11 ms·
Minsky moment
- UncleOxidant 7y agoAre we there yet?
- tlholaday 7y ago> Leading to a [...] severe demand for cash. Callooh! Callay! Something to sponge up the Global Savings Glut!
- theandrewbailey 7y agoStrange. I'd swear that there's a glut of borrowing, not saving.
- wffurr 7y agoWhy can't there be both? There's lots of capital with nowhere to go, hence bonkers real estate prices, wacky startups getting funded, overpriced assets and low bond yields. There's also of people without much capital who want to do things like buy cars and houses or start businesses. These things aren't mutually exclusive. The capital is largely held by a small number of people. Most people don't have any or not very much.
- jotakami 7y agoThere’s a difference between capital and printed money. Capital is the result of forgone consumption, of producing more than is consumed. Much of what people call “capital” is really just inflated paper claims to assets. A share of stock is not capital, it is just a fractional claim on the residual earnings produced by a business. Capital isn’t magically created when stock prices are bid up, because the underlying assets (“capital”) of the business don’t change.
- wffurr 7y agoOk, change all of my uses of "capital" to "cash" and it still holds. Most capital can be readily exchanged for cash, hence it can be referring to as "liquid assets". Where wealth comes from is an interesting question, but not especially relevant to the topic at hand.
- jotakami 7y agoThis is where the problem lies. Sure, liquid assets are as good as cash... until they aren’t. If everyone tries to convert assets to cash simultaneously, then cash gets scarce really quick and the difference between the two becomes clear. This is completely relevant to the Minsky moment, because it is the illusion of wealth created by inflated asset values that leads people to take excess risks.
- marcosdumay 7y agoOne doesn't exist without the other (unless you are saving real goods).
- throwawaybbb 7y agoThe price of borrowing has never been lower. Stable governments can borrow at negative real rates. When prices drop it means there is more supply than demand.
- anonuser123456 7y agoPersonally I don't think so. All the selling so far is first order obvious things... Airlines, travel... The knock on effects are less predictable and will come later in the crisis. A lot of lower income workers are going to be hit hard as service sector takes a big hit. Those workers tend to spend all their income, so every dollar lost there translates to another dollar the broader economy loses. That's where the Minsky moment will happen IMO.
- deleted 7y ago[deleted]
- vsareto 7y ago>All the selling so far is first order obvious things... Airlines, travel... I'm not an expert, but there's lots of money in index funds too, and those might be getting sold as well. The other first order obvious thing being people will want some cash.
- anonuser123456 7y agoI think it's a wait and see on how much the retail index investor will pull out. A lot of people have been conditioned to "buy and hold"... And the retail brokers have been pushing hard to prevent clients from selling. My broker (Fidelity) went so far as to change the home page to exclude the very nasty graphs that show huge market declines.
- justinzollars 7y agoanecdotally - maybe. Fewer people are eating out, travel plans are on hold, behavior is changing very fast.
- yesimapro 7y agoSee Also: https://en.wikipedia.org/wiki/Black_swan_theory https://en.wikipedia.org/wiki/Black_swan_theory
- rossdavidh 7y agoAlthough, given the 1918 Flupandemic and several other historical precedents, it should not have been a black swan, since it was known to occur. I've heard these referred to as "gray swans"; i.e. things that have the same impact as black swans but even prior to the fact there were people who were predicting it. For example, the David Quammen book "Spillover" essentially predicts it, and it was published in 2013 (subtitle: "Animal Infections and the Next Human Pandemic").
- dougmwne 7y agoI do think this is appropriate though since a key characteristic of a black swan is that people can look right at it but not see it due to psychological biases.
- rossdavidh 7y agoAgreed, but "black swan to most people but white swan to a few" is harder to say than "gray swan". For that matter, Nassim Taleb himself predicted that the American mortgage industry was, I think he wrote something like "a barrel of dynamite" or some words to that affect. But, for most people, the mortgage crisis was a black swan. The original metaphor, though, was that no matter how many swans you looked at in Europe, and how carefully, you would have zero data to tell you that black swans were possible, until you went to another country and discovered them.
- anonuser123456 7y agoGray swan. That's actually a good term for thinking about this. 2003 we had SARS, 2014 we had MERS. We had (and still have) Ebola. Weve had H5N1 and H7N1 outbreaks. We dodged many of these bullets, but only by the luck of their lack of infectiousness. It's been staring at us in the face and yet remained in our blindspot.
- ouid 7y ago"Do not fear! This is a cyclical phenomenon!" This is caused by coronavirus. This has nothing to do with market patterns.
- justinzollars 7y ago> This has nothing to do with market patterns. The market was priced for perfection. A pebble could have derailed it but instead of a pebble we have a bolder.
- adventured 7y agoA pebble? Not likely, and certainly not with the hyper low interest rate environment. There were lots of rocks larger than pebbles over the last few years: China trade war with escalating tariffs, global trade anxiety, Trump political chaos (Russia and generally), impeachment, Middle East chaos, US / Iran, US / North Korea (daily, escalating threats of nuclear war), Brexit. None of them derailed the market from pushing higher. It required a boulder precisely because of the interest rate environment. A pebble would not have done anything. China's economy just got put into the freezer for the past two months, the global economy is under serious threat, and even now the market remains very richly priced. It might yet require something even larger than a boulder to take this market down fully.
- ltbarcly3 7y agoI think you may have a short memory. The international situation has never been very different qualitatively than it is today. Iran has been a mess for 50 years, much of that time far worse than now. We have been at war with north korea for 70 years, some of that with actual armies marching and shooting each other. In the 70s and 80s planes were being hijacked and bombed every week. Hundreds of thousands of people died from AIDS. All the while the economy was up, down, or indifferent to these things. The world is constantly in turmoil, listen to a billy joel song for more details.
- marcinjachymiak 7y agoCoronavirus-induced supply-shock is just what it took to break a fragile system out of equilibrium.
- hammock 7y agoWhat is the difference between a Minsky moment and a top?
- tlholaday 7y ago> What is the difference between a Minsky moment and a top? Casually speaking, it’s the difference between a forced sale and profit taking.
- jnwatson 7y agoI think the bigger question is what is the difference between a Minsky moment and an inverse-short squeeze (a long squeeze?)?
- tlholaday 7y ago> I think the bigger question is what is the difference between a Minsky moment and an inverse-short squeeze (a long squeeze?)? Casually speaking, it’s the difference between a forced sale of an asset in order to repay debt after a long period of growth, and the incented but not mandatory sale of an asset which has increased substantially in price over a brief time, which is now abruptly declining, by owners hoping to salvage some of the gain.
- GrantZvolsky 7y agoThe term carries a negative connotation in that it implies guilt for the collapse.
- drocer88 7y agoLooks the coming recession the editors at HN have been front paging for the last few years might actually happen. https://news.ycombinator.com/item?id=17392859 https://news.ycombinator.com/item?id=17392859 https://news.ycombinator.com/item?id=20371314 https://news.ycombinator.com/item?id=20371314 https://news.ycombinator.com/item?id=20654624 https://news.ycombinator.com/item?id=20654624
- smoyer 7y agoI remember in the late 80's when things actually seemed pretty good - but all through Reagan's presidency, the press had been lambasting "supply-side economics" (and even his VP called it "voo-doo" economics). I can't say with certainty that there wouldn't have been a recession during Bush's first term without all the negative publicity but it certainly became a factor in his unsuccessful bid for a second term. The curious thing is that if you perform a pump-and-dump on one or more stocks you get in legal trouble. If you perform a pump (or more likely dump) on the economy as a whole, then you must be a journalist.
- AnimalMuppet 7y agoNo, the recession during Reagan's first term was because Volcker cranked up the interest rate to shut down inflation. It worked, but it hurt the economy in the short term.
- throwawaybbb 7y agoLong term too. The bottom 50% of Americans lost all their wealth and went into debt to live since then.
- onlyrealcuzzo 7y agoThe bottom 50% has almost no wealth to begin with.
- AnimalMuppet 7y ago14% inflation wasn't doing to bottom 50% any favors.
- petrocrat 7y agoMinksy also "identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers." -https://en.wikipedia.org/wiki/Hyman_Minsky#Minsky's_financial_instability-hypothesis https://en.wikipedia.org/wiki/Hyman_Minsky#Minsky's_financia... As the amount of the third type, the ponzi borrowers, grows it is more and more indicative of an impending Minsky Moment. https://www.cnbc.com/2020/02/11/ponzi-schemes-hit-the-highest-level-in-10-years.html https://www.cnbc.com/2020/02/11/ponzi-schemes-hit-the-highes...
- caleb-allen 7y agoAh darn, I was hoping it was something named after Marvin Minsky
- DonHopkins 7y agoThe joke's on you! ;) https://web.media.mit.edu/~minsky/papers/jokes.cognitive.txt https://web.media.mit.edu/~minsky/papers/jokes.cognitive.txt
- 99_00 7y agoPermabears and doom and gloom theories always get a higher profile during times of economic insecurity.
- iso-8859-1 7y agoTrue. But what are we to do? How is a casual reader supposed to know who counts as a dismissable permabear? This is just a link to a Wikipedia article, it would be odd to downvote it just because it talks about the top, it is hardly even an implication.
- 99_00 7y agoIf you don't follow the markets and don't know the various commentators record and reputation just buy index funds and focus your attention on something more enjoyable.
- 0x8BADF00D 7y agoThis next recession will be very ugly. I hope everyone on here is prepared. Last time the dollar was a safe haven asset, so those that saved were ok. We will have stagflation and the price of the dollar will collapse.
- Vinceo 7y agoCould you explain more about why we will have stagflation and a dollar collapse? Geniunly curious.
- bitxbit 7y agoI think we will finally get inflation! Corporations will move productions out of China. I expect at least 20% will come out of China and into higher cost locations. This will drive up costs. We had it too good for too long.
- andy_ppp 7y agoI’m pretty sure all governments will just print some money once COVID19 has worked it’s way through the population. Deflation is the enemy.
- scottlocklin 7y agoYou know, if people are sitting at home not doing anything for an extended period of time, that's actually inflationary whether they print money or not.
- andy_ppp 7y agoCan you explain why?
- scottlocklin 7y agoPretty simple: if you're two people locked up in your Kung Flu bunkers; someone has a 50lb sack of rice, and the government keeps sending you both cash, the price for a cup of rice is going to go up.
- elihu 7y agoTreasury yields are way down right now. I'm not an economic expert and don't really know what to make of that. It seems crazy that people are willing to loan money to the U.S. government for 30 years at a rate of 1.25%. As a taxpayer I guess I can be cautiously happy that the government will incur less interest on its debt for now. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...
- jotakami 7y agoIn the modern financial system, risk-free debt is basically as good as cash on a balance sheet. If you need to turn it into cash, you just dip into the repo (“repurchase agreement”) market. Over the past few decades the global financial system has steadily become completely unrecognizable from the standpoint of classical economics. Debt is not debt, savings is not savings, and printing money is no big deal (or so they say).
- deleted 7y ago[deleted]
- toomuchtodo 7y ago> In the modern financial system, risk-free debt is basically as good as cash on a balance sheet. If you need to turn it into cash, you just dip into the repo (“repurchase agreement”) market. The global repo market is valued at $12T USD, and only 75% of it is backed by "pristine collateral", such as government bonds. That means that $3T of it is in equities or derivatives. The fed's balance sheet is only $4T USD in comparison. Additionally, $.5T is in private capital groups, which are entirely opaque, have poor lending standards, and there's no visibility into counterparties or volume. Keep in mind, India's Yes bank that was just nationalized failed due to liquidity problems. There is a theory that global liquidity is being challenged, and central banks may not have the appetite to provide a backstop at the volume required.
- bhl 7y agoAren’t short term yields in Germany and Japan negative right now? Positive returns on a global scale is hard to come by.
- golover721 7y agoDoesn't effect your average investor, who should never ever be gambling with borrowed money. And then also shouldn't be aiming for short term gain.
- ryeights 7y agoBorrowed money or not, 10+% declines in equity prices absolutely affect “average investors”...
- golover721 7y agoYour “average investor” should be in stocks for the long term. Only speculators should be concerned with short term declines.
- H8crilA 7y agoAnother way to look at the idea is that volatility seems to be ~constant, and any efforts to suppress it (by easing) result in a surge later on (hard landing). What we may see is the unwind of the easy money that has been sucking risk premiums out of the markets. Capitalism cannot work without risk premiums/cost of capital/hurdle rates. It's not capitalism any more because the capital has no decision to make (everything will be funded, no matter how good or dumb). And as this advances people will be reminded that stocks are not "basically better savings accounts", and that while they thought they're "long term investors" they are in fact not. The price agnostic buyer of ETFs will turn into a price agnostic seller. Happened many times in the past.
- perl4ever 7y ago"Capitalism cannot work without risk premiums/cost of capital/hurdle rates. It's not capitalism any more because the capital has no decision to make (everything will be funded, no matter how good or dumb)" I think you and a lot of people have lost perspective and are putting the cart before the horse. The whole point of capitalism, the only justification, is to benefit society by driving profits to zero. The stock market is not a machine to produce profits, it is a machine to eliminate opportunities for profits. Profit is an intermediate step to the basic social purpose of moving resources where they are needed. The collapse of interest rates and profits are evidence of success.
- H8crilA 7y agoRisk premiums are something else than profits. They're much more intangible, much more "macro". If you have three companies, two of which will produce $1M (when discounted with interest rates), and the third one has the prospects of producing $1M but will actually produce $0 due to some fatal flaw in the idea (i.e. will lose everything), but you don't know and can't know which one is the loser - how much should each stock be worth? Assume there's no debt. It's pretty obvious that it should be less than $1M per company. That's what the risk premium is - the difference between discount rates used for a risky project vs the discount rate used for a non risk asset (i.e. interest rates). No risk premium means everything is discounted as a "sure thing", as if it was a government bond. It's inherently anti-capitalistic because it means that the capital doesn't get to decide what's possible, what's probable, and what's likely. Also, note that risk premiums have, a priori, nothing to do with aggregate returns. Risk premium is what you'd make if everything went well. But it often doesn't go well. In my example if all three companies traded for $666k and you bought all three you'd end up with the same amount of money at the end (once the loser is known).
- kaycebasques 7y agoHah, I love that this is trending now. I highly recommend Minsky's Stabilizing An Unstable Economy.