A Minsky Moment is fast approaching for gold – Richard Mills

2024.05.09

“Minsky Moment” refers to the idea that periods of bullish speculation will eventually lead to a crisis, wherein a sudden decline in optimism causes a spectacular market crash.

Named after economist Hyman Minsky, the theory centers around the inherent instability of stock markets, especially bull markets such as the current one that has been in place for over a decade.

As Investopedia defines it, “A Minsky Moment crisis follows a prolonged period of bullish speculation, which is also associated with high amounts of debt taken on by both retail and institutional investors.”

The Levy Economics Institute of Bard College describes his seminal theory as follows:

“Minsky held that, over a prolonged period of prosperity, investors take on more and more risk, until lending exceeds what borrowers can pay off from their incoming revenues. When overindebted investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash — an event that has come to be known as a ‘Minsky moment.”

There are five stages in Minsky’s model of the credit cycle:

Displacement – investors get excited

Boom – bullish speculation, the mania

Euphoria – extended credit to evermore dubious buyers

***Profit taking – insider/ trader aka ‘smart money’ cashes out

Bust/ Panic

Two examples of Minsky Moments are the Asian Debt Crisis of 1997, blamed on speculators who put so much pressure on dollar-pegged Asian currencies that they eventually collapsed; and the 2008 financial crisis, which started with the failure of the government to regulate the financial industry, including the US Federal Reserve’s inability to curb toxic mortgage lending, triggering a wave of mortgage defaults and margin calls – as billions in assets were sold to cover debts.

Is the current US stock market, and global economy, approaching a Minsky Moment that pops it? If so, safe-haven assets like gold and silver will surely go ballistic.

“Peter Thiel, Jeff Bezos and Mark Zuckerberg are leading a parade of corporate insiders who have sold hundreds of millions of dollars of their companies’ shares this quarter, in a signal that recent stock market exuberance could be peaking.

As markets hit record highs, the ratio of corporate insider selling to insider buying is at the highest level since the first quarter of 2021, according to Verity LLC, which tracks insider trading disclosures. Stock sales at the beginning of a calendar year are normal, with pent up demand in early 2024 being exacerbated by shareholders avoiding sales last year because of depressed company valuations.

But analysts still said this season’s spree has been surprising and an indicator that a recent tech bull run, fuelled by excitement over the rise of generative artificial intelligence, is about to wane.”

https://www.ft.com/content/3bcc3949-0bf6-4f41-bc46-57cbb0df3a7f

“Should the Fed manage to achieve a softish-landing (that is, bringing down inflation without sparking a deep recession) – or even a hard-landing without a full-blown financial crisis – we could well see another leg up in the credit cycle and the Minsky moment could be delayed for some other time. But it’s important to remember that with the interconnected nature of markets (and market sentiment) and the economy, things can deteriorate quickly and a crisis can develop much faster than you might think.”

https://finimize.com/content/we-could-be-dangerously-close-to-a-minsky-moment

Richard (Rick) Mills
aheadoftheherd.com
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