Mynsky Moment?

 

President Trump has been tweeting of length about the exuberance being manifested in the markets across the United States. It is hardly surprising that he chooses to claim credit for the same. The rise in indices in US markets both NYSE Dow Jones and NASDAQ are interesting pointers despite the Chinese virus induced pandemic still raging in the country while on the other hand there seems to be no respite from civil unrest unleashed by organizations like Antifa or BLM. The divisions in US society are too deep to be bridged at this moment. The elections seem to create more divide. The after effects of the elections are yet to be known and remain untested. There are of course encouraging reports on the progress of the vaccine but given the trial cycle and regulatory approvals, it may be some more time before the vaccine is available for mass public use.

 

At times, the current set up reminds one of Charles Dickens’ quote in Tale of Two Cities. It perhaps at some level represents the best of times in an era which from multiple perspective can be termed as the worst of times. There are perhaps beacons of hope yet the heights of despair seem to persist. Apple hit the two trillion dollar valuation marks with quite a few others marching in its footsteps. Yet the economic data is certainly yielding poor returns. Meanwhile, the tensions between US and China seem to rise and show no signs of abatement. With elections looming around China factor might become critical for President Trump to show his hard-line stand. Despite claims of candidate Biden being on similar wavelength as Trump on China, the evidence points to far moderate stand. It was in this context, there was an interesting post that appeared here.

 

The post argues that contrary to the bullish trends visible in the markets, the asset prices are actually on the verge of collapse. There is without doubt lot of money infused in the market through an unprecedented fiscal and monetary stimulus. The easy money that is seemingly available is fuelling the asset bubble or so as to speak in the assertions put forth by the above cited post. They seem to be pretty certain that the current bullish trend is unsustainable and in all likelihood, the markets might fall to their lows that were observed in March at the onset of the Chinese pandemic. They are forecasting what is called the ‘Minsky Moment’.

 

Minsky moment refers to the beginning of the trends that would result in collapse of asset classes, the rise of which was primarily due to the speculative activity generating a trend though bullish but unsustainable.  Hyman Minsky who pointed this out first, argued that speculative actions without any foundations are bound to cause a sudden collapse in asset prices. The current argument is the bullish trend is not backed by real economic data or activity and instead using the stimulus to direct the money towards speculation. In absence of real activity, these speculative activities driven by increased money supply apparently to combat the ill effects of the Chinese pandemic is bound to cause a collapse. The article posits that much of the action in the US markets has been driven primarily by the technology giants. The post quotes economist Ron William as stating the increasing divergence between the tech street, Wall Street and the Main Street. He seems to term this as ‘FAANG-tastic divergence’. He supports his contention by pointing to the flat nature of the equal weighted index of Wall Street. The momentum in the Wall Street apparently is driven by Facebook, Apple, Amazon, Netflix and Google. Of course, Microsoft also waits in the wings. To Ron William, most other indices are performing below par. Russell 2000 small cap index is trading below par. UK stock market are performing well below par in contrast to sort of exuberance in the US markets. FTSE 100 seem to be down by around 20%. Both liquidity and volatility indicators seem to point out in a Mynsky direction. ETF flows have declined. VIX have been pointing to an unusual atypical spikes. This according this post is an indicator for hedging for downside risk.

 

The anticipation of Minsky collapse is likely in the words of the author to cause a decline in asset classes by 20-30%. It is being argued that this would be single biggest deterrent to the possibility of a V-shaped recovery, something that is being discussed about all over. In fact, the argument is what one is likely to detect is W-shaped recovery of troughs and peaks. High valuations, negative seasonality in Aug-September and the beginning of the election cycle are likely to converge on course corrections in the market. The repair period is likely to be long and spread over multiple periods. The economists are of course talking on this course correction being good for the emergence of the long term bull period backed by increase in real activities than speculative or nominal activities.

 

While the forecast seem to focusing on the dire side in the short term or the immediate moment, many forecasts often go haywire. Markets usually anticipate the future. In the current trajectory, the tech world is increasing its power and more so as the world is reeling from the pandemic. These organizations are not shirking from intervening politically a la Western Union in 1876. Secondly, with the China factor looming large and possible cold war in the offing, the US companies are likely to benefit across the world. As the world moves away from the China party, the US might use economic diplomacy as a tool to reassert its dominance. In exchange for market access to the technology giants, the US might offer protective umbrella against Chinese expansionist tendencies political, geographic and economical. There can be multiple views on the future trajectories of the markets. Yet, it is little facile to talk that there is about to be a sharp collapse in the asset classes. While some course corrections might keep happening, the direction of the US market seemed to be headed upward. This long term trajectory is what is going to be critical in understand US asset dynamics.