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iTrust Daily Insight

Edition 8.20.2019

On the lookout for Market Opportunities and Minsky Moments

Oftentimes it can be difficult for the layman to understand why market cycles exist. There are often many technical (trading-related), fundamental (real-world), cyclical (3-5 year) and secular (5-20 year) factors at work.

In a normal business cycle, many entrepreneurs and investors might see a great opportunity to create value in a new way — maybe through the creation of a new app, providing some sort of new service or even building some needed form of real estate (perhaps a new warehouse or a new office building).  What often happens, though, is that many entrepreneurs and investors rush into the opportunity trying to be first or the best or the lowest-cost provider — but — not everyone will win.  Inevitably, the competition for customers or users or tenants will determine which providers make money and which providers will lose money.  Eventually, the losers close their businesses and lay off their workers.  If there was so much investment during the boom years that when the losers lay off their workers there aren’t new industries to hire those workers, then there might come to be many unemployed workers, which causes spending to reduce, which hurts the entire economy.

The anticipation of such a downturn can lead to market-sell-offs as investors anticipate business owners and CEO’s will stop investing in capital equipment (robots, computers) or making additional hires or buying new inventory.

Occasionally, such an anticipation can happen very suddenly and can sometimes be introduced by some precipitous event such as the Stock Market Crash of 1929 or the Lehman Bankruptcy of 2008.  In both cases, many people knew of the excesses of the previous boom years, but the all-of-a-sudden fall in the market led to widespread understanding of just how bad the situation was AND an increased speculation the problems were going to get worse.

This double-wammy of some market participants all “rushing for the door” to get out of the market then creating a “price signal” that others should also get out of the market is called a “Minsky Moment”.

The Minsky Moment is named for American economist Hyman Minsky.

Not all market downturns have a Minsky Moment.
But, as some movie watchers might remember from watching “It’s A Wonderful Life” (most likely remembered for the angel convincing George not to jump off the bridge) — one of the reasons for the main character’s being so down was that his Savings & Loan was suffering a “run on the bank”. That “run on the bank” was precipitated merely by the loss of confidence by his depositors that he couldn’t pay them back.  He had taken money from depositors and lent to homeowners in the form of mortgages.  When the depositors demanded back their money faster than the mortgage borrowers could repay, he suffered a run on the bank.

Today, one of the purposes of the Federal Reserve and other central banks is to prevent or slow such “runs on the bank” (email Blake Skadron if you want more detail on how).  But financial markets generally do not have such a liquidity provider.  Financial markets can still fall quickly if there is a “Minsky Moment”.

The last such big Minsky Moments in the US were the popping of the “Internet Bubble” in 2000, then the 9-11 attacks in 2001, and the Lehman Brothers bankruptcy in 2008.  Before that were the 1972 OPEC oil crisis, the 1979 OPEC oil crisis and the mid-1980s Savings & Loan failures.
Oftentimes, though, individual sectors or industries or regions can get into trouble until a savvy investor invests at the lower asset prices and the contagion never spreads from that sector or industry or region.  Berkshire Hathaway has made a lot of money over the years investing in such distressed assets.  A large foreign buyer bought a major stake in Citibank after the 1991 recession.

In addition to making sure inflation stays low and US banks remain healthy, the US Federal Reserve (central bank) also has the job of maintaining maximum employment.  To do this, it raises interest rates when the economy is strong so that the economy doesn’t get so strong that it “overheats,” which can lead to “over investment” and eventual large-scale layoffs after some of the businesses fail.  The Fed also lowers interest rates when it believes the economy might be slipping into recession.  Of course, sometimes, the Fed overshoots and leaves interest rates too low for too long — this is partly to blame for the US housing bubble from 2004 to 2006.  At other times, it can raise rates too quickly — indeed, before 2001, every recession since WWII had been preceded by the Fed raising rates too quickly.

This is why all market participants — bond investors, gold investors, stock market investors, digital coin investors — should care about the Fed.
Furthermore, all investors, market watchers and business decision makers must constantly be on the lookout for whether there is too much money going into any particular investment opportunity — or all investment opportunities.  If so, like a watchman on the lookout tower of a ship — we must also be vigilant for the risk not of a rocky coastline but rather of a Minsky Moment and also for the opportunity not of a new nautical passage but of new market opportunities.

Investors are economists who put their money where their analysis is.
And the good investors are always seeking to have the best analysis.
With these updates, we at iTrust Capital are seeking to help digital currency traders & investors as well as investors of other digital assets frame their observations and synthesize them into tradeable actions.  Of course, we can’t take a side — those selling feel equally strong about their convictions as those buying.  That’s what makes markets.  But we do want to help investors think clearly about their analyses and provide the lowest cost, least burdensome method we can for all such market participants as soon as we can do so reliably.  

Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com

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