Excerpt from his conclusions (with my emphasis):
“The bottom line here is the same as it was a few months ago: namely, that there are always and only two ways in which credit cycles are brought to a close with or without stirring the ghost of Minsky. The first is the traditional one of rising inflation, which triggers an increase in the price of money, which at some stage exposes over-leverage and balance sheet stress and sets in motion an economic cycle of income and spending restraint. The second is an endogenous decline in asset prices (house prices, credit instruments, other financial assets), with a milder increase in official interest rates in the background, which triggers more dramatic financial instability as leverage and liquidity are pared back and credit supply is interrupted…..An inflation-induced and sharper tightening of monetary policies is still a risk, but it isn’t the most likely outcome in the view of UBS economists…..But even without higher US short rates, the leverage cycle is turning, and with it we should expect to see default rates rise, and not only in US sub-prime housing. Financial markets might well be obliged to re-assess US economic and housing market prospects again later this year (to the downside)…… Either way, the subsequent implications for the credit cycle will be unequivocally negative and, probably exacerbated by large leveraged investment positions, the use of untested derivative and other hedging instruments, and the opaque nature of key products in the market place……The main message, though, remains one of ‘buyer and lender beware’. Credit cycles usually turn slowly, but their capacity to intensify once they do turn is legendary.”
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