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. How They Rewired the Global Financial MachineAll roads point toward more monetary policy expansion...
Dear Fellow Traveler: You’ll occasionally hear an analyst or media pundit point out some historical fact about how markets operate. They might say, “Since 1928… the S&P 500 has only done this X times…” I don’t care for these facts. Largely because I don’t care… at all… about anything that happened in the equity market before September 2008. That’s where the whole system broke. And when they put it back together, they didn’t fix the old one. They built something completely different. In February 2026, Hyun Song Shin gave a speech at Princeton that lays this out. He’s the Head of Research at the Bank for International Settlements, which makes him one of the most important economists on Earth and one of the least famous. His speech was titled “Post-GFC rewiring of the global financial system.” He didn’t use the word “reformed.” He didn’t say that they “fixed” the system. He explicitly chose the term “rewired,” as in someone tore out the old wiring from a house that was on fire. They then installed new wiring that runs through different walls and powers appliances that didn’t exist when the house was initially built. Of course, the whole system (or house) looks the same from the outside. But now the walls contain nothing that we remember. So, the next time someone pulls a statistic from 1974, I need you to understand that the machine they’re describing no longer exists. Here’s what replaced it… Two Massive ShiftsShin explains two structural changes. First, government debt has exploded. Before the crisis, private credit was growing faster than government borrowing. After 2008, that flipped. Private credit has roughly doubled. Government debt has more than quadrupled. The lines crossed around 2010 and have been diverging since. This matters because government bonds are the foundation of the financial system. They’re what banks hold as safe assets, what gets used as collateral in overnight lending, what central banks buy and sell to move interest rates. Given that the supply quadrupled, the raw material of the entire system changed. The second shift is who’s moving the money. Before 2008, cross-border bank lending played a central role. Regulators made it expensive after the crisis, and banks pulled back. Into that gap stepped asset managers, pension funds, insurance companies, and hedge funds. That’s the shadow banking system. These institutions don’t take deposits and don’t have the same capital requirements. The way they move money looks different… through bond markets, derivatives, and something called FX swaps. The new plumbing is faster, bigger, and harder to see. The Dollar ProblemThere are roughly $26 trillion in dollar deposits in banks around the world. Almost 30%… roughly $8 trillion… sits in banks outside the U.S. Foreign banks, in foreign countries, hold American dollars. Shin highlights what he calls a “ratchet effect.” When the Fed expands its balance sheet, dollar deposits go up. When the Fed shrinks its balance sheet… the deposits don’t come back down. They ratchet up and stick. Think of it like a car jack. Every pump raises the car a notch. When you stop pumping, the car doesn’t come back down. The Fed pumped trillions during COVID, then started pulling back. But the dollars that flowed into bank accounts around the world… they’re still there. The system is structurally larger after each round of easing, no matter what the Fed does next. The $130 Trillion ShadowThere is an instrument called an FX swap… Here two parties exchange currencies now and swap them back later. A European bank that needs dollars for a week swaps euros for dollars, uses them, and swaps back. That’s a critical function of foreign trade and commodity settlement. The total outstanding volume of FX swaps reached about $130 trillion in 2025, according to the BIS. US GDP is about $31.4 trillion. The global stock market is worth somewhere between $110 trillion and $120 trillion (though I have seen higher estimates). But this one market, which most people have never heard of, is larger than the entire global stock market. Roughly 70% of these swaps mature in less than one year, meaning most of that $130 trillion must be rolled over continuously. It’s like they’re rebuilding a bridge every year while you drive across it. In 2009, this market was about $21 trillion. It has grown six times since the late 2000s. And because FX swaps don’t appear in debt statistics the way regular borrowing does, the BIS calls this “missing debt.” Borrowing that exists but doesn’t show up in the numbers most people look at. The Hedge Fund TakeoverAfter 2008, central banks became the biggest buyers of government bonds. That was quantitative easing or QE… (the real Money Printer…) Then came tightening, and central banks stepped back. Foreign official holdings of US Treasuries peaked in the early 2010s and have trended sideways or down since. Who replaced them? Hedge funds. And the way they’re doing it tells you everything. They use the repo market. They buy a Treasury bond, pledge it as collateral to borrow cash, use that cash to buy more bonds, pledge those, and repeat the entire process... That becomes leverage stacked on leverage, all depending on the repo market functioning smoothly every single day. Well, what’s wild is that some large funds can obtain very low or near-zero haircuts in specific repo transactions. A “haircut” is the safety margin on collateral… pledge $100 in bonds, get $98 in cash. That 2% cushion protects the lender if prices drop. For the largest funds, that cushion has vanished. The logic is that these funds are too big and reputable to need one. Which is exactly the kind of logic that sounds perfectly reasonable right before we find out that “market neutral” doesn’t mean a thing as correlations all start to run together… Why This MattersBefore 2008, banks held the risk on their balance sheets. When the system broke, we could see where the cracks were. Regulators reformed the banks, but the system didn’t stop. They just rewired it. Government debt has replaced private credit. Portfolio flows replaced bank lending. FX swaps replaced cross-border loans. And hedge funds replaced central banks as the marginal buyer of government bonds. Every substitution moved risk from where regulators can see it to where they can’t. Banks are regulated, hedge funds are lightly regulated… Bank lending shows up on balance sheets, but FX swaps don’t. Central bank bond purchases are policy decisions made in public. However, hedge fund purchases are leveraged trades made in private at zero haircuts. Nobody planned it this way. Every actor behaved rationally. And the result is a system that is rational in its parts and unknowable when we step back... So when someone tells you what the market did in 1987, 1974, or 1928… just know they’re reading from a manual for a machine that was scrapped 17 years ago. The guy - Hyun Song Shin - who understands the new wiring better than almost anyone just told us where the connections run. He’s probably heading to the Bank of Korea soon… but be sure to listen when he talks. It’s unfortunate that we have to listen to people in other nations to understand our own system… 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.
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