0:02 This is Max from UNFR for the Midas
0:04 Touch Network. In our last several
0:05 videos here on Midas, I've been
0:07 highlighting some of the serious cracks
0:09 in the US economic system and revealed
0:11 the wholesale ineptitude on display
0:13 among leadership in the Trump
0:15 administration. See, there are ticking
0:17 time bombs hidden all over the US
0:19 economy. But maybe the most explosive
0:22 report yet was quietly released by the
0:25 Federal Reserve just last week. And as
0:27 expected, this is how the mainstream
0:28 media and markets on Wall Street responded.
0:35 It makes no sense. Under any other
0:37 circumstance, this would be an absolute
0:39 bombshell. But the chaos of the Trump
0:41 administration means it's just another
0:44 day in Bizarro America. But I promise
0:46 you, you're going to want to hear this
0:48 one. So, let's go. [Music]
0:51 [Music]
0:52 So, we just released an exhaustive piece
0:55 on UNFR that pulls together some of the
0:57 stories that we've broken here on MIDAS
0:59 along with some new information that
1:01 fully contextualizes just how deep the
1:03 US economic crisis goes. And it's hard
1:06 to square this sentiment with how insane
1:08 the returns in the stock market have
1:10 been. But I think that's actually part
1:12 of the story. See, investors are
1:13 increasingly running out of options to
1:15 get guaranteed returns. So, they're just
1:17 riding the wave of the stock market,
1:19 which itself is riding the wave of the
1:22 so-called Magnificent 7 tech stocks. But
1:25 nothing explains the two-tiered economy
1:26 better than the growth in the stock
1:29 market and the plummeting incomes and
1:31 increasing unemployment among the
1:33 masses. Now, adding salt to the wound,
1:35 we have the government shutdown, which
1:37 is also hiding some of the degrading
1:38 economic data that we usually have
1:41 access to. But government agencies
1:43 affected by the shutdown aren't the only
1:45 ones with data. And what I'm going to
1:47 share with you will absolutely blow your
1:49 mind. Now, to properly set the table for
1:51 this, we have to revisit and update our
1:53 theme from the last Midas video that
1:55 talked about the private credit markets.
1:57 And I'll link that episode in the uh
2:00 notes below in case you missed it. So,
2:02 basically, after the global financial
2:04 crisis, the US government put stringent
2:06 regulations and capital reserve
2:09 requirements on the banks. The goal was
2:10 to prevent them from engaging in the
2:12 risky behavior that led to the great
2:15 recession. But the years of flooding the
2:17 market with cheap and easy money after
2:19 the crisis and another monster liquidity
2:21 flood during COVID left the banking
2:24 sector flushed with cash and anxious to
2:26 put it to work. But oh those darn
2:29 regulations. Well, ever the ingenious
2:31 industry that it is, the banks indeed
2:33 found a way to put this money to work.
2:35 What you're looking at here is the
2:37 growth of the private credit market or
2:39 the shadow banking sector. This is just
2:41 the credit portion, mind you. But even
2:43 still, we're talking about a sector that
2:47 grew from around $350 billion to nearly
2:49 2 trillion over the last 15 years, and
2:52 it's projected to climb even higher. The
2:54 technical term for this market is the
2:56 NBFI or non-bank financial
2:58 intermediation market. The industry
3:00 prefers to use this because of the
3:02 negative connotation associated with the
3:04 phrase shadow banking sector, but
3:06 they're one and the same, and I think
3:08 that more accurately describes what's
3:09 going on here. So, we're going to stick
3:12 with shadow banking. Now, to be clear,
3:14 this isn't just a US phenomenon. It's a
3:16 global one, but we're at the heart of it
3:20 all. So, in July of 2025, this isn't the
3:22 big report, but it helps set the table.
3:24 In July of 2025, the Financial Stability
3:26 Board, an international body that
3:29 monitors the global financial system,
3:31 issued a report titled Leverage in
3:34 Non-Bank Financial Intermediation. And
3:35 the paper takes aim at the lack of
3:38 oversight into the shadow banking market
3:40 and the amount of offbalance sheet
3:42 leverage in the system. So essentially
3:45 banks are allowing these shadow banking
3:47 firms to gamble on loans and securities
3:50 with extreme leverage sometimes upwards
3:52 of a 100 times. Now, according to the
3:55 paper, quote, "If not properly managed,
3:57 the buildup of leverage creates a
4:00 vulnerability that when subject to a
4:02 shock can propagate strains through the
4:05 financial system, amplify stress and
4:07 lead to systemic disruption through two
4:10 main channels." End quote. Okay, so the
4:12 first channel is the originating
4:14 position that is forced to unwind
4:16 certain assets and this leads to what
4:19 they call unexpected liquidity demands.
4:21 Now in this case, think of the effect on
4:23 home prices as an asset class when the
4:25 mortgage back securities trades started
4:28 to unwind in 2008. The second channel
4:30 involves counterparties or basically
4:32 everybody else on the other side of the
4:34 trade. So this can range from commercial
4:36 banks and shadow banks that help
4:37 syndicate the products all the way to
4:40 the US Treasury. So an unwinding or
4:42 liquidation of distressed entities could
4:45 also impose direct losses on those
4:47 counterparties leading to a cascade of
4:49 financial stress resulting in forced
4:52 liquidations. So that's the backdrop to
4:54 explain the most bizarre revelation in
4:57 recent days. So here's the closing line
4:59 from this bombshell report that was
5:01 released on October 15th from the
5:04 Federal Reserve. quote, "The puzzling
5:06 disconnect between the tick and form PF
5:09 data on Cayman Islands holdings of US
5:11 treasuries is under active
5:14 investigation." Okay, this is crazy and
5:15 I'm going to do my best to explain
5:18 what's going on here. In a few of our
5:20 prior videos, we've talked extensively
5:22 about tick data and repo markets. So, as
5:25 a refresher, tick is Treasury
5:27 International Capital data and it tracks
5:29 the amount of money that's coming in or
5:31 going out of the United States. And with
5:33 the exception of Trump's Liberation Day
5:36 fiasco, the United States always, I mean
5:39 always experiences an inflow of capital
5:41 because of the high demand for US
5:42 dollars because we're the world's
5:45 reserve currency. Also, the incredible
5:46 performance of our stock and our bond
5:49 markets. Now, the repo markets are just
5:51 accounts that the Federal Reserve uses
5:54 to either inject or extract liquidity
5:56 from the markets. They're stabilizing
5:58 mechanisms that it uses to ensure that
6:00 there's enough money in the system. Now,
6:02 what we've been reporting on Midas
6:04 almost exclusively, it seems, is that
6:06 something strange is happening with the
6:09 tick data. Fewer and fewer quote unquote
6:11 official sources, meaning foreign
6:14 central banks, have been buying our
6:16 treasuries. Now, remember, this is how
6:18 we fund our deficits. So, while central
6:21 banks shed US dollars in favor of other
6:23 currencies and physical stores of value
6:26 like gold, so-called private sources
6:27 have stepped in to purchase them
6:30 instead. So on the surface it looks as
6:32 though the Treasury auctions are
6:34 relatively stable. And then came the
6:36 white paper that the Fed released on
6:39 October 15. So up until this paper was
6:41 released, it was believed that hedge
6:44 funds held around $400 billion in
6:46 short-term treasuries. Now these
6:48 purchases aren't acts of patriotism.
6:50 They make money on the actual treasury
6:52 themselves, but also on something called
6:55 basis trading. We'll get to that in a
6:58 minute. So this amount, the $400 billion
7:00 figure came from the tick data. That's
7:02 from the US Treasury. But the Federal
7:04 Reserve dug into what's called form PF
7:06 filings. These are hedge fund trading
7:09 disclosures that have to go to the SEC
7:12 and they uncovered something very, very
7:16 different. The form PF filings show that
7:17 hedge funds registered to the Cayman
7:21 Islands are holding on to more than 1.8
7:25 trillion in US securities. It's hard to
7:26 know where to even begin with this
7:29 information. First of all, the fact that
7:31 the two primary economic agencies in
7:33 this country, which are themselves the
7:36 biggest in the world, have a $1.4
7:39 trillion reconciliation problem is
7:42 alarming enough. Even more troubling is
7:45 once again these hedge funds aren't
7:46 purchasing treasuries to perform their
7:48 patriotic duty and stand in where
7:51 central banks are leaving or to just
7:53 earn the stable returns that the notes
7:55 offer. They're leveraging them to the
7:57 hilt to profit from something called a
8:00 basis trade. As insane as it sounds, the
8:03 treasury market is also an enormous
8:05 gambling sector with trillions of
8:07 dollars flowing through it. A basis
8:09 trade is a very common trade in the
8:11 commodities market because it allows
8:14 participants to hedge against future
8:16 price fluctuations. So in things like
8:18 hard commodities and agriculture, this
8:20 is really important because when the
8:22 work is done to actually take a
8:24 commodity out of the ground or produce a
8:26 commodity to go to market, you want to
8:28 be sure that that price is pretty stable
8:31 when it finally goes out to be sold. But
8:33 it turns out there's a staggering amount
8:36 of basis trading also in just the
8:39 treasury markets. Basically, every bond
8:41 has a futures contract associated with
8:44 it. So, you have the present-day bond
8:46 and what it might be priced at in the
8:48 near future. In a basis trade, an
8:50 investor will purchase whichever one is
8:52 cheaper and then sell the more expensive
8:55 one and then hope that the values
8:57 converge over time. And when you close
8:59 out these positions, there's a small
9:01 amount of profit in the middle. And I
9:03 mean tiny. So, because the Treasury
9:06 markets are so stable and short-term
9:08 notes aren't typically all that
9:10 volatile, these trades are as close to a
9:13 lock as the markets offer. The problem
9:15 is that there isn't a lot of money to be
9:17 made here, and that's where the leverage
9:20 comes in. The shadow banking sector,
9:23 most notably these hedge funds, is very,
9:25 very active in these markets. So in
9:27 order to make these trades worthwhile,
9:29 they borrow excessive amounts from
9:31 investment banks to leverage these
9:35 trades. So if they have a $100 in one
9:37 position, they might borrow a hundred
9:39 times that to make the investment
9:41 worthwhile. So this means that most of
9:43 the money in the market is actually
9:46 borrowed money, which begs the question,
9:48 what happens when these trades become
9:50 less of a lock? Because the margins on
9:53 basis trades are so slim, even small
9:55 market disruptions can trigger rapid
9:58 losses, forced selling or systemic
10:00 stress. So instead of converging over
10:03 time, the spot and future prices
10:05 actually diverge. And this dynamic is
10:07 what regulators, including the Fed and
10:10 the FSB, have recently highlighted as a
10:12 potential financial stability risk,
10:14 especially as many of these leverage
10:16 funds operate through offshore entities
10:18 like the Cayman Islands to take
10:21 advantage of lighter regulation. So that
10:23 means that any marginal disruptions or
10:25 any changes in value any volatility to
10:28 the upside or the downside event
10:30 essentially any variation beyond the
10:32 expected maturity means that these hedge
10:36 funds have enormous exposure. It also
10:39 means that our debt is held in what can
10:42 only be considered a Ponzi scheme. So as
10:44 I said in our repo market and our dollar
10:47 debasement video, this is the moment
10:49 that you assemble the troops. You get
10:51 the Fed, the Treasury, the Senate
10:53 Banking Committee, the Council of
10:55 Economic Adviserss, and all of the Fed
10:57 member banks together to do a risk
11:00 assessment of the shadow banking market.
11:02 Instead, we're ripping apart the White
11:05 House to make room for a gaudy ballroom.
11:07 Treasury data overstated by $1.4
11:10 trillion. No problem. Just move those
11:12 sconces a little bit to the left and
11:14 make sure that there's enough light on
11:16 my throne. Honestly, you just can't make
11:18 this stuff up anymore. For the Midas
11:21 Touch Network, I'm Max from UNFR. For
11:22 the full expose on Fed and Treasury
11:24 activity, make sure to check out our
11:26 channel at UNFR. Also, connect with me
11:29 on Blue Sky at UNFR as well. I'd love to
11:31 hear from you. As always, thanks to the
11:33 Might as Mighty for having me here, and
11:34 I'll catch you next time. Love this
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