Looking at the Minsky moment...
Looking at the Minsky moment... golero/gettyimages.com

Bloomberg reports that a major financial analyst, Harry Markopolos, accused General Electric, a blue-chip, of hiding it troubles (huge debts and losses) in its books. This is called accounting fraud. The company is hiding a $9 billion loss, and will soon need $18 billion in cash and $10 billion in debt to remain solvent. “These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants,” reported Markopolos on August 15, 2018. "GE’s cash situation is far worse than disclosed in their 2018 annual report to regulators." And so we have a blue-chip company, a US corporate icon, that is on the brink of a catastrophe. Why does this matter? Speculators (what I call investors) will start wondering what other blue-chip companies are hiding deep losses and huge debts.

The thinking among business reporters and economists who consider history as an important source of information have predicted that the next crash will be caused, not by the housing or the tech sectors, but in the blue-chip section of the business sector. I named Boeing as the company that would unravel that market as its 737 Max woes increased and its books became burdened by falling sales, rising debt, and a buyback bonanza that evaporated its cash reserves. But it was the mainstream business reporter and former "international merchant banker," Martin Hutchinson, who included General Electric as one of the blue-chips that could belly-up in the near future. He blamed two things for this situation: stock buybacks (a form of market manipulation—more on that in a moment), and "overpriced acquisitions." All of this leads one to conclude that we are now very much in the moment that precedes a crash, Minsky's Ponzi stage.

Hyman Minsky, a 20th century economist who was ignored until the crash of 2008 (its last stages are now called a Minsky moment), proposed in a 1992 paper, the "Financial Instability Hypothesis" (PDF), that finance moves through three distinct stages. I will call them: the stage of confidence, the stage of exuberance, and the stage of recklessness. Minsky labeled them "as hedge, speculative, and Ponzi finance."


Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.

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The fact that Markopolos—the analyst who alarmed the market about Bernie Madoff in the '00s (Madoff managed a $50 billion ponzi scheme in the years leading up to the crash of 2008)—is now, a little over a decade later, alarming the market about fraud in a blue-chip corporation, means he should be taken seriously. General Electric's present financial position has Ponzi stage written all over it.

GE CEO Larry Culp stated that Markopolos's accusations, which sank its stock by 11 percent (it's now at a puny $8 a share), are “market manipulation — pure and simple.” This is rich. To begin with, why don't we consider buybacks as stock manipulation? When a company buys back its stock, it effectively fabricates a demand for its shares. How is this not corrupting the noble laws of supply and demand? It's like Apple buying a whole lot of its phones so that their scarcity increases the cost of the phones. This is market manipulation, pure and simple. Please recall that in recent years, GE—which is now in deep trouble—bought back an astonishing $85 billion of its own stock. Yes. $85 billion. And all of this money went to top management and shareholders. This practice, which has become common, inflated the value of the stock market as a whole. We do not know how much the stock market is actually worth. We only know how much it is overvalued.

And now for a moment in the past with Ebenezer Mudede, my father, who, in 1980s, was an economist for the Zimbabwe government. One evening, he told me, as we sat in his bar, which was in the part of the house that faced the veranda, that a Zimbabwean company listed on the stock market would have a price bounce the following day. He knew this would happen because the company had won a significant contract from the government and the announcement of the deal would be made the next day. "You could make money if you bought the stock," I said, as I read the financial section of the paper, laid out on the bar. He looked at me as if I were mad. Why would he do that? If he bought the shares, he would be manipulating the market. That's wrong. The value of a stock should reflect, as closely as possible, the true value of the company. If he and other people bought stock because they had insider information, it would dishonest the price. That is wrong, he said. A stock market is supposed to reward good business practices and punish bad ones. This was pure and simple to him.