MacroPass: Michael Howell On Global Liquidity

After hitting a recent 'air pocket', does the rising trend remain intact?

This week’s installment (our eighth) of our new MacroPass service for premium members of this Substack comes from global liquidity expert Michael Howell of Capital Wars.

Numerous times of late on Thoughtful Money, I’ve opined: “Is liquidity flow all that matters when seeking to understand the macro environment?”

It often seems that way. And few understand it and track at as closely as Michael.

In today’s MacroPass report, Michael provides his latest view on current global liquidity flows, whether he sees them rising on falling from here, and whether or not investors should be preparing for a change in regime.

If you somehow missed our previous announcements, MacroPass is a weekly rotating selection of premium analysis from many of the big thinkers interviewed on Thoughtful Money.

To-date that list of contributors includes experts like Stephanie Pomboy (Macro Mavens), Danielle DiMartino Booth (QI Research), Tom McClellan, Michael Howell (Capital Wars), Darius Dale (42 Macro), Doomberg, Kevin Muir (The Macro Tourist), Alf Peccatiello (The Macro Compass), Lance Lambert (ResiClub), Ed Yardini (Yardini Research), David Hay (Haymaker), Melody Wright (M3_Melody), David Stockman (Contra Corner), David Brady (FIPEST Report), John Rubino and Adam Kobeissi (The Kobeissi Letter). And more are joining each week…

The reports issued so far in this MacroPass series include

• Melody Wright on mortgage default risk

• Edwin Dorsey on the short argument for Primerica

• Danielle DiMartino Booth on the debt-default reckoning lying ahead

• David Hay on the wild action in the Japanese yen

• Kevin Muir on the emerging opportunities in Chinese stocks

• Alf Peccatiello on the growing fragility in credit markets

• Tom McClellan’s excellent April Market Report

If you’re already a premium subscriber to this Substack, just continue below to read this week’s report from Michael.

And if you’re not (yet), read the start of it below. If you like what you see, just upgrade to premium and access the full report, as well as all past and future MacroPass content.

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Pulling Out of the Liquidity ‘Air Pocket’?

What to Watch In Coming Weeks

MICHAEL HOWELL

MAY 26

Understanding the current position in the investment cycle is crucial for managing risk and maximizing returns. Our Global Liquidity framework tells us we are still in an major upswing. This is despite the recent setback which caused an brief ‘air pocket’ in markets. Here we reassess the latest trends.

Stepping back, the heat map shown below gives an visual impression of World Central Bank actions. It measures the scale of liquidity injections measured using ‘normalised’ data across over 80 policy makers. Red refers to greatest tightness and green greatest ease. The data are unweighted, but show the commonality of policy moves Worldwide. Greatest tightness occurred in mid-2022, with the start of an upswing in the Global Liquidity cycle starting later that October. As we move further rightwards, the hues change from deep red towards orange, yellow and pale green.

Admittedly, some investors are currently becoming more concerned because latest economic data, and noticeably US employment data are, at last, beginning to soften. Indeed, the trend in the US unemployment rate has even started to trend upwards. Surely, this is bad news?

On the assumption that we avoid a US recession, which would likely severely damage investor sentiment, a slow and softening economy is often a positive signal for markets, especially when Central Banks are also pushing to quicken the pace of activity by adding more liquidity.

Fed Policy And A Slowing Economy

Consider, the next chart. This shows our monthly index of Fed Liquidity injections plotted against the contemporaneous US unemployment rate. It is normal for US policy makers to ease as the unemployment rate rises. In fact, the relationship proves remarkably robust over time. For the entire sample (1972-2024) the regression loading on the unemployment term is 5.7 times, indicating that each 1% point rise in the unemployment rate adds nearly 6 index points to our Fed Liquidity index. For the shorter, more recent period from 2000-24, the loading is a slightly higher 6.2 times. In both cases between 25-33% of the variation in Fed Liquidity can be linked to changes in unemployment.

Have there been any clear exceptions to this general rule? One glaring ‘miss’ occurred in 2008, ahead of the GFC. This is highlighted in the chart below. Then, the Fed started to ease, as expected, but strangely crimped liquidity severely from late-2007 until it was forced to react to the Lehman failure and flood markets with liquidity from September, 2008.

Therefore we should expect a