SLOWING LIQUIDITY

24 June 2026

The Liquidity Tide Is Slowing

There is a distinction that most market participants miss, and missing it is costly. The absolute level of global liquidity - somewhere in the region of $193 trillion by recent measures - continues to inch higher. But the rate of change is slowing, and it is the rate of change that markets price. That inflection is now underway, and it matters enormously for how portfolios should be positioned.

The broad implication is a rotation from financial assets towards real assets, and within real assets, towards those most sensitive to monetary inflation.

Where We Are in the Cycle

The current phase is what analyst Michael Howell at Cross Border Capital describe as the speculation phase. The label is apt in ways that are not entirely flattering. Certain segments of the market - AI, semiconductors, robotics - have delivered spectacular short-term gains, but the broader market is not participating equally. This is a narrow market, built on narrow foundations, and that narrowness is itself a late-cycle signal. Volatility is rising. But trees do not grow to the sky.

What comes next, historically, is a turbulence phase: a period in which liquidity drains more quickly and the directional bias in risk assets reverses. We are not there yet, but the transition is the time to prepare, not the time to react.

Three conditions currently confirm the late-cycle read. First, commodity markets are performing strongly - precisely what you would expect as liquidity begins to roll over and real economy activity accelerates. Second, yield curves are exhibiting a bearish flattening: long yields are rising, but short yields are rising faster, compressing the curve. This was almost universally non-consensus at the start of the year; it is now the reality before our eyes. Third, equity market breadth is narrowing even as headline indices hold up. These three boxes are all ticked.

Why Is Liquidity Slowing If Central Banks Are Still Loose?

This is the question worth thinking about - how can this be and how does this fit in with maganomics? Central banks, broadly speaking, are not tightening. So why is financial liquidity decelerating?

The answer is that money must always be somewhere. What the data is showing is a significant migration of capital out of financial markets and into the real economy. All we as investors have to do is to find out where money is heading and get there first, before prices rise. That migration is fuelling what appears to be a robust - perhaps stronger than consensus - US economy. Nominal GDP growth in the 7–8% range is not an unreasonable estimate when you account for the scale of AI capital expenditure, the size of the fiscal deficit, and growing energy export revenues. 

This dynamic is good for certain things: commodities obviously, and earnings in parts of the corporate sector. But it is not straightforwardly good for financial asset prices. The earnings multiple P/E - the P in ratio may rise as capital moves in, then compress as underlying earnings (the E) good news materialises. Wall Street has had three or four years of excellent returns. Main Street is now getting its turn. That transition is always awkward.

To repeat, the sequencing is important to understand. Liquidity leads the real economy; it does not follow it. Capital moves in fast. Stock markets are leading indicators precisely because money gets there first, pushing prices up before the underlying earnings materialise. As that same capital migrates into the real economy, it justifies the earlier price appreciation ie the E in P/E now appears - but the fuel for further multiple expansion is no longer flowing in.

The Debt Architecture and Its Implications

The structural backdrop here is one of extraordinary debt accumulation, not just in the United States but globally. An estimated four out of every five primary market transactions worldwide are now debt rollovers - refinancing of existing obligations - not new capital formation for investment or consumption. Capital markets have been quietly transformed from engines of investment into debt recycling mechanisms.

The liquidity-debt nexus is a closed loop that is worth understanding clearly. Liquidity is needed to roll over debt. If it is not there, you get financial crises. But liquidity itself is largely created through collateralised lending these days - roughly 75 - 80% of all lending worldwide, on World Bank figures, is collateral-based. The value of that collateral, largely government debt and real estate, underpins the whole system. Disrupt the debt markets and liquidity can spiral downwards rapidly.

The historical exit from excessive debt accumulation is, without exception, monetisation. You cannot default on sovereign debt at scale. The only route is dilution - printing money, engineering inflation, reducing the real burden of obligations over time. 

Japan demonstrated this after its 1990s bubble: Abenomics, quantitative easing, a collapsing yen. China is now on a structurally similar path, having accumulated vast real estate-related debt after the post-GFC boom. Capital controls allow Beijing to print without immediate external leakage, and that money is finding its way into one traditional Chinese store of value above all others: gold. The Shanghai exchange, not COMEX or London, is now the primary driver of the gold price.

The United States is not exempt from this dynamic. It is already participating in it. The Treasury is issuing debt heavily at the short end - bills rather than bonds - with something approaching 50% of US government debt now maturing within two years. The weekly refinancing requirement runs to around $600 billion. Banks absorb this short-dated paper willingly because fiscal deficits are simultaneously filling their deposit books; they have the money deposited in their reserves but they want assets that generate interest to match the liability growth. When banks buy government debt, they monetise it. Milton Friedman would not have approved.

Suppressing the Signal: The MOVE Index

One of the less-discussed mechanisms currently at work is the active suppression of bond market volatility through Treasury buybacks. The MOVE index - the bond market's equivalent of the VIX - has been kept artificially low, and the mechanics are worth understanding.

Hedge funds have become the dominant buyers of US Treasuries, running what is known as a basis trade: buying physical bonds while shorting futures contracts and clipping the spread between the two. The trade is highly leveraged and is entirely dependent on low volatility. If the MOVE index spikes, the leverage unwinds and those buyers disappear.

The MOVE also matters through the collateral multiplier. Around 80% of lending in financial markets is collateralised, and dealer banks determine haircuts based on the perceived quality and volatility of the collateral. Low MOVE means small haircuts, high collateral multiplier, abundant liquidity. Elevated MOVE compresses the multiplier and drains liquidity through the system. This is why the Treasury intervenes with buybacks each time the index threatens to break higher - replacing illiquid off-the-run Treasuries with fresh on-the-runs to keep the market functioning smoothly.

The question is how long this suppression can be maintained. A new Federal Reserve chair will be tested by markets, as is traditional. And the arithmetic is challenging: if nominal GDP is genuinely running at 7–8%, 10-year yields at around 5% represent a deeply negative real return on long duration. The long end of the curve looks structurally mispriced. The Treasury is currently starving that end of the market of supply - insurance companies and pension funds wanting duration simply cannot get it - which is providing an artificial dampener. But artificial dampeners have limits.

What This Means for Positioning

The broad implication is a rotation from financial assets towards real assets, and within real assets, towards those most sensitive to monetary inflation.

The distinction between monetary inflation and consumer price inflation matters here, and it is routinely conflated. CPI reflects two components: cost inflation (inputs, technology, productivity, energy) and monetary inflation (the debasement of the paper currency in which prices are denominated). For decades, cost deflation - cheap Chinese goods, cheap energy, technological productivity - held consumer price inflation well below the rate of monetary expansion. That gap is why Wall Street dramatically outperformed consumer purchasing power. Gold, as a direct monetary inflation hedge, has outperformed both: up roughly 15 times since 2000, compared to six or seven times for US equities.

If US federal debt continues to grow at 7–8% annually - the Congressional Budget Office's own projection - that is the hurdle rate your wealth must clear simply to stand still in real monetary terms. The instruments that clear that hurdle are precious metals, prime residential real estate, energy and resource equities, and - with appropriate caveats around volatility - leading cryptocurrencies.

Within commodities, the sequencing historically runs from precious metals to base metals to food commodities. That process appears to be underway. Oil looks cheap relative to gold on a long-run ratio basis - the gold-to-oil ratio has historically averaged around 20; at current gold prices, a mean reversion implies oil well above current levels. Energy stocks and gold miners offer leveraged exposure to these underlying trends.

The contrarian call worth flagging is that the Federal Reserve may be forced to raise interest rates within the next twelve months. The US economy is generating substantial inflationary pressure - in nominal GDP terms and in the lived experience of consumers - even as official messaging attempts to frame inflation as contained. If that pressure breaks through, the Fed's hand will eventually be forced, regardless of the short-term political calculus.

The immediate task for investors is context, not prediction. Understanding which phase of the cycle we occupy - late speculation, approaching turbulence - determines the architecture of a sensible portfolio: a diversified core weighted towards monetary inflation hedges, real assets, and late-cycle equity sectors, with a smaller, actively managed trading allocation for those with the appetite for it. The direction of the liquidity tide has changed. The wise response is not to fight it.