I've had a number of very interesting (private) discussions following the last week's post on The Wall Of Money. One important take away has been to also mention the shadow banking system as the key contributor to the wall of money.

If traditional central bank money printing is the visible high tide, the shadow banking system is the massive underwater current that amplifies that tide. It plays an enormous, often hidden role in inflating and sustaining asset valuations.

A fund can take $100 million in Treasury bonds, pledge them in and borrow $95 million in cash, and immediately use that cash to buy equities. The lender who took those Treasury bonds as collateral can turn around and use those same bonds to back a different loan for someone else. Rehypothecation - rinse and repeat.

This generates an immense amount of purchasing power that flows directly into financial markets. But it is a liquidity mirage.

[Traditional Central Bank] → Creates Visible Money Supply

[Shadow Banking System] → Creates Hidden Synthetic Credit & Leverage

[Combined Wall of Capital] → Inflates Stock Multiples

The shadow banking system is the reason why valuations defy gravity, even when central banks try to tighten the money supply by raising interest rates. The shadow banking system keeps cash flowing into risk assets.

Deals like the SpaceX IPO are attractive as they are high volume and thus are able to multiply large amount of money.

The catch is, this is all highly sensitive to confidence. The wall of money can potentially turn into a liquidity desert. But as of now the party is at its peak and everybody is happy. Things are still cheap based on the P/C (Price-to-Cosmos) ratio.

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