In this metaphorical party, though, how do you know when it’s over?
Analysts describe the end as a “Minsky Moment,” defined as:
the onset of a market collapse brought on by the reckless speculative activity that defines an unsustainable bullish period. Minsky Moment is named after economist Hyman Minsky and defines the point in time where the sudden decline in market sentiment inevitably leads to a market crash. [emphasis added]
The two most important words there, I think, are “sudden” and “inevitably.”
Experts from JP Morgan think the moment is now:
Bank failures, market turmoil and ongoing economic uncertainty as central banks battle high inflation have increased the chances of a “Minsky moment,” according to JPMorgan Chase & Co.’s Marko Kolanovic.
In the past week, investors have contended with several U.S. bank bailouts, market volatility, the collapse of Credit Suisse and the European Central Bank’s 50 basis-point rate hike.
The Fed’s decision to increase rates this week will likely provide yet another concern to Kolanovic and his team.
Since 2008, we’ve talked a lot about a “Lehman moment” – referring to the collapse of white-shoe Wall Street investment bank Lehman Brothers, which notably wasn’t bailed out by the Fed or the Treasury Department. It’s the same thing.
It doesn’t matter what we call that tipping point, that event or that day when everyone finally recognizes the party’s really over, tries to leave at the same time and gets jammed at the exits.
When you read the context above, take note of the common elements in both prior Minsky Moments; debt and bubbles. It looks as though both of those elements are making a return appearance right now.
I discussed the “everything bubble” and its consequences in May of last year. (It didn’t really take a crystal ball to see it coming, though – all you need is a grasp of how financial markets work and a little history).
Like those before and, presumably, future Minsky Moments, the one thing they have in common is debt:
Massive borrowing around the world since the financial crisis – much of it in response to the coronavirus pandemic and its aftermath – has prompted warnings of another Minsky moment to come. The surge was made possible by ultra-easy monetary policy – central banks slashing interest rates – and governments turning on the spending taps. Rising interest rates over the past year as the Federal Reserve and European Central Bank battled inflation have made debt burdens heavier. [emphasis added]
When ultra-easy monetary policy makes credit and borrowing overabundant, a bubble forms. Instead of being incentivized to save money, the combination of inflation and rising asset prices sends money flooding into increasingly speculative gambles.
When rates go up, like they are right now, all the debt generated to fuel that asset price bubble becomes an anchor that drags economic activity down.
Again, if you pay attention, you already know all this – and you aren’t alone. There’s been no lack of reporting on Wall Street’s mismanaged debt. Comparisons to 2008 only point out jus how much bigger the bubble is this time around:
The financial system has lent with abandon even as U.S. equity valuations jumped to nose-bleed levels experienced only once over the past 100 years and as U.S. housing prices adjusted for inflation exceeded their 2006 pre crisis peak. Fueling this lending spree was the approximately $5 trillion in Federal Reserve bond purchases in response to the pandemic that induced investors to stretch for yield.
One indication of excessive lending is the more than $1 trillion that has been loaned to highly leveraged U.S. companies and the skyrocketing of global debt to a level well in excess of its precrash 2008 peak. According to the International Institute for Finance, global debt reached almost $300 trillion by the second quarter of 2021. In relation to GDP, this was some 350%, above the 280% before September 2008 Lehman bankruptcy.
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