Podcast Summary
In this podcast, Michael Howell of CrossBorder Capital discusses the global liquidity cycle, inflation, and the importance of monetary hedges. Howell explains the relationship between global liquidity and debt, the role of central banks, and the potential impact of monetary inflation. He also highlights the importance of diversifying portfolios with assets like gold and cryptocurrencies to hedge against monetary inflation.
Key Takeaways
Understanding Global Liquidity and Debt
- Global Liquidity Cycle: The global liquidity cycle bottomed in September 2022 and has been rising consistently since then, lifting both Wall Street and risk assets. Global liquidity refers to the flow of money through world financial markets, which is much larger than traditional monetary aggregates like M1 or M2.
- Debt and Liquidity: The average duration of debt in the world economy is about five years, and approximately $70 trillion of debt needs to be refinanced each year. Debt and liquidity have a symbiotic relationship, where expanding debt requires more liquidity, and vice versa.
- Central Banks’ Role: Central banks play a crucial role in creating the funding pool for global liquidity. Their balance sheets, although relatively small compared to the size of global liquidity, have been steadily increasing, indicating quantitative support and injecting liquidity into the financial system.
inflation and Monetary Inflation
- inflation: inflation consists of both cost inflation and monetary inflation. Cost inflation is driven by factors like higher oil prices and wages, while monetary inflation is caused by governments relying on financial markets and potentially the Federal Reserve for funding.
- Monetary Inflation: A buildup of monetary inflation is expected in 2024 due to the supply side adjustment to the COVID crisis. The main concern for investors is the long-term upward course of monetary inflation, which is why holding more monetary inflation hedges such as gold, crypto, commodities, and real assets is recommended.
Fiscal Dominance and the Role of the Federal Reserve
- Fiscal Dominance: The Federal Reserve and the Treasury aim to maintain and even increase liquidity in the US financial system. The Treasury’s shift towards increased bill issuance allows it to inject liquidity into the market without straining market liquidity.
- Role of the Federal Reserve: The Federal Reserve’s balance sheet is projected to expand, potentially reaching a 10 trillion dollar balance sheet by 2029. This raises concerns about monetization and the need for more monetary hedges in portfolios.
Monetary Inflation Hedges
- Gold and Crypto: Gold and crypto assets are considered effective monetary inflation hedges. Crypto, specifically Bitcoin, shows a higher sensitivity to an increase in global liquidity compared to gold.
- Store of Value: Bitcoin has been acting as a monetary hedge and is being used as a store of value. Younger investors tend to understand and be familiar with Bitcoin, and tech companies are using cryptocurrencies as vehicles for their treasuries.
Sentiment Analysis
- Bullish: The podcast presents a bullish sentiment towards cryptocurrencies, particularly Bitcoin, as a hedge against monetary inflation. The guest acknowledges the uncertainties and risks associated with crypto but argues that Bitcoin has been acting as a monetary hedge and is being used as a store of value.
- Bearish: There is a bearish sentiment towards the bond market due to the risks of higher inflation and fiscal dominance. The guest suggests that while Wall Street may do well in the current environment, bond markets may not be as attractive.
- Neutral: The podcast maintains a neutral stance on the role of central banks and the global liquidity cycle. It acknowledges the crucial role central banks play in creating the funding pool for global liquidity and the symbiotic relationship between debt and liquidity.
