Newsletter: Murphy's Law Meets Hyman Minsky
As Gilda Radner said, "It's always something."
In light of recent bank failures, this month's topic is Financial Instability. First, the current state of the financial system and then a more in depth discussion of the Financial Instability Regime Indicator (FIRI) and it’s interaction with Market Uncertainty.
Financial Instability Risk and Murphy’s Law
My philosophy is a Murphy’s Law approach to risk indicators. High risk in one dimension does not mean something bad will happen to the overall market or economy. For instance, if Business Conditions are bad, that might cause a slow-down in manufacturing which could lead to the underperformance of related stock market sectors. But the overall market and economy won’t suffer. But if multiple risks are high, then the market is vulnerable to a shock. Why? Market risks build on one another. If they’re all high one risk going off will tip over the other risks causing a risk cascade. That’s why it’s important to look at multiple dimensions. As I state in the hypertext book and associated papers, the Market State Uncertainty Indicator (MUSI) has 5 dimensions. Each factor signals high or low risk: