Sometimes you have to love the naivety of the markets. At this week’s Communist Party Congress meeting in Beijing, the governor of the PBoC (People’s Bank of China) said the following;
“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”
Yet instead of focusing on this dire warning, markets are busy trying to discount the chance of a Powell Fed or a Republican tax cut. Although both of these developments would be important, China is the tail that wags the dog. Full stop. Figure out China, and all the other financial market forecasts become that much easier.
Aren’t Central Bank warnings cheap?
Some might argue this “Minsky moment” warning is nothing more than a Central Bank whistling in the wind. Didn’t Greenspan caution about a similar concern with his “irrational exuberance” speech? And didn’t that end up being a complete non-event?
Yet I would argue that China is not the same as other countries. Although there are market elements to their economy, to a large degree, China is still a command economy. If Chinese leadership wants a particular outcome, they can just demand it, and it will happen.
So when the head of the PBoC warns about a “Minsky moment”, it’s probably not a good idea to load up on financial assets. For the longest time, China exported goods and imported developed nation debt and other financial assets. They had already started down the road of re-balancing their economy away from this export-driven model, but this recent development confirms that the old playbook should be thrown out the window. The global financial system is changing, and China is leading the way. Their moves will reverberate for years in the future. The Chinese authorities have just put up the warning flag, and you would be foolish to not believe it.
