This Week…

We’re looking at why liquidity matters more than anything else.

Global liquidity is an often overlooked topic, yet as more retail investors become exposed to the fundamentals of macro investing, they’ll find that understanding liquidity is essential to navigating today’s markets.

In this issue, we’ll cover 3 things:

• What liquidity is and why it matters.
• How global liquidity levels drive risk asset price behavior.
• The role of central banks and liquidity.

Now, let’s get into it. 

Welcome to the Game

Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.

LEVEL 1  — What is Global Liquidity?  

Liquidity is the lifeblood of financial markets. Specifically, it refers to how efficiently an asset or security can be converted into cash without causing a significant price move.

• When a market is very liquid, that’s a sign of a healthy market.

In other words, liquidity is the lubricant that keeps the gears of the financial system turning smoothly. And when liquidity dries up on a large scale, that’s when volatile price movements and potential crises can arise.

Global liquidity is simply the flow of available cash and credit through all global markets. Similar to money supply (M2), this is the money around the world that could theoretically be put to work at any given time.

Which matters why?

• Market Functioning: Liquidity ensures that markets can operate efficiently. When liquidity is ample, investors can enter and exit positions with ease, reducing transaction costs and improving price discovery.
• Asset Valuation: Highly liquid assets tend to have lower risk premiums, while illiquid assets command higher returns to compensate investors for the increased risk of holding them.
• Financial Stability: Adequate liquidity is essential for maintaining financial stability. It provides a buffer against unexpected shocks and helps prevent liquidity crises like we saw with Silicon Valley Bank’s collapse in March 2023.
• Investment Opportunities: The performance of many risk assets has been shown to closely track global liquidity trends.

Which leads us to our next point…

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LEVEL 2 — Liquidity’s Impact on Risk Assets

Developing an understanding of liquidity trends can help you get ahead of investment opportunities that you otherwise might miss.

In this episode of The Journey Man (free with sign-in), Michael Howell, CEO of CrossBorder Capital, dissects why liquidity is the primary driver of market dynamics.

• “Liquidity is all important right now,” says Michael. “When liquidity picks up, many markets tend to bottom… You’ve seen the crypto space explode upwards. You’ve seen gold go up. Equities have followed suit, with technology leading the way.”

In a recession when most investors seek safety, liquidity typically drops. Investors may flock to hard assets and long-term bonds in such an environment, while riskier assets like tech stocks and crypto selloff.

In a rising liquidity environment, all assets tend to outperform — but the upside for more volatile assets is considerably higher.

Identifying the bottom in global liquidity levels in late 2022 was what helped Real Vision co-founder and CEO Raoul Pal get ahead of the latest bull market run in crypto.

Level 3 — The Role of Central Banks

Central banks have been pivotal in shaping global liquidity through policies like quantitative easing (QE).

By expanding their balance sheets and injecting liquidity into financial markets, central banks aim to support economic growth and stabilize financial conditions — but the widespread adoption of QE raises concerns about currency debasement and inflation.

• As central banks continue to rely on QE to stabilize economies and service high levels of government and private sector debts, global liquidity will be forced to rise.
• This in turn drives up asset prices.

This idea is central to Raoul’s Everything Code investment thesis, which he laid out in this free video here. In short, Raoul believes he has found a pattern of systematic fiat currency debasement caused by global central banks due to their monetization of growing debts.

That debasement creates new opportunities for forward-looking investors in assets like tech, commodities, and cryptocurrencies. Raoul and his team provide extensive research and ideas on how to trade this emerging trend over at the Exponentialist.

Next Time

Thanks for reading. In our next issue, we’ll look at an emerging investing theme that sits at the nexus of science and technology: space. 

See you then.

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