Please do not forget Heyman Minsky.

For the past few days, I’ve been directing your attention to various frameworks to better understand recent market volatility. No one goes on TV and declares that “This is an unpredictable random walk! “So what you get is a lot of short-lived, cognitively biased rationalizations that a) aren’t particularly insightful and 2) don’t help you invest.

The most helpful information I can share with you: Well, that’s not what I expect from the markets (“they fluctuate”).It’s also useless to speculate on how fast and how long the Fed will raise rates to stop inflation (which is at best just a Partially driven Fed’s QE and ZIRP policies).

I think it’s more useful to remind you misbehaving We tend to be in turmoil in the market and cliche You want to avoid. It also helps to understand more valuable research (academic or otherwise) that helps provide context and insight. Just because a job was done decades ago doesn’t mean it’s no longer valid.

This brings me to Minsky: His theory is that economic stability—expansion, increased cash flow, widely available credit, rising asset prices, or what we think is a more general economic boom—leads to excesses. Sometimes leverage is too high or credit is too easy or interest rates are too low; it can also manifest in a persistent bull market, excessive capital flows or a speculative frenzy (or some combination of all of the above).

This is the core idea for which Minsky is best known: Stability leads to instability; his financial instability hypothesis suggests that booms lead to recessions and bull markets end in crashes.¹ The loop turns over and over again.

Yes, that’s an oversimplification, but it’s worth remembering in times like these. Low volatility (down to 5%) in 2021 has mean-reverted to normal volatility and decline.

I’m not saying this is a bull market or the end of this cycle. It’s not obvious to me (yet).This was evident in 2000, and then again in 2008; it was Not obvious in 2020. So while this may be the beginning of the end, it feels more like “Seventh inning stretch“More important than anything else.

Minsky died on October 24, 1996, at the age of 77. He didn’t live long enough to see exactly how much the market recognized his work: the stability of the 1990s that led to the dot-com bust or the rise of the 2000s to the Great Financial Crisis. I suspect the instability in 2022 will be followed by the stability in 2021, and he will appreciate it.

source:
Finance and Stability: The Limits of Capitalism
Minsky, Heyman, p.
Working Paper, No. 93, Levy Institute for Economic Research (1993)
https://www.econstor.eu/bitstream/10419/186778/1/wp093.pdf

Before:
Market Rorschach Test (January 25, 2022)

Inflation and the Elephant (January 19, 2022)

Structural or temporary? (November 23, 2021)

The end of the secular bull market?not so fast (April 3, 2020)

Bull Markets and Beating Markets

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1. I am equally fascinated by parallel ideas in theoretical physics: Nothingness is inherently unstable. Thus, the creation of the Big Bang and the entire universe was caused by billions of years of stable nothingness causing the universe to spit out its own existence.