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 Regulators
After 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 Ago
On June 3rd, Moody's Analytics released a report warning about the private credit market and its unaccountability.
Here are the highlights:
Insurers have pumped nearly $800 billion offshore into this market between 2019 and 2024. That's one-third of their $6 trillion in assets.
These assets aren't traded publicly. Their valuations depend on "internal models" (whatever number makes the quarterly report look good).
When one domino falls, they all fall. The interconnections between banks, insurers, and private credit funds create "systemic risk."
Nobody seems to know what's in these portfolios.
It's like a financial black box, except the box is Texas-sized and might be more absurd than anything held by Sam Bankman-Fried at peak power.
Isn’t the world of finance… !@#%$ 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:
Nothing.
Something small breaks.
The unwind begins.
Our momentum signal goes negative.
A liquidity crisis starts…
Someone says, "Nobody could have seen this coming."
Bailout talks begin.
The bailout comes.
Insider buying reaches manic levels comparable to what we saw in 2015, 2018, 2020, 2022, and April 2025.
The market rebounds, and all that new bailout liquidity is BACK into stocks.
At some point, we reach a new all-time high on the S&P 500.
You look like a genius for reading The Capital Wave Report since we’ve done this over and over for the last five years…
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
I just wanted to let you know, I find your sense of humor to be brilliant. Good news or bad news, you give me 5 to 15 minutes of joy every day.
so let's see if you taught me anything. get out or hedge heavily at step 4 and jump back in or unhedge around step 7 and 8. did i do good teacher????
obviously you will let us know when it's step 4, correct?
hope Kentucky treats you well, thanks again for your service