Minsky Moment
Pfäffikon SZ, Switzerland – An increasing amount of Non-Bank Financial Institutions (NBFI) are entering the financial markets giving the shadow banking system an extra impulse. Aside from securitisation – for example, the packaging and polishing of mortgages – repos (the purchase and sale of securities on different dates) are playing an increasingly outspoken role within the shadow banking system.
Leading
It’s notable that The Netherlands plays a leading role in the shadow banking system. “The Netherlands (45 percent) and the US (35 percent) are the two jurisdictions where NBFIs are the largest sector relative to other financial institutions in their systems,” says the Financial Stability Board in Basel. Perhaps a nice focal point for Mr. Knot at the Nederlandsche Bank (Dutch National Bank), who has been struggling with some integrity problems in his assumed-to-be immaculate institution.
In my last column I pointed out the irrational world in which we find ourselves. The key question is: Are investors headed for a so called “Minsky Moment”? A “Minsky Moment” is the process through which apparent financial stability ultimately leads to financial instability. Investors trust central bankers, whereby their suspicion laden feelers are becoming increasingly disoriented. The result is an increasingly large amount of risks that are being taken, a pattern we can also recognize in the ever expanding world of shadow banking.
Liquidity Trap
The 0% interest rate policy has created a “liquidity trap”. The debt to asset ratio has increased in relation to the amount of disposable income. The Dutch underwater mortgages are a prime example. The 0% interest rate policy is driving prices through the roof which has the appearance of a “free lunch”. But as you know, in the financial world, there is no such thing as a “free lunch”. The real economy will eventually have to justify the increase in prices.
The financial process in which we find ourselves is primarily undemocratic and causes more inequality in the world, which is a cause of concern. The financially less fortunate do not benefit from the current process. Moreover, the economy is still not running properly. With this in mind it is not coincidental that Hillary Clinton in her presidential campaign has targeted the middle class. The odds of wage inflation eventually taking hold in the US has certainly increased.
Start process
The Fed will likely play into the hand of wage inflation and will wait before introducing a hike in interest rates. In Europe, however, we are only at the very beginning of this process. Where the Fed will likely gradually increase interest rates in five months, the ECB will take fives years – at least – to follow suit. Europe finds itself in a “liquidity trap” and will first have to try to reduce unemployment. Meanwhile the European stock prices are being further polished and investors are celebrating it as any another day. All this does indeed amount to fertile ground for a “Minsky Moment”.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
