# 2026 Liquidity Outlook: Is the Global Liquidity Cycle Past Its Peak? w/ Michael Howell Source: https://www.youtube.com/watch?v=oIDCDKUCtg4 Recap page: https://rapidrecap.app/video/oIDCDKUCtg4 Generated: 2025-12-25T16:04:45.29+00:00 --- ## Quick Overview Global liquidity cycles, which have historically followed a 5-6 year pattern, are currently showing signs of slowing down their growth trajectory, suggesting a potential shift away from the aggressive stimulus seen in 2020-2021, which could negatively impact asset markets like the S&P 500 and lead to renewed challenges like higher inflation or deflationary pressures on the real economy. **Key Points:** - Global liquidity cycles, tracked since 1970, typically run on a 5-6 year cycle, which is currently showing signs of slowing down (4:38, 4:51). - The current liquidity environment is characterized by a policy divergence: the Fed is tightening while the US Treasury is engaging in direct stimulus (issuing debt) which is flowing into financial markets rather than the real economy (4:40, 4:43). - The US Treasury General Account (TGA) refill is a significant liquidity drain, projected to be around $500 billion over the coming months, which is likely to persist (2:50, 4:50). - The US banks' public debt holdings (Treasury & Agency Securities) are growing, but at a slower rate than the overall debt issuance, indicating banks are not fully absorbing the new debt (13:22, 13:33, 13:51). - The Asset Allocation Cycle suggests the current phase is exiting 'Speculation' and moving towards 'Turbulence'/'Rebound' in the liquidity cycle, which historically favors defensive assets like bonds over risk-on assets like equities and commodities (46:27). - Michael Howell notes that while the Fed's policy is arguably helping the real economy (e.g., lower mortgage rates), it risks fueling inflation or deflation depending on where the liquidity ends up (35:35, 36:37). - The author's firm (GLI) projects Fed liquidity growth will remain positive but slow in 2026, while the S&P 500 is expected to fall slightly below the projected liquidity path (25:50). ![Screenshot at 0:09: The slide titled 'US Banks' Reserves' displays an orange line showing total reserves fluctuating since 2008, with significant downward pressure noted recently due to factors like the end of the Fed's QE program and the TGA rebuild.](https://ss.rapidrecap.app/screens/oIDCDKUCtg4/00-00-09.jpg) **Context:** Michael J. Howell, founder and CEO of CrossBorder Capital and author of "Capital Wars," joins John Gillen on Milk Road Macro to discuss the outlook for global liquidity into 2026. Howell uses proprietary GLI data, including charts on US Bank Reserves and the Global Liquidity Cycle, to argue that current monetary policy is creating distortions and risks, particularly concerning the sustainability of government debt financing and asset prices. ## Detailed Analysis Michael J. Howell discusses the current state and future trajectory of global liquidity, emphasizing a divergence between the Fed's tightening stance and the ongoing fiscal stimulus from the US Treasury. Howell notes that while the Fed is actively draining liquidity (QT) and raising rates, the Treasury continues to issue debt to fund deficits, which is effectively injecting liquidity into financial markets via TGA mechanisms (like the TGA refill, projected to be around $500 billion, and Treasury bill issuance) rather than directly boosting the real economy. This creates a complex environment where financial markets are being supported by direct stimulus, even as monetary policy aims to tighten. Howell contrasts this with previous cycles, noting that the current liquidity injection is more directly aimed at financing the government debt rather than supporting broader asset prices, which he sees as a key difference from past QE programs. He points to his GLI data showing that US banks are still increasing holdings of government debt, but at a slower pace relative to issuance, creating risk. Furthermore, the Global Liquidity Cycle chart suggests the world is currently in the 'speculation' phase, heading towards 'turbulence' and 'rebound' (favoring commodities/cash over bonds/equities), though the current cycle's shape is less pronounced than in previous decades. The overall implication is that while asset prices may not crash immediately due to ongoing governmental stimulus supporting the markets, the underlying conditions are creating risks, particularly if inflation remains sticky, potentially forcing the Fed into a difficult path of rate cuts sooner than expected to avoid economic stress. ### US Banks' Reserves - Reserves have fallen following the end of QE and the TGA rebuild, with recent dips potentially linked to the April Tax Payments and TGA Rebuild (0:09). ### Liquidity Stimulus Mechanics - The stimulus is now more directly aimed at financing the Treasury's debt issuance (Treasury QE) rather than broad market liquidity injections seen during the pandemic (10:09, 10:14). ### Fiscal Dominance & Debt - The Treasury is issuing significant debt ($500 billion/month) to fund the deficit, which forces the Fed to manage this via its balance sheet or risk market stress (2:50, 3:36). ### US Banks' Public Debt Holdings - Commercial banks' holdings of Treasuries/Agency securities (orange line) are increasing annually but at a slower rate than M2 Weekly (red line), suggesting banks are not fully absorbing all government debt issuance (39:05, 39:40). ### Global Liquidity Cycle (1970-2025) - The cycle is currently near a peak, suggesting a downturn (liquidity contraction/turbulence) is likely, although the current cycle is less extreme than historical cycles (44:20, 45:48). ### Asset Allocation Cycle - Current positioning suggests moving out of risk-on assets (Equities, Commodities) and into defensive assets (Bonds, Cash) as we move from 'Speculation' towards 'Turbulence' (46:27). ### Inflation & Policy Implication - High monetary inflation coupled with cost/wage inflation presents a dilemma for the Fed; aggressive policy easing (like rate cuts) could exacerbate inflation risks (33:33, 37:55). ![Screenshot at 0:09: The slide titled 'US Banks' Reserves' showing the long-term trend of bank reserves, with recent sharp declines noted.](https://ss.rapidrecap.app/screens/oIDCDKUCtg4/00-00-09.jpg) ![Screenshot at 0:37: A slide titled 'Coming Up...' indicating the structure of the interview discussion.](https://ss.rapidrecap.app/screens/oIDCDKUCtg4/00-00-37.jpg) ![Screenshot at 10:09: A chart titled 'Growth of Fed Liquidity' showing volatile year-over-year percentage change, with a projection for 2026 \(grey area\).](https://ss.rapidrecap.app/screens/oIDCDKUCtg4/00-10-09.jpg) ![Screenshot at 39:59: A slide titled 'US Banks' Public Debt Holdings' comparing Treasury/Agency securities growth vs. M2 Weekly growth, showing banks are buying less relative to issuance.](https://ss.rapidrecap.app/screens/oIDCDKUCtg4/00-39-59.jpg) ![Screenshot at 46:24: A diagram illustrating the Asset Allocation Cycle, showing asset preferences shifting from 'Risk On' \(Equities, Commodities\) to 'Defensives' \(Bonds, Cash\) as liquidity tightens.](https://ss.rapidrecap.app/screens/oIDCDKUCtg4/00-46-24.jpg)