The $15 Trillion Liquidity Flood | WAYT?

Key Concepts

• Liquidity-Driven Markets: The primary driver of recent market performance is a massive influx of global liquidity, exceeding traditional economic indicators.
• Shift in Fed Mandate: The Federal Reserve’s focus has evolved towards prioritizing financial stability, particularly the repo market, over solely controlling inflation and employment.
• Valuation Expansion Dominance: Market gains are largely attributable to valuation expansion (investors paying higher multiples for earnings) rather than earnings growth.
• Global Capital Flows & Risks: While capital has flowed into the US, potential reversals due to foreign investor exits or shifts in Japanese monetary policy pose risks.
• Investment Framework: A reactive investment approach focusing on capital flows, insider buying, policy changes, and momentum signals is advocated.
• “Extractor” Investment Strategy: Investing in essential services and choke points in the economy – businesses that benefit from ongoing expansion costs – is presented as a historically sound strategy.

Market Performance & Liquidity (Parts 1 & 2)

2025 has seen surprisingly strong market performance, including record highs in the stock market, record consumer spending, a robust IPO market, and faster-than-expected GDP growth. This is despite interest rate cuts and a complex global economic situation. Garrett Baldwin argues this is primarily driven by a massive influx of global liquidity – estimated at $15 trillion since January 2024, with $13 trillion added in 2024 alone. This liquidity, defined as everything beyond M2 and encompassing the over $100 trillion “shadow banking system” (as per Michael How’s work), mechanically drives asset prices, capex, and consumer spending. The S&P 500 has experienced 38 all-time highs in 2025, compared to 70 in 2021, 1 in 2022, and 57 in 2024.

A key observation is that recent market gains are primarily driven by multiple expansion – investors willing to pay more for the same earnings – rather than actual earnings growth. Foreign capital within the S&P 500 has increased significantly, now at 19% compared to 8% in 2008. Approximately $40 billion is currently being pumped into the market monthly, with an expected additional $117 billion inflow from Japan. China is also predicted to be bullish for copper and manufacturing.

The Federal Reserve & Financial Stability (Part 1)

The discussion highlights a shift in the Federal Reserve’s focus from traditional inflation and employment mandates to prioritizing financial stability, specifically the stability of the repo market (SOFR). The Fed’s actions, including Treasury issuance and interventions in the repo system, are seen as injecting liquidity and preventing systemic freezes, referencing the 2019 repo market crisis as a precedent. Baldwin posits that the Fed’s primary mandate is now financial stability.

Risks & Potential Catalysts (Parts 1 & 2)

While global capital has largely flowed into the US, the potential for a reversal is acknowledged. The possibility of foreign investors exiting the US market, coupled with the possibility of Japan raising interest rates, is identified as a potential source of future volatility. A potential trigger for valuation compression is identified as foreign capital outflow, though this is countered by consistent domestic buying pressure.

Market Structure & Investor Behavior (Part 1 & 2)

The shift in market structure towards passive investing (now 50% of flows, compared to 5% in the 1990s) and increased leverage (30% of flows currently, compared to 15% in the 1990s) is highlighted as a factor amplifying market movements. The FNGD (MicroSectors Fang+ Index -3 Inverse Leveraged ETN) is presented as a signal for identifying periods of leverage unwinding. The proliferation of ETFs – over 4,800 in the US – is noted, raising questions about incentives driving their creation.

Investment Framework & Strategy (Parts 1 & 2)

Baldwin emphasizes a reactive investment framework, focusing on capital flows, insider buying, policy changes, and a momentum signal (based on the work of JD Henning and Gary Antinachi). He advocates for reacting to market conditions rather than attempting to predict them. He also presents a strategy of investing in “extractors” – businesses providing essential, consistently demanded services, like insurance (specifically mentioning Kins) – framing this as investing in choke points in the economy and things that benefit from ongoing expansion costs. This is presented as a historically sound approach during times of uncertainty.

Market Cynicism & the “Grift” Mentality (Part 2)

The conversation highlights a perceived “grift” mentality in the market, exemplified by the failed attempt to launch the “Tuttle Capital Government Grift ETF” (ticker GRFT), designed to target firms with political connections. This ETF was unable to be listed on any major exchange. This is linked to a broader cynicism about the incentives driving the creation of numerous ETFs, with examples like those simply tracking the S&P 500 for a 30 basis point fee.

Performance Data (Part 1 & 2)

• Gold Performance: Up 66% in 2024 (best year since 1979), annualized at 11.3% over the last 20 years.
• Silver Performance: Up 169% in 2024 (best year since 1979), annualized at 11.6% over the last 20 years.
• Financials sector performance: Showed strong performance in 2023, with a recent surge following a mid-year pause.

Conclusion

The discussion paints a picture of a market increasingly driven by global liquidity and investor sentiment rather than underlying economic fundamentals. The Federal Reserve’s evolving priorities and the changing structure of the financial landscape – with the rise of passive investing and leverage – contribute to this dynamic. While opportunities exist, navigating this environment requires a reactive investment approach focused on capital flows, identifying potential risks, and potentially focusing on essential services that are resilient during times of uncertainty. A healthy dose of skepticism, differentiating it from cynicism, is also encouraged.