The "Minsky moment" is back.
Six years ago, the theories of economist Hyman Minsky were used to make sense of the collapse in housing prices, and its attendant effects on the economy. Today, Marc Chandler says the energy sector has just suffered its own Minsky moment. And while he doesn't expect it to take down the stock market, the slide in oil could have a serious impact on the high-yield bond market.
Minsky moment is a term coined by Pimco economist Paul McCulley in 1998, and it refers to a point when a period of rapid growth and risk-taking leads to a sudden turn lower and a crisis. Chandler, global head of markets strategy at Brown Brothers Harriman, says that is precisely what is happening in crude oil.
"Many people a couple years ago, a year ago, were saying that oil prices could only go up—'we're in peak oil'—meaning that we're running out of the stuff. So a lot of things were leveraged based on oil prices that can only go up. Sort of like house prices—'they can only go up.' So what happened is, because people held this as a deep conviction, they leveraged up," Chandler said Thursday on CNBC's "Futures Now."
In fact, the energy sector has borrowed $90 billion in the high-yield market since 2008, Chandler said, making energy producers "a large component of the high-yield market itself."
The problem is that "a lot of the loans, like loans on houses, were made not so much on a person's ability to repay the loan as on the value of the house. Similarly, the banks and investors bought high-yield bonds or leveraged loans on the energy sector not on the basis of their ability to repay it, but on the value of the oil in the ground."
And so what happens now that crude oil has fallen nearly 40 percent from its June highs?
"The big risk now to our shale is not going to be that the price of oil drops so far that it's not going to be profitable," he said. "The weakness, the Achilles' heel, is that they don't get the cheap funding anymore."
Or, to use a more modern metaphor: "This is sort of when Wile E. Coyote runs off the cliff."