Michael Howell Shares Why We Should Master the Liquidity Cycle to Predict Markets

 

Episode 689 of the My Worst Investment Ever podcast brought an extraordinary conversation with Michael Howell of CrossBorder Capital, one of the world’s leading experts on global liquidity. Few people understand the plumbing of the financial system as Howell does, and his insights reveal something most investors overlook:

Liquidity—not interest rates—is what truly drives markets.

Below is Andrew’s value-rich recap of Howell’s key teachings on global markets.

Why the liquidity cycle is more important than interest rates

Most investors instinctively watch interest rate decisions from central banks. But Howell argues this traditional focus blinds people to the real forces shaping financial stability. In today’s highly leveraged world, where global debt far exceeds GDP, the financial system depends not only on the cost of money but on the availability of money.

Liquidity is the lifeblood that allows institutions to refinance, roll over debt, generate credit, lend, borrow, and stabilize markets during stress. Because debt refinancing now outweighs new capital raising by about seven to one, even small contractions in liquidity can spark systemic problems. When liquidity dries up, refinancing falters—and crises emerge quickly.

This is why understanding where liquidity is headed, and how it behaves across borders, is one of the most powerful forecasting tools investors can master.

The current cycle: a tightening that quietly triggered a recession

According to Howell, the global liquidity cycle recently reached its tightest point in more than a decade. Central banks spent roughly 15 months aggressively tightening monetary conditions, and although economic data lagged, financial markets felt the pressure immediately.

Markets, being forward-looking, priced in the impact long before consumers noticed any slowdown. Howell believes the recession effectively began before most people realized it, because liquidity stress appeared first in the financial system rather than in the real economy.

The critical inflection point came in October 2022 during the British gilt crisis, when extreme leverage in UK pension funds nearly triggered a global contagion. Immediate intervention by US authorities—particularly liquidity injections—prevented a 2008-style collapse. Those actions marked the moment when the liquidity cycle quietly began its turn upward again.

Since then, both the Federal Reserve and the People’s Bank of China have been adding liquidity back into the system, easing strains in money markets. Howell believes this will continue for some time, helping to stabilize bond volatility and gradually improve overall financial conditions.

Why the MOVE Index now matters more than the VIX

Investors have been trained to monitor the VIX Index as a measure of risk and volatility. However, Howell stresses that the VIX—focused solely on equities—is no longer sufficient for understanding modern financial instability.

True financial crises rarely begin with falling stock prices. Instead, they originate in the bond market, where trillions of dollars must be refinanced regularly. For this reason, Howell points to the MOVE Index, which measures volatility in US Treasury markets, as the superior indicator.

When Treasury volatility rises, it signals stress in the deepest, most important pool of global collateral. Since government bonds anchor the world’s collateralized lending and repo markets, disruptions there spread quickly into credit creation, liquidity flows, and eventually equities. Watching the MOVE Index, therefore, provides a clearer early-warning signal than the VIX, which reacts later in the crisis cycle.

Understanding this shift—from equity-led to bond-led volatility—is essential for anyone trying to stay ahead of market turning points.

Collateral pools: the new foundation of global credit

One of Howell’s most important insights is the changing role of collateral in modern finance. Traditionally, the Eurodollar system dominated global liquidity and credit creation. But over the past decade, its influence has faded dramatically.

Instead, the financial world is increasingly governed by collateral pools—bundles of high-quality assets such as US Treasuries, corporate bonds, and mortgage-backed securities used to secure loans and carry out financial transactions. These pools dictate who can borrow, how much leverage is possible, and how liquid markets remain during stress.

This shift has profound implications. Credit availability now hinges more on collateral quality and liquidity than on lending capacity in Eurodollar markets. As the value of collateral changes, so do credit conditions.

Another major transition is taking place: the move from LIBOR to SOFR. LIBOR, based on bank estimates, became vulnerable to manipulation, while SOFR uses actual overnight transactions backed by Treasury collateral—making it more trustworthy. This reinforces the broader shift toward a financial system defined by real collateral, real transactions, and more transparent mechanisms for determining the cost of money.

Why the dollar will continue to dominate despite rising global competition

While discussions about “de-dollarization” continue to circulate, Howell believes these concerns are overstated. Several forces reinforce the dollar’s long-term dominance.

First, the United States remains the world’s true global banker. Its financial markets are unmatched in depth, transparency, liquidity, and the availability of high-quality collateral. China may be expanding economically, but lacks the institutional trust, regulatory transparency, and financial depth needed to replace the United States as the center of global finance.

Second, Howell highlights the pivotal role of Saudi Arabia. As a surplus nation, Saudi Arabia must invest its wealth somewhere safe. It is extraordinarily unlikely that it would shift its reserves entirely into Chinese financial assets, which lack the security and liquidity of US Treasuries. Without Saudi participation, China cannot build the scale necessary to back a global reserve currency.

Third, the historical foundation of the dollar—laid by the Bretton Woods agreement—remains deeply entrenched. The dollar is not merely a dominant currency; it is the backbone of global settlement, global debt, global reserves, and global trade finance. Replacing the dollar would mean replacing an entire global infrastructure.

While the dollar may face short-term fluctuations—including the possibility of a moderate correction—its strategic dominance is unlikely to be challenged meaningfully for decades.

Final thoughts: liquidity is the market’s master signal

Michael Howell’s message is powerful and consistent:
Liquidity drives markets, credit cycles, asset prices, and financial stability.

Understanding the liquidity cycle—where it is tightening, where it is expanding, how collateral is behaving, and how central banks are responding—is one of the most forward-looking, predictive frameworks an investor can use.

Instead of fixating on headlines or interest rates, investors should examine:

• global liquidity injections
• the health of collateral pools
• balance sheet capacity
• bond-market volatility
• cross-border money flows

Mastering liquidity is mastering the rhythm of the financial system itself.

Connect with Michael Howell

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