Global liquidity is falling at the fastest pace since the great financial crisis, according to Michael Howell of CrossBorder Capital. Amid flat yield curves, collapsing emerging market equities, and weak gold and commodities prices, Howell also details the decline global risk appetite, which he believes is poised to spread to U.S. markets. Filmed on October 10, 2018 in London.
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Mike Howell On: The Collapse In Global Liquidity | Expert View | Real Vision™
Well, in terms of global liquidity, it's currently falling at the fastest rate that we've seen since 2008, so the short answer is it's not good.
This is coming with a bias towards the US, so in other words, the US dollar is likely to be firm certainly in the short term. We have longer term concerns about the dollar, but that's another question. And if you look around the world, you can see the consequences of this tight liquidity. Yield curves, which are an extremely good barometer of liquidity, are flat universally. You've seen cryptocurrency markets skid badly.
They're down 80% this year. They're a very liquidity sensitive asset. Gold is down. Commodity prices are weak. Emerging market currencies are very fragile. And emerging markets stock markets are falling out of bed. These are all classic symptoms of a tightening liquidity environment. What's more, if you look at risk appetite measures, which tend to precede turning points in the economy, they are turning lower in pretty much every economy outside of the US.
It's absolutely fair to say that the US risk appetite has not yet cracked. We think that's just a matter of time. In actual fact, the Fed has more or less been flat-lining in liquidity terms for much of the last two years, certainly it's got a moderately tight policy in our reckoning. But what you're now seeing is other central banks are joining in. You've seen the ECB at the margin through this year tightened quite noticeably, much more in the markets leaving. You're also seeing emerging markets central banks being forced to tighten because of the upward shock to the US dollar.
It's fair to say that liquidity is at lows or towards lows. And liquidity is a leading indicator, so it tends to have its impact, first of all, on bond markets and forex markets, it then migrates through to stock markets, and then it starts to hit the real economy. So when it hits the real economy, you tend to see an inflection point in the liquidity cycle. So actually what we're looking for over the next 6 to 12 months are some signs that the liquidity cycle itself is bottoming out. And that may
seem somewhat paradoxical, but as I say, liquidity leads. And liquidity tends to move up as economies are coming down. Now, that movement coincides with steepening yield curves, so what we've got to start to anticipate are signs that the yield curves globally, in fact, will begin to steepen. That steepening normally comes through from the short end, not the long end. We also should be starting to see rising volatility in markets, beginning in the fixed income markets, probably migrating into forex markets, although clearly we've seen some recently, and then ending up in stock markets. And it's that sequence that we're paying very close attention to.