Is a market turning point approaching?
Roger Montgomery | Montgomery Investments
It’s natural for investors to question how long the good times can last—and what might bring them to an end.
One perennial concern is the staggering level of global debt, which reached a record US$312 trillion by mid-2024, according to the Institute of International Finance. And while it’s tempting to sound the alarm, assessing the risks requires deeper analysis.
Debt Alone Isn’t the Whole Story
Global debt levels have steadily risen for a century or more, with the U.S. alone now carrying US$35.46 trillion in national debt (up from US$395 billion in 1924). However, global debt growth has accelerated since China’s entry into the World Trade Organization in 2001. After that, its dumping of cheap products fuelled deflation fears, ultra-low interest rates, and central banks’ efforts to stave off economic crises.
Investors looking for a trigger often turn to Debt-to-GDP as a pulse. However, while comparing debt to GDP helps gauge repayment capacity - Japan’s ratio is the highest globally at 261 per cent - this metric doesn’t provide clear guidance on when trouble might strike.
Enter Michael J. Howell, former Research Director at Salomon Brothers and author of Capital Wars, who argues that the ratio of debt to liquidity is a more timely indicator of financial health.
Figure 1. Howell’s Debt as a percentage of Domestic Liquidity. Advanced economies.
Liquidity, or the availability of money to refinance maturing debt, is essential for financial stability. Today, with roughly US$350 trillion in global debt and an average maturity of five years, approximately US$70 trillion must be refinanced soon.
The problem? While debt heads incessantly northeast, liquidity behaves cyclically, and financial stress builds when debt grows faster than liquidity. Howell’s research shows that the debt-to-liquidity ratio reverts to a long-term mean of about 2.5. Refinancing tensions arise when this ratio is above average, potentially triggering financial crises. When it’s below average, abundant liquidity fuels asset booms, as we have seen in recent years' crypto, NFT, and AI equity booms and bubbles.
The Global Re-Fi Cliff (GRC)
We’ve had the GFC, but the above picture paints a forthcoming "Global Re-Fi Cliff" (GRC)—a surge in refinancing needs tied to debt issued during the pandemic at historically low interest rates. This refinancing wave is expected to peak between 2026 and 2028, creating significant strain on financial systems. While the GRC could spell trouble, Howell emphasises that stresses will unfold gradually rather than as a sudden shock.
What Lies Ahead?
One of Howell’s key indicators, the Global Liquidity Cycle, aligns with the average five- to six-year debt maturity cycle. This cycle hit a trough in September 2022, coinciding with the bottom of equity markets. The next peak is projected for 2025/26, suggesting liquidity could tighten significantly thereafter. If Howell’s analysis holds, late 2025 might mark a turning point for markets. And if today’s rally continues – which I believe a combination of positive economic growth and disinflation supports – prices could feasibly be overextended by 2026. Meanwhile, geopolitical tensions—such as China’s 2027 ambitions for Taiwan— could potentially exacerbate the situation.
Be Alert, Not Alarmed
Despite these risks, investors shouldn’t sell everything and flee to cash. Historical precedents, like Australia’s much-feared “Mortgage Cliff,” demonstrate that fears of financial collapse don’t always materialise. In Australia’s case, strong employment and consumer liquidity cushioned the impact of rising rates on the mortgages that rolled from ultra-low fixed rates to higher variable rates in 2023 and 2024.
History reveals that financial crises often emerge when debt outpaces liquidity but while record debt levels make financial systems more vulnerable, the transition from stability to crisis is a process. So, as 2025 unfolds, investors might want to be ready to take advantage of any short-term dislocations.
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