Summary

Michael Howell focused his conference call on the global liquidity, capital flows and asset allocation. Michael sought to answer a series of questions during his presentation. Are we seeing a V-shaped rebound in markets and economies? Michael says yes, not just in the markets but also in economies. Has there been a sea change in monetary policy? 2, perhaps 3. EG, MMT, ACU and Central bank digital money. Will high street inflation restart? Likely, due to the scale of fiscal spending and the retail money around. Is the US dollar peaking? Likely, with capital flow evidence. Has the long-term GDP trend slowed or quickened? Overall, Michael says it has quickened - a concentration for CapEx in technology, with new industries coming around such as green, electric car, and increasing the value added will quicken the pace of growth, for the next few years. Are equities in a bubble? No evidence based on liquidity, but there will probably be a bubble or surge in equities over the next 12-18 months. Are bonds a safe asset? No! And this is the main risk for investment managers. Michael goes on discuss what liquidity is doing now, comparing central liquidity divided between what the US is doing and what non-US major economies are doing. Liquidity has shot up this year, and still remains very elevated, not only from central bank but also from the private sector. Michael has been upbeat about markets and economies because of this liquidity injection. In terms of explaining what has contributed to the expansion of Global Liquidity since COVID, the European private sector and ECB have contributed about a quarter, the Chinese private sector and the banks have contributed a fair amount and the Federal reserve is about 10%. This is far more balanced than pre-COVID, where about 80% came from the US dollar devaluation and from the Chinese private sector and Chinese banks. Michael also covered inflationary risks. He splits the issue into two, under monetary inflation and high street inflation. Currently, there is a lot of monetary inflation, less China-influenced deflation, but still some technology deflation. Michael predicts a moderate pickup in inflation and suggests that the price of gold is driven by a monetary phenomenon, and not CPI inflation like some believe. In terms of asset allocation, a low period of inflation will have equity and bond correlations start to increase as we move rightwards. Michael continues to discuss the risks implied through the equity market and bonds. With inflation, more people will move out of fixed income into the equities market, and it will become further overpriced. Whereas this period of QE has meant rising term premia periods of quantitative tightening have meant premia has collapsed, and bond markets are a safe asset for investors. Michael then discussed the dollar. The recent surge in US liquidity has been due to the fiscal response from US authorities, throwing money into the private sector, as well as the Fed expanding its balance sheet. Private sector liquidity indicates the strength of the economy and the return on capital, and this drives the USD higher. More Fed liquidity is a negative factor for the USD. CrossBorder’s Forex risk index measures this difference and tracks the movement of the dollar. It has been foreshadowing the dollar progressively weakening. Michael finished his presentation with a short analysis on the emerging markets, and how they have rebounded this year before summarising; Global liquidity is likely to rise strongly to 160 trillion or twice world GDP by the end of this year. We could be seeing peak dollar and maybe peak levels of liquidity, but liquidity is not collapsing near term. There is no evidence that China is easing by the PBOC yet, but that is going to come. Equities will continue outperforming particularly given a little bit more inflation. Right now, there is certainly no evidence of bubbles. Yet, bond markets are high risk. If you think value stocks are cheap, bond volatility is equally as cheap. Yield curves have got to steepen. Long dated bonds are very vulnerable and inflation is a rising threat.

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