Will an Asymmetric War Trigger a Minsky Moment?

Hyman Minsky was a respected 20th-century economist best known for his theory regarding unstable markets. His hypothesis was that long periods of stability or growth led to similar periods of instability. The longer markets remain stable, the greater the impact will be when instability occurs.

But why does stability breed instability? The simple answer is that during good times, lenders and borrowers gradually take on more risk. What starts as prudent borrowing shifts to speculative borrowing and eventually to what Minsky called “Ponzi finance”, where borrowers can’t cover interest or principal and depend entirely on rising asset prices to stay afloat. When confidence finally cracks, the whole structure unwinds at once. That violent unwind is the Minsky Moment.

The timing of this transition is nowhere near as predictable as the chart below suggests. But the Minsky Moment occurs as the transition from stability to instability takes hold.

Still, it can be difficult to pinpoint the exact time of, or event that causes, a Minsky Moment. After all, which is the snowflake that finally triggers the avalanche, or the drop of rain that starts the mudslide? Physically, it may be possible to find that elusive snowflake, but the real danger is always the pressure building up in a stable environment that moves it to that ultimate period of instability.

A Familiar Example: The Global Financial Crisis

The question is, what are the triggers that lead to these Minsky Moments? The slow build-up of the housing bubble in the U.S. was a major factor behind the Global Financial Crisis (2007–2009). It created a credit bubble that collapsed on itself and had consequences for the credit, equity, and housing markets. These “can’t miss” bundles of NINJA debt (No Income, No Job, and No Assets) were supposed to be secure and unlikely to default. After all, the housing market at the time never dropped. Conveniently, people had forgotten about the impact on housing caused by 22% mortgage rates experienced in 1982.

I would argue that the instability had started to occur in 2007, well before the sale of Bear Stearns to JP Morgan in the spring of 2008 and the failure of Lehman Brothers in the fall of that same year. NINJA debt gets my vote as the trigger for that particular Minsky Moment.

Sometimes Minsky Moments are triggered by what economists call endogenous events. These are internal problems that one should be able to at least see if there is sufficient objectivity and analysis. Investors such as John Paulson, Michael Burry (made famous by the movie The Big Short), and even Warren Buffett were well placed to look at the danger signals and respond.

Then there are events that are triggered by external or exogenous shocks, such as COVID-19. In both cases, equity markets tumbled, a severe recession followed, and ultimately a recovery out of the chaos caused by two very different Minsky Moments.

The Pressure Building Before the War

Which brings us to our main theme today. Equity markets were at almost record-high valuations at the end of last year, with the S&P 500 reaching just over 7,000 in late January. Corporate debt had been piling up, private credit markets had ballooned since 2020, and consumers were already stretched by rising costs. Meanwhile, the current U.S. administration’s tariff program (the largest U.S. tax increase as a percent of GDP since 1993) was already feeding inflation before a single bomb fell on Iran. Businesses that had been absorbing tariff costs had little room left to also absorb higher energy prices.

In other words, the kindling was already piled high. All that was needed was a match.

The War in Iran: Asymmetry of a Different Kind

Is the war in Iran (occurring as this is being written) going to prove to be that match? Is it the event that triggers a Minsky Moment in both credit and equity markets?

The war has been described as asymmetric by many observers because the devastating firepower that the U.S. and Israel can bring to bear cannot be matched by Iran. In theory, this war is completely one-sided, and Iran has no chance.

However, that is what most experts said about Gandhi’s resistance to the British Empire to make India an independent country in 1947. Vietnam comes to mind from the 1950s to the 1970s, as do Iraq and Afghanistan, more than once. Of course, we are all familiar with how one-sided the Ukraine war is, as it enters its fifth year, with more than 1.2 million Russian soldiers estimated dead or wounded according to CSIS and UK Ministry of Defence assessments.

This is asymmetry of another kind. It is more than simple guerrilla tactics and can be devastating to the stronger opponent if the weaker one is willing to endure pain and take as long as required to prevail.

After three weeks of war, Iran has:

• Closed the Strait of Hormuz except to Iranian tankers (primarily bound for China), now paradoxically exempt from U.S. sanctions if they agree to sell oil in yuan rather than U.S. dollars
• Destroyed approximately 17% of Qatar’s LNG export capacity at the world’s largest LNG plant, Ras Laffan. QatarEnergy estimates repairs could take up to five years
• Attempted to mine significant parts of the Strait of Hormuz to keep it closed for weeks or months
• Used low-cost drones to attack sites across the Gulf, including oil and gas facilities and, arguably more critically, desalination plants in the region

Regime change now seems to be off the table for Israel and the U.S. How, then, do they “win” this war without boots on the ground?

Most of Iran’s ballistic missiles and much of its infrastructure have been destroyed. Its nuclear facilities were significantly degraded by strikes last summer, yet Iran still holds 440.9 kg of uranium enriched to 60% — enough, by IAEA parameters, to produce material for approximately nine nuclear weapons if further enriched to weapons-grade.

One other casualty of the war is fertilizer, with nearly one-third of globally traded fertilizer passing through the Strait of Hormuz and planting season in the Northern Hemisphere already underway.

Iran does not need a large navy, F-35s, or sophisticated missile systems to inflict ongoing damage on the region, especially economically.

While the U.S. and Israel can continue near-unlimited air strikes against Iran given their control of the skies, there are few examples in history of air superiority alone winning wars. It did not succeed in WWII with the carpet bombing of cities such as Dresden and Tokyo. In the first case, it took the ground advances of Patton’s and Zhukov’s armies to bring the war to a close; in the second, two nuclear bombs.

The Aftermath (So Far)

• As of March 23, 2026, Brent crude oil was trading at approximately $110 per barrel, or about 75% more than in February. Saudi officials have cautioned it could reach $180 per barrel if the infrastructure war persists beyond April.
• LNG shipments have been dramatically impacted, with spot prices in Asia more than doubling, along with the longer-term supply outlook from the Gulf.
• Fertilizer prices have risen approximately 50%.
• Equity markets have not entered bear territory, but the S&P 500 is down roughly 5% year-to-date, [TB1] giving back all of its early 2026 gains. The Nasdaq is approaching correction territory, down nearly 9% from its highs. The 10-year U.S. Treasury yield has climbed toward 4.42% as inflation concerns, driven by rising energy and fertilizer prices, ripple through the economy.
• Oil and gas infrastructure under attack by Iran could take months or years to repair and replace.
• The war is opposed by a majority of Americans, as well as most U.S. allies.

Europe: The Other Shoe

One consequence that has received less attention is how exposed Europe is. European gas storage levels entered 2026 at just 46 billion cubic metres, compared to 60 bcm in 2025 and 77 bcm in 2024, following a harsh winter. Dutch TTF gas benchmark prices have nearly doubled to over €60 per megawatt-hour since the war began. Under EU regulations, storage must reach 90% capacity by December, meaning Europe needs to inject roughly 60 billion cubic metres during the refill season, a tall order given current supply constraints.

Remember, Europe has only partially recovered from the energy shock of the Russia-Ukraine war. In many ways it is more exposed to this crisis than the United States. The European Central Bank has already postponed planned interest rate cuts as inflation expectations rise. If this conflict drags on through the summer, a European recession becomes a very real possibility, and that would have broader global consequences.

The Compounding Problem: Tariffs Meet War

This energy shock is not happening in isolation. The current U.S. tariff program was already pushing costs higher for businesses and consumers before the war began. Average U.S. gasoline prices rose 48 cents per gallon in just the first week after strikes on Iran began, layered on top of price increases already driven by tariffs. Many businesses, having already absorbed tariff costs over the past year, have little room left to absorb higher energy and transportation costs without passing them on to consumers.

Consider the combined effect: tariffs push up the price of goods. The war pushes up the price of energy and food. Together they create the conditions for stagflation, rising prices alongside slowing growth, which is precisely the environment most hostile to both bonds and equities.

If this war continues to drive energy and food prices for an extended period, we are very unlikely to see either lower inflation or interest rates.

What This Means for Your Portfolio

Given the damage and pain Iran has already experienced, we do not believe it will capitulate to U.S. demands to reopen the Strait, surrender its enriched uranium, fund reconstruction, and allow oil and gas flows to resume as they were before the war. We also expect Iran to seek some form of leverage over the many U.S. military bases within striking distance.

If events unfold this way, the impacts of the conflict could be prolonged, with higher inflation and interest rates persisting for longer.

While equity markets initially responded positively to Trump’s announcements of negotiations, the Iranian perspective on what talks were, and were not, taking place appears to differ meaningfully.

So, what do we think this means for portfolios?

• We have always emphasized the importance of cash flow within a portfolio. In our view, roughly 50% of long-term returns for most portfolios should come from rents, dividends, or interest. As of now, the dividend yield on the S&P 500 is about 1.25%, while the TSX is less than 2%. On a year-to-date basis, both U.S. and Canadian Dividend Aristocrats indices have outperformed the broader indices by more than 4% in less than three months.
• Fixed income should, in most cases, be shorter duration or structured with variable rates (such as private debt and certain mortgages).
• In our view, hedge strategies in credit can offer higher-yield, lower-volatility alternative to long-only equity exposure.
• We remain strong proponents of income-producing real estate and private equity, where active management has a more meaningful stake in outcomes than is typically the case in public markets.

Conclusion

This newsletter is being written during the fourth week of the war, as efforts continue to reach some form of ceasefire. Both sides remain entrenched and far apart in what constitutes success.

Is the war with Iran a Minsky Moment? It may be too early to say with certainty, but the ingredients are in place: stretched valuations, a compounding tariff and energy-driven inflation shock, fragile European energy supply, and a conflict with no clear path to resolution. History tells us that oil shocks of this magnitude have preceded bear markets in nearly every instance since the 1970s.

The uncomfortable truth about asymmetric wars is that they tend to last longer and cost more than anyone predicts at the outset. Iran does not need to match American and Israeli firepower to inflict serious economic damage; it only needs to keep the Strait of Hormuz closed and the drones flying long enough for the economic consequences to compound. And from a U.S. perspective, one has to wonder what the impact will be on November’s midterms.

The longer this continues, the more likely it is that the snowflake finally triggers the avalanche.