Michael Howell: Bullish on Gold, Cautious on What Comes Next

0:05Trevor Hall: Hey everybody, Trevor Hall here with Mining Stock Daily reporting from London and the Iron Duke pub here in Mayfair where we've been covering LME week throughout the week with a number of interviews. And we're going to start releasing those interviews with the one and only Michael Howell of CrossBorderCap talking about all things liquidity. And where is it? Is AI sucking up as little liquidity as there is? So a lot to cover here with my one hour conversation with the one and only Michael Howell. Special thank you to Visa Silver, Integra Resources, Survival Gold and Equinox Gold for continued support of this podcast.

0:43Trevor Hall: And also a big thank you to Tara Hutton who make the invisible investable. All these teams help us do these trips to London each and every year to cover the LME week. And we are grateful for everything they provide for us. So enough of this. Let's jump into my conversation with Michael Howell of Cross Border Cap. All right, everybody. Welcome back to Mining Stock Daily covering the LME week here and actually taking somewhat of a step away from metals and really going to focus on macro and global liquidity. And who better to talk about the liquidity cycle here in London than Michael Howell of Cross Border Capital.

1:21Trevor Hall: Mike, good to see you. I love chatting with you. I've been looking forward to this conversation for a long time. Thanks for joining us here. Well, great pleasure, Trevor. Yes. Always a pleasure. I just got back from a conference in Nashville where I sat with Jared Dillian, Tony Greer, and a number of other big macro people. And one of the themes that I think came out of that two-day discussion was how difficult this market has been to make money. There are very few themes that actually worked. And I have that in the back of my mind and really using that to set up the question, okay, Mike, where are we at in the global liquidity cycle?

1:59Trevor Hall: What have you seen in 2026 that really backs up that difficulty for investment?

2:06Michael Howell: Well, I think just to evidence what Tony Greer has been saying is that just look at the performance of fund managers this year. I mean, most of the fund managers I've got money with have lost money this year. So it shows it's a pretty tricky market, even though the indexes seem as if they're going up. I think once you drill into that, you can see there's a lot of disquiet. I mean, it looks like the Russell 2000 is probably in a bear market already. You look at stocks around the world, they're not behaving very well. You're seeing tension in some of the new capital raising areas. and junk spreads are clearly blowing out.

2:36Michael Howell: So it's been very tough. And I think what that tells us is we're late in the liquidity cycle, and that's what we've been arguing. Liquidity is a leading indicator. The liquidity cycle peaked in growth terms Q4 last year. It normally leads by about nine months or so. And so we're pretty much on track now for saying that we're hitting an air pocket. And I think that's probably correct. It doesn't mean to say the markets are going to go down on a straight line, but I think it's going to be choppy. and this is the environment that we kind of describe as speculative, a speculative market where you can make money but volatility is high so the quality of returns is poor.

3:11Trevor Hall: How much deterioration in asset prices do you expect before liquidity potentially finds a bottom? Are you seeing any signs liquidity has found a bottom?

3:22Michael Howell: Well I think that's a very interesting question Trevor. I think the one's got to sort of explore and look around and see if there are any hints or signs of that. I think if you look at Bitcoin, that's kind of an interesting point to start with. Bitcoin seems to have hit a bid. It seems to be staying above levels of about 70 ,000, which I think would be a critical break if it fell below that. And it may be telling us a little bit more about what's happening, particularly in terms of US monetary policy. Now, US monetary policy is complicated. It's been made more complicated by the arrival of a new Fed chair, and maybe with new directives.

3:56Michael Howell: I mean, we'll see about that. But it strikes me that the Federal Reserve is operating a very different model than what it's traditionally done. And I think it's fair to say that Fed funds are not a very useful guide anymore to what the Federal Reserve is doing. And that probably ceased to be the case pretty much since the GFC, you know, what, 15 or more years ago. So I think we've got to start thinking about what the Federal Reserve is up to. And my view is that they're focusing a lot on the repo collateral markets. And they're really saying that what we need to do, and actually Kevin Walsh made this point very explicitly in the last FOMC presser, what they want to do is to maintain an ample bank reserve regime.

4:34Michael Howell: And what that means is they want banks to remain liquid. And by implication, they want money markets to remain liquid. Now, that's telling us that they've got one finger on the pulse of the financial markets, and they don't want a financial market collapse. Okay. Now, can they pull it off? That's the$64 ,000 question, but I think at least they're looking at it. And if you look closely, dig deeply into the data, what you find is that really, since the error they made, and the error was fourth quarter of last year, when they let bank reserves collapse under the somewhat sort of loose notion that they wanted to see a much smaller Fed balance sheet, if you recall those debates, and consequently bank reserves were left to tumble, and they fell quite noticeably by about 300 billion or so in that period.

5:22Michael Howell: You saw huge disquiet in repo markets. Repo spreads blew out. Federal Reserve reacted very quickly, reassuringly perhaps, by introducing yet another acronym. So the acronym, the new acronym is RMP, which is Reserve Management Purchases. This is another QE in disguise. They denied it was QE, but clearly it is. If it's yellow and it's quacks, it's a duck. And basically what they did is they lifted the level of bank reserves again by injecting funds through treasury bill purchases. And that continues. Now, for most of the last year, and actually, or since that date, let's say through 2026, they have maintained a fairly stable level of bank reserves.

6:03Michael Howell: So despite the fact the Fed funds has gone up, you're looking at actually a lot of stability in repo money markets, which what they want to do. The other thing to think about is what the Treasury is doing, because there's another leg to this monetary policy now. And we've coined the term Treasury QE to describe what's going on. And that is really a shift away from the old model of Fed QE, which came in after the GFC. This is now Treasury QE. And what the Treasury is doing is basically doing two things. Number one, is it issuing a lot more bills? And that may seem a somewhat wonkish or arcane point for a lot of people, but it's very important because what it means is that the Treasury, by issuing bills, is effectively monetizing debt.

6:49Michael Howell: And the reason that's monetization is it's not the fact they're issuing the bills, it's more the fact of who tends to buy the bills. And who buys bills and very short-dated government debt are banks and credit providers. If banks and credit providers buy the debt, that's monetization. And that is what's going on. So that's number one factor they're doing. The other thing is they're doing treasury buybacks. And treasury buybacks are not designed to reduce the level of yields, despite what the Financial Times or Wall Street Journal claim. I mean, Besant is not foolish enough to believe that a$6 billion purchase of a buyback is going to control a $40 trillion market.

7:26Michael Howell: But what it is doing is actually capping volatility in the markets. And if you cap volatility in the bond markets, in other words, look at the move index for a very good guide to that. If you cap volatility, you basically ensure the leverage of collateral is maintained. So in other words, the collateral multiplier, the factor that turns collateral into liquidity is still very elevated. If that collapsed, it would be a big, big problem. So the focus of the Federal Reserve and the Treasury seems to me a lot more on liquidity management than actually maybe interest rate management. I think that's a key point.

8:00Michael Howell: Therefore, the takeaway would be, does this mean the downside is smaller?

8:05Trevor Hall: Well, does that mean the downside is smaller?

8:07Michael Howell: It should do, but let's see. I don't know. I mean, we've got to see whether this works.

8:11Trevor Hall: So let me try to simplify the question because it definitely feels like the Federal Reserve and the Treasury, this is one big step towards marrying the two, right? But is it safe to say that you believe the Fed's RMP program is funding the purchases of the Treasury's bills? No, I'm not saying that so much.

8:37Michael Howell: I mean, they are technically in a very small way, but this is minor. What they're doing is they're facilitating the private sector doing that. So effectively, who is funding the deficit is the private sector, private banks, okay, to a large extent. But the fact that you've got leverage in the markets and you've got a stable repo collateral market really means that banks can do this. And effectively, what they're doing is they're just kicking the can down the road through another vehicle. So this is not Fed QE, it's Treasury QE. it's being funded not by the Federal Reserve in this case, it's being funded by the private sector, but the Federal Reserve is standing behind them, if you like, giving support.

9:14Trevor Hall: So has the Treasury market effectively become too important for the Fed to allow yields to rise freely?

9:21Michael Howell: Well, the Treasury market was always the most important element. That's why central banks exist. People forget that. I mean, this whole thing about fighting inflation and trying to create employment and new remits, the whole idea of a central bank is basically to maintain the integrity of sovereign debt markets. That's what they were invented for in the first place. And that's pretty much what is going on now. If push comes to shove, central banks will basically go back and protect the bond markets. I mean, you saw that in the case of the Liz Trust moment in the UK, when the Bank of England switched from a QT to a QE policy overnight to protect the bond market.

9:56Michael Howell: So that's what will happen. And the US Treasury, Fed are no different.

10:00Trevor Hall: Yeah. Do you think there'll be a time where the Fed and the Treasury officially just become one?

10:06Michael Howell: Well, I think more or less they are one. I mean, I agree with you.

10:09Trevor Hall: They mostly are one,

10:11Michael Howell: but I think it's cosmetic that they're separate.

10:13Trevor Hall: Yeah. But do you think there will be time where they just officially come out and say like, we're going to end the Fed and move everything into the Treasury or vice versa?

10:21Michael Howell: Well, I think that would be sort of politically inconvenient. But I think it works pretty well at the moment so if it if it ain't broke you know why fix it all right

10:31Trevor Hall: fair enough has the the roles of besant and warsh made you kind of reevaluate your game plan or what's changed in your day-to-day or the or how you do your work and analysis since those two have come in and done some things a little bit differently i think the i think the first

10:51Michael Howell: thing is that they're clearly working together okay and i'm sure that warsh's appointment was in some way signed off by Bessend. I'm sure that must be the case. I think equally, if you look at how policy is really changing, it's really this introduction of bill finance, or in other words, the much greater use of bills to finance the deficit, which is really the key thing. And that gives the Treasury a big monetary footprint in the markets. Yeah.

11:21Trevor Hall: Isn't that exactly what Janet Yellen was doing?

11:23Michael Howell: Yes, and she was criticized, ironically, by Scott Bessent for doing that.

11:28Trevor Hall: Right. I mean, people are saying she needed to go to jail. This was criminal. Yeah. And now it seems like they're doing the exact same thing, but nobody's out there saying Bessent needs to be locked behind bars.

11:38Michael Howell: I think that's right. You remember, I think probably about three or four years ago, Stanley Druckenmiller, the famous US investor, actually went on stage to say that what Janet Yellen was doing were basically the economics of Argentina. You can't really say that now, but I mean, that's more or less what he said. And effectively, it's a very inflationary policy. The question is how inflationary. It's not hyperinflationary, but it may add a couple of percentage points to underlying inflation.

12:03Trevor Hall: Let's do talk about inflation and where you stand. I think I have empathy towards all arguments. Obviously, costs are going up. I see it every day to day and anecdotally. And it seems like obviously the Fed stance is to subdue inflation, there's, you know, they will use Fed policy rates to do so. But it certainly feels like more of the inflationary pressures right now are from supply-side dynamics on the energy side. You know, and our friend Barry Knapp will always argue that inflation is always a monetary and fiscal phenomenon. Now, we can battle inflation by providing more supply on the energy side.

12:47Trevor Hall: There's actual tangible things we can do that we didn't have to go to the Federal Reserve policy to fix. Do you feel interest rate hiking cycle further after this would be a mistake or is it necessary?

13:03Michael Howell: Okay, well, let me unpack what you just said. I think there are two questions there. What's driving inflation? And secondly, will higher interest rates affect that? Now, I think the question on the interest rate front is what do high interest rates really mean now? I'm not sure. I really get that. I'm not sure the FOMC or the Bank of England or whoever it may be understand what they're doing. If you're raising interest rate, what are you trying to achieve? That's what I'm not clear about, or a lot less clear in this current world. Because if you've got a situation where governments are major debtors to the private sector, and interest rates go up, surely on the government debt, you are actually increasing your transfer payments to the private sector, you're actually increasing your income payments, your interest income payments into the private sector.

13:50Michael Howell: So if interest rates go up, you give more money than you take out. Therefore, it's an income boost. It's a boost to the economy. So given the fact that nobody's really borrowing huge amounts for CapEx, you know, part-shaped, the AI boom in the US, the CapEx boom in the US, but mostly, generally worldwide, most capital expenditure is basically done by state organizations, i.e. Chinese corporations. We're not really interested in what the interest cost is. So you can't say that interest rates play the same role in the economy that they did probably 30, 40 years ago. The textbook model is higher interest rates cool the economy.

14:27Michael Howell: I don't think that's true anymore. I'm sure that's not. It may be the case that if bond yields ultimately rise, there is an effect via the housing market. That's possible. Or consumer credit or maybe that avenue. But the traditional route is actually mysterious. And so I'm not clear whether higher interest rates have any effect at all. What really matters is the volume of liquidity, because you might get a financial crisis, and that financial crisis may throw the world economy to recession, and then a deflation rebounds. So I think that bit is more important to understand. If you come back to the question about what's driving inflation, I think you've got to recognize there are two moving parts with inflation.

15:07Michael Howell: There's a monetary element, which I think we're all pretty assured that is going to keep buzzing away or humming away at a reasonable clip. Maybe that's going on, I would argue, at about 7 % to 8 % per annum. That's your monetary inflation element. And then on top of that, you've got to add or subtract what I think of as cost inflation or deflation. Now, that could be from higher energy prices. It could be from productivity gains. It It could be from cheap Chinese goods that are being dumped. It could be a whole range of things, higher taxes, whatever. That's your supply side element. Now, to my mind, main street inflation, which is what we're talking about, is a cocktail of those two elements.

15:47Michael Howell: And for much of the last 20 years, we've had the benefit of technology, lowish energy prices, and cheap Chinese goods. All deflationary. So all deflationary. So you add the monetary inflation, which has been going on the whole time, to the cost deflationary elements and main street prices don't move very much. You look forward and you've got the monetary inflation still there. Have you got the supply side disruption? I don't know. I think you can argue it one of two ways. You could say AI is a great productivity booster. You could say that we're in a world now where there's a scramble for resources and energy is going to be more expensive or copper or whatever inputs are more expensive and therefore you get more cost inflation that way.

16:30Michael Howell: That's possible, okay? I'm not clever enough to decide that one, but all I would say is that let's say that's a wash, you've still got the monetary inflation element, which is causing prices to go up.

16:40Trevor Hall: What is the same relation with maybe a step here, but the liquidity cycle where we're at with a CapEx cycle? If we are talking about supply-side inflation, we can alleviate that by allocating more capex to bring more supply, right? In the long term, that would be deflationary. But where do we sit right now in the capex cycle compared with where we obviously doldrums of liquidity?

17:08Michael Howell: Okay. Well, the way I would argue that, Trevor, is to say that all money that is anywhere must be somewhere. So if it's in the financial markets, it's not in the real economy. And if it's in the real economy, it's not in the financial markets. So often you see a seesaw effect. So when liquidity in financial markets goes down, it's not necessarily because central banks are tightening. It could easily be, but the real economy is absorbing funds and actually crowding out financial markets. And that's normally with a big CapEx cycle. So the CapEx cycle or the economic upturn that we're seeing now is actually pulling liquidity out of financial markets.

17:41Michael Howell: And that is the main reason that the liquidity cycle is inflected lower, not because central banks have hit the brake, okay, that they're doing that tentatively, much more that the real economy is growing very fast. We've made the case that if you look at, for example, the US Treasury market, which is really in the sort of the eye of the storm in many cases, or actually, you know, partially that probably the French market is more in the eye of the storm as we speak. But you get the idea that Treasuries are generally of concern because yields have gone up. Now, a lot of people say, I would say, ill-informed commentators, particularly a lot of the media, with some exceptions, but mostly the media, say this is all to do with deteriorating fiscal finances.

18:25Michael Howell: This is all to do with the Trump effect or the Besson effect or the fact that debt is too high or whatever. It's not true at all. There's no evidence anywhere in the data that that's the case. What you're seeing is bond yields going up because the economy is red hot. Okay. And what we're looking at is nominal GDP growth in the US economy, which is at its fastest clip, hard to believe, but in nominal terms, this is correct, the fastest clip since the mid-1980s. Okay. Now, inflation is a large part of that. So the quality of growth is poorer. I come quietly on that, but the level of nominal GDP growth is high.

19:01Michael Howell: Back in the mid-80s, bond yields were about seven to eight percent. And where are we now? We're approaching six, five and a half, six. So you could see that relative to the economy, the bond market looks to be pretty fairly priced. To understand the element about is there too much net supply of debt, other concerns among investors about the quality of debt or whatever, you've got to look at term premia. Term premia are flat to falling. So it's not the fiscal side. This evidence, If you can't do or people don't have access to term premium, look at something like the 10-5 yield curve spread. That's falling, okay?

19:41Michael Howell: That's telling us that we're getting a situation where term premium are going down. And it's basically not about fiscal funding. It's all about economic growth. So that would suggest that if you've got the prospect of attenuating economic or business cycles in 2027, bond markets are not a bad place to be.

20:02Trevor Hall: Mm-hmm. There's been so much emphasis on CapEx build out from the hyperscalers here, and that's actually been a huge talking point in markets here with seeing those, you know, CoreWeave has been, basically the markets compared to where their debt is trading now is about 50-50 if that company is actually functional or not, right? I think that's pretty telling. But is that just kind of a sign that we maybe overdid it? Is that more anecdotal on Corey's part? Or is there real concern that that debt that they've taken on is just too much in an environment where the payback is just not going to be - Well, the cash flow is weak.

20:50Michael Howell: I mean, the fact is that you can go back to what Warren Buffett always says is when the liquidity tide goes out, you can see who's swimming naked. And that's pretty much the story. And what we're seeing is that, and CoreWeave is clearly one particular example, but just look at junk spreads. I mean, junk spreads are beginning to blow out quite seriously. Even if you look at investment grade, I mean, they're beginning to rise relative to treasuries. So there's an increasing bid for safe assets in the system.

21:20Trevor Hall: Yeah. Such as? Safe assets?

21:22Michael Howell: Well, I think safe assets, one's got to look at things like, I mean, the ultimate safe asset is the US Treasury. But it's equally, if you look at the German Bund, the German Bund is a safe asset. I mean, the whole problem that the euro system has, I mean, why the euro system is a bonkers system is there's no safe asset in the euro system. The only safe asset is the German Bund, which is not a European asset, it's a German asset. And the problem comes is when push comes to shove in the euro system, okay, what do people buy if they want a safe asset? They buy German bonds. So you get spreads in the bond markets blowing out, which is what you're seeing now.

21:57Michael Howell: I mean, the great paradox that you're looking at within the French bond market is not the fact necessarily that term premium, the risk premium of French bonds is going up a lot. It's much more that the German risk premium is going down, right? It's because of this whole phenomenon. And so whatever it takes, to use the term that Draghi came up with, whatever it takes to fix the euro system, they will have to go and buy peripheral debt, which basically means that they're printing money. So why would you want to own the euro in this sort of environment? Hence the dollar goes up.

22:30Trevor Hall: Could we see a situation where we continue to see strong economics underlying the whole system, but rising yields really don't have much of an effect on the overall on that speed of growth, like people just accepting that bonds are going to rise but the economy still stays strong, as you said? Well, I think it's - Is there a breaking point, I guess?

22:59Michael Howell: I think it's possible. I mean, I think the point that I was trying to say earlier on is the Fed funds don't have very much impact. Bond yields have a lot more impact. They're a much larger part of monetary conditions. then you've got to add in things like the exchange rate. I mean, that clearly matters. And so once you start to look at what's happening, stronger dollar, rising bond yields, high energy prices, this is clearly crimping growth. And the fact is that if you look into 2027, it's quite likely that this sort of burden will cause economies to slow meaningfully. Now, you've still got the AI capex bend.

23:36Michael Howell: You've still got a government deficit of 6 % of GDP in the US. So there's still momentum in the economy, but it could easily slow down quite markedly. And that is maybe what the bond markets are going to start telling us pretty soon. And that's the warning for commodity prices.

23:54Trevor Hall: Okay. We're going to get to commodity prices here in a little bit. I do want to go back. I don't know. I think it was about two or three years ago, Mike, like, you know, we've done over 4 ,500 episodes of mining stock daily. And so I have a handful of conversations that I've had in the past that really like stick with me. And the conversation you and I had in Frankfurt a couple of years ago during Kai Hoffman's event, I will never forget because we were talking about debt monetization. Um, and you've argued that governments ultimately have to monetize our debts because widespread default could undermine the entire credit system.

24:33Trevor Hall: And you put some numbers in front of me in that conversation, I about fell out of the chair. So I remember this conversation. Where does that sit here today, you know, mid-October in 2026? Is that argument still as strong, if not stronger?

24:50Michael Howell: Yeah, look, the trends in the system haven't changed. And what we've got to remember is that we live in a debt-dominated world, okay? That's the clear fact. And debt is compounding, and it's mostly being driven by government debt. That's the main driver right now. And what you're seeing is pressures on government spending worldwide. It's aging populations. I mean, I have to rehearse the arguments, but aging populations, more welfare handouts, more defense spending. Governments need to invest in infrastructure because they haven't done that for a long time. So the list of spending demands is getting longer and longer and longer.

25:28Michael Howell: can they tax us anymore? Well, I mean, you know, deep breath, hopefully not, but they're going to find some ways of doing a little bit more, maybe through wealth taxes. That seems to be inevitable. So you still can't close the gap with spending. So the only thing to do is to monetize that. Okay. I mean, you can issue debt, but ultimately debt has to be paid back and it won't be paid back. So it'd be monetized. And so that is really the path that we're on. And because of this big pile up of debt, what people forget is that debt has to be periodically repaid. There's a refinancing cycle. And average duration of debt in the world economy is about five years, okay?

26:06Michael Howell: Which means every five years, notionally, that debt has to be rolled over. Now, you need balance sheet capacity to do that. If you don't have balance sheet capacity, you get a financial crisis, okay? That's what financial crises really are, an inability to refinance debt. So what happens is that ultimately the central banks have to provide the liquidity because they're the source of all liquidity. And so they have to bail the system out. So what you've got is a situation where number one, debt is growing exponentially. Number two, liquidity follows, but liquidity has a cycle to it as well, which is why you get the booms and the busts in the financial markets.

26:41Michael Howell: But ultimately, it travels the same course. So the first question to answer is how much is debt growing? My view is that debt is compounding at a rate of about 8 % per annum, 7-8%, that sort of figure. This is looking at the US, but the US is a very good benchmark for elsewhere. 7-8 % per annum. What does that mean in real terms, in practical terms? It means that if you grow at 7-8 % per annum, you're more than doubling every 10 years. So the stock of US debt, which is now 40 trillion, will be 80 trillion by 2036. Okay? Okay? It'll be 160, you know, again, you know, another 10 years. So 2046. So these are big numbers, right?

27:24Michael Howell: If you look back in history as a guide, from 2000, sorry, beg your pardon, actually you can go back even further. 2000s applies, but you can go back even further to 1970. 1970 or 1971, to be accurate, the US came off the gold exchange standard, Bretton Woods. The dollar was freely floating. This was the era of paper money, without any backing at all from gold. In that period, federal debt grew at an average rate of 8.5 % per annum, the stock of debt. It wasn't a straight line, but that was the compound rate. Global liquidity, which is effectively, as I've tried to argue, is a monetization of that debt, grew by 8.6 % per annum on average.

28:12The price of gold grew by 8.6 % over that same period.

28:18Michael Howell: Is that remarkable? Is that a coincidence or is this how we should be thinking about things? So if you've got 7 % to 8 % growth in debt over the next 10 years, let's say, what's going to happen to global liquidity? What's going to happen to gold? So those are the benchmarks. And in my view, if you look at all other commodities, they price off gold. Okay? That's my view. We'll see if that's, yeah. Proof is in the pudding. Proof pudding is in the eating rather. Now, if you then look at equities, equity markets over that period, looking at the S &P, did a short 10%. So they were better than gold over that period.

28:59Michael Howell: It hasn't always been the case, but they were better over that period. And if you look at the bond markets, they were a lot worse. So you barely got six and a bit percent out of 10-year treasuries. This is per annum, I remember. and you got at least 100 basis points less out of the five-year note. So you're looking at, you know, bonds that underperform. This is the world we're in, okay? Politicians are kicking the can down the road. There's no change in this, okay? There's still a cycle, and you've got to remember there's a cycle, but there's a trend, and that trend is becoming embedded.

29:32Trevor Hall: You mentioned the five-year refinancing cycle, and I kept on thinking five years ago we were in COVID. and you know there were definitely a monetary phenomenon there obviously but is that five year refinancing I mean it feels like it's coming home to risk and that's basically why we're having this huge conversation now because of the refinancing.

29:56Michael Howell: There's a thing called the debt maturity wall which is basically all to do with debt that was termed out during the post-COVID period when interest rates were slashed near zero a lot of corporations personal borrowers decided they would refinance their debts at low interest rates and push them out towards the end of the decade. And that's exactly what's happening. So there's a huge amount of debt coming back into the system in the next few years to be refinanced. That's putting additional strain on balance sheets on top of the AI CapEx spend, on top of the fiscal spend, the new spend. This is existing debt for refinance.

30:30Trevor Hall: Is this a normal cycle, implications of a cycle? This is completely - No, it's more because what you've done is you've

30:35Michael Howell: basically taken debt out in the period of COVID. I mean, the question to ask is, why have we had this everything bubble? We've had the everything bubble because there's been no debt to refinance and there's been lots and lots of liquidity being pushed into the system. So the vent is always asset markets, right? This is what happens. So now what you've got is a downswing of the liquidity cycle with a lot of debt coming back into the system to be refinanced. And that's why it's a fairly ugly picture, right? Unless the central banks try and do something. Yeah.

31:07Trevor Hall: Well, let's talk about that. What forces the Fed to intervene? Or maybe not just the Fed, all sovereign central banks.

31:14Michael Howell: Well, to put it bluntly, that'll follow the Fed. I mean, the Fed is in charge. And if you get disruptions, and we're living in a dollar world, if you get disruptions in the dollar financing system, the Federal Reserve will have to act. So what specific event

31:29Trevor Hall: would lead the Federal Reserve to provide a meaningful, significant additional liquidity?

31:35Michael Howell: Well, I think there would be, I mean, there'd be a number of things, but I would say if you've got heightened volatility in the treasury market, if you've got auctions seeing very low bid to cover ratios, those would be, I think, phenomenal. If it would be very difficult to sell debt in any form, I mean, those are really, I suppose, those two previous statements say the same thing, but problems in the debt markets, and It could be corporate defaults as well. Would a big equity market slump do it? Could do. That's possible. If you start to see, you know, areas of the financial system being seriously impaired, yeah, they'd come in and act.

32:15Trevor Hall: Let's talk about gold. You mentioned it a little bit in that historical, the benchmarks you have on the horizon here. You've also made argument that China's monetary expansion has been a real important driver. in the recent years of the gold price outside of some of the geopolitical conflicts that we get inundated with. Can you explain how Chinese liquidity finds its way into the gold market and does it remain underappreciated?

32:45Michael Howell: Well, I think the answer is on the latter point, it's hugely underappreciated because China is the elephant in the room. If you think the West has got debt problems, just start thinking about China. China's got big debt problems. and we know that after certainly after the GFC China put its foot to the floor in terms of trying to pump the economy up and trying to pull the world economy out of the slump. There was huge overbuilding in China that was focused on infrastructure and apartment construction and whatever there's a lot of debt which is currently being held by local governments in China which is probably so vast that even the central government's got no clear idea about how big this is, but it clearly impairs growth in the economy.

33:31Michael Howell: China is seeing a situation not a million miles away from what Japan saw about 15, 20 years ago, where it had two lost decades. If you look at one of the maybe sort of interesting, tongue-in-cheek interesting comparisons that are often thrown out, which is to say, let's look at the US bond market. What is the US bond market yielding? It's yielding circa five and a half. What are Chinese bonds yielding circa one and a half? Okay, that 400 basis point spread, according to some commentators, pro-Chinese commentators, this is all about the risk premium now being attached to US assets. It's showing that the world is losing confidence in the US and term premium, risk premium government debt is rising, complete rubbish.

34:17Michael Howell: What that's showing is that the Chinese economy has flattened its back. Because if you believe, take my argument, that nominal bond yields basically align with nominal GDP growth, the 5.5 % are maybe rising US government bond yields are reflecting a strong economy in the US, strong nominal economy. The 1.5 % yield in China is reflecting a very poor Chinese economy. And if you allow, you know, if you assume generously that the Chinese economy may be growing at 2%, right, real, that's telling you they've got half percent price deflation. So this is not a great environment to hold debt. You're looking at a debt deflation classically.

34:56Michael Howell: So what does China do? It could basically do what Japan has done. Or it could do what America did in the 1930s and what Scandinavia did in the 1990s. and the two alternatives are japan sits and waits ultimately it caves in so look at abinomics abinomics took 20 years to occur but it's now cured the japanese problem so they've monetized the debt and restructured the economy and now japan has clearly suffered a very weak yen but they've got through their debt burden because effectively debt has been devalued uh relative to other assets in the economy okay what america did and what scandinavia did is basically do that with alacrity, with speed, very quickly.

35:40Michael Howell: So they very quickly devalued their currency and their debt, tried to get prices up. And that was a more immediate solution. I mean, the US did another smaller example after the GFC, let the dollar go down, pushed in liquidity. China needs to do that. China has been doing that, but it's not necessarily been a straight line. And if you look at the gold price, and I challenge anyone to do this, because I've done it and tried to show this correlation. Plot the gold price against what the People's Bank of China's balance sheet is doing. The People's Bank's balance sheet expands significantly before the gold price moves up in 2022, and it starts to top out around the time the gold market starts to come off at the beginning of this year.

36:31Michael Howell: There's a very clear correlation. You can even go drill deeper and look at changes, monthly changes in that data, and it's still compellingly good. So what it's trying to say is that China is a big driver. Now, why is that? Because China's expansion of its monetary balance sheet is trying to monetize debt. What they're doing, in my view, is trying to create what I call a dual circulation system. So you've got an internal value of the yuan, and you've got an external value of the yuan. And they're trying to keep those separate through capital controls, through large forex reserves, and through compliant state banks.

37:09Michael Howell: They've doubled down on their anti-crypto drive, so you can't get money out through that channel very easily. So what those two systems are, are basically separate. They can keep the yuan dollar as their cosmetic rate, okay? And they can devalue internally through this mechanism of basically printing money and allowing domestic prices and wages to go up, okay? That may take time, but they've got to print the money first. And the vent is unlikely to be real estate because it's on its back. The Chinese then tend not to go for the stock market. They tend to go for gold and precious metals. And so if you look at Chinese retail buying gold and silver, it's very strong.

37:48Trevor Hall: Yeah, it has been very strong. In fact, it was two weeks ago when they came off of their holiday, you immediately saw the

37:55Michael Howell: gold price move when they were back and buying.

37:57Trevor Hall: But it seems like this is more of an attempt to manage their debt situation than it is anything that people argue, well, they're buying the gold for the next currency regime. But you don't seem to be a part of that camp. It's more of a management.

38:11Michael Howell: Well, I think there's another argument, which is not unconnected, which is saying that let's take a step beyond this and say, well, okay, how is the world managing international currency arrangements or international monetary arrangements? In my view, we're basically moving towards a bifigated system whereby you've got the dollar and its satellites, and you've got the yuan and its satellites. Okay, this is looking into the future. The dollar system is backed by US treasuries, okay? And it may well be an adjunct to that, which is stablecoin, possibly, okay? Let's not dismiss that. And then you've got, on the other side, an equivalent Chinese monetary system.

38:50Michael Howell: But China doesn't have an obvious collateral to back the currency. The US dollar has US treasuries which are accepted collateral, and collateral is important. If the Chinese can't use government bonds as collateral because they're not widely circulating, what it can use is gold. Everyone understands that. So it's accumulating gold as a way of giving some credibility to the yuan, the paper yuan, to anchor the paper yuan. Doesn't not mean to say this is a gold standard, far from it, okay? It's a gold exchange standard, which is very different. It's like Bretton Woods. That was a gold exchange standard.

39:25Michael Howell: And what that basically means is that you have your stock of gold, which is effectively backing part of the currency, and you allow limited transactions. So if you've got a friendly power like the Saudis, and China wants to do a gold oil exchange deal, it can do that, and it can pay for the oil with gold, okay? And they have set these facilities up around the world so they can do that. I would venture that's possible, but it's not gonna be very frequent. These are just cosmetic moves. China doesn't wanna let its gold go, obviously, in the same way the Forks Knox didn't wanna open the doors and let the French or the Brits take the gold away in the late 60s.

40:07Michael Howell: So there will be restrictions on that, but that's what I think is going on.

40:11Trevor Hall: Speaking of using gold as a management tool, back on the US side, Judy Shelton coming in as an advisor for the Treasury Department. Kind of leads for the speculation maybe they are interested in some sort of gold-backed note. Is that something that potentially could be on the table using U.S. gold reserves, which we still speculate is or is not there at Fort Knox?

40:38Michael Howell: Well, I mean, never say never. I mean, Judy Shelton's always got a lot of interesting stuff to say, that's for sure. The fact that she's been brought in as an advisor, supposedly, is clearly meaningful. Scott Besson obviously respects what she says, and she's worth listening to. But will that mean that the US goes to a gold standard or backs the currency with gold? No, because, I mean, governments can't exist in this world if you've got fiscal largesse, which you clearly have. You need the ability to print money, print paper money. You've got to have that. and so there's no way this is going to happen.

41:16Trevor Hall: We got just a few minutes left here, Mike, so I do want to start wrapping it up. But on the gold side, do you feel that the capital rotation, are we still in the beginning of a capital rotation from financial assets to hard assets or is it a continuing evolution throughout this cycle until we finally get some clarity and some things start calming down?

41:43Michael Howell: Well, I think you've got to differentiate the trend from the cycle, okay? Okay. Trends may have changed, and trends may be clearly favoring real assets, and I definitely believe that. So I think in the medium term, you definitely want exposure to commodities, you want exposure to gold, you probably want exposure to Bitcoin, you don't want exposure to bonds. The problem is the short term is almost the opposite to that. and the cyclical downswing may hurt us, but this is an opportunity to buy at lower prices. So in my view, you want to be switching out of commodities right now into bonds, right?

42:20Michael Howell: And that may be a maverick view, but I think that's what my data tells me.

42:26Trevor Hall: You're not the only one, I think. Okay.

42:28Michael Howell: Well, okay. It's less of a maverick view, but it's an increasingly popular view, but I think that makes sense because bond markets seem as if yields are now generous relative to the state of the economy. And it looks as if if the economy does falter, commodity markets, which seem stretched, may more come off. So I think that's a reasonable call. The point is, though, if you get a slower economy and you get this liquidity disruption, what will central banks do? And my inclination is they're going to have to start putting money back quite quickly because there's so much debt out there, that the pressures, the refinancing pressures will be just enormous, and they're going to have to create another upswing.

43:11Michael Howell: And it may be that you get a difficult period, but that difficult period, which a lot of things will fall in price, commodities, gold, Bitcoin, probably everything, equities for sure, you're going to have to start, you're going to think about buying back in on the dips.

43:28Trevor Hall: Well, you have suggested that the liquidity cycle could potentially bottom and recover. next year, sometime in 2027. What should we be watching that would convince you that that certainly has happened and we see another rise in global liquidity?

43:45Michael Howell: I think the number, the things, well, let me say this. I'd be pretty certain that the liquidity cycle bottoms in 2027, okay, period. What I've really been arguing recently is that we originally said that was likely second half of the year. That was most likely the case. Of 2027? Yeah. Okay. And what we're now saying is it may be brought forward. I don't know yet, but this is what I'm beginning to think because of what I'm seeing the Federal Reserve do, okay? Because the Federal Reserve is so concerned about or seems to be so concerned about financial conditions that the ability for them to tighten in the face of this big debt load may be just too much.

44:24Michael Howell: So if you look at, for example, what Walsh seems to be doing right now, in my estimation, he's basically tightening at half the pace that Powell did in 22, okay, 21-22. So this is a half speed ahead sort of idea. So that may be enough to get us somewhat close to that. So I'd be watching Bitcoin because I think Bitcoin is the most fantastic barometer of liquidity. It's probably the most liquidity sensitive asset on the planet as it happens from experience, okay. It's going to be volatile, but maybe that's worth looking at. I'd be looking at the slope of the yield curve, that's for sure, because the slope of the yield curve tells us a lot of information about the liquidity cycle.

45:06Michael Howell: It lags the liquidity cycle, but it's a confirming indicator. And then I'd be looking pretty closely at two other things of hard data. I'd be looking at what the People's Bank of China is doing, because they're one of the two big elephants in the room when it comes to liquidity. And the other thing I'd be looking at is to look at what the Federal Reserve is doing on a weekly basis in terms of accommodating bank reserves. Okay.

45:26Trevor Hall: So is there a corner of the market today that investors are failing to appreciate? Or is it one of those we need to just kind of stand and wait for this thing to get some clarity?

45:40Michael Howell: Well, I think the thing is that maybe people don't realize that the liquidity cycle is turning down. And the reason for that is you've seen stock indexes elevated for some time. And people keep saying, well, it's different this time, it's different this time, it's different this time. They always do at these points. And trying to convince people to move away from risk assets at this point of the cycle is always the most difficult job you've got. You can never do that. Because you don't get any thanks if it goes right. And you get lots of bad noises if you get it wrong. So it's a really difficult call, telling people to sell too early.

46:17Michael Howell: I mean, people don't mind taking a 10 % loss, but what they hate doing is basically missing the last 10%. And that's this human nature. So it's very difficult to explain to people that thing. What I would say is the big thing that's missing is a misunderstanding of China. And people don't realize that China's got this debt burden, and it has to get out of that debt burden. And there's all these sort of, you know, there's this drumbeat or sort of cri de coeur coming out of a lot of Western analysts and economists to say, China's got to revalue its exchange rate upwards. Okay. It needs to appreciate the yuan, not allow it to depreciate.

46:51Michael Howell: Nothing could be further from the truth. Okay. This is not what China wants. Probably what China is going to get either. You simply can't have that situation because it's not the fact that China's economy is weak, which is the reason they've got this big trade surplus, and they're trying to push their surplus production internationally. It's not because they're super competitive necessarily and the exchange rate is wrong. In actual fact, you just do a very simple test and ask the question, what would happen if capital controls were eliminated right now? Would the yuan go up or would it come down?

47:24Michael Howell: I would say 99 times out of 100, it would come down.

47:29Trevor Hall: Let me one last question, Mike, then we'll let you go. Just kind of curious what it would take for an official Fed intervention. It's been some weakness in the equity market. Would something like a 15, 20 percent drawdown in the equities kind of corral the sentiment towards the Federal Reserve providing liquidity, doing another round of QE to keep this thing elevated?

47:55Michael Howell: I think per se, no. I think that that would, I mean, secretly, I think Besson and Walsh would be happy with that because it would basically mean the funding environment for treasuries was a lot better. Okay. You get a switch of money. You got to remember that a lot of investors worldwide are very underweight fixed income right now. So a lot of money could make that shift into the markets. If there was disruption in the fixed income markets, if there were problems in major institutions, then they would act. If there was a risk of a recession, they would act. Okay. All right. Good to see you. Thanks so much.

48:31Michael Howell: Likewise, Jeff.

48:31Trevor Hall: Thanks so much for coming over and spending the hour with us. Always appreciate the conversations, Mike, and we will do this again, hopefully next year. Look forward to it. All right. Thank you. Why don't you tell everybody about the cross-border cap where they can find your work? Oh, yeah. Okay.

48:45Michael Howell: Let me do that. A little advert. Best way is through Substack, which is called capital wars. So we write on Substack two or three times a week, giving data and giving narrative explanations of what we think is going on. There is a website, which is glindexes.com, which is where institutional investors can basically get data and deeper analysis. What about an updated version of the book?

49:14Trevor Hall: I feel like it's overdue, Mike.

49:16Michael Howell: Yeah, I'm actually talking to a publisher now about doing another version of that. So we'll see.

49:22Trevor Hall: The thing keeps evolving once you publish a second version and you probably need it to do a third. Well, that's maybe the case. All right, Mike. Thanks so much. Good to see you. Thank you. The information presented should not be considered investment advice. Mining Stock Daily and its affiliates are not responsible for any loss arising from any investment decision in connection with the material presented herein. Please do your own research or speak with a licensed financial representative before making any investment decisions.