Blog: Markets are Fragile, again – Credit and Debt Ceiling risks mount up
When markets are Fragile and leverage is high, a downside shock can cause calls for collateral as asset values decline leading to more selling. Minsky Moment risks are rising.
Here we go again.
On March 2, 2023 I posted that the Market Uncertainty State Indicator (MUSI) had passed from a Fragile state to a Turbulent one as financial leverage had become less of a risk. That was good for stocks. While both states have high volatility, fragile markets have higher downside risks than turbulent markets where the risk of downside losses is offset by the possibility of upside gains. The reason for this is the level of leverage in the economy. When markets are Fragile, a shock to the downside can cause calls for collateral as asset values decline. This results in further selling, increasing a downward spiral. On March 2 it appeared that the economy had grown enough so that leverage was no longer the threat it had been. Unfortunately, leverage has now caught up with the economy. In addition, the risk of a “Minsky Moment” has also increased as the Financial Instability Regime Indicator (FIRI) moves back to Excessive Leverage.