MacroVoices #545 Michael Howell: Warsh vs. The Markets

Michael Howell's core thesis is that global liquidity, not central bank policy, is the primary driver of asset markets. The current liquidity cycle bottomed in late 2022 and peaked at the end of 2025, meaning the growth rate of liquidity is now falling even though the absolute dollar level remains elevated. Howell estimates the cycle is roughly 60 percent through its current decline and does not expect a trough for another two years, placing the next bottom in mid to late 2027. Because approximately 80 percent of all lending is now collateral based, rising asset prices increase collateral values and enable more borrowing in a self-reinforcing loop, which Howell characterizes as an everything bubble that has run beyond central bank control.

The episode title refers to a conflict between Kevin Warsh as Fed chair and market expectations. Trump expects a chair who will cut rates, but Warsh has signaled he wants markets to do the tightening for him by pushing bond yields higher while maintaining liquidity at the front end through the ample reserve regime, a recipe for a steepening yield curve. Markets want to flatten the curve, which is why Warsh is fighting them. Howell states with 100 percent conviction that the next Fed policy decision will be a rate hike rather than a cut, citing a SOFR-less-two-year-yield spread beginning to move in a direction similar to the early 2022 tightening signal. The two-year Treasury breaking through SOFR rates is the same setup that preceded a 25 percent decline in the S&P 500 and a 75 percent decline in Bitcoin between late 2021 and early 2022.

Howell argues nominal GDP growth is accelerating to between 6 and 8 percent, driven by fiscal spending, the AI boom, and deglobalization effects on capital expenditure and inventory building. Because the four-year moving average of nominal GDP closely tracks the 10-year Treasury yield adjusted for term premium, he believes the 10-year yield could test 6 percent in the not too distant future. Treasury bills currently represent 22 percent of outstanding federal debt, above the stated preference of 15 to 20 percent, and Howell says that share could rise toward 30 percent, a level last seen in the early 2000s. A rise to 30 percent would, in his view, be very bad for the dollar and would cause the gold market to shoot up.

Howell's highest conviction medium-term trade is gold going higher. He argues the breakaway of gold from its normal relationship with real interest rates beginning in early 2022 was driven by the PBOC turning on liquidity aggressively, not by Russia or other commonly cited reasons. The Shanghai gold exchange is now the marginal price setter for gold worldwide. The PBOC turned off its money taps on March 2nd and then turned them back on almost exactly on the day a memorandum of understanding was signed, though Howell describes this as conjecture proved by association rather than direct insight and acknowledges the MOU may be fragile. The increase in the gold price in the ten days prior to the discussion led him to conclude China is turning the money taps back on and that the correction in gold is likely over. Silver beginning to outperform gold is, in his view, a confirmation signal that sentiment is returning to precious metals.

China's liquidity is moving almost exactly opposite to the United States. The PBOC maintained tight liquidity for years to defend the yuan against a strong dollar, reinforcing China's debt problem and creating debt deflation. Howell argues China can manage a bifurcated exchange rate regime, maintaining a stable yuan externally while devaluing it internally, which raises prices and wages relative to nominal debt and progressively erodes the debt burden, but at the cost of a much higher gold price. Chinese government bond yields at 1.7 percent are the only major bond market where yields are falling.

Howell uses the gold-to-oil ratio as a framework, noting it tracks the global liquidity cycle closely and has shown very long-run stability with a long-run average of approximately 20 times since at least 1970. At a gold price of 4,000 dollars per ounce and a 20-times ratio, the implied oil price is 200 dollars per barrel, and even at a 30-times ratio the implied price is approximately 135 dollars per barrel. Howell acknowledges the 200 dollar figure may be extreme and describes it as triangulation rather than a formal projection. He is heavily invested in energy stocks and says rising oil prices and rising bond yields together argue for scaling back beta exposure in equities and risk assets.

Patrick Ceresna structured a bull call spread on GLD with an October 2026 expiration, buying the 410 strike call for approximately 15 dollars and selling the 450 strike call at 4.50 dollars, for a net debit of roughly 10.50 dollars on a 40-wide spread, offering an approximate three-to-one payoff. On equities, the S&P 500 cleared a fresh all-time high with speculators at the 96th percentile of positioning on a one-year basis while the Dow is at the 99th percentile. NASDAQ positioning went net short by 35,000 contracts and the NASDAQ has not joined the Dow and S&P at fresh all-time highs, with Ceresna saying reaching 8,000 on the S&P will require Magnificent Seven participation.