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While everyone's obsessing over the Fed's "massive" $6.5 trillion balance sheet, they're missing the real story. 

The shadow banking system - hedge funds, private equity, crypto platforms - is sloshing around $110 trillion. 

One hundred and ten trillion. With a T.

That's why every bear case keeps getting obliterated. That's why fundamentals feel broken. 

That's why Stanley Druckenmiller himself admitted in 2018 that momentum trading doesn't work anymore.

Here's what kills me. 

I've been doing this since the nineties. 

I lost money on the backside of dot-com. 

I crushed it during the '08 crisis. 

But most traders are still stuck in a mindset from 30-40 years ago, back when markets actually reflected underlying economics.

Post-2008, everything changed. Post-2020, it got completely out of hand.

"It's capital in, capital out since 2008. That's how broken it is."

I don't care if you've been a trader for 25 years. 

I don't care what you believe about fundamentals. I've had some of the best long-term value investors in the world come up to me in the last two and a half years and say, "You're right."

Right now we're looking at valuations that are extraordinarily stretched. 

Price-to-sales at 3.3x - the markets are pricing in 3.3 years of revenue for the S&P 500. 

Subprime auto loans are cracking. Existing home sales haven't been this bad in 25 years. Everything in the underlying economy looks brutal.

And yet there I was at 9:45 this morning, screaming "buy the dip."

Why? Global liquidity. Michael Howell's measurement hit $185.8 trillion last week. Global debt is at $338 trillion. These numbers are so big people can't comprehend them - it's hard to think in four commas.

The Rehypothecation Shell Game
 

Here's the plumbing most people never see. 

When bond market volatility is muted and collateral quality is strong, the repo market stops requiring haircuts on Treasury bills.

Imagine you've got $10 billion. 

You buy short-term T-bills, then take those bonds to the repo market and use them as collateral for cash. Normally, you'd pay a 2% haircut - so your $10 billion in bonds gets you $9.8 billion in cash. But when volatility is low, they don't ask for a haircut. They just give you the money.

This is all by design. The Treasury Department wants people to own as many T-bills and bonds as possible. 

So they encourage this moral hazard - no haircuts overall in the global financial system.

These people are engaging in massive financial engineering to make 5-10% a year. You know what you're getting paid in money markets right now? 4.5%. They're basically paying you 4.5% of vigorish so they can leverage up to make 15-20%.

They take a billion dollars, leverage it up to $10 billion with no haircuts. When they get a 1% return, they make 10%. 

But when leverage unwinds are necessary - during an April event, an August 2024 event, a Silicon Valley banking crisis - a 5% move can become a 50% loss. A 20% move can blow the entire fund up.

When leveraged hedge funds need to raise cash quickly, they sell the most liquid assets first: T-bills, bonds, then the mag seven stocks. 

Janet Yellen admitted this back in April when interviewed by the Australian Financial Review. Asked about the March volatility, she said: "We had a lot of leveraged hedge funds that were selling US treasuries."

The journalist - engaging in malpractice - didn't ask the obvious follow-up: Why are leveraged hedge funds owning all this US debt in the first place?

Look at the mag seven stocks. How many ETFs is Nvidia (NVDA) in? Over 1,200. Tesla (TSLA)? Over 1,000. 

Microsoft (MSFT)? Over 700. There's no price discovery anymore in any of this. When momentum returns, when there's a policy shift and insider buying, these stocks just run. That's where the leverage is. That's where all the repo action flows.

Right now, three forces are expanding liquidity: People's Bank of China injecting capital, bond market volatility staying muted, and rising collateral quality. When T-bill yields decline, those bonds become prime collateral for the rehypothecation cycle - using the same bonds over and over again to borrow capital and buy stocks.

The markets can remain irrational longer than you can remain solvent. 

But when you understand that $110 trillion in shadow banking assets dwarfs every fundamental concern, when you grasp that collateral multipliers drive more capital flow than earnings reports, everything starts making sense.

So many people just don't see it for what it is because we're still stuck in pre-2008 thinking. 

The world changed drastically, and people have still not caught up to those changes.

It's all about capital. It's all about momentum. And it can be very simplified if you allow it - if you stop fighting the system and start understanding how the plumbing actually works.

Because once you see the $110 trillion shadow banking reality, every bear case starts looking pretty small.  

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