Minsky Melt-Up
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MANUFACTURING A MINKSY MELT –UP
If the banks wanted to get collateral values up, and manufacture a ‘Minsky Melt-Up' here is what some of their strategy elements would call for:
1- Have the Federal Reserve reduce Fed Funds Rate to Zero
Done
2- Have the Federal Reserve hold down rates for a historic length of time i.e. a “very extended period”
Done
3- Have Federal Reserve flood market with money (i.e. Quantitative Easing)
Done
4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs)
Done
5- Have accounting changed that forced asset liquidation for mal-investments (see Accounting)
Done
6- Change Margin requirements or Leverage Pricing
ISE had instituted special rebates for specific option liquidity providers – April 1
Done
NYSE Euronext's U.S. Options Exchanges Announce New Pricing and Fee – April 5
Done
ISE to Introduce a Modified Maker/Taker Fee Schedule – March 29
Done
New interest rate futures contracts and futures options on Eurodollar & US Treasuries
Done
7- Spin or exaggerate economic news through the media in a positive manner only
In Process
8- Decrease risk premiums and increase levels of speculation
Returning
Phantom volume at 3 am on Sunday night
In Process
Is volume merely hiding in plain sight, dark pools and structured notes?
In Process
The obvious overhang of CFTC position limits
In Process
The cross-pollination of inter-continental routing capabilities
In Process
9- Establish a Carry Trade that will flow monies to US assets (i.e. re-establish Yen Carry Trade)
In Process
Market Melt Up? More Like Yen Meltdown In Process
10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk
Expect
11- Give the market a surprise jolt - like China revising it's currency peg (China biggest US collateral holder)
Expect
12- Increase the Velocity of Money by instilling an inflation worry in the public
Mixed
13- Place restrictions on market shorting (i.e. shortages on key dates)
Expect
I am not saying that a successful Minsky Melt-Up will be achieved or in fact could be successfully manufactured. Frankly, I would be very skeptical if it weren’t for the fact that former Federal Reserve Chairman Alan Greenspan specifically said this could not happen (He also stated that market bubbles could not be identified by the Fed nor addressed with Monetary Policy (yeh right)). His views have typically been my contrarian indicator which has given me an investment edge over the years. Before reading Alan Greenspan’s ‘Greenspeak’, consider that we presently have unstable economic policies, risk premiums have been high and the Fed has successfully inflated a bubble in the Bond Market over the last 20 months through QE (Quantitative Easing).
…Greenspan said “because the markets themselves are asymmetric: they melt down, but don’t melt up!” Mr. Greenspan argues:
(1) the ironic result of successful stabilization policies is a journey to excessively-thin risk premiums, and if
(2) history has not dealt kindly with the aftermath of protracted periods of low risk premiums, and if
(3) asset prices do not tend to melt up but do tend to melt down, then
(4) logic implies that the fattest fat-tailed secular risk to price stability is deflation, not inflation.
How so? If bubbles are the ironic externality of successful stabilization policies, then those policies can be successful only so long as there are asset classes that the central bank can inflate into a bubble. When there are no more free and clear assets to lever up, the game ends in a debt-deflation. As the great Hyman Minsky intoned, stability is ultimately destabilizing! That is the logical consequence of too-successful inflation stabilization. Don’t call it a conundrum, but rather a dilemma, if the Fed were to set and achieve a too-narrow target zone for inflation. (2)
If according to Hyman Minsky, protracted periods of market stability leads to instability and a market meltdown, does this preclude therefore that protracted periods of market instability negate the possibility of a market melt-up (per Greenspan)? I intentionally phrased the logic for this argument in perfect ‘Greenspeak’ fashion so we can all remember exactly how we got ourselves into this global predicament in the first place.
CONCLUSION
This is a well executed strategy. It has been almost militaristic in its execution - all the elements from a solid communications program (i.e. CNBS hype), accounting and regulatory changes (FASB 157, 166, 167 deferrals et al ), government statistics (does anyone actually still believe the CPI, Labor Report or other government statistics any more?), and public’s sentiment through the controlled market perception barometer pumped at them every evening on how well the DOW Industrials are doing. The US economic and financial situation has now reached a point where the potential crisis could be referred to by our government interventionists as a matter of national security. This is precisely why I am leaning towards a Minsky Melt-Up being successfully manufactured.
There is an old market saying: “Don’t fight the Fed!” This market guideline has never been truer. In fact today it is more appropriate to say:
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