“Minsky moment”: the bubble is about to burst

11 בפבר׳ 2020

We continue to collect all sorts of signals about the onset of an imminent apocalypse on world stock markets, and especially the US stock market. We already wrote about the inversion of the yield curve, the favorite Buffett indicator, Schiller indicator, Hindenburg index, and Titanic syndrome, as well as other specific and not very metrics.

Today we’ll talk about another interesting concept - the Minsky moment. This concept was proposed by Hyman Minsky in the 1920s when developing the theory of economic cycles.

In his opinion, periods of continued growth in stock markets end in acute crises. This is due to the fact that investors, accustomed to a constant increase in prices, lose caution and start buying stocks with borrowed money, which provokes an extremely rapid growth of the stock bubble. And if one part of borrowers is able to refinance their debt, then the other part repays debts only due to rising prices in the stock market. Accordingly, as soon as rampant growth in the stock market ends, such borrowers have to get rid of shares in order to pay off their debt obligations. Since there are a lot of borrowers of this type in the midst of price bubbles, such actions lead to a stock market crash.

Actually, this moment of time is called the “Minsky moment”. What do we have today? How much have investors played and buy with debt funds?

One of the options for determining the level of lending to investment activity is the analysis of “free cash”. In periods of high speculative activity, investors prefer to borrow money, respectively, they have a negative cash balance.

So, starting in 2013, the cash balance of investors in the US stock market is negative. At the same time, the size of the negative balance fluctuates around historical highs and exceeds the values that were 3-5 times during the dot-com bubble and the global financial crisis. Such a high level of debt has never been in history. Accordingly, when the “Minsky moment" comes, the fall will be very loud.

The reasons for what is happening on the surface: Central banks have made access to credit resources so cheap that this has led to a massive influx of borrowed speculative funds into the stock markets and the formation of price bubbles on them. Recall that since 2007 the balance of the Central Banks has increased from $ 5 trillion to $21 trillion at the current time. Guess how much capitalization of the global stock market has grown over this period of time? In 2007, it was about $65 trillion, and in 2019 amounted to $85 trillion. In fact, the growth is entirely due to the expansion of the Central Banks.

The IMF recently issued a global warning of prohibitively high levels of debt and a slowdown in global economic growth. That is, by and large, stated the ideal conditions for the emergence of the "Minsky moment".

The only thing that keeps markets from falling into the abyss now is an unbridled belief in further growth, even though there is no reason for this. But faith is a very unreliable foundation. Any doubt in the bright future will bring down the dam of faith and panic waves will flood the markets.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market grew by an average of 7-8 times (and some issuers showed growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).