
Minsky moment - simonpure
https://en.wikipedia.org/wiki/Minsky_moment
======
petrocrat
Minksy 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_financia...](https://en.wikipedia.org/wiki/Hyman_Minsky#Minsky's_financial_instability-
hypothesis)

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-
highes...](https://www.cnbc.com/2020/02/11/ponzi-schemes-hit-the-highest-
level-in-10-years.html)

------
drocer88
Looks 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)

~~~
eanzenberg
If you predict a recession every year you will eventually be right

~~~
paulmd
And on the flip side - just because the bubble doesn't pop this year doesn't
mean your assessment of the fundamentals is wrong. The market can stay
irrational for a longer time than you can remain solvent.

~~~
nardi
Credit where credit is due:

"Markets can remain irrational a lot longer than you and I can remain
solvent."

-A. Gary Shilling

------
H8crilA
Another 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
"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
Risk 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).

~~~
perl4ever
I didn't/don't think that's what the phrase means.

If the expected value is $666,666 then wouldn't be the risk premium be the
discount you want for the _risk_ of getting zero, compared to an investment
that _definitely_ returns $666,666?

I also feel like I read recently about a study showing that investors are
empirically (at least to some extent and at least these days) willing to pay
_more_ for more "risk", kind of like lottery players.

I'm a little foggy about why, with the low cost of diversification, investors
would demand a risk premium greater than zero, at least.

~~~
H8crilA
[https://en.m.wikipedia.org/wiki/Risk_premium](https://en.m.wikipedia.org/wiki/Risk_premium)

> If the expected value is $666,666 then wouldn't be the risk premium be the
> discount you want for the risk of getting zero, compared to an investment
> that definitely returns $666,666?

Risk premium is something that connects future profits to the present, to
create an expected value. It is in fact, typically, a yearly rate expressed in
percent. Simple example: say the 10 year bond is 2%, you slap 5% risk premium
on top of that and you get 7%, with which you discount future profits to the
present expected value. Why 5%? Well that's why I'm calling it "intangible".
It's risk, it's hard to say what risk is when often you could not have
possibly anticipated all the problems. But you know that they're there. All of
the recorded history of humanity confirms that trouble is always there.

> I'm a little foggy about why, with the low cost of diversification,
> investors would demand a risk premium greater than zero, at least.

Well that's up for everyone to decide [what risk premium do they want]. I'd
personally stay on the side that assumes that failure, any level, size and
scope of failure, is always possible.

Broad diversification was always possible and executed at the institutional
scale. It really doesn't change all that much. All that changed is that the
"small guy" can have it. In particular it does not mean that risk was somehow
banished from the world by Jack Bogle's work.

~~~
perl4ever
"It really doesn't change all that much"

In your toy example, it's a huge difference. You have a 1/3 chance of losing
all your money without it, but a zero chance if you own all three.

With the stock market, it's not clear exactly what diversification gets you
because nobody has the future correlation matrix, but it must be worth
something. I think millions of people are implicitly assuming the whole market
can't go to zero.

~~~
H8crilA
Risk premium is not (just) about the risk of total ruin, or ergodicity like
Nassim Taleb likes to say. It's a method of computing expected value.

------
99_00
Permabears and doom and gloom theories always get a higher profile during
times of economic insecurity.

~~~
iso-8859-1
True. 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
If 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.

------
elihu
Treasury 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/i...](https://www.treasury.gov/resource-center/data-chart-
center/interest-rates/Pages/TextView.aspx?data=yield)

~~~
jotakami
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.

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).

~~~
toomuchtodo
> 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.

------
hammock
What is the difference between a Minsky moment and a top?

~~~
tlholaday
> 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
I think the bigger question is what is the difference between a Minsky moment
and an inverse-short squeeze (a long squeeze?)?

~~~
tlholaday
> 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.

~~~
ltbarcly3
They are basically the same, one is a forced sale and the other is a panic
sale. You might consider a minsky moment a specific kind of long squeeze.

------
caleb-allen
Ah darn, I was hoping it was something named after Marvin Minsky

~~~
DonHopkins
The joke's on you! ;)

[https://web.media.mit.edu/~minsky/papers/jokes.cognitive.txt](https://web.media.mit.edu/~minsky/papers/jokes.cognitive.txt)

------
UncleOxidant
Are we there yet?

~~~
anonuser123456
Personally 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.

~~~
vsareto
>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
I 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.

------
golover721
Doesn'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
Borrowed money or not, 10+% declines in equity prices absolutely affect
“average investors”...

~~~
golover721
Your “average investor” should be in stocks for the long term. Only
speculators should be concerned with short term declines.

------
yesimapro
See Also:

[https://en.wikipedia.org/wiki/Black_swan_theory](https://en.wikipedia.org/wiki/Black_swan_theory)

~~~
rossdavidh
Although, 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
I 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
Agreed, 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.

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andy_ppp
I’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
You 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
Can you explain why?

~~~
scottlocklin
Pretty 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.

------
kaycebasques
Hah, I love that this is trending now. I highly recommend Minsky's Stabilizing
An Unstable Economy.

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0x8BADF00D
This 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.

~~~
bitxbit
I 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.

------
ouid
"Do not fear! This is a cyclical phenomenon!"

This is caused by coronavirus. This has nothing to do with market patterns.

~~~
fiachamp
It's like no one in government(or the Fed) has read Antifragile...

~~~
motohagiography
"As long as the music is playing, you've got to get up and dance." \-- Chuck
Prince, Citigroup.

