Guide · Part II — The mental tools

Liquidity cycles and the Singapore translation

Before judging any asset, ask whether global money is expanding or contracting.

In a drain, cash and quality win and speculation is punished, regardless of how good the individual story is.

That is the working claim of Michael Howell’s liquidity framework, and it comes with one important local translation for anyone whose base currency is the Singapore dollar.

The problem

Most investors analyse companies; far fewer analyse the water the companies float in. Yet in any given year, a large share of a market’s move is the tide, not the boats. Illustratively, in a strong liquidity expansion, if underlying businesses grow earnings around 6% a year while their share prices rise around 16%, roughly ten of those sixteen points came from investors paying more for the same earnings — the tide — and only six from the businesses themselves. Attributing the whole move to stock-picking skill is the most common self-deception in a bull market.

The problem, then, is measurement: what exactly is “the tide,” and can it be read before it turns?

The insight

Howell’s answer is to measure total flow through the financial plumbing and call it global liquidity. Three components feed it.

• Central-bank balance sheets. Asset purchases inject reserves; balance-sheet run-off drains them.
• Bank credit creation — the under-appreciated one, because most money is not printed by any central bank; it is lent into existence by commercial banks, and when credit tightens, total liquidity falls even if the central bank does nothing.
• Cross-border flows. Reserve accumulation by surplus countries exports liquidity; reserve drawdowns to defend currencies remove it.

A publicly available proxy exists for the largest bloc: net liquidity approximately equals the central bank’s balance sheet, minus the government’s cash account held at the central bank, minus the overnight reverse-repo balance — the last two being pools that drain reserves away from markets. Howell’s empirical claim is that changes in this measure lead risk-asset prices by roughly twelve months, because liquidity first expands or contracts the balance-sheet capacity of the dealer banks standing in the middle of every market, and only later shows up in prices.

The first principle underneath is that money is credit — book entries that a system creates and destroys — and prices are set at the margin by credit-funded buyers. Earnings belong to the real economy; the willingness to pay a multiple for those earnings belongs to the credit cycle. Howell measures the switch that turns that willingness on and off.

The Singapore translation

Singapore requires reading the same tide through a different instrument. The US central bank steers through interest rates; the Monetary Authority of Singapore steers through the exchange rate — managing the Singapore dollar against an undisclosed trade-weighted basket of currencies, adjusting the slope, width, and centre of its policy band. For a small economy where trade dwarfs domestic output, the exchange rate is simply the more powerful lever, and local interest rates largely follow global ones as a consequence.

Two practical readings follow. First, a strengthening Singapore dollar on a steeper appreciation path is MAS tightening — a local tell that the authority sees inflation pressure, often rhyming with a global liquidity drain. Second, a portfolio split between SGD and USD assets is exposed to the same global tide through two different doors: a US tightening cycle hits USD assets directly through rates and multiples, while it reaches Singapore through trade, credit conditions, and the currency. An SGD-based allocator holding a large USD sleeve is implicitly short their own home currency — a position most holders never chose consciously, and one that a strengthening SGD quietly taxes.

In plain English

Watch two dials, both free. Globally: is net liquidity rising or falling — is the reservoir filling or draining? Locally: is the Singapore dollar on a strengthening or easing path? Together they give a posture — lean with the tide or brace against it — roughly a year before the tide fully shows up in prices. The point is not precision timing; it is refusing to judge any asset’s prospects without first checking the water level.

Where this breaks

This chapter carries a practitioner-judgement label deliberately: the liquidity-leads-prices relationship is an empirical regularity with a strong record, not a law. The lead time wobbles, the measurement is contested at the edges, and crowded knowledge of an indicator erodes its edge.

The deeper failure mode is structural, and Howell’s framework inherits it honestly. The cycle assumes the central bank can always ease — that opening the tap reliably lifts assets. Late in a long debt cycle, that assumption can fail: when debts are high enough and rates can fall no further, newly created money stops flowing into productive lending and flows instead into other currencies and inflation-hedge assets. Central bankers call it pushing on a string. In that regime the normal signal inverts — more liquidity, but it flees the currency rather than lifting the economy — and the assets that respond are the hard, supply-capped ones rather than the productive ones. Knowing which regime is operating matters more than the liquidity number itself.

The action: add the two dials to whatever gets checked monthly. Net liquidity for the global tide; the Singapore dollar’s path for the local one. Neither requires a subscription, and both answer the question that should precede every allocation decision — what is the water doing?