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Minsky moment ahead? More economists are warning about the possibility

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Moomoo News Global wrote a column · Jul 21, 2023 18:10
Fueled by a rally in technology stocks, the U.S. stock market has experienced an impressive surge in 2023. Amidst a chorus of "cheers," growing concerns about a valuation bubble and high debt levels have led more economists to warn of a possible Minsky moment.
Source: Yahoo Finance
Source: Yahoo Finance
JPMorgan's Marko Kolanovic has warned as early as March that bank failures, market turbulence, and ongoing economic uncertainty amidst central banks' efforts to combat high inflation have heightened the likelihood of a Minsky moment.
Ludovic Subran of Allianz: "We have all the ingredients of a so-called Minsky moment."
James Montier at GMO's asset allocation team noted that most markets appear to carry the fingerprints of a "slow burn Minsky moments" today.
What is a Minsky moment?
A Minsky moment, named after economist Hyman Minsky, refers to a sudden and significant drop in asset prices after prolonged growth and speculative investing. In prosperous periods, investors often become overly optimistic, take on excessive risk and accumulate debt, creating a bubble in asset prices. Once the bubble bursts, it can trigger a swift and severe decline in asset values, potentially leading to financial instability or even a crisis.
Source: Forbes
Source: Forbes
Minsky's theory has been proven time and time again, including the rapid sell-off of technology stocks after the dot-com bubble and the collapse of real estate prices during the global financial crisis of 2008.
James Montier coined the term "slow burn Minsky moments" in his latest research. He suspects the rolling financial crisis is due to a massive build-up of private sector debt, with very high rates of credit growth and leading to a credit bubble. In other cases, these build-ups remain dormant and unnoticed until a crisis, when they suddenly act as amplifiers, leading to a sharper downturn than would otherwise be the case, the so-called "slow-burn Minsky moments.
What are the signs that a Minsky moment may be on the way?
Currently, our markets possess many of the characteristics of a Minsky moment, as well as an array of simmering risks that have the potential to trigger a crisis at any moment.
1. A remarkable surge in both stock price and investor sentiment
The U.S. stock market delivered an impressive performance in the first half of this year, with all three major indexes experiencing a sharp rebound that surpassed the expectations of numerous analysts and investors. Notably, the Nasdaq Composite, heavily weighted towards technology companies, registered its strongest first-half performance in four decades, surging by 31.7%. As big tech and meme stocks continue to rise, some analysts have detected a faint scent of a potential Minsky moment.
Minsky moment ahead? More economists are warning about the possibility
2. Rising leverage and borrowing by investors and institutions
As James Montier said, "Credit creation plays a major role in the development of a bubble."
Overheated markets are usually accompanied by a significant accumulation of private-sector debt and excessive credit growth. However, when asset prices become uncoupled from underlying fundamentals or investor confidence wanes, borrowers may struggle to repay their debts, triggering profit-taking and a chain reaction of panic selling that drives down asset values.
According to Richard Vague, a ratio of private sector debt to GDP in excess of 150% is an important threshold. James Montier's latest research showed that the U.S. has been operating at or above this level for the past 20 years.
Minsky moment ahead? More economists are warning about the possibility
3. Market bubbles may be forming
More and more economists are discussing concerns about a tech stock bubble. According to Game of Trades, Tech stocks are trading at their highest valuations since the financial crisis, with a forward P/E relative to the S&P 500 index of 1.4 times, second only to the dot-com bubble of the late 1990s.
"The tech sector is officially in a bubble," Citi said.
Minsky moment ahead? More economists are warning about the possibility
4. Excessive risk-taking without adequate attention to risk management
Risky investment behavior and ignoring risk management practices are also characteristics of the Minsky moment. According to Cboe Global Markets data, the current put-call ratio has fallen to its lowest level since January 2022, showing that investors are less fearful of the market and let their guard down.
Minsky moment ahead? More economists are warning about the possibility
5. Tightening of loan terms and other forms of credit
As Allianz's Subran highlighted in May, fading liquidity across the economy as banks tighten their lending terms is another sign that the Minsky moment could be coming.
"Everybody's problem now is the very abrupt tightening, but then there is an additional layer of wrong risk management" he further noted the potential problems with non-bank lenders' commercial real estate loans that aren't subjected to the same regulations as banks.
6. Issues affecting investor sentiment and confidence remain numerous
While investor sentiment remains optimistic and enthusiastic, it is crucial to recognize that confidence-dampening risks remain prevalent in today's markets, which could trigger profit-taking and capital outflows. These risks include macroeconomic downside risk, the potential for corporate earnings to fall short of expectations, and weaknesses within the financial sector, which have already been reflected in previous banking crises.
Source: Bloomberg, Fortune, yahoo finance, Game of Trades
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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