The Last Container (Or the Last Great American Bull Market?)Volume 17 of Postcards from the Edge of the World... The system doesn’t stop the flood. It builds new places for the water to go.
“I hope we are wrong…” - Michael Howell, Cross Border Capital, March 22, 2026 To Whom It May Concern (You): I’d written the first chapter of my next phase of Postcards from the Edge of the World. I wanted to take a slightly different approach… But I realized after an email this morning that I hadn’t defined the greatest extraction machine of them all… And - in a time of market stress - it was worth one more Volume on this subject. So, I wrote this all morning… and most of the afternoon. All because of an email that arrived this morning at 5:51 am… It came from Michael Howell’s Capital Wars on Substack. If you don’t know Howell, you should. He runs his Global Liquidity Index. I argue this is the most important data set for macro-themed investing. Howell’s index tracks the total capital and credit available inside the global financial system… There are two forms of liquidity that matter here. Funding liquidity, which is the ability to borrow, and market liquidity, which is the ability to transact without moving the price too much. When both deteriorate at the same time, the system seizes. Meanwhile, everything else… momentum, returns, valuations, earnings… lives downstream of all that money sloshing around (or… not sloshing around.) The subject of this morning’s note was “The Four Horsemen of the Liquidity Apocalypse.” The thesis was as blunt as the title suggests. The four primary inputs in his model… central bank reserves, the collateral multiplier, the U.S. dollar, and oil prices… are all tightening or moving in the same direction. Not one or two of them, the way you might see in a normal correction. All four… moving in the same direction… right now. You likely know the dollar and oil prices, as well as the actions of the Federal Reserve and other central banks. The collateral multiplier measures how many times a single unit of high-quality collateral, such as a Treasury, can be reused within the financial system through repo and shadow-banking chains. Federal Reserve research has shown that primary dealers routinely create several times as many secured liabilities backed by Treasuries as they actually own… and that multiplier can swing violently in a crisis. The most well-known multiplier crisis in recent years was in March 2020, when the multiplier collapsed in a matter of weeks… meaning the same Treasury was reused across the system, and when that reuse stopped, credit evaporated faster than the losses themselves. Howell’s analysis laid out how much each of those inputs weighs on the index, and the combined effect is staggering… A larger decline in global liquidity would push his model to levels we haven’t seen since the worst episodes of the past three decades. Howell closed his primary note with five chilling words… “I hope we are wrong.” If you follow the waterfall argument and understand how liquidity sits upstream of everything else… You know that this dynamic isn’t new. Variations of this multiplier stress appeared in 1931, in 1998, and again in 2008… each time centered on collateral stress and funding pressure. In 2008, a collapse in collateral confidence triggered rapid deleveraging, which was subsequently offset by large-scale liquidity provision from central banks. And that sets us up for the inevitability of the next GREAT extraction… The Ways They TakeI’ve written about the waterfall structure of markets before, and I need you to understand it now more than ever. Liquidity sits at the top of the financial system, the way water sits at the top of a mountain. When it flows, capital moves downhill into equity momentum, then into returns, then into asset prices, lower volatility, and eventually into the real economy, where it becomes wages, spending, and the things we call growth. When it stops flowing, everything downstream dries up. This is how the plumbing of the global financial system works, and it’s obviously starting to seize up right now, according to this model. What makes this moment different is that all four inputs to liquidity are tightening simultaneously… a pattern historically associated with late-cycle conditions. The recent rise in oil prices, driven largely by geopolitical tensions, is feeding directly into inflation expectations and bond market volatility… and, from there, into all four of Howell’s key inputs. Higher bond yields push the MOVE index of bond market volatility higher… and it has recently moved to 108. The upward pace is consistent with the start of periods with elevated collateral stress. A rising dollar is tightening financial conditions globally. Central banks, rather than stepping in to ease conditions, are still running on tighter policy into all of this. Some are even considering rate hikes this year. The reason the MOVE index matters so much is something I wrote about at length last summer while diving into Bank for International Settlements reports on haircuts and the impact of the Bank of Japan’s monetary policy on U.S. bond markets. In the wake of the 2008 financial crisis, the structure of global lending changed. A large and growing share of lending, particularly in wholesale funding markets, is now collateral-based, according to the World Bank. Banks and institutions no longer rely on unsecured, relationship-based lending… they lend against collateral, and the dominant form of that collateral is high-quality government bonds… especially U.S. Treasuries in dollar funding markets. When the MOVE index rises, the value of that collateral becomes uncertain. When collateral becomes uncertain, lenders often impose larger haircuts on repo-style lending… meaning you can borrow less against the same asset. When haircuts rise across the system, credit tightens. When credit contracts at scale, the waterfall runs dry. This entire mechanism transmits through the repo market, where Treasuries are exchanged for short-term funding and priced daily. A growing share of this activity now occurs outside traditional banks, in the shadow banking system, where regulation is lighter but leverage remains. In recent readings, Howell’s daily market liquidity index has plunged. Market depth… a measure of how easily large trades can be executed without moving the price… has deteriorated sharply. Liquidity stress, which tracks short-term repo funding pressure, is climbing to levels that should concern anyone with meaningful exposure to risk assets. What Howell’s model is capturing is a deterioration in both forms of liquidity at once… the ability to borrow and the ability to transact… which is the signature of a systemic event, not a routine correction. What’s Beneath the NoiseNow… a fair warning… I need you to hold two thoughts in your head at the same time… Both are true, and they point in opposite directions over different time horizons. The first thought is that a liquidity drain is real, it’s measurable, and it’s happening right now. The market is moving into what Howell describes as “Risk Off” territory, and our momentum gauges over at Me and the Money Printer support him. This is not just a forecast or an opinion. It is a reading of current conditions. The second thought is that the system has followed a consistent playbook in every major crisis since 2008. Every major liquidity crisis since 2008 has ended the same way. The drain accelerates until something structural breaks… a repo market seizure, a bond auction that doesn’t clear, a bank or fund that can’t roll its overnight funding… and then the central banks step in. Failure in this system does not mean recession. It means a breakdown in collateral confidence that prevents the system from rolling its own funding. They expand the balance sheet, open swap lines, buy bonds, and flood the system with new liquidity… Why? Because the alternative is a cascading failure of the collateral chain on which the entire financial system is built. They did it after 2008. They did it in September 2019 when repo rates spiked sharply, forcing Fed intervention. They did it through 2020 and 2021 on a scale that took the Federal Reserve’s balance sheet from under $1 trillion pre-2008 to nearly $9 trillion at its peak. Even after years of “tightening,” the balance sheet is still holding assets that dwarf anything the world saw before the financial crisis began. Unlike prior cycles, central banks are now operating with elevated balance sheets and persistent inflation pressures, which narrows their policy flexibility. The question has never been whether they will “print” again. The question is when… and what happens to all that new money once it arrives. Because that’s where the extraction really lives… We’ve talked about the Cantillon Effect, and how broker-dealers benefit from all that new capital, and the average person ends up with higher prices and likely an interest payment. And that’s what connects today’s liquidity crisis to something much larger than a market correction. How Power Really WorksThis isn’t really a free market system… It’s really a governance structure built on liquidity provision, collateral stability, and political tolerance for inflation (and, of course, never-ending extraction.) It’s a centrally planned… balance sheet-driven system, not a price-driven one. The system is boxed in three ways.
That leaves one path… expand liquidity. Austerity is theoretically possible, but in a system with this level of debt and political sensitivity to unemployment and inflation, it has consistently proven to be unsustainable. Europe tried in 2011, and society resoundingly rejected it… In every volume of this Postcards series, I’ve named an extraction mechanism… a structure that transfers purchasing power through monetary expansion without direct fiscal authorization. In Volume 15, it was the regulator that managed misconduct rather than ended it. In Volume 16, it was the healthcare system that absorbed $5.3 trillion a year while hiding the real price behind employer tax exclusions. In Volume 11, we discussed the Debasement Index… roughly 6.7%… the rate at which U.S. M2 money supply has expanded annually since the end of Bretton Woods, outpacing real GDP growth in every decade since… and argued that any investment that doesn’t clear that rate is losing purchasing power in silence. But I’ve never named the mechanism that sits upstream of all the others. The one that makes all of them possible. The one that funds the subsidies, backstops the debt, and guarantees that the extraction never has to stop. It’s the “Money Printer” itself. And the system is already building the containers for its next use. They Need More Places for Money to GoA few days ago, SEC Commissioner Hester Peirce appeared at a conference to discuss crypto ETFs, tokenization of real-world assets, and a broad openness to new financial products. The coverage framed it as deregulation… the SEC getting friendlier, the doors opening for innovation. And there’s some truth in that framing, as far as it goes. But my question was not whether the SEC is getting friendlier. My question is: “Why does the system need these products to exist in the first place?” The U.S. government is running deficits that would have made previous generations pass out at the dinner table… The national debt is now above $39 trillion and rising rapidly. The Treasury is issuing paper at a pace that requires a constant, expanding universe of buyers. The traditional buyer base… banks, pension funds, foreign central banks, money market funds… is either shrinking or getting more selective. The foreign share of Treasury ownership has declined as a percentage of total outstanding debt, banks face regulatory constraints on how much duration they can hold, and the Fed has been reducing its balance sheet since mid-2022. So when the central banks are forced to respond to the next major liquidity crisis… when they have to print again, as they have in prior crises… all of that new capital will need somewhere to land. And here’s the part that should get your attention… The last two rounds of printing contributed to asset inflation and, eventually, consumer price pressures. New money that didn’t have enough containers… it piled into housing, drove up grocery and energy costs, and showed up in the CPI… at which point it stopped being an economist’s problem and became a political one. The constraint is not economic. It’s political. The system can withstand losses in asset values. It struggles to withstand losses in voter purchasing power. The system learned this lesson the hard way. Voters noticed, and careers ended. So what do you do if you’re the system, and you know you’ll have to print again, but you can’t afford to let the money show up in the price of eggs? You build new containers. You create new financial products that can absorb liquidity without passing it through to consumer prices. The system doesn’t stop the flood. It builds new places for the water to go. Every tokenized money market fund, crypto ETF, and stablecoin framework that’s backed by Treasury reserves… can function as absorption capacity. They’re new distribution channels for government debt, wrapped in a format that attracts a class of buyer who would never open a Treasury Direct account but will hold a tokenized T-bill on their favorite exchange. Consider a stablecoin backed by Treasury reserves. Every dollar parked there is government debt absorbed… without an auction, without a primary dealer, and without showing up where anyone is looking. No coordination is required for this outcome. The incentives of each actor… Treasury, central banks, regulators, and asset managers… all point in the same direction. Each is responding rationally within its mandate, but the aggregate outcome is systemic. The SEC isn’t opening the door because they suddenly love decentralization. They’re opening the door because the incentives all point in the same direction… the system needs more absorption capacity before the next flood arrives. Remember, in simple terms… liquidity supports collateral, collateral supports credit, and credit supports asset prices. When liquidity contracts, the entire chain tightens at once. The Everyday HustleI want to be very direct about the implications, because they cut both ways depending on the time horizon. In the near term, the liquidity drain that Howell is documenting means the market is under genuine pressure. Risk assets live downstream of the waterfall, and the water level is dropping. If his model is right… and his track record suggests you should take it seriously… then stocks, speculative positions, long-duration bets, and anything that depends on cheap credit and optimistic forward assumptions are entering a period of real compression. I could be wrong about the timing. Liquidity models aren’t precise, and this system has outlasted many smart people before. But these dynamics can persist longer than expected, and when they reverse, they tend to reverse faster than positioning can adjust. Over a longer horizon, the severity of the drain makes the eventual response inevitable. The system can’t allow the collateral chain to fail, because a large share of global lending depends on it. The system can’t tolerate sustained dysfunction in Treasury auctions, because the entire debt structure depends on continuous refinancing. And when the response comes… when the “printing” starts again… the new liquidity will need somewhere to go that doesn’t destabilize the political system. The people who understand this cycle are the ones who position themselves on the right side of it. And the people who don’t understand it get extracted from both ends of the process… they lose money in the drain, then lose purchasing power in the flood that follows, and then they watch the containers fill up with wealth that used to be theirs. That is the extraction mechanism that sits upstream of all the others. It’s not healthcare, or banking, or housing. Those are where the money lands after it’s been printed. The real extraction is the printing itself… the annual debasement… and the system’s relentless need to build new containers to absorb the output before it becomes visible enough to provoke a revolt. The Real EconomyEvery extraction mechanism I’ve written about in this series turns out to be a container for the same underlying process. Healthcare accounts for a fifth of GDP and grows every year regardless of who’s in charge… because subsidies guarantee demand, and the money supply guarantees the subsidies. Housing absorbs another massive share, inflated by the same government-backed liquidity that makes mortgages available but never makes them affordable. Education captures decades of future earnings through a student loan system designed to expand access, but it ultimately raises prices. The banks manage the flow and take their percentage, as we saw with Wells Fargo in Volume 15… where the fines were not a punishment but a licensing fee for continued extraction. All of these are tributaries of the same river. The river is liquidity. The sources are the Federal Reserve and the Treasury Department… and other groups that resemble them on every continent. And the extraction is the gap between what your dollars can buy today and what they could buy before the last round of “printing.” That gap compounds each year. It doesn’t appear on any W-2 or in any invoice, but it explains why your grandparents could raise a family on one income, and you can barely manage on two. Every volume in this series has been about a different facet of that same compounding erosion… and this volume, the last in the series, is about the engine that drives all of it. Howell’s four horsemen are riding right now. The MOVE index is signaling collateral stress. Oil is draining liquidity through the energy channel. The dollar is tightening conditions globally. And central banks are watching the gauges, waiting for the moment when they have to act. The end state is a system that requires continuous liquidity expansion, with sophisticated mechanisms to absorb it without triggering political backlash. When they act, the flood comes. And the pipes being laid right now… the tokenized products, the crypto ETFs, the new frameworks for absorbing capital at scale… will fill alongside other risk assets. The Back PageI started this series to name the things that take from you without asking. Seventeen volumes later, I’ve traced those things back to their source. The source is the architecture of the monetary system itself… a system that must expand to survive, that must print to service its own debt, and that must constantly engineer new places to put the output before it becomes visible enough to provoke a political response. Monetary systems do not fail when they are inefficient. They fail when they become politically intolerable. And political tolerance is determined by the cost of living, not the level of debt. The system doesn’t need you to understand any of this. In fact, I don’t even think it wants you to understand any of this… It just needs you to keep participating. The truth, though… You don’t have to participate blindly, and you don’t have to stand in the path of the waterfall while the water is falling. Your Sovereign Moves (Household)I’ve written things that people can do at every level. Even if you’re not an investor, you can take charge of your finances and ensure that you’re protected. Here are a few easy steps. 1. Recognize that cash is a position. In a draining liquidity environment, one of the most effective defensive positions is to preserve what you have. Cash is not passive. It’s a deliberate allocation to safety while the waterfall reverses, and the goal is to keep your capital intact so it’s ready to deploy when the cycle turns. 2. Move surplus cash out of your bank account and into short-duration instruments. Your savings account pays you a fraction of what your money could earn on the very same government paper that backstops the entire system. Move it into a Treasury money market fund or a short-term T-bill ETF, where you’ll earn yields currently around 4% with minimal duration risk, and your principal is backed by the full faith and credit of the U.S. government… which, as we’ve spent 17 volumes discussing, has historically taken extraordinary measures to preserve that commitment, because the alternative is the end of the system itself. 3. Reduce your exposure to long-duration risk. This is not a call to sell everything. This is a call to understand that in a liquidity drain, the assets that suffer most are the ones that depend most on cheap credit, optimistic forward assumptions, and the continuation of conditions that are now deteriorating. Growth stocks, speculative positions, positively leveraged bets, illiquid alternatives… all of these live at the bottom of the waterfall, and when the water level is dropping, you want to be on the high ground… 4. Watch the gauges. You can follow Howell’s Global Liquidity Index or just tap into the MOVE index of bond market volatility. When these reverse… when liquidity starts expanding again, when the central banks re-enter the market, when the collateral multiplier begins climbing… that will be the signal the system is turning again. When the flood comes, the paths of least resistance will announce themselves. The containers that were built during the drought will fill fast... Bitcoin too. The Sovereign MoveThe sovereign move this month is not a stock. It’s a posture. I’ve spent 17 volumes showing you the extraction mechanisms… the healthcare system, the banks, the housing market, the subsidy-inflation ratchet, the debasement itself. In every volume, the move has been to position yourself on the other side of the extraction… to own the building, to clear the hurdle rate, to see the invoice before it arrives. This time, the move is simpler and more uncomfortable. ... Listen to this episode with a 7-day free trialSubscribe to Postcards From the Edge of the World to listen to this post and get 7 days of free access to the full post archives. A subscription gets you:
|
%26stroke%3Dnone%26strokeWidth%3D3.6){kind=small}
Subscribe to:
Post Comments (Atom)
0 Response to "The Last Container (Or the Last Great American Bull Market?)"
Post a Comment