Minsky’s Four Conditions for a Bubble: Do They Resonate Today?

During their recent episode, Taylor, Carlisle, and Dan Rasmussen discussed Minsky’s Four Conditions for a Bubble: Do They Resonate Today?. Here’s an excerpt from the episode:

Jake: And speaking of bubbles, we’ll wrap up this segment here with a mental model I read about recently, which fits in with a lot of what we were talking about. This is Hyman Minsky’s four necessary conditions for a bubble. I don’t know if you guys have seen this before, but I just recently happened to stumble across it. Tell me if you see any of these four hallmarks in today’s activities around the world.

So, number one. Technological and financial displacement or paradigm shifts which can capture the collective imaginations and drive narratives. Number two, loosening credit as a raw fuel for the system. Number three, amnesia. Each generation has to learn their own lessons the hard way. It’s different this time, is the common mantra. And number four, abandonment of time-honored valuation principles, shifting from profit to revenue to clicks to eyeballs or whatever.

There’s always new math that’s required to see the future. If you don’t get it, then the world has passed you by, you’re a luddite and you’re a bozo who’s stuck in the past. So, those are anything feel like rhymes with those four today that you see in the world?

Tobias: We’ve had the paradigm shift.

Jake: It’s already shifted.

Tobias: Paradigm shifts happen. AI– [crosstalk]

Dan: Listening to all-time low credit spreads.

Tobias: Yeah. The credit spread is credit versus the higher-

Dan: Treasurys.

Tobias: -levered loans versus treasuries?

Dan: Yeah. I like to look at the high yield spreads. High yield relative to treasury restoration matched, which is– There’s actually been research showing the longer spreads stay abnormally low, the greater the risk of a financial crisis, which is basically proving Minsky’s second point.

Jake: Well, stability creates instability,-

Tobias: Instability. Yeah.

Jake: -which is the other big finding that he had.

Tobias: Which makes perfect sense. If you feel like you can borrow without risk to buy assets, of course, you’re going to do that until– [crosstalk]

Dan: Right. And if those assets don’t show any risk or volatility, why you can lever up to buy them?

Tobias: In some sense, that’s what MicroStrategy has been doing with selling debt to buy bitcoin. Bitcoin goes up, lets you borrow more. I don’t see any four in that thesis, whatsoever, that should just keep on working forever.

Jake: Yes.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts