MInsky and Kindleberger - Kindred spirits concerning bubbles and credit instability

 

Charles Kindleberger set the tone for any discussion of bubbles in his book, Manias, Panics, and Crashes, through his deep narrative and useful framework which is similar to the pioneering work of Minsky. Normally, these two are separated as different thinker about bubbles, yet there are closer similarities than many may suspect, and many refer to their general explanation of bubbles as the Minksy-Kindleberger model although there is no formal mathematical approach.

This alignment of Minksy and Kindleberger is well described in a new article by Perry Mehrling called, "The Minsky-Kindleberger Connection and the Making of Manias, Panics, and Crashes". These two are kindred spirits and Kindleberger may have been influenced by the early work of Minsky on the instability of credit. He may not have been a believer of Minksy's views on the business cycle, but they are economic brothers with respect to their view that credit can be unstable those create extremes that can generate crashes. The inherent instability of credit requires superior monetary institutions that can control credit and serve as the lender of last resort if there is a crisis after a bubble.

Bubbles are all about credit extremes and Kindleberger used his strong knowledge of economics history and institutions to provide extensive analysis on how panics and bubbles may take root and create the vexing problems that continue into the 21st century.

Both economists come out of a pre-WWII institutionalist background which was forsaken in the post-WWII move to high theory in economics. Institutions matter and the credit frameworks that are created in the modern economy can lead to financial instability that is not directly modeled in most presentations of monetary economics.

The Cantillon Effect - What is driving survey differences?

Why are so many consumers unhappy in the current economic environment? We can think about the Cantillon Effect, names after the 18th century French economist. If there is new money in the system that can create inflation, it may first impact the rich who can increase their wealth. There may not be a general rise in prices as usually taught, albeit all prices may be increasing, but there are relative price changes which will affect different households differently. Because inflation can be localized and can be gradual, different groups will respond and be impacted by a shock to money that can lead to inflation. For example, increases food prices will have less impact on rich households because food is a smaller portion of their consumption basket.

Consumers who do not have wealth or do not have the knowledge or the capability to exploit increases in money may not be able to adjust or adapt to higher inflation pressures created from those who were able to exploit greater money earlier. These poorer households will be more impacted by the increase in goods without the ability to exploit the money increases. 

Hence, there is a distributional effect from inflation that is often not avoided in the inflation discussion. The inflation shock over the last two years has had a disproportional effect on lower income household who are not able to generate a wealth effect or are not able to take advantage of a monetary shock. 

The wealthy are feeling good about the economy. Poorer households who are unable to protect themselves from inflation may have a different view. 

The magnificent seven versus all the rest - what will drive 2024 returns?

 

2023 was all about the "magnificent seven", those highflyer stocks that dominate the SPX index (AAPL, AMZN, GOOG GOOGL, META, MSFT, NVDA, and TSLA). The ratio of the mag 7 to the Pax moved from about 2 at the beginning of the year to a high of 3.5 at the end of November to the current level of 3.37. Can this continue? Increasing valuation will be difficult but we must look at what is happening to the rest of the SPX. The equal-weighted index returned about half the market cap weighted SPX. If we have a market correction, it is not clear that the mag 7 will be the driver or the place to hide. 

The SPX benchmark will be driven by the mag 7, so any view on what will happen to equities should include a specific view on this large cap subindex. 

There is no certainty for 2024

 

“Certainty comes from believing we have learned all there is to know. Confidence comes from the effort to learn all we can."  - Madeline Albright Always good to think about the certainty issue as we make predictions for 2024. We are not good predictors and we do not have certainty. Those that feel they have certainty are foolish. There is still a lot to learn about what may happen in 2024, and we will be surprised perhaps even in January.  We can build our confidence, but research has shown that just because we have more information or facts does not mean that more confidence is warranted. Confidence is not always tied to more knowledge; however, less knowledge is a clear sign that we should be less confident.  So let's start 2024 with healthy skepticism.