Late-Cycle Playbook: What Michael Howell’s Liquidity Cycle and Raoul Pal’s “Banana Zone” Mean for Crypto Now

Late-Cycle Playbook: What Michael Howell’s Liquidity Cycle and Raoul Pal’s “Banana Zone” Mean for Crypto Now

Global liquidity has been rising since late-2022 and—by several cycle frameworks—looks late-stage but not peaked yet. Michael Howell’s work flags a 5–6-year liquidity rhythm now approaching a crest in the next ~6–9 months, with growing refinancing and collateral-market risks. Raoul Pal’s view: that very pressure likely forces more liquidity for longer, extending crypto’s “banana zone” and pushing the ultimate peak into Q1–Q2 2026. Translation: upside remains, but the left-tail risk (a sharp air-pocket) increases. Your edge is positioning and risk control, not calling the exact top.

“We’re Entering the WILDEST Stage of the Market Cycle” Raoul Pal & Michael Howell

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1) The Liquidity Cycle We’re Riding

Howell’s framework tracks market liquidity—the money flowing through financial markets—rather than simple monetary aggregates. Two key takeaways:

• A repeating 5–6-year rhythm. The latest cycle bottomed in Oct 2022; since then liquidity has surged. Stripping out China’s volatility, the “advanced economies” pulse looks like a classic late-cycle upswing aiming for a peak within months, not years.

• Late-cycle behavior = fragile + euphoric. Parallels to the mid-1980s: policy “accords,” rising commodities, higher yields, and then a sudden risk-off when inflation/funding fears reassert. Peaks don’t form gently—they often spike and snap.

The structural pressure cooker

• Debt roll & liquidity gap. Crises often show up as refinancing problems. A large wave of government, corporate, and household debt matures into 2026–2028, just as rates are no longer zero.

• AI capex is draining cash from markets. Big Tech’s cash piles that once parked in money markets are being redeployed into massive data-center/AI spend, subtly siphoning liquidity from financial assets.

• Collateral stability matters. The US Treasury market and repo plumbing (SOFR spreads, MOVE index) are the fulcrum. Authorities have strong incentive to suppress vol and keep collateral flowing—but rebuilding cash buffers (e.g., TGA) while running QT is a tightrope.

Implication: Liquidity is still supportive now, but the system’s sensitivity to shocks is rising. Late cycles can run higher than feels reasonable—until they don’t.

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2) The Case for “Longer for Longer”: Pal’s Banana Zone

Raoul Pal frames crypto’s explosive phase as the banana zone—where liquidity, narrative, and adoption reinforce each other.

• Timeline call: His Global Macro Investor work points to an extension into Q1 (possibly Q2) 2026, as rolling global debts necessitate further liquidity support. That backdrop historically turbocharges crypto.

• Rotation roadmap (“waiting room”). BTC & ETH lead; then high-beta L1s/L2s (e.g., SOL and peers), then broader Total3 (alts ex-BTC/ETH), with memes and laggards chasing late. Expect staged rotations, not everything mooning at once.

Implication: The same debt-liquidity constraints that worry Howell can, in practice, keep liquidity taps open—buying time and fuel for crypto.

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3) How to Invest When Both Are True

The most likely path is upward but stair-stepped, with fat-tail downside if policy or plumbing wobbles. Position like a realist:

Core positioning (convexity without fragility)

• Core 50–70%: BTC / ETH as liquidity beta + network “quality.”

• Satellite 20–35%: High-quality infra (scalable L1/L2, data, restaking, liquid staking, stablecoin rails), plus selective AI/infra plays with real users.

• Speculative 0–15% (only if appropriate): Rotational alts/memes sized small and harvested often. No hero leverage.

Risk management (your edge this late in the game)

• Stagger entries (DCA/tranches). Late cycles whip. Let volatility work for you.

• Pre-plan profit taking. Ladder sells on strength; rebalance back into core after outsized runs.

• Guardrails over guesses:

  • No or minimal leverage; if you must, use defined-risk option structures.

  • Position sizing rules (e.g., 1–3% per alt idea; 0.5–1% for memes).

  • Hard invalidation levels; obey them.

Dashboard: signals worth watching

• Global liquidity proxies: G5 CB balance sheets; US TGA draw/build; RRP usage.

• Treasury plumbing stress: MOVE index; SOFR-GC repo spreads; on-the-run/off-the-run dislocations.

• Supply & policy mix: QT pace; bill vs. coupon issuance; jawboning on “financial stability.”

• Credit & the consumer: HY spreads, delinquency trends.

• Crypto internals: BTC dominance, Total3 breadth, funding rates, perp basis, stablecoin net issuance.

Red flags to de-risk into

• Persistent Treasury/repo stress (MOVE spikes, SOFR basis widens).

• A policy mix that tightens into heavy issuance (QT + rising coupons without offsets).

• Liquidity gauges rolling over across US/EU/JP/China.

• Crypto leverage/funding at extremes with narrowing breadth.

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4) Scenarios to Plan For (Not Predict)

• Base case (Pal): Liquidity stays net-easy; cycle extends into 2026. BTC/ETH grind up, rotations broaden, volatility high but buyable.

• Air-pocket shock (Howell risk): Collateral hiccup, policy misstep, or funding scare → a fast 20–35% risk-off across beta before support returns. Survivable if you sized right and had dry powder.

• Melt-up then snap: A final vertical leg (late 2025/early 2026) that ends violently. This is where pre-planned profit ladders matter most.

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Bottom Line

Both frameworks can be right: late-cycle upside fueled by liquidity management and rising fragility under the surface. Your job isn’t to nail the date of the peak—it’s to compound into it and walk away with gains intact.

• Stay core-heavy, liquidity-aware, and leverage-light.

• Let rotations pay you, then rotate back to quality.

• Watch the plumbing; respect the tape.

None of this is financial advice—just a playbook to help you navigate a late-cycle that still has room to run.