Cycles, Bubbles & Crises

Learning objectives

By the end you can:

1. Describe the anatomy of the business cycle (expansion → peak → contraction → trough) and date it the way professionals do (the NBER method: depth, diffusion, and duration across real GDP, income, employment, and industrial production), and explain precisely why the popular "two consecutive quarters of falling GDP" rule is wrong, using 2020 (a two-month recession) and 2022 (two negative GDP quarters and no recession) as the proofs.
2. Classify any indicator as leading, coincident, or lagging, name the key members of each family (yield curve, building permits, new orders, the stock market, credit spreads lead; GDP, employment, industrial production coincide; the unemployment rate, CPI, unit labour costs lag), and build a coherent cycle read from a mixed panel.
3. Explain how a PMI is constructed (the diffusion-index formula % higher + 0.5 × % same, and the 50 line), compute one from its sub-components, and say why a survey of purchasing managers leads the hard data.
4. State Minsky's Financial Instability Hypothesis ("stability is destabilizing"), define hedge, speculative, and Ponzi finance precisely from the cash-flow-coverage test, classify a real lending situation, and explain what the Minsky moment is and what triggers it.
5. Apply the Kindleberger/Minsky bubble anatomy (displacement → boom/credit expansion → euphoria → distress/profit-taking → revulsion/panic) as a template to any mania, and identify which stage a described episode is in.
6. Run each of seven great cycles and crises through the anatomy (1929, 1970s stagflation and the Volcker cure, Japan's 1990s bubble and balance-sheet recession, the dot-com bust, the 2008 GFC, the 2020 COVID shock, and the Asian crisis of 1997–98), naming the specific mechanism and the durable lesson of each.
7. Use the growth/inflation 2×2 to name the four regimes and the asset classes that win and lose in each; explain sector rotation across the cycle; and explain the All-Weather insight that **assets are priced off surprises relative to expectations, not levels** — so a rate hike can rally bonds.
8. Characterize India's cycle: historically less endogenous-credit-driven than the US, with its own specific vulnerabilities (oil and the current account, FPI flows, the 2018 IL&FS/NBFC episode as India's clearest Minsky moment). And articulate honestly why recognizing regime and excess beats trying to call the turn.

Prerequisites & connections

Builds on. M7.01 is the spine: the short- and long-term debt cycles are the cycles anatomized here, and "spending = money + credit" is why a credit contraction is a recession; Minsky is the microfoundation of Dalio's debt cycle. From M7.02, the central bank's lender-of-last-resort role (Bagehot) is the crisis function every case study turns on, and "read the surprise, not the print" is the seed of the surprise-vs-level idea in §4.8; the policy response is often the difference between a crash and a depression. From M7.03, the yield-curve inversion is the marquee leading indicator (§4.3), and the "rates are the gravity of valuation" idea explains why bubbles inflate when rates are low; inflation types (cost-push vs demand-pull) are the whole story of the 1970s. From M7.04, fiscal policy is the other half of the 2008/2020 response, debt-deflation and r vs g connect to the crash mechanism, and the anatomy of sovereign crises directly sets up the Asian '97 case. From M3.05, reverse DCF ("what is priced in?") and duration are exactly the tools for judging a bubble's valuation excess (dot-com) and for understanding why long-duration assets lead the cycle. From M2.02/M2.07, leverage, coverage ratios, and the credit lens are the raw material for classifying hedge/speculative/Ponzi. From M6.04, Marks's pendulum of sentiment and the behavioral biases (herding, recency, narrative) are the psychology inside the euphoria stage.

Feeds forward. M7.06 takes up FX, capital flows, and the impossible trinity: the Asian '97 case here is the bridge, deliberately left at the water's edge of "currency and maturity mismatch" so M7.06 can formalize the sudden-stop mechanism, the eurodollar plumbing, and the global financial cycle. M7.07 is the dashboard capstone, and it inherits the indicator taxonomy (leading/coincident/lagging), the PMI, the credit-cycle stage, and the regime 2×2 that the dashboard is built to read; the "regime memo" you write there is the cycle read made permanent. M9 (portfolio, risk, and process): "where are we in the cycle" sets the exposure dial, "is there excess" sets the risk budget, and Marks's "you can't predict, you can prepare" is the temperament installed here, which means reducing risk when the margin of safety has vanished, without pretending to know the day. M8 (the rapid-analysis system): every teardown from here on carries a one-line macro overlay, the cycle stage and regime the business is operating in.