Why the "Melt Up" Narrative is Wrong...
The markets are going to scream higher if leverage expands and liquidity surges... But it has little to do with interest rate cuts.
Good morning:
The financial media is broken.
Yahoo! Finance just published a headline so divorced from reality that I had to read it twice.
They're telling you the melt-up narrative is about Fed rate cuts in 2026.
They're wrong. Dead wrong.
And if you believe them, you’re not going to see it coming… until it’s already over.
Markets haven’t surged because of rate cuts… they’ve surged despite hikes and a Fed Funds Rate pinned above 5%.
Why is this?
While I regularly discuss the Money Printer through the lens of the Federal Reserve and central banks, there’s an entirely different aspect of how our financial system operates that we rarely hear about in traditional media.
Is it because it’s complex?
Is it because most financial journalists don’t understand leverage?
Is it because we rarely trace the origin stories of leverage, collateral, and credit creation?
Yes.
Today, let’s talk about the leverage machine… and why THAT’S the story of a potential melt-up - and likely several market implosions along the way…
Government Borrowing and the Melt-Up Machine
The way the U.S. government borrows money has undergone significant changes over the last decade.
That fundamental shift is what could send stocks surging in the months and years ahead.
However, it can also cause sudden crashes, as we saw during the dislocations in 2020, 2022, 2023, and beyond, when leverage quickly became illiquid.
We don’t hear about these leverage unwinds in the financial media until after the fact.
And we don’t know what the crisis is until AFTER our Capital Wave signal goes red.
Most media stories often fail to capture the structural pattern (we do over and over).
Each crisis gets treated like a one-off when, in fact, they share the same fragile core…
We have over-leveraged structures, opaque counterparty risk, and the illusion of constantly liquid markets...
How We Got Here
Ultimately, we must understand how the global financial system evolved.
Let’s go back to 2017.
That’s a good place to start in understanding how our government borrowing has changed. That year, Congress passed the Tax Cuts and Jobs Act of 2017.
Many people believe that the stock market surged after the new law was enacted because corporate taxes were slashed from 35% to 21%.
That’s only half the story.
The real shift happened elsewhere.
The U.S. government had to cover the deficit gap. We needed approximately $1.5 trillion more over the next 10 years.
That’s when the government altered its borrowing practices in a major way.
Instead of selling long-term bonds, the government chose the cheaper option.
It began to boost the sales of short-term debt, specifically T-bills.
For those new to T-bills, these are essentially IOUs that mature within a year.
To understand how these bills are different, consider this analogy (even if it’s a very loose analogy).
If you need to borrow money, consider taking out a 30-year mortgage or using credit cards. The government chose the credit card option.
T-bills jumped from 11% of government debt issuance in 2016 to 21% today, according to a June update for the Senate on the national debt.
Some, including Bank of America, think it could hit 25% soon. Morningstar offered a sharp commentary on this issuance outlook on July 4.
That 4% shift could represent $1.2 trillion more in high-quality collateral… much of which can be used in repo markets to support leveraged trading.
T Bills and the Repo Machine
T-bills are special.
They enable more leverage in the financial system.
Banks and hedge funds use them like cash to borrow even more money.
Here's the magic trick:
Step 1: Take a $100 T-bill
Step 2: Hand it to Goldman Sachs
Step 3: Get $100 in cash. No haircut. Zero margin.
Step 4: Buy $100 more in T-bills
Step 5: Repeat until you’re controlling billions… with none of your own money.
That's it. That's the whole game.
The Fed's data shows that 74% of these loans have zero "haircut."
Fed data also shows funds transacting at zero or negative haircuts often run gross leverage between 6:1 and 9:1.
As the supply of T-bills expands, it increases the pool of pristine collateral in the system.
This allows hedge funds and other non-bank institutions to borrow more through the repo market. They do so often at zero haircuts, creating powerful leverage loops.
More available collateral can mean more borrowing, and that borrowed capital often flows into riskier assets, such as equities.
Of course, this isn’t a direct pipeline.
It also depends on factors like counterparty risk, margin policies, the Fed’s stance, and institutional risk appetite.
But think of T-bills as the kindling.
Leverage is the spark.
And market psychology (bulls versus bears)?
That’s the wind.
This game is dangerous.
We've seen it blow up a few times recently.
How It All Goes
More T-bills don’t automatically mean more money in the stock market…
However, they do increase the system’s available collateral.
This is especially true for hedge funds operating in the repo market.
When pristine collateral floods the system, it enables more leverage.
Of course, that leverage requires risk appetite, margin frameworks, and liquidity dynamics to allow it.
When we have a large, leverage-fueled melt-up, the dark side of the market reveals itself.
We’ve already seen multiple leverage-driven meltdowns in recent years.
The 2019 repo spike froze overnight lending.
In March 2020, leveraged basis trades nearly broke the Treasury market.
In 2021, Archegos transformed a family office into a $100 billion market disruptor by utilizing total return swaps. (The SEC complaint against Sung Kook Hwang from April 2022 shows Credit Suisse and Nomura reported combined losses over $7.5 billion.)
The GILT Crisis in 2022 demonstrated how leverage in government bonds of another country can fuel massive unwinding and global crises.
SVB’s 2023 collapse shared the same core problem. There was overconfidence in liquidity that wasn’t there.
In August 2024, sharp deleveraging in Japanese markets, particularly among hedge funds exposed to long/short basis spreads, triggered a rapid correction in the Nikkei.
And in 2025, the basis trade reemerged as a systemic threat, as Janet Yellen barely explained in an interview with the Australian Financial Review. Multiple leveraged hedge funds were facing margin calls as Treasury liquidity thinned and repo rates spiked. What looked like a low-risk arbitrage again turned reflexive and destabilizing.
All these examples weren’t just market selloffs.
At their core, these events, dating back to 2019, were leverage-triggered liquidity crises…
They were systemic earthquakes caused by margin calls, forced liquidations, and stress on counterparty relationships.
We used to call them Black Swan or Fat Tail events.
But now they feel like Tuesday.
They’re symptoms of a system where credit expands rapidly through fragile channels and collapses just as quickly.
Financial journalists may report the wreckage, but they rarely expose the underlying pattern.
These events illustrate what happens when excessive borrowing drives asset prices.
Everything looks great until something breaks.
Then, everyone runs for the exit, and you’ve got ocean-sized capital trying to drain through a street manhole.
The setup today is even more extreme.
With so much debt in T-bills, the government has to roll over hundreds of billions every few months.
If buyers get nervous, rates could spike.
Then, the Fed might have to step in again.
With debt servicing costs rising, the Fed faces increasing pressure from fiscal realities. This is a dynamic that critics refer to as 'fiscal dominance.'
They can't let markets fall too far without risking financial stability.
So, they're trapped.
But are you?
How to Play All This.
For stock investors, this means two things.
First, the melt-up could continue.
As long as T-bills keep flowing and hedge funds keep borrowing, stocks could soar.
The Fed seems afraid to stop it.
But second, the crash risk is enormous.
Any shock, such as a failed Treasury auction, a bank failure, or a geopolitical event, can trigger forced selling.
With everyone leveraged up, the unwind would be fast and brutal.
So, I'm going to give you the cheat codes.
The signals that separate the pros from the bag-holders.
Look at repo rates.
Watch the VIX.
Check if Treasury auctions are getting weak coverage.
See if the gap between T-bill yields and other rates is widening.
And keep your eye on the FNGD. (Bank of Montreal MicroSectors FANG Index 3X Inverse Leveraged ETN).
When and if there is a crash, it will resemble a very familiar pattern…
Full Steam Ahead
The government's debt strategy has turned financial markets into a house of cards.
This is the REAL MONEY PRINTER…
Not some PhD economist in a marble building.
Not some politician promising a stimulus.
It's a $30 trillion debt machine that's turned every T-bill into rocket fuel for leverage.
The party could last months. Maybe years.
But when it ends?
Well... let's just say I hope you're reading the Capital Wave Report when it does.
The Capital Wave signal will flash red.
When the music stops, the exit door will be tiny.
Remember, these markets are like an ocean…
Ride the wave, but keep one eye on the tide and the other on the locals.
In a hyper-leveraged market, things that can't go on forever tend to come to a sudden halt.
And when they do, being early is the same as being right. That’s why we make it so easy with the Capital Wave Report… we’re going to have more of these massive risk-off events… as they’re baked into the system.
This isn’t a stock market that operates on fundamentals.
It’s front-running liquidity… constantly.
Because in a system built on margin, the only thing that matters is who sees the exit first…
And that door?
Stay positive,
Garrett Baldwin
Truth