Liquidity ‘Wrecking Ball' About To Crush Economy, Markets

David Lin

Introduces Michael Howell and the thesis that global liquidity is about to get even tighter, acting as a wrecking ball for markets. Gold and Bitcoin have already warned of this.

Michael Howell

Liquidity peaked in late 2025 and has been slowing down. This matters because liquidity is the marginal price of assets. The slowdown is not due to the Fed yet, but because the real economy is so strong it absorbs liquidity.

David Lin

Asks about Kevin Warsh's first FOMC performance and the nine governors who wanted a rate hike.

Michael Howell

Kevin Warsh is trimming the Fed's remit and questioning the role of Fed funds as a single policy lever. He wants markets to tighten for him, which means a stronger dollar and rising yields.

David Lin

Asks how the Fed potentially tightening and ECB already tightening fits into the global liquidity cycle picture.

Michael Howell

Most central banks outside the Fed have pure inflation remits and are compelled to tighten as inflation picks up. The global trend is toward tightening.

David Lin

Asks for a chart showing correlation between global liquidity and world wealth.

Michael Howell

Shows charts: Fed liquidity growth slowed after COVID peaks; repo market showed stress in late 2025 (spikes like a 'heart monitor' nearing coronary attack); the Fed responded with disguised QE (RMP program). Bond volatility (MOVE index) is critical—low volatility helps credit creation, high volatility causes problems. The Treasury is doing buybacks to control bond volatility.

David Lin

Asks if Kevin Warsh will embark on tighter monetary regime regarding balance sheet size, given his past criticism of QE.

Michael Howell

Short answer: no. Longer term they may try to reduce the balance sheet, but that requires banking system reform. In the short term, they tried shrinking in late 2025 and it caused repo market problems.

David Lin

Shows Kalshi prediction market data: 70% chance DXY above 104, 57% above 105. Asks why markets are bullish on the dollar.

Michael Howell

The dollar is in a long-term uptrend since the GFC, underpinned by capital flows into US tech and post-GFC regulatory changes favoring US assets. A Fed tightening will add to this. Warsh wants markets to tighten, meaning a stronger dollar and rising yields.

David Lin

Asks which comes first: rising long-end yields or rising dollar.

Michael Howell

They move together. The yield curve is flattening, which indicates liquidity tightening. The Fed and Treasury want a steeper curve but the market is deciding otherwise.

David Lin

HSBC warns 4.5% is the danger zone for institutions. What happens at 6%?

Michael Howell

4.5% is a danger for the financial sector, not necessarily the economy. The danger point for financial markets comes earlier due to leverage. Above 5.5% becomes problematic for the economy too.

David Lin

Asks if the US economy can withstand rates up to 6%.

Michael Howell

Above 5.5% becomes problematic, but there's a lot of positive momentum from the fiscal deficit (6-7% of GDP) and a massive capital spending boom.

David Lin

Core PCE hit 3.4% in May, highest since Oct 2023. Asks what he makes of the print.

Michael Howell

There is an underlying inflation problem. The TIPS breakeven (2.5%) is disconnected from the GDP deflator (higher). Underlying inflation pressures are clearly there, so the Fed has to act.

David Lin

Asks about similarities and differences to the 2022 situation when rate hikes were terrible for all markets.

Michael Howell

The 2-year Treasury yield has been a very good predictor of market rates. It is now saying rates have to go up, similar to the warning it gave in 2021-22.

David Lin

Asks if gold and Bitcoin have seen this coming.

Michael Howell

Yes. Bitcoin is a good barometer of US liquidity conditions—if Fed liquidity slows, Bitcoin suffers. Gold is more complicated: the PBOC has been deliberately devaluing the yuan internally by printing money, and Chinese residents bought gold as a hedge. PBOC liquidity and the gold price track almost one-for-one.

David Lin

Asks about the 'great race to the bottom' for fiat currencies and what happens to hard assets like gold if that sentiment is no longer alive.

Michael Howell

If central banks are tightening, that could be happening now. Money in the real economy is not in financial markets, so financial prices (Bitcoin, gold) are suffering. This is a warning for Wall Street.

David Lin

What happens to Wall Street in a yield-flattening, higher inflationary, higher long-end environment?

Michael Howell

In 2022, Wall Street fell 25% and Bitcoin 75%. This time, Wall Street will likely be rangebound in 2026 with volatility, but as liquidity tightens further, odds of a challenge increase by year-end or into 2027.

David Lin

Asks about gas/oil prices after the Iran MOU and broken ceasefire. Oil is still around $70.

Michael Howell

The gold-oil ratio has been constant at about 20x over the long term. Currently it's around 45x. If gold stays elevated (say $4000 minimum), simple math suggests $200/barrel oil. Oil looks very cheap against gold and other commodities.

David Lin

Notes that historically, spikes in the gold-oil ratio have preceded recessions. Asks why not this time.

Michael Howell

Previous recessions occurred because the Fed tightened aggressively when oil rose. This time, there's a lot of momentum from the fiscal deficit and capex spend that may keep the US out of recession.

David Lin

Asks what happens with the confluence of higher interest rates, higher debt, and higher deficits.

Michael Howell

Debt grows exponentially. Policymakers are funding deficits at the front end (issuing bills), which banks buy. That's monetization, which leads to Main Street inflation.

David Lin

Asks if the Fed can raise rates while commercial banks still lend at the same volume.

Michael Howell

You'd need a steeper yield curve, which may not be possible in this environment.

David Lin

Confirms: liquidity at all levels will be weaker this year.

Michael Howell

Yes. Fed liquidity has been slowing. There was a jolt from repo tensions but that's temporary. Financial sector liquidity will be challenged. Real economy demand is strong, sapping the financial sector, but higher rates will eventually quell that too. A progressive sequence of slowing liquidity.

David Lin

Asks for investment implications.

Michael Howell

Move to defensive areas of the market. Consider commodities for inflation protection. Move towards shorter-duration government debt or TIPS (yielding over 2% real, which is hard to beat).

David Lin

Asks why deficits are exploding globally (US, Europe, Japan).

Michael Howell

Aging demographics in the West require more welfare, social security, Medicare spending. Governments have committed to these programs. Cost inflation in these programs is higher than mainstream inflation. Politically, no one wants to cut spending (Democrats) or raise taxes (Republicans), so deficits keep rising.

David Lin

Asks about UK welfare spending exceeding tax receipts.

Michael Howell

It's obscene. The UK is a laboratory showing how to destroy an economy with a socialist administration that just wants to spend on welfare.

David Lin

Asks how to turn that around, given cutting welfare is unpopular.

Michael Howell

Younger generations will rebel against paying taxes for unsustainable welfare. Governments must bite the bullet and pare down welfare spending. No one is brave enough, but that's the answer.

David Lin

Asks why global liquidity is so important for predicting macroeconomy.

Michael Howell

The liquidity cycle precedes everything. Money drives markets. Economics is downstream of liquidity, geopolitics is downstream of economics. It all starts with the flow of money through global financial markets.

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