The Minsky Moment: Rising rates threaten credit, AI, and stocks
Hyman Minsky, the late Columbia University credit cycle expert, taught us that a long credit and asset-market boom fueled by cheap money inevitably leads to a moment when those markets flip and panic selling sets in. All too often, those moments came when interest rates started to increase at a rapid pace. In turn, defaults become very much more common as borrowers find it difficult to service their debt when they have to roll over low-interest-rate loans at very much higher interest rates. At the same time, stock markets at high valuations lose their appeal as high-yielding government bonds offer a more attractive and less risky investment alternative.
TL;DR
- Long credit and asset-market booms fueled by cheap money inevitably lead to market flips and panic selling, often triggered by rising interest rates.
- The past five years have seen such a boom, propelled by low central bank rates post-2020 recession.
- Recent sharp increases in long-term interest rates globally suggest a potential "Minsky Moment" is imminent.
- Excesses in private credit and AI debt markets, coupled with record-high US stock valuations, exacerbate this risk.
- Rising rates threaten the $2 trillion private credit market, with defaults already at multiyear highs.
- Withdrawals from private credit funds are accelerating, leading to redemption caps.
- High long-term rates could negatively impact AI investments, which have driven significant economic growth.
- Stock market valuations are at levels seen before the 2001 dot-com bubble burst, facing headwinds from higher discount rates and competition from bonds.
- Policymakers have limited ability to prevent a market downturn but should plan to mitigate its impact.
- Concerns about large budget deficits and high inflation are contributing to rising bond yields.