A Minsky moment resembles a snake attack: a sudden and violent destructive move, much like a stock market crash. It originates in a slow psychological process according to economist Hyman Minsky, namely a gradual weakening of the financial system through mounting debts in periods of irrational euphoria.
Can we verify this hypothesis? And is the Minsky moment actually unpredictable?
Ahhh, the simple scientific world of René Descartes! Single cause, single effect. In the economic world however, this unfortunately is not the case. One cause can even bring about two opposite effects.
A devaluation, for example, usually produces a deterioration in the external accounts first and then an improvement second. Economists call this phenomenon the “J-curve.”
However for more than 20 years, the financial policies of developed economies have turned the page upside down. The “J” has become an “η.” Immediate relief and pain for tomorrow.
The tapering in view of the US Federal Reserve now raises the question: Would “tomorrow” be the end of the summer?
Are there laws in economics as well as in physics? We say yes, absolutely. Just like gravitation, classical mechanics, thermodynamics, and even quantum mechanics.
To understand this phenomenon requires a bit of imagination. In particular, a new status of law, which does not find its foundation in an external Platonic world but rather the self-organization of individuals. Here, we state a new scientific law governing a living society: rats in a cage, or «The Law of Diving Rats.”
This example introduces Econophysics.
Our previous publication, The Mason’s Strategy, underlined the longstanding and intriguing forecasting power of behavioral finance. Today, our masons go back to the university to study macroeconomic sciences and specifically where stock markets go. This time, they want to know in a purely objective manner.
Will they succeed?
Notre dernière publication, La Stratégie du Maçon, dévoilait la surprenante puissance prédictive de la finance comportementale. Aujourd’hui, nos maçons retournent sur les bancs universitaires pour étudier les sciences économiques. Ils veulent découvrir, cette fois de manière purement objective, où vont les marchés.
Vont-ils réussir ?
To check the horizontality or verticality of a wall, masons still use an ancestral instrument today known as the “Spirit Level”. Now, let us use this instrument to measure the psychology of the equity markets to warn us when they start to tilt in the wrong direction, at the risk of collapsing the edifice.
Pour vérifier l’horizontalité ou la verticalité d’un mur, les maçons utilisent encore aujourd’hui un instrument ancestral : un Niveau à Eau. Nous allons utiliser cet instrument pour mesurer la psychologie des marchés actions et pour nous avertir quand ils commencent à pencher du mauvais côté, au risque d’écrouler