Over the weekend, DB’s credit strategist Aleksandar Kocic discussed what Minsky Dynamics for the “New Normal” look like based on a matrix that charted the various progressions of Leverage vs Volatility, with four possible end states. However, since that graphic explanation proved too problematic for some, another Deutsche macro analyst, Alan Ruskin, released a far simpler representation of the current (and historical) Minsky cycle, which compartmentalizes the world’s various assets in their 7 discrete states along the Minsky cycle (as defined in Charles Kindelberger’s ‘Manias, Panics and Crashes – A History of Financial Crises’). These start with the 1) macro shock ‘displacement’, move to 2) ‘healthy expansion’, to 3) ‘leveraged driven gains’, to 4) ‘euphoria’, 5) ‘insider profit-taking’, 6) ‘liquidation and panic’ and onward and downward to 7) ‘revulsion and discredit.’
Where are we now?
Before the answer, first here are some caveats from Ruskin:
Sometimes it is obvious, but deciding which state any asset is in at any point in time is a true art form, and the most important decision from an investment standpoint. While assets often sequence as Minsky suggested, assets can get stuck for prolonged periods, or, some stages are so fleeting they can count as being skipped. In the last Alpha Alert on Minsky cycles back in 2014, it was noted that assets with severe supply constraints (most obviously esoteric assets like Stradivarius violins, but also more relevant assets like Sydney housing) tend to get locked into certain upswings, or simply don’t conform to traditional cycles. But for the vast majority of financial assets, the Minsky framework and the sequencing is useful.
This post was published at Zero Hedge on Oct 30, 2017.
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