Investors should prepare for months of market readjustments due to the imminent threat of a “Minsky Moment,” said a top economist.
The “Minsky moment” is named after economist Hyman Minsky’s description of a precipitous drop in asset prices after a build-up of debt.
Ludovic Subran, the chief economist at Allianz, formerly worked at the World Bank and France’s finance ministry.
Credit Crunch Will Tank Global Economy
Analysts have expressed concern over the liquidity markets since the start of a series of bank failures in March.Silvergate Capital, Signature Bank, Silicon Valley Bank, Credit Suisse, and First Republic have all been absorbed by their competitors since their collapse over the past two months.
The failures sent shockwaves across the financial system, with regional lenders nationwide losing their value as depositors panicked.
Subran’s reference to the “Minsky moment” and his list of associated risks explain how the circumstances that gave rise to the banking crisis still remain a major threat to economic stability.
“Of course, the commercial real estate and the doom loop with the regional banks in the U.S. is a concern,” he added, referring to the phenomenon of when one bad event triggers another, worsening the first.
“I’m concerned about the mispricing of corporate-credit risk, especially when I think that high-yield spreads are still too compressed, to be honest. And I’m also looking at the non-bank financial intermediaries.”
He explained that the sudden shift in central bank monetary policies over the past year, as seen with aggressive interest-rate hikes, are responsible for the current economic tensions, but he also said that other factors are at play.
“Everybody’s problem now is the very abrupt tightening, but then there is an additional layer of wrong risk management,” said Subran.
“A new financial accident could come from the banking sector, it could come from some very specialized hedge funds in commercial real estate, but it could come from a mixture of those two,” and that investors are in for a bumpy ride.
US Economy Will Probably Face ‘Hard Landing’ by Mid-2023
A team of strategists at Allianz, led by Subran, predicted last month during an interview with Business Insider that the U.S. economy would freefall into a recession by the second half of the year.Allianz predicted in April that U.S. GDP would shrink 1 percent between mid- and late 2023 and warned that “rapidly tightening credit conditions, exacerbated by the banking crisis,” would fuel a downturn.
Subran’s team warned that the Federal Reserve’s hawkish monetary policy and increasing wariness by the banks to issue loans would squeeze credit flows, setting the stage for a recession.
The report added that continuous turmoil in the regional banking sector would worsen the credit crunch, causing the American economy to spiral “toward a crash landing.”
If more regional lenders start to fail, it would lead the industry to become more risk-averse and result in a pullback in lending, making it harder for Americans to access credit. In turn, a lack of credit would lead to a fall in spending and investment, which would weigh on the nation’s overall economic health.
The strategists noted that a sharp drop in deposits over the past year had already wiped out $472 billion from the nation’s total money supply, which may spell “doom” for future financing conditions.
“Banks have been curtailing the supply of credit to the private sector, and low confidence in the financial sector will likely make them even more conservative,” wrote the analysts, who added, “in post–World War II history, this is a unique event.”
“While credit growth has still held up, a significant decline in bank lending seems inevitable amid the collapse of monetary aggregates,” they concluded.
