Global liquidity cycles have reportedly peaked in late 2025 or early 2026, signaling a challenging environment for risk assets and equities, while simultaneously supporting strong nominal GDP, commodities, and the real economy.
Option volume on LIQUIDITY-CYCLES indicates large block hedging by prime desks. Downside asymmetry is expanding.
Dealer gamma exposure on LIQUIDITY-CYCLES creates elevated volatility near the current strike cluster. Not adding exposure until after the backlog data clears.
On our macro desk, we are watching Michael Howell’s indicators closely. With the global liquidity cycle aligning with a 65-month sine wave and peaking around late 2025/early 2026, the risk-reward for U.S. large-cap equities looks increasingly treacherous. The shift from Fed QE to Treasury QE is redirecting money away from financial markets and into the real economy. Consequently, we are advising clients to prepare for potential SandP downside by year-end, trim overextended growth positions, and rotate selectively into commodities and natural resource cyclicals where earnings revisions are actually inflecting higher.
Analyzing the plumbing of the current market structure reveals a hidden danger heading into 2026: liquidity fragmentation. While headline metrics make markets look abundant, order books are splitting across venues, and instruments are growing increasingly complex just as the market's shock-absorption capacity wanes. If a funding crash or debt maturity wall triggers a sudden contraction in liquidity growth rates, assets that appear liquid could rapidly behave illiquid under pressure. Investors ignoring these structural warnings risk being caught heavily exposed when volatility spikes.
From a quantitative allocation standpoint, we have to respect the historical pattern of 5-to-6-year liquidity cycles terminating right about now. Even if absolute liquidity doesn't crash, a significant drop in its growth rate is enough to shake speculative positioning and elevated Shiller CAPE ratios. As we navigate this tug-of-war between a slowing financial sector and an accelerating real-world economy, our protocol is to stay invested through volatility while strictly building up cash cushions, maintaining core AI exposure, and using dips to accumulate monetary inflation hedges like gold and cryptocurrencies.
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