Stability breeds instability – this was economist Hyman Minsky’s lasting contribution to the craft. The Minsky Moment , popularized during the 07-09 US housing crisis, basically suggests breeding animal spirits too long creates systemic problems. Essentially, the ongoing rises in asset prices creates the sense of a new paradigm, that the elevated activity was safe, and home prices couldn’t fall.. that didn’t end well.
And, as Mohamed El-Erian writes for Bloomberg, excessive stability breeds instability down the road.
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The smoother the road, the faster people are likely to drive. The faster they drive, the more excited they are about getting to their destination in good, if not record time; but, also, the greater the risk of an accident that could also harm other drivers, including those driving slower and more carefully.
That is an appropriate analogy for the way unusually low financial volatility influences positioning, asset allocation and market prospects. And it holds for both traders and investors.
This post was published at Zero Hedge on May 15, 2017.
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