Follow The Flow Of Money

Editor’s note: Today’s the final essay in a multi-part series on how the massive spending into the AI buildout will play out over the economy and for the companies involved. Please see the first essay here, the second essay here, the third essay here, the fourth essay here, and the fifth essay here.

Here’s Porter now…

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How do I know the funding and the buildout won’t continue? Because this entire bubble was never about technology. The bubble around the artificial intelligence (“AI”) buildout was caused, like all financial bubbles, by a corruption of the money supply.

The railroad boom of 1865-1873 was fueled by the paper money of the Civil War. The telecom bubble of 2000 was fueled by the Federal Reserve’s response to the Russian default and fears about Y2K. And, of course, the mortgage bubble of 2008 was fueled by the Fed’s aggressive response to 9/11 and the “War on Terror.”

The AI bubble is a direct result of the Federal Reserve’s response to COVID. Our central bank created an unimaginable amount of new money – roughly $7 trillion.

By late 2021, the money market funds that received most of this cash couldn't find enough safe, short-term places to put it. So the Fed opened up what amounts to a giant parking lot for cash. It's called the reverse repo facility (“RRP”).

Don’t let the jargon fool you. This is simply the government printing money and handing it out to favored financial institutions.

Technically, it works by a money market fund depositing its cash to the Fed overnight. (Note: there’s no reason the Fed, which can create as much cash as it wants, would ever need to borrow money from a money market fund.) The Fed then gives the fund a Treasury security as collateral for the night. The next morning the Fed gives the cash back plus a tiny amount of interest. It's called "reverse repo" because from the Fed's point of view it's the reverse of a normal repo – the Fed is borrowing the cash rather than lending it. Once again – as with neocloud, which I wrote about on Monday – when something is called a made-up word that has no actual meaning in the English language, beware.

With the Fed handing out money for nothing, it was no surprise that the RRP “parking lot” filled up fast. At its peak in December 2022, the RRP held about $2.5 trillion in money market fund cash.

And that money is what has been powering the entire AI bubble.

Let me show you what happened.

Early in 2023, the interest rate on Treasury bills rose above the rate the Fed was paying on RRP cash. That happened because the Fed was responding, finally, to the massive inflation their policies and the government’s massive deficits had caused.

Money market funds are legally required to seek the best safe yield they can, so as interest rates rose, they pulled cash out of the RRP and bought T-bills instead. This happened continuously from mid-2023 through October 2025. Roughly $3 trillion of cash came out of the RRP over that period – from $2.5 trillion at peak down to essentially zero by October 2025.

As you’ll see below, what happened to this capital as it entered the private financial system is complicated. But all you have to know is that from mid-2023 until last October, trillions in capital flooded into our financial system. And that’s what’s driven equity valuations higher and higher, and that’s what’s funded the entire AI buildout.

The key thing to know is this: that money is now all spent.

Our private financial system works primarily on two tiers. Money market funds (when they can’t get a completely free ride from the Fed) lend cash to primary dealers (the biggest banks). The primary dealers relend cash to everybody else: hedge funds, private credit funds, real estate financing vehicles, and increasingly, the AI-capex financing engine.

When the RRP started draining in 2023, the money that came out went into T-bills at first. But it didn’t stay there. Through private repo lending, it funded the primary dealers (the big banks). And because the big banks now had an enormous amount of cheap short-term cash coming in, they lent out more and more to non-bank borrowers. Why? Because trillions in capital had to land somewhere in only about two years.

Non-bank is finance jargon for any lender or credit institution that isn't a chartered bank. It includes hedge funds, private credit funds, private equity firms, mortgage lenders that aren't banks, insurance companies, pension funds, real estate investment trusts, business development companies, structured product vehicles, and so on.

Collectively, they are called the "shadow banking system" because they perform banking functions – they extend credit – but they don't take insured deposits and don't have direct access to the Federal Reserve's liquidity facilities.

The shadow banking system has grown enormously over the last 15 years. It's where most private credit lending lives – Blue Owl Capital (OWL), Apollo Global Management (APO), Ares Management (ARES), Blackstone (BX), and KKR (KKR). It's also where most of the AI-capex financing sits. Not the equity – that's on the hyperscalers' balance sheets – but the debt behind the data centers, purchases of the high-speed GPU chips, and neocloud operators. That financing gets warehoused in the shadow banking system and eventually distributed as securitized paper, which, hey, why not, Moody’s says it’s AAA!

The shadow banking system funds itself largely through repo. It borrows short-term cash from the primary dealers, secured by whatever collateral it holds – Treasuries for the most part, but also mortgage bonds, corporate loans, structured products rated AAA. That’s what’s so valuable about that Moody’s rating.

As a result, from mid-2023 through October 2025, both sides of the plumbing grew at the same time.

The primary dealers' repo funding grew because money market funds pushed more and more cash into it as they pulled out of the RRP. Non-bank lending grew because the primary dealers, flush with all that new cheap cash, extended it out to the shadow banking system, which used it to fund private credit, hedge fund leverage, and – most importantly for our purposes – the entire ecosystem of data center loans, GPU-backed term loans, and neocloud financings.

Both grew because the same exogenous force – the RRP draining – was pushing money into both simultaneously. It looked like the private credit system was generating its own growth out of business demand. It wasn't. It was being lifted from underneath by the parking lot emptying.

By October 2025, the RRP was effectively empty. The parking lot was drained. The COVID “credit card” was tapped out.

From that point on, the financial system became zero-sum. Any new dollar of primary-dealer repo funding has to come from somewhere else in the system. It can't come from the RRP anymore because the RRP is empty.

Money market funds have a finite amount of cash to lend. If they lend more of it to primary dealers in repo, they have less to lend elsewhere. And the primary dealers, if they want to keep their own repo books growing, have to pay higher interest rates to attract that cash. Higher repo rates raise the shadow banking system's funding cost. Higher funding costs mean the shadow banking system can either extend less credit or charge borrowers more.

The mechanical result: if primary dealer repo grows, non-bank lending shrinks by approximately the same amount. The two lines that had been rising together for three years – bank repo and non-bank credit – now move inversely.

That’s what’s happening. The correlation flipped in October 2025 and has stayed flipped. Repo went from a rising tide that lifted both dealer and shadow-bank balance sheets to a zero-sum competition between them.

Nvidia (NVDA) saw this coming and raised $25 billion to survive what’s about to happen. CoreWeave’s (CRWV) most recent financing tanked because of the impact of a zero-sum financial world.

Shadow banking is being squeezed. The most-leveraged, weakest-collateral, most-concentrated shadow bank borrower – a neocloud with GPU collateral serving AI customers – gets repriced first.

But this is only the beginning.

The two-year Treasury to Fed Funds interest rate spread sits at +50 basis points – the same level reached in the second halves of 2001, 2008, and 2021. Emerging-market inflows just posted one of the largest sudden stops on record. Real U.S. personal income is falling at recession pace. Year-to-date household-survey employment losses exceed both 2001 and 2008. Prime-age labor-force dropouts are at ex-COVID records. Except for mortgages, credit delinquency rates are at crisis highs.

What ends a capex boom? It eventually runs out of money.

Jesse Livermore described what happens when a capex boom runs out of money in Edward Lefevre’s book Reminiscences Of A Stock Operator.

Finally there came the awful day of reckoning for the bulls and the optimists and the wishful thinkers and those vast hordes that, dreading the pain of small loss at the beginning, were now about to suffer total amputation – without anesthetics. A day I shall never forget, October 24, 1907… No money anywhere, and you can’t liquidate stocks because there is nobody to buy them. The whole Street is broke at this very moment.

Livermore made $1 million on that day. He saw his signal to start shorting when the railroads began advertising equity offerings that had earlier and earlier execution dates and accepted payment in installments.

He recognized a death struggle for capital.

Will you?

Tell us what you think of today’s Daily Journal:porterstansberrydirect@gmail.com

Good investing,

F. Porter Stansberry
Stevenson, Maryland