If there is too much debt to be refinanced in 2026 and 2027, and liquidity is needed to refinance the debt, why would the global liquidity cycle end in 2026?
It would need to restart agreed. But what we are saying is that supply of liquidity from cycle falls and demand for liquidity for refinancing rises. Result = kepow!
TIPS are very long duration so they should move higher if rates come down. Equally they give inflation protection. Ideal for stagflation. You might get better short-term returns from conventionals in an extreme risk-off case, but you will need to trade them carefully. TIPS are decent Buy and Hold at these yields (1.8%) since it is hard to make more than 2% real over long term from any asset.
Michael in a risk off, could you elaborate why you would go with TIPs rather than nominal bonds - would the latter not outperform, particularly beaten down longer duration treasuries?
Its largely because of the compounding impact of interest payments, Hence zero interest rates would help. Similarly faster GDP growth would boost tax revenues. Really we need to look at the gap between interest (r) and growth (g). r>g is the issue
Im not switching from Risk On yet. Rather getting ready for some major challenges. Three things are on the horizon, but I also don't like the near term reaction of the MOVE index right now. Stronger inflation; Chinese deflation and Debt refinancing are upcoming. These may not affect the supply of liquidity, but they threaten to raise liquidity demand and crowd out risk assets.
Hi Michael, I'm trying to reconcile your current assessment with your previous one. From what I can see, aside from the recent uptick in the MOVE index, the only notable shift is the outlook on Chinese policy response (both fiscal and monetary). The debt refinancing schedule, market conditions (calm, pockets of speculation), and China’s deflationary pressures seem relatively unchanged. Would you agree?
The policy makers seem like they are always successful in kicking the can down the road, I expect no different next time around. And yeah monetary hedges may finally act as such and become a lifeline
Several factors. First the estimated position in the Liquidity cycle. Second corroboration from the position of the economy. Note the economy should be around 12-15 months behind. Third we consider the behaviour of different asset classes, notably also sectors to confirm exactly where we are. Currently Liquidity is around the Calm phase. Economy looks around Rebound in its cycle, which is consistent with Liquidity in Calm. However, the behaviour of certain asset classes is hinting at Speculation.
Michael, what factors will be monitoring to tell if we have entered the Speculation and / or Turbulence phase of this liquidity cycle? Also, are these factors quantitative, qualitative or a mix? thanks as always!
Hello, I have been reading about the possibility of the US and other governments using various forms of a yield curve control or longer term devaluation of US treasuries and other government bonds over a decade or more to essentially inflate the debt away. Forcing pensions, banks and other entities to hold bonds while they run inflation/monetary debasement rates higher such as what has happened to value of US long dated treasuries when compared to gold or equities during the last few years. Do you believe this is their ultimate goal as what they did through 1940-1950's or that they really don't have any longer term strategy to handle this mounting global debt?
They have no strategy and no clue apart from printing money. Welfare State too generous. Nearest is Bessent recognising he has to get long term interest rates lower...good luck there without recession
Read John Hussmans recent monthly review. There are a few ways of measuring how over/undervalued a market is. Where we stand, we are more over-valued than 1929, & 2000. The Buffet Indicator is circa 200%. 2000 it was circa 150%. In order to get to these rich valuations, we needed to blow through ALL previous valuations. But now? No one mentions them. I am not calling “ a top here”. But…all anyone can deduce is that ALL PREVIOUS MARKET TOPS LOOKED VERY MUCH LIKE THE CURRENT ONE. Might there be more legs in this rally? Sure. My only question would be “would you set up your BBQ table on the train tracks if I was unable to tell you when the next train was due”?
Hi Michael,
If there is too much debt to be refinanced in 2026 and 2027, and liquidity is needed to refinance the debt, why would the global liquidity cycle end in 2026?
It would need to restart agreed. But what we are saying is that supply of liquidity from cycle falls and demand for liquidity for refinancing rises. Result = kepow!
Thank you so much for your response. I’m truly impressed by your work and can’t wait for the book to arrive.
TIPS are very long duration so they should move higher if rates come down. Equally they give inflation protection. Ideal for stagflation. You might get better short-term returns from conventionals in an extreme risk-off case, but you will need to trade them carefully. TIPS are decent Buy and Hold at these yields (1.8%) since it is hard to make more than 2% real over long term from any asset.
Thank you Michael
Michael in a risk off, could you elaborate why you would go with TIPs rather than nominal bonds - would the latter not outperform, particularly beaten down longer duration treasuries?
Yes... real interest rates negative
More cash and more TIPS and ultimately more gold, even though gold often initially sells off.
What would the "Risk Off" portfolio structure look like in such an environment? Increased allocation to gold and/or TIPS? T-bill and chill?
Fed will do "Interest Rates Zero Not Interest Rates Zero" to refinance debt of the big kahuna (US gov)
It's Fed's number one priority, keep US gov solvent
Agree. Im getting nervous
Its largely because of the compounding impact of interest payments, Hence zero interest rates would help. Similarly faster GDP growth would boost tax revenues. Really we need to look at the gap between interest (r) and growth (g). r>g is the issue
Im not switching from Risk On yet. Rather getting ready for some major challenges. Three things are on the horizon, but I also don't like the near term reaction of the MOVE index right now. Stronger inflation; Chinese deflation and Debt refinancing are upcoming. These may not affect the supply of liquidity, but they threaten to raise liquidity demand and crowd out risk assets.
Hi Michael, I'm trying to reconcile your current assessment with your previous one. From what I can see, aside from the recent uptick in the MOVE index, the only notable shift is the outlook on Chinese policy response (both fiscal and monetary). The debt refinancing schedule, market conditions (calm, pockets of speculation), and China’s deflationary pressures seem relatively unchanged. Would you agree?
Is the exponential nature of total debt a given or is there something that could realistically break this trend?
DOGE or reneging on Welfare State
The policy makers seem like they are always successful in kicking the can down the road, I expect no different next time around. And yeah monetary hedges may finally act as such and become a lifeline
Several factors. First the estimated position in the Liquidity cycle. Second corroboration from the position of the economy. Note the economy should be around 12-15 months behind. Third we consider the behaviour of different asset classes, notably also sectors to confirm exactly where we are. Currently Liquidity is around the Calm phase. Economy looks around Rebound in its cycle, which is consistent with Liquidity in Calm. However, the behaviour of certain asset classes is hinting at Speculation.
Out of curiosity, which asset are in speculation ?
Michael, what factors will be monitoring to tell if we have entered the Speculation and / or Turbulence phase of this liquidity cycle? Also, are these factors quantitative, qualitative or a mix? thanks as always!
Hello, I have been reading about the possibility of the US and other governments using various forms of a yield curve control or longer term devaluation of US treasuries and other government bonds over a decade or more to essentially inflate the debt away. Forcing pensions, banks and other entities to hold bonds while they run inflation/monetary debasement rates higher such as what has happened to value of US long dated treasuries when compared to gold or equities during the last few years. Do you believe this is their ultimate goal as what they did through 1940-1950's or that they really don't have any longer term strategy to handle this mounting global debt?
They have no strategy and no clue apart from printing money. Welfare State too generous. Nearest is Bessent recognising he has to get long term interest rates lower...good luck there without recession
Read John Hussmans recent monthly review. There are a few ways of measuring how over/undervalued a market is. Where we stand, we are more over-valued than 1929, & 2000. The Buffet Indicator is circa 200%. 2000 it was circa 150%. In order to get to these rich valuations, we needed to blow through ALL previous valuations. But now? No one mentions them. I am not calling “ a top here”. But…all anyone can deduce is that ALL PREVIOUS MARKET TOPS LOOKED VERY MUCH LIKE THE CURRENT ONE. Might there be more legs in this rally? Sure. My only question would be “would you set up your BBQ table on the train tracks if I was unable to tell you when the next train was due”?