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Coronageddon: Can a "Minsky Moment" be Avoided?
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There’s a chance that the coronavirus will be contained in the United States and that fewer people will be infected than in China or Iran. But there’s also a possibility that the highly-contagious virus will spread and that there will be sporadic outbreaks across the country. If this latter scenario takes place, then the ructions in the stock market will intensify making it impossible to form a bottom or spark a relief rally. If stocks can’t find a bottom, then pressure will build on the weak players, who purchased securities with borrowed cash, to sell their good assets along with the bad in order to repay their debts. These massive selloffs can quickly turn into firesales where it’s nearly impossible to find a buyer regardless of price. This is what the financial media calls “panic selling”, a vicious, self-reinforcing downward spiral in which stock prices collapse in a frantic, disorderly selloff. The phenomenon has also been described by Pimco’s Paul McCulley as a “Minsky Moment”. Here’s a definition from Investopedia:

“Minsky Moment crises generally occur because investors, engaging in excessively aggressive speculation, take on additional credit risk during prosperous times, or bull markets. The longer a bull market lasts, the more investors borrow to try and capitalize on market moves. Minsky Moment defines the tipping point when speculative activity reaches an extreme that is unsustainable, leading to rapid price deflation and unpreventable market collapse. What follows, as hypothesized by Hyman Minsky, is a prolonged period of instability.” (Investopedia)

So, how close are we to a Minsky Moment?

In the last week alone, US stocks have shed $3.6 trillion in market value while benchmark 10-year Treasury yields have dropped to all-time lows and the ominously-named “fear gauge” or VIX (Volatility Index) has spiked to levels not seen in more than two years. The losses have been savage and severe, but the credit markets have held up fairly well so far. Next week could be a different matter altogether though, after all, there’s only so much fat on the bone. Another week like last week, would lead to widening credit spreads, major dislocations in the corporate bond market and, very likely, a few sizable defaults. Over-extended corporations that have borrowed over a trillion dollars from Mom and Pop investors to buy back their own shares, would certainly face a day of reckoning as their cash flow vanishes overnight and their prospects for rolling over their prodigious pile of debt drops to zero. This is typically how credit cycles end, in a fetid cloud of blood and smoke.

Despite persistent warnings from the IMF and other establishment institutions, Central Banks have done nothing to curtail the 11-year orgy of debt-fueled spending or the rampant reckless speculation that has sent stock prices through the roof even while workers wages have remained flat and standards of living have continued to slip. For more than a decade the Fed has kept interest rates locked on their emergency setting while pumping trillions in liquidity into the financial system at the first sign of trouble. So now stocks are the biggest bubble in history and the Fed finds itself without the tools it needs to counter the effects of the coronavirus. This has all the makings of a major catastrophe.

So how does this end?

Well, next week the Fed will announce that it is slashing rates by 50 basis points and that it’s coordinating its action with its fellow central banks, the BoE, the BoJ, and the ECB. The Fed might also announce an additional liquidity program aimed at banks and financial institutions that suddenly find they themselves unable to borrow at the Fed’s discount rate. The announcement could ignite a relief rally, but the surge is not likely to last long since it will not have any material effect on either the virus or the disruptions to supply-lines. The Fed’s easy money will not create the Chinese-made components that laptop manufacturers need to sell their products. They won’t put skittish workers back in the factories or passengers back on airplanes or consumers back in the retail stores. The Fed’s low rates are designed to stimulate demand, but they do nothing to mitigate a “supply shock”. Regrettably, the problem is on the supply side not the demand side.

For a better understanding of how the coronavirus is roiling markets, I’ve transcribed a short interview with market analyst Mohamed El-Erian who explains recent developments and provides a window into the future. El-Erian sees the current drama unfolding in four phases.

Mohamed El-Erian — “Phase one, is the economic and corporate shock. Global growth slows, companies generate less earnings, their costs go up, and their supply chains get disrupted.” (This is already happening.)

“Phase two is financial disruptions. Now we will see pockets of illiquidity, pockets of distress selling, market dislocations, and a complete closure of markets for any kind of funding other than bank funding. These two phases feed onto each other.” (This is also happening now.)

“Phase three, the formation of a bottom which happens in finance first, then in the economy. But for that to happen, it’s not about central banks like a financial sudden stop. It’s about addressing the underlying issue, which is the virus.” (No bottom in sight.)

“Phase four, when we have to look at the longer-term (scare? inaudible) Central banks realize whatever they do, will be shown to be ineffective and the faith that investors have always had that central banks can bolster valuations, is going out the window…..The Fed will cut rates because markets will begin to dysfunction, but (rate cuts) will not deliver a better economic outcome.”

“The problem is…you need the fundamentals to stop deteriorating in order to form a bottom. But the “technicals” can not stabilize long enough to form a bottom in the face of the continuously negative news.What we need is hope, realistic hope that we have a way to solve this issue, and a vaccine is the best way to do that but that’s not coming anytime soon.” (No vaccine, no remedy.)

Bloomberg –“Is this selloff still orderly?”

“It was until yesterday (Friday afternoon) but now we’re starting to see the things you typically see when too many people are trying to reposition themselves and their isn’t enough risk-taking capacity in the middle. So we are seeing massive price gaps, very little liquidity in certain sectors of the corporate bond markets and emerging markets, and finally people are realizing what you and I have talked about for a long time. They took on too much liquidity risk.” (Watch the whole interview on: “Mohamed El-Erian Breaks Down Coronavirus Impact Into Four Stages”, Bloomberg News)

This interview will help readers understand how hard it’s going to be to calm the markets and stop the downward slide. There are four points that need to be emphasized:

1– In order to turn markets around, a bottom must be formed. Unfortunately, forming a bottom is impossible when stocks are whipsawed every few hours by more bleak information. In short, the news cycle is driving stocks lower.

2– On Friday signs of distress began to appear as a result of the the 5-day Wall Street bloodbath. (“Financial disruptions, pockets of illiquidity, pockets of distress selling, market dislocations, and a complete closure of markets for any kind of funding other than bank funding.) These are the red flags signalling a Minsky Moment is approaching, that is, when speculative activity reaches a tipping point leading to “rapid price deflation and unpreventable market collapse”..followed by “a prolonged period of instability.” In short, a stock market crash.

3– “Markets will begin to dysfunction, but (rate cuts) will not deliver a better economic outcome.”
In other words, Wall Street is demanding lower rates, but lower rates won’t help, in fact, they will further undermine the Fed’s credibility.

4– Finally , what’s needed to stop the selloff is a vaccine. Regrettably, there probably won’t be a vaccine for another 12 to 18 months. By that time, Wall Street could be a pile of smoldering rubble.

 
• Category: Economics • Tags: Coronavirus, Federal Reserve, Wall Street 
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  1. Bert says:

    On Friday signs of distress began to appear as a result of the the 5-day Wall Street bloodbath. (“Financial disruptions, pockets of illiquidity, pockets of distress selling, market dislocations, and a complete closure of markets for any kind of funding other than bank funding.)

    Mr. Whitney,

    I don’t dispute your point that the market is highly vulnerable to the economic effects of the epidemic and that any bottom will be due to medical events not to technical factors in the market.

    However, please explain precisely what was worse on Friday, February 28, than on the previous four days. What I saw Friday was an attempt to rally after price tested a long-term area of support. The rally recovered very little of the week’s loss, but its likelihood was apparent to my version of technical analysis. Is it not possible that even though a much lower bottom will be required by the economic disaster looming, the descent will occur via an ebb and flow recognizable through principles of price action?

    • Replies: @Winston2020
  2. BuelahMan says:

    Likely the least motivational podding to get a vaccine I’ve ever read.

    Is Whitney invested in vaccine manufacturers?

  3. clickkid says:

    ” By that time, Wall Street could be a pile of smoldering rubble.”

    Thanks for ending on a positive note.

    • Replies: @Neoconned
  4. man, sometimes Mike writes some useless crap doesn’t he?

    • LOL: Twodees Partain
  5. @Bert

    “What I saw Friday was an attempt to rally after price tested a long-term area of support.”

    Here’s why the market rallied:

    Powell Issues Unscheduled Statement To Calm Crashing Markets, Fails
    28 Feb 2020

    [MORE]

    https://www.zerohedge.com/markets/fed-chair-powell-issues-unprecedented-statement-calm-markets

    …at exactly 2:30pm on Friday with 90 minutes left until the close, Powell issued an unprecedented statement meant to do just one thing: calm markets and stop the crash.

    “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

    Chart showing effect of Powell’s statement:

    ————

    A geneticist has just analyzed the genetic code of the SAR-CoV-2 virus that caused the death in WA on Saturday and from a “family tree” analysis estimates “our best current expectation is a few hundred current infections” undetected in WA:

    The reason they haven’t been found? “I believe we’re facing an already substantial outbreak in Washington State that was not detected until now due to narrow case definition requiring direct travel to China.” That “narrow case definition” was due to the US test kit shortage issues I’ll discuss below. We are NOT finding existing cases because test criteria are too restrictive due to that test kit shortage. You won’t find what you can’t look for.

    ————

    VERY bad:

    New Covid-19 death raises concerns about virus spread in nursing homes
    FEBRUARY 29, 2020

    https://www.statnews.com/2020/02/29/new-covid-19-death-raises-concerns-about-virus-spread-in-nursing-homes/

    Washington state reported on Saturday the first death in the U.S. from the new coronavirus, the first health care worker to be infected with the disease, and most worrying, the first known outbreak in a long-term care facility.

    At a nursing facility in Kirkland, Wash, approximately 27 of the 108 residents and 25 of the 180 staff have some symptoms, health officials said during a teleconference with the Centers for Disease Control and Prevention.

    “We are very concerned about an outbreak in a setting where there are many older people,” said Jeff Duchin, health officer for public health for Seattle and King County.

    The deceased, a man in his 50s with underlying health conditions, was not a resident of the facility, and officials have not yet found a link between his case and the outbreak in the nursing facility.

    ————

    VERY bad related to above:

    Washington state firefighters quarantined ‘out of an abundance of caution’
    29 Feb 2020

    https://www.nbcnews.com/health/health-news/live-blog/coronavirus-updates-live-countries-prepare-outbreak-spreads-n1143556/ncrd1146256#liveBlogHeader

    Washington state firefighters who came into contact with coronavirus patients have been quarantined “out of an abundance of caution,” a local official said Saturday. They will remain isolated for two weeks.

    Seven members of the Redmond Fire Department in King County have been removed from service, according to public health officials. Six are quarantined at home and one other at a secured facility.

    In neighboring Kirkland, also in King County, firefighters who responded to an outbreak at a nursing home are being quarantined either at home or at a facility. At least 27 patients and 25 staff members at the Life Care Center have symptoms associated with COVID-19, according to local health officials.

    Kirkland officials did not say how many firefighters there are being quarantined.

    ————

    The far too limited testing in the US has been caused by a limited number of labs able to do a test and problems with the US test kits caused by a faulty ingredient (reagent). That’s now fixed and the FDA/CDC say that by the end of next week they’ll be able to do 10,000 tests per day. That’s when we’ll find the true number of cases here that haven’t been found because we’ve been unable to adequately look for them.

    • Replies: @Weston Waroda
    , @Bert
  6. carlus says:

    I have a question: why won’t the FED or the “plunge protection team” simply print whatever amount of dollars it takes to buy enough stocks to keep the market from falling more?

    • Replies: @Digital Samizdat
  7. Anonymous[405] • Disclaimer says:

    Coronageddon. Chosen by the people on February 17!!

    • Replies: @Tim too
  8. I compared the virus outbreak in China to a nuclear explosion. Similar to El Erian.
    Shock waves reverberate around the world in varying times and places, to follow later, obviously in Hong Kong and Korea as they are quite close. Hyundai in Korea is closed, and Hong Kong is also.

    Fiat Chrysler closed a plant in Serbia???
    It only takes ONE part to not be available for the manufacturing of electronics, automobiles, or whatever to STOP a production line to dead stop. All workers stay home.

    Pick any one of the car plants in Mexico, Toyota pick up plant in Texas, or any GM, or Ford plant missing a SINGLE component for all the electronic whiz bang gadgets in the new units!

  9. @Winston2020

    A geneticist has just analyzed the genetic code of the SAR-CoV-2 virus that caused the death in WA on Saturday and from a “family tree” analysis estimates “our best current expectation is a few hundred current infections” undetected in WA:

    Extrapolating the data from South Korea, where they appear to be very aggressive about diagnosing cases of cornoavarius, 2 deaths in Washington would mean 385 total cases in Washington state, or about 370 undiagnosed cases. This is from the Johns Hopkins coronavirus dashboard, tracking the spread and mortality of the virus around the world. So, you don’t have to be an expert, just follow the virus on that website with your calculator. Which is probably what the experts do, not analyze from the coronavirus genetic code family tree, LOL.

    https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

  10. @carlus

    Legally, the Fed is not allowed to invest directly in equities, just t-bills.

  11. onebornfree says: • Website

    “If stocks can’t find a bottom, then pressure will build on the weak players, who purchased securities with borrowed cash”

    Speculating, with money that the individual cannot afford to lose [via borrowing], is always a bad idea. Many do it, very few [occasionally]get away with it, due to luck, and not their own imagined superior prescience:

    “Got Money You Can Afford To Lose?[How to Safely Profit In Stocks,Gold,Crypto’s etc.]”
    http://onebornfreesfinancialsafetyreports.blogspot.com/2016/11/speculations-got-money-you-can-afford.html

    Regards,onebornfree

  12. Svevlad says:

    Haha yes. Yes! Burn it to the ground.

    That’s what happens when you stick your arse where cocks are measured. Smart nations like Iceland took the steps to protect themselves against this shit all the way back in ’08.

  13. Bert says:
    @Winston2020

    Powell was asleep when the market began its turn at 1:30 am EST. Coronacrash for most. Coronacash for a few.

  14. In other words, Wall Street is demanding lower rates, but lower rates won’t help, in fact, they will further undermine the Fed’s credibility.

    The current rate environment suggests the time value of money is approaching zero (it already passed that point in Europe). what this signals is that policy-makers intend to go full bore on having capitalism without capital, that the system will chug along on consumption coupled by a bare minimum of CAPEX as deemed adequate by management, who are incredibly talented at short-term malinvestment. To be generous, this is not sustainable. To be honest, we won’t have to worry about Wall Street becoming a pile of smouldering rubble because it will be lost in the pile of smouldering rubble that was the global economy.

    Finally , what’s needed to stop the selloff is a vaccine. Regrettably, there probably won’t be a vaccine for another 12 to 18 months.

    Wishful thinking.

  15. Neoconned says:
    @clickkid

    I highly doubt it’ll get that bad. Corona will peter out in a few months to a year. Interest rates are so low investors are practically giving companies and the government(s) money for FREE…..

    In such an environment of low interest rates the stock buyback machine that has been fueling the stock market surge(basically by creating Japanese style “zombie corporations” saddled with unpayable debt but low interest rates that allow plodding to continue) will continue unabated. The only thing that will stop the surge will be a move to say some asset class like bitcoin…..and that will force governments to go ape sh-t in taxes, capital controls, etc to stop capital from flowing OUT of the economy and into other assets….meaning out of the dollar and dollar-backed assets….

    WE may have some kind of 1987 style crash but over the next few years the long term trends will stay the same and we’ll see asset values continue their climb — they have to — and or things go totally apesh-t…..Trump and the rest of the powers that be simply put won’t allow it. They’ll print into armageddon and prop asset values up…..deflation is a b-tch…..when hyperinflation finally comes the reaper comes with it but that’s probably 20-30 years out yet.

  16. (This comment is addressed to Mr. Whitney as a writer, not so much to this particular article.)

    I don’t know if you read the comments Mr. Whitney, but I want to say that I’ve always appreciated your articles, and it is nice to see you writing on economic topics again.

    I’m still fairly young (a reagan baby) but I’ve been reading your articles for years, having first come across you over at Counterpunch, when Mr. Cockburn was still steering that ship.

    Anyway, I remember reading one of your articles in 2006(ish), that helped me see that a major downturn was coming soon. You simply pointed out that something like $1.4 trillion worth of adjustable rate mortgages were scheduled to reset over the next year. When stocks began to slip in ’07 and my dad told me he had lost some money in the market I told him about your article, and what it meant. He got out of the market completely the next day. Thanks!

    A few years later I got myself into an econ phd program, where the school let me teach my own undergrad courses. It was fun in many ways, and I enjoyed being around smart people. But one thing I observed was an inability or unwillingness of many of the profs to use intuitive logic. Not all, but many, of them seemed blind to the actual goings-on of the world, and seriously believed that markets only go awry because of “bad government.” Why? Because a model of perfectly optimizing, foresighted, rational expectations agents, tells them so.

    The department would invite scholars from other schools or institutions to present their research. I can’t remember his name, but one day the guest was a researcher from the SF Fed. He presented an interesting working paper that used optimizing, rational expectations agents to show how capital spending can get bunch up in short periods of excessive investment, leading to capital overhang, and a later drop in investment, provoking a recession.

    I was flabbergasted by what one of the department’s profs said, even before the guest got into his paper: “this is what the crazies like Paul Sweezy used to say, and everyone knows they were idiots!” It was slightly less rude than that, but that was the essence. Anyway, I realized that even if you play by their rules but get the wrong results (capitalism isn’t perfect) they still hate you.

    When they asked me to teach an undergrad macro course, I decided to spend a weekend reading The General Theory, since the core of intro courses is essentially still Keynesianism (it’s when you get to grad school that you unlearn that “garbage,” and learn “the truth”.) Anyway, I told a prof that I read it as preparation for teaching and I could tell from his expression that he wasn’t thrilled. At the end of the day the department wasn’t thrilled about my thesis topic either and eventually bid me good bye (ABD as they say.)

    Anyway, as much as I developed a well-trained brain, I’ve always appreciated honest, intuitive straight-shooters like you. It’s much more enlightening than the equations of know-nothings who can’t see a depression coming when their already in one. Thanks again!

  17. Parfois1 says:

    Regrettably, there probably won’t be a vaccine for another 12 to 18 months. By that time, Wall Street could be a pile of smoldering rubble.

    It may be a callous remark, but I say it: Bring it on! It’s about time the speculating racketeers betting on the stock market Ponzi casino are pushed out of their skyscraper fortresses with the rubble. It is going to happen with or without coronavirus anyway, the whole rotten system is sustained by continuous injections of virtual liquidity – like an artificial heart pumping fake blood into a cadaver.

    The usurers are already out in force to profit from the social unease unfolding in may places by panic buying. My local supermarket has been literally raided in spite of price increases of most basic items of 25% (items I usually buy). Disgusting profiteers taking advantage of a minor disruption – imagine what they would do if a major disaster was looming! NowI understand why some people loot supermarkets in times of trouble; their greed must perforce play a role in retributive paybacks.

    I was shocked when I went to do my weekly shopping today, not expecting the novelty of empty shelves when there is very little to worry about. Death, the universal leveller, will come soon or later anyway, so why are people so selfish by hoarding stuff? By doing so they deprive other people of their basic needs. After all it is not a question of survival and, even if so, what is available should be distributed according to a hierarchy of social needs, mainly by a measure of community usefulness and moral values (e.g. children first, then health professionals, emergency services and so on … politicians and billionaires last). Remember the RMS Titanic? The crew (politicians) were the last, mainly their fault the vessel sank…

    I wonder how the Chinese, Iranians and Italians are coping with that problem. Reminds me of the catastrophic horrors of the Leningrad siege with 1.2 million civilian deaths, mostly from hunger and cold. This coronavirus thing is less than a mozzie bite.

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