You are a free subscriber to Me and the Money Printer. To upgrade to paid and receive the daily Capital Wave Report - which features our Red-Green market signals, subscribe here. A $3 Trillion Problem...When we look back on this period... We'll remember not just the money printer... but the fact that it was so insanely easy for shadow banks to crush us all.
Welcome to Me and the Money Printer… Each day, Garrett Baldwin explores the absurdities of the stock market with the reverence they deserve… which is none.
Dear Fellow Traveler: Remember 2008? That’s when we all learned that shadow banking could blow up the entire financial system? Yes, shadow banking… Don’t look at me like a deer in headlights. Shadow banks are the system of financial institutions (like hedge funds, private equity firms, and money market funds) that offer credit and perform bank-like activities… but aren’t regulated or monitored like traditional banks. Yeah. No regulation. Nothing can go wrong there… right? These entities don't take deposits like regular banks. You know… the safe part of banking. No… they borrow TONS of money short-term to make long-term loans. All this does is create the same risks as banks without the safety nets like FDIC insurance or Federal Reserve backstops. The regular banks caused the Great Depression. Bad news. Shadow banks have caused nearly every major crisis since 1997. And not only are these banks ramping up debt again… they’re even bigger than they were in 2008. Most people have no idea what this is. But you will immediately. Today, I want to introduce you to a different world. Let’s talk about Private credit… What could be a $3 trillion monster. Blame the RegulatorsAfter 2008, regulators did what regulators do… They regulated the hell out of banks. Capital requirements, stress tests, Volcker rules, the works. Banks, being banks, said "screw this" and stopped lending to anyone who didn't have a 850 credit score and their firstborn as collateral. That’s where something happened… Private credit emerged. Suddenly, unregulated lenders said, "Hey, we'll lend to all those mid-market companies the banks won't touch.” What could go wrong? The answer is everything. Moody's Warns About What We Said Years AgoOn June 3rd, Moody's Analytics released a report warning about the private credit market and its unaccountability. Here are the highlights:
Nobody seems to know what's in these portfolios. It's like a financial black box, except the box is Texas-sized and might be more absurd than anything held by Sam Bankman-Fried at peak power. Isn’t the world of finance… !@#%$ magic? Is This the Next Crisis?So, what would a crisis in this private credit market look like? As always, it begins with a spark. I’d expect that a mid-market company will eventually default. Maybe it's a buyout that goes sideways. Maybe rates stay high, and they can't refinance. Doesn't matter. One default becomes five, five becomes fifty. Next, the market’s valuation fantasy ends. Remember that private credit funds can't mark their assets to market because there IS no market. They've been carrying these loans at whatever valuation their Excel model spat out. When redemptions start, they have to sell. Suddenly, that loan they valued at 95 cents on the dollar is worth 60. This is where we face broader contagion. Remember those insurers with $800 billion in this stuff? They’d start taking losses. Banks that lent to private credit funds would get nervous. Credit spreads would then expand greatly. Remember, even the "safe" stuff gets repriced because everything's for sale in a panic. That leads to a retail massacre. At some point, this would no longer be an institutional problem. Private credit ETFs and interval funds are now marketed to retail investors (and that broker in the Hamptons this summer that you don’t like… is laughing about this…) When grandma's "high-yield alternative investment" fund gates redemptions, Congress would finally get involved, but they still had no idea what the hell had happened. We’d probably start having conversations about regulating all of this stuff… but not yet… not before.... The Fed would finally step in with a bailout. Why? Because there’s always a bailout. There’s ALWAYS a bailout. THERE’S ALWAYS @#$%@# BAILOUT!!! Except this time, the thing we're bailing out isn't even a bank. It's a shadow of a shadow. Why This Time Is Different (And Worse)The thing about Lehman Brothers blowing up is that we knew the address of Lehman Brothers. That bank had a regulator. They even had (some) transparency. In this industry, however, we’re flying blind… There are no stress tests, no standardized reporting… and no real oversight. The Moody's report suggests we need "stress-testing, transparency mandates, leverage limits." What do I suggest? We need a time machine to go back and not create this monster in the first place. Everyone's acting like this is fine. Pension funds are piling in for yield. Insurance companies are doubling down. Even retail investors are getting pitched "democratized private credit access." It's like watching a rerun of 2007, except everyone's wearing different costumes and pretending it's a new show. I'll tell you exactly what happens next, because I've seen this movie before:
We'll ride this thing until the wheels fall off, then act shocked when we're sitting on the side of the road. Because if there's one thing the financial system loves more than creating disasters, it's pretending they can't happen. Welcome to Private Credit. Stay positive, Garrett Baldwin About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
|
Subscribe to:
Post Comments (Atom)
0 Response to "A $3 Trillion Problem..."
Post a Comment