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The Bull Market Just Ended | Michael Howell

https://www.youtube.com/watch?v=9QniqDBjUUs

TLDR Late-cycle money is shifting from financial markets into the real economy, raising refinancing risks as debt comes due and liquidity tightens. Michael Howell expects policymakers to supply liquidity if markets seize up, but warns that growing debt and money creation may keep inflation elevated, supporting long-term hedges such as gold and Bitcoin. Bonds may offer attractive short-term returns if growth and yields cool, while AI and commodity booms remain vulnerable to overinvestment and cyclical downturns.

Key Insights

1. Track liquidity and refinancing risk, not just interest rates

Assess financial conditions by looking beyond the central-bank policy rate. The discussion highlights three useful indicators: money-market liquidity, volatility in Treasury collateral markets, and the availability of credit to refinance maturing debt. Because many capital-market transactions involve rolling over existing borrowing, a shortage of liquidity can create stress even when a company or investment project has long-term potential. Widening credit spreads, strained refinancing, and rising volatility can be practical warning signs of late-cycle risk.

2. Separate financial-market trends from real-economy strength

Strong economic activity does not always mean financial assets will keep rising. The discussion describes liquidity shifting from financial markets into production, investment, and other real-economy uses, which may support growth while putting pressure on asset valuations. Rising bond yields can weigh on equity price-to-earnings multiples even as strong earnings provide support. To interpret market signals, compare liquidity conditions, growth, yields, and earnings rather than relying on a single headline indicator.

3. Treat debt and technology booms with careful risk management

A promising technology does not guarantee that every company financing it will succeed. The fiber-optic boom is cited as an example of valuable infrastructure accompanied by excessive investment and eventual company failures. High borrowing costs and very high-yielding corporate bonds can signal financing stress, so examine debt levels, refinancing schedules, cash flow, and margins alongside a company’s growth prospects. Distinguish the long-term potential of an industry from the financial resilience of individual businesses.

4. Match bond exposure to the economic cycle and your time horizon

Bonds may become more attractive when growth slows and yields peak, but their performance depends on inflation, interest rates, and the maturity of the bond. The speaker views current Treasury and inflation-protected bond yields as potentially appealing, while cautioning against treating bonds as an unquestioned very long-term holding. Consider how much income you need, how sensitive your holdings are to rate changes, and whether inflation could erode returns. A market-cycle view can inform decisions, but it cannot guarantee that yields have reached their peak.

5. Build inflation protection around diversification, not a single forecast

Growing government spending and debt may contribute to persistent inflation and currency purchasing-power erosion, even without causing hyperinflation. Gold and Bitcoin are discussed as possible long-term monetary-inflation hedges, while bonds may provide income and commodities may benefit from structural demand. These assets behave differently: Bitcoin can be especially volatile, and commodity prices can fall when economic growth moderates. Diversify according to your time horizon, cash-flow needs, and tolerance for loss rather than assuming any one hedge will always work.

6. Make decisions using forward-looking scenarios and your own risk limits

Financial markets often price in expectations about future conditions, so consider how growth, inflation, liquidity, and refinancing needs may evolve—not only what the economy looks like today. Develop multiple scenarios, such as continued growth, slowing growth, or a recession, and consider how each might affect your investments. Avoid relying on precise price levels or forecasts as certainties, and review whether your portfolio can withstand volatility and credit stress. The discussion is not investment advice; research investments independently and account for the possibility of loss.

Questions & Answers

What is driving the late-cycle shift away from financial risk assets?

Michael Howell argues that money is moving from financial markets into the strong real, or production, economy. This shift is visible in widening high-yield spreads, rising bond yields, volatility, and weak IPO markets, and is not driven mainly by central-bank tightening.

Why does Howell consider debt refinancing a major vulnerability for financial markets?

About 80% of primary capital-market transactions involve rolling over existing debt. Refinancing depends on liquidity, and when there is not enough liquidity to refinance maturing debt, defaults or central-bank intervention can follow. Howell sees many recent crises as refinancing crises.

How are governments likely to fund rising spending, and what could that mean for inflation?

With spending demands rising and limited room to increase taxes, governments are likely to rely more on debt and money creation. Howell does not expect hyperinflation, but says this could keep inflation above the Federal Reserve’s 2% target and erode purchasing power.

What does Howell think about bonds as an investment?

He cautions against holding bonds as a very long-term investment, but sees potential short-term appeal late in a tightening liquidity cycle. He describes current Treasury and TIPS yields as historically generous and says U.S. 10-year Treasuries could deliver a decent return or roughly break even over the next 12 months.

What do CoreWeave’s high borrowing costs indicate about AI and the market cycle?

CoreWeave’s bonds yielding nearly 16% illustrate how financial distress can appear first in debt markets near a cycle’s end. Howell says this does not mean AI lacks a future; promising technologies can attract excessive investment, followed by falling margins and company failures.

Why might gold and Bitcoin serve as long-term inflation hedges?

Howell links monetary expansion and growing government debt with rising demand for scarce assets. Since 1971, gold has grown at a rate similar to U.S. federal debt and global liquidity. He also views Bitcoin as a liquidity-sensitive potential hedge, though it is more volatile than gold.

Why have bond yields risen, and what could make them fall?

Howell says recent U.S. yield increases mainly reflect strong economic growth rather than fiscal concerns. If nominal GDP growth slows from roughly 6–6.5%, yields could come down; he also says a recession next year is possible, though uncertain.

How does Howell interpret the recent decline in global liquidity?

He says global liquidity growth peaked around the fourth quarter of the prior year, and the overall level has recently begun to fall. The main cause is a shift of funds from financial markets into the real economy, which he views as a late-cycle signal.

What is Howell’s view on commodities and their near-term outlook?

He sees long-term support for commodities from years of underinvestment and strategic competition for resources, but emphasizes that prices are cyclical. If economic growth moderates in 2027, commodity prices could fall.

How does Howell assess Bitcoin’s price level and volatility?

He says Bitcoin holding above $70,000 could support the possibility that it has formed a bottom, while a break below that level would weaken the case. He owns Bitcoin and gold, but holds more gold because Bitcoin is more volatile; wider institutional adoption could make him consider increasing Bitcoin’s share.

Summary of Timestamps

Michael Howell describes a gradual shift of money away from financial risk assets—not a sudden collapse like 2008–09. Widening high-yield spreads, rising French bond yields, market volatility, and weak IPO activity are signs that the financial cycle may be turning.

Howell argues that this shift is driven less by central-bank tightening than by a strong production economy drawing capital away from financial markets. In a K-shaped economy, asset owners may prosper while people in the producing economy face greater pressure; a downturn could therefore weigh particularly on the economy’s upper leg.

Debt refinancing is a major vulnerability: Howell estimates that roughly 80% of primary capital-market transactions involve rolling over existing debt. When liquidity is insufficient to refinance maturing obligations, defaults can follow—or central banks may need to intervene.

The conversation raises whether policymakers will provide enough liquidity to prevent a crisis or act only after one begins. Howell believes the Federal Reserve is more alert to refinancing risks than it was in 2008–09, while governments, AI investment, and maturing corporate loans compete for available funds.

CoreWeave’s reported large quarterly loss and bonds yielding nearly 16% illustrate how debt markets can signal stress even when investors remain optimistic about AI. Howell cautions that a promising technology can still attract excessive investment, weaken company margins, and lead to failures—as happened during earlier fiber-optic booms.

Rising government spending on aging populations, defense, and infrastructure is likely to increase reliance on borrowing and money creation. Howell does not expect hyperinflation, but says persistent monetary expansion could keep inflation above the Federal Reserve’s 2% target and gradually erode purchasing power.

Howell compares long-run asset performance since the United States left the gold standard in 1971: federal debt and global liquidity grew by about 8.5% annually, gold by about 8.6%, and the S&P 500 by roughly 10%. U.S. Treasuries returned around 5–6%, leading him to view gold and Bitcoin as possible long-term inflation hedges.

Although Howell cautions against treating bonds as a very long-term holding, he sees potential short-term value in them late in a tightening liquidity cycle. He points to Treasury yields near 5.5% and TIPS yields around 3% as historically generous, while noting that investors must balance inflation protection with income and cash flow.

Howell says the central market tension is increasingly about financing and refinancing existing debt, rather than raising new capital for investment. Because bonds also serve as collateral for credit, refinancing depends on liquidity—and liquidity in turn relies on functioning debt markets.

Howell characterizes several major episodes—including the Asian financial crisis, 2008, the 2019 repo crisis, and COVID-era stress—as refinancing crises. Since debt continues to grow, he expects liquidity to expand as well, supporting demand for inflation hedges such as gold; he says gold could potentially double over the next decade as U.S. federal debt grows.

Howell argues that monetary policy should be assessed through more than the Fed funds rate: money-market liquidity and volatility in Treasury collateral markets also matter. He adds that central banks may prioritize protecting sovereign debt markets over inflation and employment goals when financial stability is at risk.

Global liquidity growth peaked around the fourth quarter of the prior year and has since weakened. Howell says the recent decline in the overall level is largely due to funds moving from financial markets into the real economy, rather than being caused solely by central-bank tightening—a pattern he associates with the late stage of the cycle.

Different markets are responding to the cycle in different ways. Strong real-economy activity has lifted commodities, while rising bond yields have pressured equity valuations; at the same time, resilient economic growth has supported unusually late earnings gains. Howell is considering reducing exposure to commodities and equities and shifting toward bonds as growth slows.

Howell remains positive about long-term commodity demand because of years of underinvestment and strategic competition between the United States and China for resources. Still, commodity prices are cyclical and could fall if growth moderates in 2027; he emphasizes that markets look ahead roughly nine months, so expected conditions matter more than the economy today.

Howell says recent increases in U.S. bond yields mainly reflect strong economic growth, rather than the fiscal concerns often highlighted in the media. If nominal GDP growth slows from roughly 6–6.5%, yields could decline, and a recession next year remains possible, though uncertain.

Howell sees U.S. 10-year Treasuries as capable of delivering a reasonable return—or at least breaking even—over the next 12 months. He estimates a rough fair-value yield range of 5.5–6%, taking into account a term premium that is currently about 50 basis points below zero.

Howell views gold as a long-term hedge against monetary inflation and prefers holding it rather than trying to time every market move. He says the gap between U.S. and Chinese bond yields mainly reflects different growth conditions: stronger U.S. growth supports higher yields, while China’s weak, deflationary economy helps explain its lower yields.

Bitcoin is another liquidity-sensitive asset that Howell considers a potential monetary-inflation hedge. He says holding above $70,000 could support the case for a possible bottom, while a break below that level would weaken it; he owns both Bitcoin and gold, with a larger allocation to gold because Bitcoin is more volatile.

Howell says he might increase Bitcoin’s share if institutional adoption reduces its volatility. He directs listeners to his Substack, Capital Wars, and notes that institutional investors can access his work through GL Indexes.

The host reminds viewers that the discussion is not investment advice and encourages them to do their own research and recognize the risks involved. The episode closes with thanks over music.