The liquidity vacuum: why markets may need a reality check

The liquidity vacuum: why markets may need a reality check

Over the weekend, CrossBorder Capital’s Michael Howell updated his global liquidity analysis, concluding that the sell-off for Bitcoin is not over yet, and that elsewhere, accelerating global economic growth will drain liquidity from other asset markets, limiting their upside potential.

While some forecasters see Bitcoin rallying to $90,000, Howell and the team at CrossBorder Capital have other ideas.

According to Howell, the wind has been knocked out of the sails of the “Everything Bubble,” and if you sustain a vertical move upward, a slide toward $30,000 is statistically the most likely path.

Bitcoin follows money

Howell’s research shows that global liquidity is responsible for 40-45 percent of systematic movements in Bitcoin’s price. Think of liquidity as the tide: when it’s high, all boats (and digital coins) rise. However, at the moment the liquidity tide is waning. While the upward trend in liquidity provided support between 2022 and 2025, that trend has officially ended.

Figure 1. Liquidity is increasing slowly

Source: Crossborder Capital

If you look at Figure 1, you may notice that liquidity has moved slightly higher recently. Howell acknowledges this, but dismisses it as a “temporary” blip – a small bump sparked by two specific events:

1. The Federal Reserve’s Reserve Management Purchases (RMP): a “stealth Quantitative Easing (QE)” intended to calm repo market jitters.
2. Injections by the Chinese People’s Bank of China (PBoC): a standard liquidity pump ahead of the Lunar New Year.

The catch? China’s latest Notice #42 explicitly bans residents from engaging in crypto. So even if the PBoC floods the zone with Yuan, it will not flow into Bitcoin wallets.

Three reasons why the outlook is bleak

Howell divides the bearish liquidity outlook into three different pillars: cycle, policy and refinancing.

1. The Cyclical Downturn: Main Street vs. Wall Street

According to Howell, global liquidity moves on a five- to six-year cycle, and the company’s Global Liquidity Index (GLI) indicates we are in a major downturn. Interestingly, this isn’t just about tightening central banks; it’s about the real economy.

Figure 2. (global) liquidity cycle of advanced economies

Source: CrossBorder Capital

As the global economy gains momentum, more money is needed for working capital and capital expenditures (capex). In Howell’s words: “Any money that’s anywhere has to be somewhere, and if it’s flowing through Main Street, it’s not available to Wall Street.”

2. Policy uncertainty: the “Warsh” effect

Incoming Fed Chairman Kevin Warsh is expressing a desire to reduce the Federal Reserve’s (the Fed) ‘footprint’. While investors keep an eye on interest rates, the real game is the liquidity injected into the money markets. We are already seeing “spikes” in the repo markets (the difference between the Secured Overnight Financing Rate (SOFR) and the Interest on Reserve Balances (IORB), indicating that liquidity is already tight. If the Fed continues to shrink its balance sheet by trillions, risky assets will be the first to feel the pressure.

3. The $45 Trillion Debt Maturity Wall

This is perhaps the most intimidating part of Howell’s analysis, and something we’ve been pointing out to investors since early last year. During the COVID-19 era, borrowers took advantage of low interest rates to “pay down” their debts. That debt will now be cancelled.

• By 2030, global demand for refinancing will reach $45 trillion – double the 2024 level.
• 70 to 80 percent of capital market transactions now consist only of “refinancing” old debt rather than creating new value.
• This creates a ‘liquidity vacuum’ where available money is sucked into paying off old debts rather than buying securities or risky assets like Bitcoin.

Figure 3. Fed Liquidity and the S&P 500 (25 Weeks Lagged)

Source: CrossBorder Capital

The silver lining: the ‘Fed Put’ lives on

It’s not all doom and gloom. Howell notes that while the near future looks “disappointing,” there is light at the end of the tunnel.

Policymakers cannot let the financial sector fail. Every time a crisis looms (2008, 2020 or the recent repo booms), central banks eventually blink and flood the market with liquidity. The coming ‘refinancing crisis’ will likely force the same response.

For that reason, Howell believes that owning Bitcoin will still serve as an insurance policy against monetary excesses. It should be a stock in all portfolios, but he believes there will likely be better buying opportunities in the coming months.

Looking at Figure 3, Howell notes, “The correlation is close enough to warn that weak or declining Fed liquidity is not a good backdrop for risky assets.”

Closing thoughts

Liquidity restrictions are being tightened. While Bitcoin remains a crucial hedge against the fiat currency’s inevitable depreciation in the long term, its short-term momentum points to the downside.

If Howell is right, the next target will be towards $30,000, not $90,000. For patient investors, this should not be seen as a disaster, but as a buy signal waiting for the cycle to bottom in 2027.

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Roger Montgomery is the founder and chairman of Montgomery Investment Management. Roger has more than three decades of experience in fund management and related activities, including equity analysis, equity and derivatives strategy, trading and securities brokerage. Before founding Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also the author of the best-selling investing guide to the stock market, Value.able – how to value and buy the best stocks for less than they are worth.

Roger regularly appears on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.

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