We no longer have business cycles; we have credit cycles

 

The story about sandpiles and the financial system may be the most popular letter I’ve written in the last 25 years. 

It is one we should all re-read every few years to remind us how change happens slowly, then suddenly. 

A very important book by Mark Buchanan called Ubiquity, Why Catastrophes Happen. 

I HIGHLY recommend it if you, like me, are trying to understand the complexity of the markets. 

The book is about chaos theory, complexity theory, and critical states. It’s written so anyone can understand—no equations, just easy-to-grasp, well-written stories and analogies.

Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche.

First, economist Dr. Hyman Minsky showed how stability leads to instability. 

The more comfortable we get with a given condition or trend, the longer it will persist, and then the more dramatic the correction when the trend fails.

Go back to 1997. Thailand began to experience trouble. The debt explosion in Asia began to unravel. 

Russia was defaulting on its bonds.

A diversified pool of debt was suddenly no longer diversified. 

The fingers of instability reached into Long Term Capital Management and nearly brought the financial world to its knees.

We no longer have business cycles; we have credit cycles. 

Central banks and governments, not to mention investment banks and investors, are all using credit in formerly unbelievable ways, and I am here to shout that the world is becoming one massive finger of instability.

John Mauldin 20 September 2024

https://www.mauldineconomics.com/frontlinethoughts/late-summer-sandpile

The Fed Is Flying Blind. Investors Don’t Seem to Care

James Mackintosh Wall Street Journal 22 September 2024

https://englundmacro.blogspot.com/2024/09/the-fed-is-flying-blind-investors-dont.html

Hyman Minsky

https://englundmacro.blogspot.com/2020/09/markets-are-facing-potential-minsky.html