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Dear Fellow Traveler, Last night, a reader asked a smart question… “Where does liquidity come from…” I wanted to ensure that I had a complete answer for this… So I asked a website whose voices to cite on the matter… No joke…
I didn’t think that writing about this was some foreign language… but it’s fitting… The four authors above (particularly Howell and Poszar) shape my worldview at the top… And that worldview remains the same… Every rally has a story. It could be the Dot-Com boom, the AI revolution, a Fed pivot, or China reopening. But that’s not what drives the market higher… Howell and Stanley Druckenmiller have argued that liquidity (or money) moves markets… Today, we’ll discuss the three smartest voices in tracking liquidity… why they're all seeing the same disaster coming… and what you can do about it. The Everything MenMichael Howell runs CrossBorder Capital. In late 2022, when everyone was hiding under their desks, he saw global liquidity bottoming and called for a massive rally. Markets surged across 2023 and 2024… Here's what Howell knows that most don’t… The Fed can raise rates all it wants, but if the Bank of Japan is printing, China's easing, and the Treasury is playing games with bill issuance, global liquidity is still expanding. While Powell was talking tough about fighting inflation, the system added trillions in liquidity from late 2022 to mid-2024. That's not tightening. That's a firehose of money dressed up as discipline. Meanwhile, Zoltan Pozsar used to run strategy at Credit Suisse. Now he's at Exante Data, and he sees liquidity differently. Forget what central banks say. Watch the repo market. The repo market is where banks and hedge funds borrow money overnight using Treasuries as collateral. It's trillions of dollars moving every single day. When it breaks, everything breaks. Remember September 2019? Repo rates went from 2% to 10% in one day. The Fed panicked and injected $75 billion into the market overnight. They were supposedly tightening but had to restart QE immediately. That's Pozsar's point: the plumbing matters more than the policy. The RefereeThe Bank for International Settlements (BIS) is the central bank of central banks. They don't care about narratives. They track credit spreads, lending standards, and whether banks are actually willing to lend. In their view, you can have all the reserves in the world, but if banks won't lend and spreads are blowing out, there's no liquidity. It's like having water in the reservoir, but with broken pipes leading to your house. You're still thirsty. So, where DOES IT ALL COME FROM?We have five sources… Engine 1: Central Banks (The Obvious One)Everyone watches the Federal Reserve… But that’s just one puzzle piece… Yes, they print money through QE and cut rates. However, what Howell discovered is that they're always conducting backdoor operations that nobody talks about. While the Fed was "tightening," they drained the Treasury General Account and reverse repo facility, injecting hundreds of billions of dollars. China's central bank is printing so hard that the yuan-gold price doubled in 18 months. Japan never stopped printing. But Pozsar's view matters here… Central bank money only works if it can flow through the system. No repo market? No collateral? That money sits there like a Ferrari with no gas. Engine 2: Commercial Banks (The Boring One)Banks create money when they lend. You get a mortgage, and the bank creates a deposit. That's new money. Multiply that by millions of loans, and you've got liquidity creation. The BIS monitors whether banks are actually willing to lend. Tight credit spreads mean they're eager. Wide spreads mean they're scared. Right now? Standards are tightening while spreads look calm. That's the setup for a credit crunch. Engine 3: Shadow Banks (The Dangerous One)Shadow banks are Pozsar's specialty. Hedge funds, money market funds, and dealers all create liquidity outside the traditional banking system through repurchase agreements (repos) and collateral chains. The same Treasury bond can be borrowed and re-borrowed multiple times in a day, creating multiples of its value in liquidity. It's financial alchemy. It works great until someone wants their collateral back and the music stops. When repo breaks, like in 2008 or 2019, liquidity doesn't decline… It just goes away… Instantly. Engine 4: Government Spending (The Elephant)Governments are trapped. They need to issue debt to fund deficits. But issuing debt drains liquidity from markets. It's cannibalistic. The U.S. is shifting to short-term bill issuance because it's cheaper. However, as Howell warns, if rates spike, the interest bill will explode. We're already spending more on interest than defense. At 5% rates, interest alone would be $1.75 trillion annually. A looming debt, where trillions of dollars will be needed to refinance existing debt, remains a significant challenge. Look for that in the years ahead… That will suck liquidity out of markets like a black hole. Engine 5: Global Flows (The Wild Card)When the dollar weakens, emerging markets boom. When China eases, commodities rally. When Japanese housewives engage in the carry trade, global markets shift. These flows are massive and unpredictable. Turkish banks are borrowing in dollars to buy local bonds. Saudi petrodollars recycling into Treasuries. It's a global liquidity carousel that never stops spinning until it does. Where We Are Now (Spoiler: Late in the Game)Howell says we're at "9 o'clock" in the liquidity cycle. Not midnight yet, but getting late. Liquidity peaks in 2025, maybe early 2026. After that? Hoo boy… Pozsar's worried about collateral. As the Fed shrinks its balance sheet, there's less high-quality collateral for the repo market. That's like removing oil from an engine while it's running. The BIS sees credit conditions tightening beneath calm surfaces. Banks are pulling back even while spreads look normal. It's the calm before the storm. All three agree: we're in a late cycle with massive refinancing needs on the horizon, and the traditional playbook won't work. So what does? That was the point of the Hedge of Tomorrow…
Pozsar says to own pristine collateral, such as Treasury bills and German Bunds. Boring in good times, lifesavers when repo markets freeze. The BIS says keep liquidity buffers. Don't be fully invested. When credit seizes, cash is king even if it's being debased. The machine is still running, but the check engine lights are flashing everywhere. Howell sees it in cycle timing. Pozsar sees it in collateral stress. BIS sees it in credit spreads. They're all looking at the same dying patient from different angles. And they all agree… Time's running out. Stay liquid, Garrett Baldwin About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
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