S&P 500

‘I’m A Minsky Moment, I’m Not THE Minsky Moment’

Listen, I mean there's good news and there's bad news and then there's one simple question.

Listen, I mean there’s good news and there’s bad news about last week.

The bad news is that Seth Golden blew up and a bunch of former logistics managers at big box retail stores were forced to ponder a return to their mundane existence coordinating the cigarette break schedule for their subordinates who had never heard of something called “the VIX” until their former (and now future) bosses abruptly quit last year, kicking over a DVD display on the way out the front door while shrieking something about being an “XIV millionaire.”

And please, spare me your bullshit about how that isn’t funny anymore, because you goddamn well know it is.


The other bad news is that when the living-room-vol.-seller tycoons blew up it triggered the most vicious VIX spike in history and that, in turn, spooked the holy shit out of everyone else, leading directly to a scenario where investors were bouncing off the walls like coked-out ferrets selling everything one minute and buying it all back the next, a situation that reached a cartoonish climax on Friday when a truly absurd late afternoon panic bid (egged on by a binge-tweeting Jim Cramer) drove the Dow higher by 330 points into the closing bell.

That’s the bad news.

The good news is that according to BofAML, this was “not THE Minksy Moment” it was just “a Minsky moment”:


In the immortal words of Phil Connors, “I’m a god, I’m not THE God.”


So why wasn’t this THE Minksy Moment? Well, here’s BofAML to explain:

Although this week saw a Minsky Moment for VIX, this is not THE moment we had in mind. We anticipate there will eventually be a massive correction to risk assets at the end of this economic cycle, which we don’t see coming until at least 2020, if not later. That’s THE Minsky Moment that we had in mind.

Basically, this isn’t “the big one, Elizabeth.”

But beyond that kind of general, 30,000-foot assessment, BofAML offers some insight via their Global Financial Stress Index. Here again, there’s good news and there’s bad news. The bad news is, it jumped 0.50 from January to February and that’s the fifth sharpest monthly increase on record:


And “that’s just one week into the month!,” the bank exclaims (the exclamation point is in the original note).

Ok, but here’s the good news about that. The good news is that if you look at the breakdown, that spike is down to the dramatic jump in equity volatility, captured in the SKEW sub-index. What didn’t move (or barely moved, as far as I can tell) was the liquidity stress sub-index. Here’s the comparison:


For BofAML, this is a big deal. In fact, it’s a Trump-ish “yuuuge”. To wit:

This is huge. We think it is remarkable testament to all the regulatory reforms and recapitalization of the financial system that has occurred since the Great Financial Crisis.

That, or it’s a testament to blind faith in the central bank backstop that, not incidentally, has also been part and parcel of the post-crisis environment.

So the question going forward is pretty simple. If spillover is for now being contained by the assumption that the policymaker “put” is still in place (even if the strike has moved), what happens if central banks’ silence (or perceived ambivalence) ends up causing markets to question their faith in the Almighty?

Or, to borrow from Phil Connors again, what happens if Draghi/Kuroda/Powell decide to proceed with normalization despite the turmoil, effectively conveying the following message to markets:

Look, we’re just a god, we’re not THE God.



2 comments on “‘I’m A Minsky Moment, I’m Not THE Minsky Moment’

  1. We have seen this story before. It is not just a coincidence that tax cuts for the rich have preceded both the 1929 depression and the 2007 financial crisis. The Revenue acts of 1926 and 1928 worked exactly as the Republican Congresses that pushed them through promised. The dramatic reductions in taxes on the upper income brackets and estates of the wealthy did indeed result in increases in savings and investment. However, overinvestment (by 1929, there were over 600 automobile manufacturing companies in America) caused the depression that made the rich, and most everyone else, ultimately much poorer.
    As I said in: MORL’s Yield Climbs To 23.2% As A Result Of The Highest Monthly Dividend In More Than 2 Years
    …The quandary for investors can be described as someone who has seen the first and last page of a book, but does not know either how long the book is or what happened between the first and last pages. We know that a massive transfer to the rich will happen. We know that the middle class has a much higher marginal propensity to consume than the rich. We know that initially the rich, or if you rather the job creators, use their additional after-tax income to invest. This extra investment initially boosts securities prices. The higher prices securities for securities enables investments to occur, that might have otherwise been undertaken. These can range from factories, shopping centers and housing. What we don’t know is the path that equity prices and interest rates will take between the enactment of the tax shift and the eventual financial crisis or other event occurs, at which time the massive excess of supply of loanable funds as compared to demand for loans will push risk-free short-term interest rates down to near the lower bound, as was the case during the 1930s, in Japan for decades and in America since 2008…”

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