Blog: An El Nino level regime change for the markets?

In the Market Climatology section of the Hypertext Book, I use the El Nino Southern Oscillator (ENSO) as an example of a climate level regime change.  It appears that ENSO is undergoing such a regime change, from La Nina, which just ended, to El Nino, which will probably start in the Fall or Winter.  The world should be prepared for the accompanying regime change in weather conditions.  Since I use ENSO to explain market regimes in Fractal Market Cycles and Regimes, I thought it might be a good time to review the current market state as well.

In Cycles vs. Regimes I distinguished between short-term cycles and long-term regimes.  The regimes determine the characteristics of the cycle.  I mentioned that the market cycle (4-6 years) operates within longer term regimes tied to inflation levels (10-20 years) and financial instability (8-20 years).  The latter related to the Financial Instability Hypothesis (FIH) of Hyman Minsky.  When financial instability risk is high, it means that there is an excessive amount of leverage in the economy and the markets.  This leverage amplifies downturns so that any shock will be taken very badly, giving mean to the term “fragile.”  Without this leverage markets are more resilient. A shock may make it bounce around, the way a pendulum does if you bump the table, but it eventually returns to its original state.