The Liquidity Cycle Peaks Again: What Michael Howell's Framework Says About 2026
If money moves markets before fundamentals ever do, what does it mean that the world's most experienced tracker of that money now says liquidity has peaked?
FAST TRACK (30-second summary)
Michael Howell, who built his global liquidity framework watching money physically move across the Salomon Brothers trading floor in the 1980s, argues capital arrives first before fundamentals justify it. His sixty-five month liquidity cycle, identified in 2000 and stable ever since, is currently peaking in 2026, following the last peak in 2021.
Warning signs include a bearish flattening yield curve, narrow market breadth beneath a handful of surging technology names, a gold-oil ratio implying oil should be trading well above two hundred dollars a barrel, heavy US debt refinancing, and stress in market plumbing.
The big structural problem: roughly six hundred billion dollars a week of US debt needing refinancing, forcing authorities to suppress bond market volatility rather than control yields directly.
Howell's advice is not to time the peak precisely but to manage risk: keep a disciplined core portfolio and ring-fence any speculative positioning.
Introduction
There is a persistent habit among investors of treating markets as a referendum on fundamentals: earnings, interest rates, growth forecasts. Michael Howell, who has tracked what he calls global liquidity for four decades, argues this gets the causality backwards. Money moves first. Fundamentals catch up later, if at all, to justify what has already happened. His framework, developed on the trading floor at Salomon Brothers and refined ever since, treats the flow of money and credit through world financial markets as the primary driver of asset prices, with fundamentals relegated to the story told afterwards.
What follows sets out Howell's current thinking on where the liquidity cycle stands, how it is measured, and what it implies for asset allocation through the remainder of 2026.
Why It Matters
If Howell is correct that liquidity leads fundamentals rather than the reverse, then conventional analysis, focused on earnings multiples, GDP growth and central bank rate announcements, is perpetually looking in the rear-view mirror. For a reader trying to position a portfolio ahead of a shift rather than in reaction to one, understanding where the liquidity cycle sits matters more than parsing the latest earnings season. The stakes are not abstract: Howell's own cyclical marker points to a peak in 2026, and the framework's last peak, in 2021, was followed by a significant repricing across risk assets.
Contents Cover the Following
1. What global liquidity actually measures
2. Why liquidity leads fundamentals rather than the reverse
3. The sixty-five month cycle and its four phases
4. Late cycle warning signals: the yield curve and market breadth
5. Debt monetisation and the mechanics of yield suppression
6. The gold to oil ratio as a triangulation tool
7. IPOs, buybacks and the direction of flows
8. Portfolio construction across the cycle
9. Beneath the Headline Rate: SOFR, Reserves and the Fed's Plumbing - this is covered in the article Fed Plumbing Explained
1. What Global Liquidity Actually Measures
Howell defines liquidity broadly as money and credit, not simply the money supply figures that dominate financial commentary. The practical measurement looks at the credit side of financial institutions' balance sheets worldwide: central banks such as the Federal Reserve, the Bank of Japan and the People's Bank of China, alongside private sector banks, shadow banks and the repo markets. The distinction that matters is between money circulating in the real economy, which funds car manufacturing or widget production, and money circulating within financial markets, which is what his framework is built to track. It is this second category, wholesale money used for financial transactions rather than real economic activity, that determines asset prices.
Glossary
Global liquidity. The aggregate flow of money and credit through world financial markets, encompassing central bank balance sheets, private bank lending, shadow banking and repo market activity, as distinct from money circulating in the real economy. Howell treats it as a measurable quantity, built up bank by bank and market by market, rather than a loose metaphor for "easy money".
Shadow banking. Lending and credit creation carried out by institutions other than traditional deposit-taking banks, such as money market funds, hedge funds and private credit vehicles. It sits outside much conventional bank regulation, yet supplies a large and growing share of the credit that Howell's framework tracks.
Repo market. Short for repurchase agreement market, where institutions borrow cash overnight or short-term by temporarily selling securities, usually government bonds, with an agreement to buy them back at a slightly higher price. It is one of the plumbing systems of global finance and a key place where liquidity stress shows up first.
Financialisation. The long-run growth of financial markets relative to the size of the underlying economy. Howell notes that US financial markets are now roughly two times GDP, compared with fifty to sixty percent several decades ago, which is why liquidity flows now carry outsized influence over asset prices relative to historical norms.
2. Why Liquidity Leads Fundamentals Rather Than the Reverse
Howell's central claim is that capital arrives before the justification for it does. Expanding price-to-earnings multiples, for instance, reflect anticipation of future fundamentals that may or may not materialise, but the transaction itself is driven by available money. When central banks force liquidity into markets, as occurred after the 2008 financial crisis and again after the pandemic, asset prices rise regardless of what fundamentals are doing at the time.
"We're schooled in the idea that markets react to fundamentals, but actually capital gets there first."
The growing size of financial markets relative to GDP amplifies this effect: wealth effects generated by rising asset prices now feed back into the real economy in a way that was far less significant thirty or forty years ago.
Follow the money - be the first to get where the banbks are pushing the liquidity
Glossary
Wealth effect. The tendency of rising asset prices to increase consumption and economic activity, independent of underlying income growth, by making asset holders feel and behave as though they are wealthier. A rising stock market can therefore lift real-economy spending even before wages move.
Lagging indicator. A metric, such as corporate earnings or GDP growth, that responds to and confirms a market move only after the move has already occurred, rather than predicting it in advance. Howell's argument is that most of what investors watch closely falls into this category.
Price-to-earnings multiple, PER. A valuation measure comparing a company's share price to its earnings per share. A rising multiple means investors are paying more for each unit of current profit, typically because they expect profits to grow, or because there is simply more money chasing the same shares.
Cantillon effect. A theory describing how the benefits of money creation are distributed unevenly. Those who receive newly created money first can buy assets and goods before prices rise, while those who receive it later often face higher prices without a corresponding increase in income.
The practical lesson is that capital begins with Federal Reserve policy, is leveraged through the financial system, and then spreads into the real economy. Successful investors seek to follow that flow, identifying where money is moving next as the Cantillon Effect, economic conditions, and geopolitical forces channel it into commodities, monetary metals, quality property, and companies with durable pricing power.
3. The Sixty-Five Month Cycle and Its Four Phases
Howell identified a recurring cyclical pattern in global liquidity data using Fourier analysis around the year 2000. That work established the sixty-five month periodicity and, once set, the method has proved stable ever since, with the actual cycle extrapolated forward and tracked against outcomes for the following quarter century. The cycle divides into four phases: rebound, calm, speculation and turbulence. Equities perform best during the rebound and upswing phases. Commodities do best around the peak, because the liquidity cycle leads the real economy, and as liquidity peaks the economy is moving from trough towards acceleration, increasing demand for raw materials. As liquidity subsequently tightens, defensive assets and cash come into favour, and as the squeeze deepens towards the cycle's trough, longer duration bonds perform best in anticipation of central bank rate cuts.
Howell's current assessment places the cycle at a peak in 2026, following the last peak in 2021.
Glossary
Sixty-five month liquidity cycle. A recurring cyclical pattern in global liquidity that Howell identified using data analysis around the year 2000, with an approximate periodicity of sixty-five months. It has been tracked and extrapolated forward ever since, and has lined up reasonably well with subsequent turning points in markets.
Fourier analysis. A mathematical technique, originally developed for physics and signal processing, that breaks a complicated, noisy series of data down into a set of simpler repeating wave patterns. Howell applied it to decades of financial data to test whether liquidity moved in genuine, measurable cycles rather than at random, and it was this analysis that surfaced the sixty-five month pattern.
Speculation phase. The late stage of the liquidity cycle, occurring around its peak, characterised by continued positive returns coexisting with elevated volatility, such that the risk-adjusted quality of those returns is significantly reduced. Howell places the market in this phase as of 2026.
Turbulence phase. The most difficult stage of the cycle, arriving as liquidity contracts sharply and financial conditions tighten. It typically brings the worst risk-adjusted returns for equities and commodities, and is when Howell's framework argues investors should already be positioned defensively rather than reacting to the stress as it appears.
4. Late Cycle Warning Signals: the Yield Curve and Market Breadth
Howell points to several markers of a late cycle environment. The most robust, despite lagging the liquidity cycle by roughly nine months, is the slope of the yield curve; a bearish flattening, where long end yields rise more slowly than short end yields, is a reliable late cycle confirming signal. A second marker is market breadth: strong headline index performance driven by a narrow group of technology and semiconductor stocks, while the broader market outside those names remains lacklustre and many individual stocks make new lows, is characteristic of a late stage rally rather than a broad-based bull market.
"You've got to be approximately right rather than precisely wrong."
Glossary
Yield curve. A line plotting the interest rates, or yields, on government bonds of different maturities, from short-term to long-term. Its shape is one of the most closely watched signals in finance, because it reflects investor expectations for growth, inflation and future central bank policy.
Bearish flattening. A movement in the yield curve in which long-term yields rise more slowly than short-term yields, causing the curve to flatten and potentially invert. It is generally regarded as a late cycle warning signal, since it suggests investors expect growth or inflation to cool even as near-term borrowing costs stay elevated.
Market breadth. A measure of how broadly a market's gains are distributed across constituent stocks, as opposed to being concentrated in a small number of large or high-momentum names. Narrow breadth beneath a rising headline index is a classic sign that a rally is running out of underlying support.
Term structure. Another name for the pattern of interest rates across different maturities, essentially the technical term behind the more familiar phrase "yield curve". Movements in the term structure are what Howell is describing when he refers to flattening or steepening.
5. Debt Monetisation and the Mechanics of Yield Suppression
A structural feature of the current environment, in Howell's account, is the scale of government debt requiring refinancing. US Treasury debt carries an average maturity of five to six years, meaning a continual rolling burden estimated at roughly six hundred billion dollars a week. Financial markets, in his view, now function primarily as refinancing mechanisms for existing debt rather than as new capital raising mechanisms for productive investment. When banks purchase government debt, they are, in effect, monetising it, a process Howell frames as printing money by another name.
The authorities manage this burden partly through issuance strategy, concentrating new supply at the short end of the curve to starve the long end and keep long yields capped, and partly through direct intervention, using Treasury buybacks to suppress bond market volatility whenever the MOVE index, the bond market equivalent of the VIX, spikes higher.
Glossary
Debt monetisation. The process by which government debt is purchased by banks or central banks acting as intermediaries, effectively expanding the money supply to fund government borrowing rather than debt being absorbed by genuine new savings. Howell regards the current pace of Treasury issuance and bank purchases as a modern form of this practice.
MOVE index. An index measuring implied volatility in the US Treasury bond market, functioning as the bond market's equivalent of the VIX equity volatility index. Howell treats spikes in the MOVE index as a more important signal to watch than the Federal Reserve's own policy rate.
Yield volatility control. A policy of suppressing fluctuations in bond yields through active intervention, such as Treasury buybacks, distinct from yield curve control, which targets the level of yields directly rather than their volatility. Howell argues this, rather than outright yield curve control, is what is actually happening in US Treasury markets today.
Debt refinancing. The process of replacing maturing debt with newly issued debt, rather than paying it off outright. With an average Treasury maturity of five to six years, a large share of outstanding US government debt must be refinanced on a rolling basis every year, regardless of whether new spending is taking place.
6. The Gold to Oil Ratio as a Triangulation Tool
Howell treats the long-run ratio between an ounce of gold and a barrel of oil, averaging around twenty to one over the past fifty to sixty years, as a further confirming signal that moves in step with the liquidity cycle. At the front end of a liquidity upswing, the ratio rises because the gold price climbs while oil lags. Towards the back end of the cycle, the ratio falls back not because gold declines but because oil catches up, as money exits financial markets and flows into the real economy.
With gold trading in the four to five thousand dollar range, the historical ratio implies an oil price above two hundred dollars a barrel, a figure Howell acknowledges sounds implausible to most investors but which he presents as a structural implication of sustained debt monetisation rather than a near term forecast.
Glossary
Gold to oil ratio. The number of barrels of oil that one ounce of gold can purchase, historically averaging around twenty to one over the long term - the last 50 or 60 years. Howell uses it as a cross-check on whether gold or oil is mispriced relative to the other, and as a secondary indicator of the liquidity cycle's stage.
Debasement trade. An investment approach built on the expectation that ongoing debt monetisation and currency creation will erode the purchasing power of fiat money over time, typically expressed through holdings of gold, gold miners, and broader commodities as stores of value rather than income-generating assets. Howell's gold-oil analysis sits within this broader thesis.
Triangulation. In this context, the practice of cross-checking a view on one asset, such as gold, against two other related variables, here the oil price and the gold-oil ratio itself, so that no single number is relied upon in isolation. It is a discipline for testing whether a price looks genuinely stretched or simply unfamiliar.
7. IPOs, Buybacks and the Direction of Flows
A wave of major initial public offerings, including SpaceX at a scale representing a significant share of total US market capitalisation, alongside anticipated listings from firms such as Anthropic and OpenAI, would ordinarily be read as liquidity being withdrawn from financial markets to fund real economy activity, a negative signal within Howell's framework. He notes a mitigating technicality: the free float offered in such listings is typically small relative to the headline valuation, forcing index funds and other passive vehicles to chase limited available supply.
The more significant structural shift, in his view, is on the buyback side. Share buybacks in the US have been substantial but are beginning to slow as corporate cash is redirected towards capital expenditure, at the same time as buyback activity in Europe and Japan is increasing, a divergence he suggests favours geographic diversification away from US equities.
Glossary
Initial public offering (IPO). The first sale of a private company's shares to public investors, converting it into a publicly listed company. Large IPOs draw fresh cash out of the pool of money circulating within financial markets and into the company being listed.
Free float. The proportion of a company's shares actually available for public trading, as distinct from shares held by founders, insiders or locked up post-listing. It determines how much index and passive fund buying pressure a new listing can absorb relative to its full valuation.
Share buyback. The repurchase by a corporation of its own outstanding shares using company cash, reducing share count and, all else equal, supporting the share price. Howell treats it as the structural counterpart to IPO issuance in the flow of funds into and out of equity markets.
Capital expenditure (capex). Spending by a company on physical assets such as factories, equipment or infrastructure, intended to support future growth. Howell's point is that cash once used for buybacks is increasingly being redirected towards capex, reducing one source of equity market support.
8. Portfolio Construction Across the Cycle
Howell is cautious about translating cyclical analysis into precise market timing, preferring, in his words, to be approximately right rather than precisely wrong. His practical recommendation is a two tier portfolio structure: a disciplined core, built to compound steadily through the cycle even at modest annual returns sufficient to outpace inflation over the long term, and a smaller speculative allocation, sized according to individual risk tolerance, that can ride cyclical momentum during phases such as the current speculation stage without exposing the whole portfolio to a sharp reversal.
He regards the tendency of retail investors to treat their entire portfolio as a momentum trade, rather than ring-fencing speculation within a disciplined core, as one of the more consistent and costly mistakes made across market cycles.
Glossary
Core-satellite portfolio structure. This is the central structural idea Howell wants investors to take away. The "core" is the majority of the portfolio, say 80%. built for discipline and durability rather than excitement: diversified, unglamorous, and expected to deliver modest but reliable real returns, say 5 to 10% annual, that outpace inflation over the long run regardless of which phase the liquidity cycle is in.
The "satellite" is a smaller, clearly bounded portion, sized to what an investor can genuinely afford to lose, that is deliberately allowed to chase momentum during phases like the current speculation stage. The two are never mixed. The discipline is not in avoiding speculation altogether, since Howell is relaxed about investors taking speculative positions if they wish, but in never letting speculative logic govern the core, so that a sharp turbulence phase damages only the satellite and leaves the core, and the investor's long-term position, intact.
Risk management (in this context). The discipline of controlling how much of a portfolio is exposed to a given source of risk, rather than trying to predict the exact timing of a market turn. Howell frames sizing a speculative allocation as a risk management decision, not a forecasting one. Use Sharpe and Sortino.
Momentum trading. An approach that buys assets because their price is already rising, on the expectation the trend will continue, rather than because of an underlying valuation view. Howell warns against letting this become the default behaviour for an entire portfolio, since momentum can reverse sharply once a cycle turns.
Bottom Line
Howell's framework does not predict a crash on a given date. What it does is describe a regime: a liquidity cycle at its peak, a bond market showing late cycle stress, a rally increasingly narrow beneath the surface, and a debt refinancing burden so large that central banks are managing bond volatility directly rather than allowing markets to set yields freely. None of that requires an immediate reversal. It does argue for treating the current rally as a speculation phase rather than the early stages of a durable bull market, and for structuring portfolios accordingly: a disciplined core, a bounded speculative sleeve, and closer attention to commodities and non-US equities than the headline index numbers might suggest is necessary.
Optional Deep Dive
The basis trade. Part of what keeps long-term US Treasury yields capped despite a booming, inflationary economy is a specific piece of financial engineering known as the basis trade. Hedge funds buy cash Treasury bonds and simultaneously sell Treasury futures short, pocketing the small pricing gap between the two. The trade is highly profitable when scaled up with borrowed money, but it only works while bond market volatility stays low, because a sharp move in yields can turn a small, safe-looking spread into a large loss almost overnight. This is why the Treasury's own buyback programme, which steps in to suppress the MOVE index whenever it spikes, is not just a debt management tool but also, in effect, life support for the basis trade itself. The two are entangled: suppressed volatility sustains the trade, and the trade's continued appetite for cash Treasuries helps absorb the enormous weekly issuance the US government needs to roll over its debt.
Japan's role in financing US debt. Japan has historically been one of the largest foreign holders of US Treasury debt, a position closely tied to the gap between Japanese and US interest rates. For years, Japanese interest rates were held near zero while US yields sat far higher, encouraging what is known as the carry trade: borrowing cheaply in yen and investing the proceeds in higher-yielding US Treasuries. That flow has been a quiet but significant source of demand supporting the US bond market. As the Bank of Japan has moved gradually away from its ultra-low rate policy, the incentive for Japanese investors and institutions to keep recycling savings into US Treasuries has weakened, and any further narrowing of the US-Japan rate gap raises the risk that this long-standing source of demand shrinks or reverses, adding to the pressure on US authorities to find other buyers for their debt.
CPI Inflation. "The inflation process is often described using CPI, but CPI is merely the final stage visible to consumers. Inflation usually begins with rising commodity costs, appears next in business surveys such as ISM and PMI Prices Paid, then enters the Producer Price Index through intermediate-demand and final-demand goods. Only after firms pass these higher costs through the supply chain does inflation appear in consumer measures such as CPI and PCE. For this reason, CPI is generally regarded as a lagging indicator of inflationary pressure already building elsewhere in the economy."
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ISM Prices Paid – A survey measure showing whether purchasing managers are paying more or less for inputs.
PMI (Purchasing Managers' Index) – A survey of business activity, orders, employment and input costs.
PPI Intermediate Demand – Inflation occurring between businesses as goods and services move through the production chain.
PPI Final Demand – Prices received by producers for goods and services sold to final users.
CPI – Consumer Price Index; measures prices paid by households.
PCE – Personal Consumption Expenditures; the Federal Reserve's preferred measure of consumer inflation.
Cost Transmission – The process by which higher input costs move through the supply chain and eventually reach consumers.
Related Articles on this Site
https://www.livingintheair.org/2026/08/the-liquidity-cycle-is-peaking-and-what.html
https://www.livingintheair.org/2026/06/slowing-liquidity.html
https://www.livingintheair.org/2026/06/fed-and-treasjury-buying-short-abd-long.html
https://www.livingintheair.org/2026/04/fx-swap-lines-used-to-support-us-fiscal.html
References
Michael Howell, interviewed August, 2026.
