The liquidity cycle

(images source from cross border capital, Michael Howell’s framework)
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Riding the Liquidity Cycle: A Practical Playbook for Investors

Michael Howell’s central insight is simple but profound: liquidity drives markets. If you can map the global liquidity cycle, you can position ahead of turning points in risk appetite, yields, and sector leadership.

Liquidity Leads Everything

‍CrossBorder Capital’s framework breaks this cycle into four repeating phases—and shows how asset allocation should adapt to each stage.

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The Liquidity Cycle in Four Phases

1. Rebound - Liquidity injection starts after a squeeze
   • Early signs of recovery in cyclicals and technology sectors
   • Equities begin to improve, with cyclical and technology sectors showing strength
   • Credit assets perform also perform well as funding ease
   • Bond duration lags as yields rise
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2. Calm - Liquidity is abundant, risk appetite returns
   • Investors reengage across risk assets, broad equities move higher with strong participation
   • commodities strengthen alongside improving demand
   • credit assets remain supportive, though less strong than equities
   • bond durations underperforms
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3. Speculation - Liquidity remains high, excess build
   
   • Investors chase momentum, valuation stretch
   • Risk appetite remains strong but become overextended.
   • Equities still perform, led by technology and growth sectors
   • Commodities maintain support but can show mixed signals.
   • Credit assets lose some strength as cracks begin to form
   • Bond duration stays weak.
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4. Turbulence - Liquidity tightens, volatility spikes
   
   • Risk appetite collapses, investors retreat to safety
   • Equities weaken sharply, with cyclicals and technology hit hardest
   • Credit assets struggle under tighter funding.
   • Commodities roll over under liquidity stress.
   • Bond duration outperforms as investors seek safe havens.
   • Defensive industries (healthcare, staples, utilities) perform relatively better.

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The lesson for investors is simple: follow liquidity, not the headlines. By aligning asset allocation with the phase of the liquidity cycle, investors can tilt toward strength (equities and credit in Rebound/Calm) and protect capital when conditions shift (defensives and bonds in Turbulence).