-- Published: Friday, 21 February 2020 | Print[1] | Disqus[2]
Richard (Rick) Mills, Ahead of the herd
Minsky Moment refers to the idea that periods of bullish speculation will eventually lead to a crisis, wherein a sudden decline in optimism causes a spectacular market crash.
Named after economist Hyman Minsky, the theory centers around the inherent instability of stock markets, especially bull markets such as the current one that has been in place for over a decade.
As Investopedia defines it[3], A Minsky Moment crisis follows a prolonged period of bullish speculation, which is also associated with high amounts of debt taken on by both retail and institutional investors.
The Levy Economics Institute of Bard College describes his seminal theory as follows:
Minsky held that, over a prolonged period of prosperity, investors take on more and more risk, until lending exceeds what borrowers can pay off from their incoming revenues. When overindebted investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash an event that has come to be known as a Minsky moment.
There are five stages in Minskys model of the credit cycle:
- Displacement investors get excited
- Boom - bullish speculation, the mania
- Euphoria extended credit to evermore dubious buyers
- Profit taking insider/ trader aka smart money cashes out
- Bust/ Panic
Two examples of Minsky Moments are the Asian Debt Crisis of 1997, blamed on speculators who put so much pressure on dollar-pegged Asian currencies that they eventually collapsed; and the 2008 financial crisis, which started with...