The Instability of Stability

Global CIO Commentary by Scott Minerd

Economic stability, according to post-Keynesian economist Hyman Minsky, encourages more risk taking and higher leverage -- ultimately causing speculative bubbles and painful recessions. Government intervention designed to stabilize or stimulate the economy, such as quantitative easing (QE), is destabilizing when it gives markets a false sense of confidence. When false confidence is high, Minsky noted, markets become dominated by Ponzi buying -- when investors ignore fundamental asset values and nevertheless borrow to buy, based purely on the belief they can sell assets for more tomorrow than they paid today.

The U.S. Treasuries market could now be described as a Ponzi market. The only reason investors would buy Treasuries today is that they expect the Federal Reserve will buy them at higher prices in the future. This reasoning will come unstuck, however, once the Fed curtails its asset purchase program. We do not know when the Fed will taper QE, but the longer its expansionary policy continues, the more volatility-inducing pressure will build. That means stock and bond markets appear to be in for a rough ride over the next six months or so.

Economic Data Releases

Good Enough Payroll Number Likely to Keep QE on Pace

Eurozone Retail Sales Disappoint, but Encouraging Signs Elsewhere, Weaker Chinese Dat