A research note from high-profile JPMorgan equity strategist Marko Kolanovic on Monday, US time.
- the possibility of a Minsky moment in markets and geopolitics has increased
- "The bailout of several U.S. banks did not manage to calm markets, which consumed another large bank in Europe,"
- "In a Trichet-like moment, the ECB increased rates by 50bps."
- Kolanovic acknowledged that the Fed is facing a difficult task on Wednesday but is likely already past the point of no return, and "a soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending)."
- Kolanovic believes that even if central bankers successfully contain the contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators.
The note got widespread financial media coverage.
US stocks surged into the close despite the ingrained pessimism:
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The (overhyped and overused) term "Minsky moment" refers to a sudden collapse of asset prices and a contraction of credit, resulting in a severe economic crisis.
- The term is named after economist Hyman Minsky, who observed that long periods of economic stability and growth can create conditions that lead to financial instability and eventual collapse:
- Minsky argued that during periods of economic growth, borrowers and lenders become increasingly complacent and optimistic, leading to an increase in risky lending and borrowing practices.
- Eventually, this creates a situation where there is a high level of debt and a large number of borrowers who are unable to repay their debts.
- When this happens, there is a sudden collapse of asset prices and a contraction of credit, resulting in a financial crisis.
- The Minsky moment can also lead to a wider economic crisis, as the collapse of asset prices can lead to a contraction of spending and a decline in economic activity.