Michael, you omitted Gold & other commodities in your concluding thoughts. Is it fair to say that they should continue to benefit from this ample liquidity environment (and as we progress from "calm" towards the liquidity cycle peak? Clearly gold has been consolidating for some time now (& recently outshined by crypto) but doubt the outlook has fundamentally changed? Appreciate your thoughts.
Michael, do you think part of the disconnect with critics like Andy Constan is that they don’t view Bitcoin as a legitimate macro asset? Your framework seems particularly effective at forecasting assets that are liquidity-sensitive and reflexive — like BTC — while theirs focuses more on traditional plumbing and risk transfer. Is this just a case of different assets, different lenses?
I'm reminded of 'glass houses and stones' but Andy is a sensible guy althou I do not understand his framework and it apparently has caused him to be short risk assets this year? He wrongly dismisses 'liquidity' in my view, which is strange since he apparently like me worked at Salomon, where everything was about liquidity! In my view, the huge macro debts we face emphasize the need to understand liquidity. And clearly there is something wrong with traditional investment tools.
It’s like watching generals fight the last war, while the battlefield has already shifted beneath them.
Arguing about definitions, clinging to old models, debating whether something is “real QE” while retail is front-running liquidity, moving nimbly, and stacking asymmetric upside.
He is not stupid. I like him. But like so many - Trapped by mandates. Trapped by legacy reputation.
Do you think it’s possible the length of the cycle will become fundamentally changed by the shortening of the term structure of the government debt?
It seems like by getting to 2 weeks to 2 year debt and out of 2 year to 30 year debt the refinancing is pushed forward but at high rates demands constant rises in liquidity until either a) much of the debt is paid off b) long term rates come down.
So could this mean the end of the 5-6 year cycle into some perpetual stair stepping rise in liquidity that lasts long enough to restructure or pay off the debt?
Ultimately yes. The length of the liquidity cycle is based on refinancing and appears to match the average maturity of all debt. Note even with bill issuance it will take time to reduce av maturity of entire debt stock
The most powerful governments in the world will drive fiscal and issuance policy and any other levers at their disposal to take care of their own debt before they take care of private debt. Thus, the more aggressive they become, the more relevant *their* average debt stock overrides the importance of the total debt stock?
Like it will take time, but it might not take as long as it would to compensate for all the longer term corporate and individual debt?
National debt in the United States is rising. The increase in the US debt ceiling is leading to a flood of new US Treasury bonds being issued. The newly issued Treasury bonds are being bought by the banking system. This causes cash to flow from the banks to the US Treasury (TGA). This withdraws money from the monetary system. Money parked at the Fed is not part of the money supply. This would indicate a declining money supply, or liquidity. Is my assumption correct?
If the government didn't spend it, then yes. But it does spend and this ends up as larger bank deposits. These are a further source of funding for the banks...magic money!
Thanks, good comparison between M2 and Liquidity. Question: You write that under QE, the "Fed’s balance sheet has grown larger and the private sector’s balance sheet has changed its composition..." So, should I assume you mean the "non-bank" private sector balance sheet has changed composition, but not grown larger? Because, under QE, both commercial bank reserves and deposits increase, as do the Fed's assets and liabilities. Please clarify, thanks.
Yes you are correct. Banks balance sheets will benefit from higher reserves to match the larger deposits. But for the NBPS these deposits are offset by fewer bonds
Have you done an analysis on whether and how the lead time differs near cycle tops?
Jeff Ross says that toward the end of the cycle it outruns the liquidity, tops, and typically liquidity increases a little but BTC takes the lead in rolling over. However, I also know your measurement is proprietary and he calculates it differently.
So I’m curious if you’ve done an analysis like that for your liquidity metric.
I suppose I can answer my own question looking at your chart. It does appear BTC starts rolling over first. So I suppose if you were to try to time a cycle top instead of a cycle bottom, you would use the proportional running away from the liquidity line, or a running away of the price to liquidity ratio, as the indicator.
Two things drive long term yields - policy rates and term premia. The latter are gently rising and following Bund and JGB term premia. The former...ask Mr Trump! I think they should fall 100bp. As a rule around 50% of a policy rate change is passed to long end ie 50bp. Add back a 25bp possible rise in TP and you might see a small fall.
Hi Michael was recently doing some work on Bitcoin volatility as it is now becoming a proper asset. Link to chart above https://ibb.co/xqspcJyX. In the chart above the top panel charts Bitcoin’s price trajectory (blue line), featuring clean red dots marking all-time highs. The bottom panel displays the 30-day realized BTC volatility to 30-day forward-looking VIX ratio (purple line, right side), appropriately lagging VIX by 30 days to align temporal horizons. Alongside a percentile ranking representation (left axis). Light blue shading marks historically low ratio values (bottom 10%), while light red indicates high-ratio extremes (top 10%).
Notably, the purple line now frequently resides within—or near—the bottom shading zone, visually confirming that Bitcoin volatility is trending below its historical average relative to implied market volatility.
The prevalence of bottom-10% ratio shading illustrates that Bitcoin is less volatile today than it has been against implied equity volatility historically. Bitcoin is now exhibiting more moderate and predictable volatility, aligning it closely with the needs of institutional asset allocators.
Michael, you omitted Gold & other commodities in your concluding thoughts. Is it fair to say that they should continue to benefit from this ample liquidity environment (and as we progress from "calm" towards the liquidity cycle peak? Clearly gold has been consolidating for some time now (& recently outshined by crypto) but doubt the outlook has fundamentally changed? Appreciate your thoughts.
Michael, do you think part of the disconnect with critics like Andy Constan is that they don’t view Bitcoin as a legitimate macro asset? Your framework seems particularly effective at forecasting assets that are liquidity-sensitive and reflexive — like BTC — while theirs focuses more on traditional plumbing and risk transfer. Is this just a case of different assets, different lenses?
I'm reminded of 'glass houses and stones' but Andy is a sensible guy althou I do not understand his framework and it apparently has caused him to be short risk assets this year? He wrongly dismisses 'liquidity' in my view, which is strange since he apparently like me worked at Salomon, where everything was about liquidity! In my view, the huge macro debts we face emphasize the need to understand liquidity. And clearly there is something wrong with traditional investment tools.
It’s like watching generals fight the last war, while the battlefield has already shifted beneath them.
Arguing about definitions, clinging to old models, debating whether something is “real QE” while retail is front-running liquidity, moving nimbly, and stacking asymmetric upside.
He is not stupid. I like him. But like so many - Trapped by mandates. Trapped by legacy reputation.
Do you think it’s possible the length of the cycle will become fundamentally changed by the shortening of the term structure of the government debt?
It seems like by getting to 2 weeks to 2 year debt and out of 2 year to 30 year debt the refinancing is pushed forward but at high rates demands constant rises in liquidity until either a) much of the debt is paid off b) long term rates come down.
So could this mean the end of the 5-6 year cycle into some perpetual stair stepping rise in liquidity that lasts long enough to restructure or pay off the debt?
Ultimately yes. The length of the liquidity cycle is based on refinancing and appears to match the average maturity of all debt. Note even with bill issuance it will take time to reduce av maturity of entire debt stock
That makes sense but couldn’t we also say this?
The most powerful governments in the world will drive fiscal and issuance policy and any other levers at their disposal to take care of their own debt before they take care of private debt. Thus, the more aggressive they become, the more relevant *their* average debt stock overrides the importance of the total debt stock?
Like it will take time, but it might not take as long as it would to compensate for all the longer term corporate and individual debt?
Thanks for the article.
I have the following question:
National debt in the United States is rising. The increase in the US debt ceiling is leading to a flood of new US Treasury bonds being issued. The newly issued Treasury bonds are being bought by the banking system. This causes cash to flow from the banks to the US Treasury (TGA). This withdraws money from the monetary system. Money parked at the Fed is not part of the money supply. This would indicate a declining money supply, or liquidity. Is my assumption correct?
If the government didn't spend it, then yes. But it does spend and this ends up as larger bank deposits. These are a further source of funding for the banks...magic money!
Thanks, good comparison between M2 and Liquidity. Question: You write that under QE, the "Fed’s balance sheet has grown larger and the private sector’s balance sheet has changed its composition..." So, should I assume you mean the "non-bank" private sector balance sheet has changed composition, but not grown larger? Because, under QE, both commercial bank reserves and deposits increase, as do the Fed's assets and liabilities. Please clarify, thanks.
Yes you are correct. Banks balance sheets will benefit from higher reserves to match the larger deposits. But for the NBPS these deposits are offset by fewer bonds
Have you done an analysis on whether and how the lead time differs near cycle tops?
Jeff Ross says that toward the end of the cycle it outruns the liquidity, tops, and typically liquidity increases a little but BTC takes the lead in rolling over. However, I also know your measurement is proprietary and he calculates it differently.
So I’m curious if you’ve done an analysis like that for your liquidity metric.
I suppose I can answer my own question looking at your chart. It does appear BTC starts rolling over first. So I suppose if you were to try to time a cycle top instead of a cycle bottom, you would use the proportional running away from the liquidity line, or a running away of the price to liquidity ratio, as the indicator.
Also look at gold. A major break lower would be followed by BTC
Imo the best way to time cyclical tops and bottoms in btc is on chain analysis; tracking GLI is, IMO, more a longer horizon strategic tool.
Why? The point of the post here is that the cycles line up almost perfectly. But the problem is the lead time turns into a lag at the cycle top.
Do you still see the long end rates rising as inflation pressures increase, or do we need to wait until the Treasury QE/Not-QE-QE stop?
Two things drive long term yields - policy rates and term premia. The latter are gently rising and following Bund and JGB term premia. The former...ask Mr Trump! I think they should fall 100bp. As a rule around 50% of a policy rate change is passed to long end ie 50bp. Add back a 25bp possible rise in TP and you might see a small fall.
Hi Michael was recently doing some work on Bitcoin volatility as it is now becoming a proper asset. Link to chart above https://ibb.co/xqspcJyX. In the chart above the top panel charts Bitcoin’s price trajectory (blue line), featuring clean red dots marking all-time highs. The bottom panel displays the 30-day realized BTC volatility to 30-day forward-looking VIX ratio (purple line, right side), appropriately lagging VIX by 30 days to align temporal horizons. Alongside a percentile ranking representation (left axis). Light blue shading marks historically low ratio values (bottom 10%), while light red indicates high-ratio extremes (top 10%).
Notably, the purple line now frequently resides within—or near—the bottom shading zone, visually confirming that Bitcoin volatility is trending below its historical average relative to implied market volatility.
The prevalence of bottom-10% ratio shading illustrates that Bitcoin is less volatile today than it has been against implied equity volatility historically. Bitcoin is now exhibiting more moderate and predictable volatility, aligning it closely with the needs of institutional asset allocators.
Compelling thoughts! Thanks
Thanks Michael. Very insightful . Initially, you project that the liquiditu will peak this Q4 2025. Has it been pushed back to 1st half of 2026?
Likely yes
So no bear market.
Not yet, but depends on funding/ collateral situation more than anything
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