's reserve currency, but its purchasing power via debasement is actually decreasing.

B (44:48)

Yeah, absolutely. And I think what could it weaken or strengthen against? Well, if you look at, I think the yen is. My view is I think the yen is deliberately being held down. I think that the Chinese yuan has to weaken against the US dollar in some form. And I think that if you look at the Europeans, European units, I think that whole fiscal backdrop is so ugly that I can't see why the euro should strengthen particularly against the dollar anyway. So there may be a case for some of the emerging market currencies picking up or the Aussie dollar cyclically, I don't know, but they're tiny in the context of things. On the other hand, if you're debasing the main standard of value in the world economy, then you're going to have real assets like gold, silver, precious metals going up and you're going to have cryptocurrencies going up at the same time. So this is, you know, these are the hedges against this long term monetary debasement. And as I, you know, as I, and I know you keep saying there's a trend here and there's a cycle, the trend looks, you know, compelling. The cycle. We may be coming to the end of it, but, you know, cycles go up and down.

A (45:59)

The other thing, so just zooming in now is we use our financial conditions index as a lead on total global liquidity and it has been sideways for a while, but it looks like it's about to expand again because it's the dollar interest rates and all of those seem to be moving the favor of that, which then gives us a longer lead on the cycle. So I'm trying to get your thinking on, okay, what does the next like three to six months look like on a forward basis from what you can see from liquidity?

B (46:35)

Okay. I mean, my view is, I mean, I'm not bearish on liquidity over that time frame. I think that there are a number of questions that people will raise. And I think one of those, and I'm going to show you another chart, hopefully if this one works, is what's happening to the Fed balance sheet. So that's number one. And this is looking at a concept that I call Fed liquidity, which is the thing that I came up with when I wrote that book Capital wars, which is looking at the various components that the Fed uses to get liquidity into the system. Now that's clearly an important element. It's not the whole story, but it's an important element. And what this is basically showing is that if you look at the projection period on paper, the growth of Fed liquidity falls and goes negative. And the reason for that is if you come back to the underlying ingredient, which is U.S. bank reserves, this chart is showing our projections through year end of US bank reserves based on.

A (47:41)

Yeah, everyone's getting really caught up on this because they're like the reverse repo is empty. And therefore if you rebuild the tga, you've got a massive liquidity shock.

B (47:51)

Yeah. So, I mean, the question is, number one, will they rebuild the tga? Well, okay, if you look at the quarterly refunding announcement, it says they're going to go back to 850. Well, I would be staggered if they get there because to take that amount of money out of money markets would cause the repo spread to spike. And I don't think they want to do that. There's every indication they're trying to manage the repo spread. So I don't think. I don't buy the fact they're going to put it up. Even if they do put it up, you can find other ways of injecting liquidity, as we said, through Treasury QE or getting the banks to buy debt. So I think there are other ways around it. But what that chart is trying to illustrate is that the dotted line, the red dotted line, is my estimate of what adequate reserves are, minimum reserves in the system. And it looks as if there was that step change back last August when you got the change in the stress test rules. But basically what's happened to bank reserves through this year is they very closely hugged that dotted line. And I think that's deliberate because as we know, the Federal Reserve controls bank reserves in aggregate completely. And I think that's what they're targeting, amongst other things. So to see that drop off, which is the TGA rebuild prospectively, I just don't buy. I don't think it's going to happen. So I think that number one is you've got still pretty decent Fed liquidity and everything that I hear Scott Besson say, and what I see the Fed doing is they want to manage that liquidity. They don't want to pull the rug from the markets. Why should they? Number one, I think if you look at offshore markets, in other words, international markets, I think that Europe continues in the groove it's been doing, which means adding more liquidity. They're going to have to do that anyway. And I think all the moves are towards more ease in Europe. Japan, I think follows because they want the yen to remain soft. And China is embarking on a major monetary expansion. So as far as I can see, the liquidity background still looks to be pretty benign over that timeframe.

A (49:55)

Yeah. When we look at both the Fed net liquidity of this and this is what a lot of people are talking about is, oh, my God, this is going to be a liquidity shock. But when you look at total liquidity, because it takes into account what's happening in the banking sector, it's A different chart. And it seems to be that it's the total liquidity dominance now and this has become more of a steady as she goes factor. Same with the balance sheet. So they've moved away, even though the balance sheet's a component of this, but they kind of move away from these things over time. And it now seems to be. It's the banks and there's other mechanisms they can use the pension system and the insurance sector as well at various points. Because they're all the big buyers of bonds.

B (50:38)

Yeah, yeah. I think this is. I mean, I think they've. You know, Scott Bresson, as we know, is a clever guy and I think he's thought these things through and he is conscious of the fact that liquidity is critical to markets.

A (50:50)

Yeah, exactly. It helps having a hedge fund manager as the Treasury Secretary because we all speak the same language, so we kind of know what he's up to. So where do you think. Where is your. To go? Back to where we started. Your best guesstimate right now of when liquidity peaks, is it Q1 a bit longer? I'm in the camp of Q2, but obviously it's probabilistic and it can change, but it's not this year. That's a big important factor for markets.

B (51:23)

Yeah, I mean, in my view, it's at least six months away. I mean, the estimates we came up with, we use leading indicators. Those leading indicators are based on factors like what the business cycle is doing, what's happening to things like oil prices, what's happening to volatility in the bond markets. I mean, a number of things. But that actually comes up with the latest figure that we saw. I saw was March of next year. So it's pretty much close to where you're saying about that sort of timeframe. That's what I would think. Now, it may be extended by a number of factors, but that's what I think the, you know, the cycle is pointing to.

A (52:03)

Yeah, I do, too. And what's really interesting to me is I've then go back to asset markets. The two big assets that I look in all of this is really obviously cryptocurrency and technology stocks, because they seem to be outperforming debasement more than anything else. They're in a log trend channel, which means that basically over time, if the cycle's extended, the price goes higher. And I think people don't really understand this mechanism because of what happened in the kind of stunted cycle of 2021 that we've kind of got the opposite of 2021 at play here, which is that that time is being extended and therefore price likely gets extended upwards.

B (52:42)

Yeah, I mean that makes sense to me. I think that's, you know, at the end of the day, you know, we should be investing more and more in liquidity sensitive assets. I think that makes sense.

A (52:55)

One thing we did do, and I just wanted to get your thoughts on this, gold has been an interesting market. It kind of does what it's supposed to do right now. But what we found is gold seems to be highly correlated with financial conditions, not real rates and all the other things it was linked to. But it now seems to be pretty much real time financial conditions. So you know, it's been in this kind of wedge pattern recently. Let's assume that the dollar weakens a bit more from here. Rates come down a bit more. That'll break out gold because that's the majority of financial conditions which kind of leads everything we found by about nine months. So gold has become really interesting to watch and for me is now quite explainable. It goes from periods of being explainable to not explainable. But that pattern in gold I think is important. I know you look at gold as well.

B (53:48)

Yeah, no, I think I'd endorse that. I think that if you look at real interest rates, real interest rates on the gold price moved very closely together for a long, long time. And then until they didn't. And they didn't basically from 2022 onwards. Now you can argue that that was a lot of people say, well that's because of Ukraine invasion. That was because basically people got disillusioned with the dollar, they wanted a safer asset. That may be the case. I don't think that lines up exactly. I think what's the bigger driver is that was really the period where you saw, that was the time when you saw the beginning of this monetary debasement. So gold basically began to be moved much more by monetary factors, by the flow of liquidity and a lot less by essentially the cost of carry interest rates. So I think that's the people are buying gold as a protection, as a monetary hedge now in the same way as I think a lot of people are buying, I mean people bought Bitcoin because they didn't really know why, but they bought it. But I think now you're getting people who are buying it as a monetary inflation hedge.

A (54:52)

You know, if you've ever wished you could ask me a question, any question 24 7. Well now you can. The Ralpal bot is my AI assistant trained on all of my insights, macro research, macro views, even wine and travel knowledge. The Ralbot is available for everybody who subscribes to either Connect, Alpha or Pro. It can really change your life. You get me as your mentor 24. 7. The link's in the description. I think you're going to love it. Let's assume that most of the world's major central banks know the game is debasement of currency and they're all having to do it together to refinance debts, then part of their job is to offset some of that. So if you know you've got to go through a debt refinancing cycle, the dollar has to weaken for everybody, well then the most likely outcome is they end up diversifying dollar reserves out into an asset like gold. And we've seen certainly in the Middle east, bitcoin being put on, you know, various parts of the sovereign wealth fund balance sheets. So it seems very consistent with them understanding the great one. To me, the greatest of all, I think was the Swiss national bank because they kind of figured out what the game was because they're at all the meetings, but they're too small to matter. I remember meeting them years ago and they were like, we can do anything we want because we're too small to matter. And what they did, instead of kind of managing this process, they just bought tech stocks, which was genius because that was the right thing to buy.

B (56:23)

Exactly. Yeah, exactly. Right. I mean, that's right. I mean they maybe we look to them first as be the buyer, the official buyer of bitcoins. It's entirely possible.

A (56:33)

Yeah, because everyone thought, what are they crazy? They turned into a hedge fund. But they figured out, well, debasement, you might as well just buy the asset that outperforms the debasement and their balance sheet's been great, which has kept the Swiss franc strong over this whole period or steady over the whole period.

B (56:47)

But I think the other thing is, which I'm sure you've got an opinion about it as well, is about the role of stablecoin and how this gives a conduit to the treasury and bessant to actually do a lot more funding. I mean this could be big. And I think it's, you know, if you start to look at how stablecoins operate, typically you could make a case, and in fact I've sort of argued negatively in one regard to say that, you know, a big growth in stablecoin could actually dent bank credit significantly. Because actually a stablecoin is a Lot more or a stablecoin issuer is a lot more constrained than a bank. And if a lot of funds move from banks into stablecoins, you're not going to get credit growth, which is clearly a possibility. But then you've got to think about it from the other side is that actually it's a wonderful source of credit for the Treasury. And so this is what you're going to get is much more public sector led credit growth via the stablecoin conduit. And it's really an opportunity, in no other words, to, for governments to print money.

A (57:54)

What's interesting is those of us have been around a long time. You know, we grew up with the euro dollar market. The euro dollar market was the wholesale funding markets of the dollar. But that stopped at like the big Japanese banks, you know, the European banks and stuff like that. And then you had to get access to it and it was restricted down to, to others. It was hard to get hold of dollars outside of that. But that was the big dollar funding market. What stablecoins essentially is, is a fractionalized euro dollar market down to individual level. So it means you can be in any country in the world and get access to dollars, which is an extraordinary thing. And so what you're doing is spreading the dollar and the issuance of bonds and the holding of bonds down to individuals all around the globe.

B (58:38)

Yeah, I think it's a revolution. I think you can see why it's so important given the sort of sudden change of heart by the Europeans who were sort of dragging their feet hugely on some equivalent Euro currency and now they're basically going full steam ahead.

A (58:59)

And are they going to do it via the central bank digital currency route or are they just going to let the open market just build to try and spread demand for Euros?

B (59:08)

Because, well, I think given the fact it's Europe, it's got to be the central bank route. They're not going to let the private sector get in there, but that's what they should be doing.

A (59:16)

Yeah. And let's see whether there's actual demand for euros on a globalized basis. It feels like it's a dollar world

B (59:22)

and it's US they're running scared because they realize that they could be wiped out or smothered, crowded out in fact by dollar stablecoins.

A (59:35)

And even your chart of showing the amount of money piling to the US shows that that crowding out is happening. And that's what we're seeing in the UK and the French bond markets essentially is there's not Enough foreigners who want to finance other countries debts. We're seeing whether arguably, maybe in Japan as well, there's not enough demand because everybody would rather finance the U.S. yeah, I think, absolutely.

B (60:02)

I think that's the reality of that chart. But it's been the reality for the last 15 years that there's a lot of money flowing that has flowed into the US because the US is the bond market, it's global collateral and they've got on top of that, the added icing on top is the tech sector.

A (60:24)

So final question for you. Do you think the rate of debasement or the increase in liquidity, the rate of change increases from here going into this whole big large refinancing, refunding period. So we should see a spike in all of that or is it kind of more as steady as she goes?

B (60:41)

The way that I think about it is to go back to this chart which is looking at the ratio between debt and liquidity. And what this is really saying is that over the long term financial stability demands a stable debt liquidity ratio. This is for the advanced economies. If you get debt growth, and I think debt growth is, let's take the US as a decent benchmark, debt growth is likely to be growing at something like 8 to 10% per annum. Well, that sort of magnitude then I think what you've got on top of that is equivalent liquidity growth because you need a stable debt liquidity ratio. So liquidity has got to grow at pretty much the same rate. Now what we know is that a lot of those projections, and I tend to use numbers that come from the Congressional Budget Office for want of any other source, they give decent long term projections. The problem with the CBO numbers is they don't take into account recessions. And we know that recessions basically lead to big deficits. And in the last couple of recessions the US deficit's blown up by 4 to 5 percentage points of GDP. So you could be seeing actually a lot faster potential growth of debt anyway. So I think that these figures of sort of 8 to 10% minimum, sorry, minimum figures and that's what we ought to be thinking about. So in that case you've got to choose assets that are likely to give you that sort of return over the medium term. And there's not that many around. Certainly bonds don't do it.

A (62:09)

Super interesting, Mike, as ever look fantastic to run through all of this with you. I think it's always incredibly helpful to people and I guess the message is steady as she goes for now. The ongoing gaming next few months.

B (62:23)

Yeah, through year end. I think that's right. I mean we always know that September is a bad month, but you've got to discount that historically. But I mean, generally I think it's okay.

A (62:34)

Yeah. I mean we will get wiggles and we'll get liquidity withdrawals and all of that stuff, but the trend is intact and continues for a while.

B (62:42)

There are too many bears out there to my mind. I mean people want to call the top of the market and I think that's always problematic.

A (62:50)

Yeah, totally agree. All right, my friend, thank you ever so much.

B (62:53)

Thanks.

C (62:53)

Good.

B (62:54)

Enjoy it.

A (62:56)

So another great conversation with Mike. Always good. Always good to be able to go around the world, look at what's going on, look at how it plays into assets. Think about not only the short term time horizons, the medium and the longer term time horizons and how this all plays out. You see, these are the tools you need to really navigate this. These kind of tools help you unfuck your future. Now never forget on Real Vision we have Real Vision Alpha that has the Macro investing tool with myself and Julian Battelle where we produce all of these charts every week for you so you can navigate it. It's honestly life changing as an investment for your future and how to unfuck it. Anyway, I'll see you next time. Take care.

C (63:43)

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A (65:01)

You obviously enjoyed the episode because you're

B (65:02)

here with me at the end.

A (65:04)

But listen, don't forget to go to realvision.com join and grab a free membership. It's an incredible community packed with alpha great investment ideas and the research that you need to help you unfuck your future. So get started now. Go to realvision.com join

D (65:24)

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