The moment when the champagne pyramid collapses.
The change of direction at the peak of a roller-coaster.
Finding a lost wallet, a knife bashed through your laptop, and cringeworthy messages sent to year-long neglected friends after waking up from that crazy party night.
Your all-in poker bet losing to a marginally better hand.
The life-saving mirage turning out to be not more than sand.
A Minsky moment is a point in time where hope, fun, euphoria and exuberance very suddenly pivots to the opposite – fear, panic, regret.
Named after the eponymous economist, it represents the sudden onset of sobering reality.
And you know that reality will have to kick in at some point when 5% of the Nasdaq-100 index are responsible for 60% of the 2023 rally (a 1:12 lever).
We are in bubble territory, ladies and gentlemen – people are ignoring or rationalizing away historic precedent, risk control is thrown into the wind, the new paradigm of AI has been announced, and the ever-necessary “this time it’s different” has been uttered … because “AI makes companies money”.
For various reasons that I’ve laid out over various posts during the summer (ranging from breadth and concentration to macro to sentiment and exuberance to an abject lack of high-quality stocks under accumulation to sector rotation to lack of rally confirmation and more), there are concrete reasons for me to cry foul and assume this rally is nothing more than smoke and mirrors, the Emperor’s New Cloths.
Part of the 2023 rally’s success has been extreme hedge fund leverage. However, market volatility is also extreme, extremely low – a breeding ground for heavy volatility shock. Think 1998 collapse of Long-Term Capital Management, the 2008 financial crisis, the early 2020 panic deleveraging, the 2021 Archegos collapse, or the 2022 UK gilts rout.
I don’t know when this market will finally roll over, no one does. In fact, it might continue melting up to new Highs in the Nasdaq and S&P 500. And last time there was a liquidity shock (the March US banking insolvency episode), the money-printer was quickly put into action to bail out the “evil-doers” and cushion the market – so I wouldn’t assume that a crash of phenomenal proportions and speed has to manifest.
But at some point, something’s gotta give. Enough cracks have formed in the world of AI to show that it is not, at least not yet, what all the tech oracles and doomsayers have foretold in the last year. We might not face an immediate crash, but I believe the signs indicate that a sobering reality is soon to set in for those still pushing the AI cocktail despite the ice cubes melting – that it’s not so cool after all, or quite yet, to justify the overweight position in a handful of US mega-cap tech companies that everybody and their grandma have assumed.
