Paging Mr. Minsky….

For those not familiar with a ‘Minsky Moment” you can read up on it HERE. It is a term that refers to a point in time where a leveraging cycle in the economy is about to enter into its final stages. This event is preceded by a cycle where borrowed money is encouraged over cash – sound familiar? The byproduct of the Fed’s ultra-low interest rates has spurred record amounts of consumer, commercial and sovereign debt financing so Minsky’s theory may be playing out in historic form.

However, what matters most is when it starts. It is not that hard to figure out that the debt party will end one day. For the mortgage market in 2007, the Minsky Moment was when borrowers failed to make their first payment which caused the securitization market to implode as mortgage bond prices fell and trapped investors in bad assets. You might think that the mortgage market would have tapped the brakes before its apex but that is how debt markets work – they keep issuing until they can’t anymore. There were warnings signs as early as 2005 but investors drew comfort in that new issue mortgage bonds kept clearing the market at ever lower yields. What could be wrong if the bonds kept clearing the market at that level? At the time, investors failed (ignored) to see that buyers were thinning out and that Wall Street was complicit in stuffing bonds that nobody wanted in structured vehicles (CDOs). Eventually, players either ran out of money or were told their bonds had no buyers. That is when the fun started as the stock market took over a year to get the joke.

Today’s version of 2007 lies within the high yield debt markets that did have a brief Minsky moment at the end of 2018 when the high yield market shut-down. As you know, the Fed saved the day and the bonds flew off the shelves in January so the Fed bought itself some more time to manage the next financial crisis. I have been reading about more bond issuances beginning to struggle for buyers so there are cracks emerging in the credit markets.

Despite all the tools the Fed has at their disposal, they are not ready for a global thermonuclear trade war – that is out of their hands. And the battle is heating up as the Chinese upped the ante this week with additional tariffs against the U.S. and the President responded in kind late Friday. It is clear that this won’t end anytime soon and the stock market is now starting to get the joke .

The S&P 500 has closed lower over the last four weeks and dropped 2.55% on Friday. In the chart below, the expanding triangle pattern may be starting to gain some traction. If correct, we will take out the December 18 low in the coming weeks/months.

12 Year Chart of the S&P 500

Chart of the Week!

The NFL season opener is September 5th, below is how much you have to pay to be an owner.

Economic & Central Banking Snippets 

  • Taiwan exports fell for the ninth straight month (3% y/o/y for July) as the country is tech heavy and is suffering from global trade tensions.
  • The Fed minutes released on Wednesday were a mixed bag as some officials called for more aggressive easing while others resisted any changes to the Fed Funds rate. The minutes indicated that the 7/31 rate cut was viewed as a “recalibration of the stance of policy, or a mid-cycle adjustment, in response to the evolution of the economic outlook”. The chart below illustrates that the language of the minutes reflect a Fed that is grappling with where we are in the business cycle. (FT/WSJ)
  • Government agencies in recent weeks have substantially lowered their estimates of job gains, output growth and corporate profits as part of their regularly scheduled updates based on fuller data. Employers added about two million jobs in the year through March, down 501,000 from a prior estimate, the Labor Department said. That brought down the average monthly gain over that period to about 168,000 from 210,000. (WSJ)
  • Existing-home sales in July rose 0.6% from a year earlier, the first year-over-year uptick in 17 months and possible a sign that lower mortgage rates are finally starting to drive sales after a weak spring selling season. (WSJ)
  • The August Manufacturing PMI slipped below 50 to 49.9 which indicates the manufacturing sector is trending towards a contraction. However, most economists consider a reading of 46 or lower as a recession so there is some room before the wheels come off the U.S. economy. This is the first time since September 2009 that the manufacturing component has fallen below 50 as export orders fell to the lowest since August 2009. “The PMIs for manufacturing and services remain much weaker than at the beginning of 2019 and collectively point to annualized GDP growth of around 1.5%.”

Macro Snippets

  • Shipments of recreational vehicles to dealers have fallen about 20% so far this year, after a 4.1% drop last year. Multiyear drops in shipments have preceded the last three recessions. (WSJ)
  • A prolonged rally in the U.S. Dollar is pressuring U.S. corporate earnings, hitting commodity prices and threatening to deepen a selloff in emerging markets. The ICE Dollar Index, which tracks the dollar against a basket of six major currencies, stands near its highest level in more than two years. That’s been a double-edged sword as U.S. exporters are less competitive abroad and U.S. multinationals are hit when they convert foreign revenues into U.S. currency. Developing countries pay more to service their dollar-denominated debt while oil, copper and most other raw materials become more expensive to foreign buyers. The dollar’s strength also has been a boon to countries trying to boost growth because it makes their currencies—and exports—cheaper to U.S. consumers. (WSJ)
  • The US Treasury Department is considering a proposal to offer bonds that mature in 50 or 100 years as the Office of Debt Management is “conducting broad outreach to refresh its understanding of market appetite” for this tenor of debt.
  • Germany has sold 30-year debt at a negative yield for the first time, although demand at Wednesday’s auction was weak as some investors balked at the prospect of paying to tie up their cash for three decades. The bond is the first German 30-year debt to be sold without coupon payments, meaning investors who hold it to maturity get nothing back until 2050. (FT)

That is all for now until next week’s Market Update. Thanks for being a subscriber!  


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.