Waiting For The Trump Minsky Moment

Everything Trump is doing right now violates Economics 101. It's only a matter of time before Trump finally learns economics, the hard way.

No sooner had I posted on the resumption of Trade War 2.0 than Trump changed his mind and punted European tariffs out another 45 days to July 9th. Clearly, he discovered the calendar in the meantime. Be that as it may, his impulsive Twitter escalation definitively revealed that the trade war is NOT over and therefore investors have at most six weeks to prepare for another onslaught of tariffs. But in the meantime, he could change his mind any time and slam Japan and Korea or another major trading partner next. Which means that higher prices are coming to a store near you by mid-summer.

Trump's "big, beautiful" deficit bill passed the House last week, but it now faces significant pushback in the Senate. In order to fund the bill, Trump is planning to throw 8 million poor people off of Medicaid. In other words the tax cut for the wealthy will be funded by tariffs on the working class and also by stripping them of their healthcare coverage. In order to make corruption great again. It's a risky political gambit, as even Steve Bannon admits that many MAGA supporters will lose their healthcare.

However, from a markets standpoint the way forward is equally dicey for this massive deficit increasing bill. What Trump is attempting is to run a highly stimulative fiscal deficit at the end of the business cycle. This violates every tenet of macroeconomics 101, which apparently Trump never learned about in school: According to macroeconomic axiom, at the beginning of the cycle both fiscal and monetary policy should be stimulative. But at the end of the cycle, with inflation expectations at cycle high, both fiscal and monetary stimulus should be contractionary. Otherwise the fiscal stimulus will drive higher interest rates and trigger the Minsky Moment as follows:

Minsky Financial Instability Hypothesis:

"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."

Given the compounding price effects of tariffs AND a stimulative tax cut, it's only a matter of time until we get a CPI reading that explodes this Ponzi market.

From a bond market perspective, yields can only back up so far before they trigger the Minsky Moment. Where exactly that breaking point is of course is a matter of debate, however one could argue that there is substantially more downside in yields than upside.

This chart shows the 30 year mortgage has been ~7% for a similar period of time as it was in 2007 when the housing market collapsed. In the lower pane we see that REITs rolled over a long time ago.

From a stock market perspective, all we are seeing these days is serial short covering, Retail investors have bought into this beautiful delusion with both hands, but institutions have been net sellers in 2025. I would remind every bullish pundit that this is what happens at every market top: Institutions become bearish while retail investors become bullish.

But, but, but...what if the dollar explodes and Treasuries go bidless? Then the Fed will be forced to Japanify the Treasury market. I will consider it a once in a lifetime opportunity to front-run the Fed.

In summary, this is the end of the super cycle. Trump doesn't know it. Congress doesn't know it. The Fed doesn't know it.

Yet.

Which means they will all learn Macroeconomics 101 at the same time.