I wonder if it’s time to dust off the Minsky model to explain which stage the global financial markets find themselves in. You will recall that the model is named after the American economist Hyman Minsky, after whom the term “Minsky Moment” which involves the precipitous collapse of asset prices such as we saw in 1929 or 2007 is also named. 

This model begins with a major piece of economic disruption, for example a war or the introduction of a radical industrial innovation, takes us through the process of organic investing with cash, moves on to euphoric investing based on leverage amid an atmosphere of widespread mania, peaks as industry insiders sell and ends with a crash where the thought of investing induces widespread revulsion and nausea.

I reckon we are in the euphoria stage, at least as price action on the Dow Jones index is concerned; we have seen the index surge from 18,000 on the day of Donald Trump’s victory in the November to an all-time high just north of 22,000 earlier this month.

Although if there’s an atmosphere of mania it’s one based on a dance of death along the “Ring a Ring a Roses” variety where more than one of the dancers expects to fall down, perhaps terminally.

Some of the US indicators can hardly be described as euphoric; the Nasdaq is near historic lows on a relative valuation basis, while the Russell 2000 last week erased its 2017 gains and broke its 200 day moving average to the downside, even though it subsequently bounced off it.

For those who recall the choreography of the Global Financial Crisis (GFC), the recent share price collapse of British “doorstep lender” Provident Financial summons up eerie echoes of the failure of Northern Rock, another British bank which suffered a run in 2007 on the back of a liquidity crisis and had to be nationalized soon after, as the GFC was getting into its full lethal swing.

Provident Financial blamed faulty software for a sharp decline in its loan collections, which precipitated a 66% drop in its stock price last Monday, the biggest one-day drop in British blue-chip stock trading history. That might be an answer of sorts, but it would be in keeping with the surge of “sub-prime” leverage which is infecting the UK economy.

This leverage might not immediately fall into the euphoria silo either, given that it is in many cases based on households facing declining income as a result of the collapsing pound importing inflation into Britain and, as a result, desperately needing to plug the liquidity gap.

Interestingly, Mr Minsky was a vocal opponent of the 1980s banking deregulation in the US, for reasons which are unsurprising given the model he propounded. If the GIF was the result of this deregulation, then his position was justified.

Now that we have Goldman Sachs running the US economy, in the form of President Trump’s top advisors, the mood is right back to 80s deregulation. That’s why banking stocks have done so well since the Trump victory and also explains the surge in big US company share prices.

The recent divergence of some US indices from the euphoria of the Dow might suggest that the cracks are already beginning to appear. But if this is a risk-on environment based on the promise of deregulation and fiscal easing, it probably has more legs, particularly given the parsimonious yields on offer in the fixed income universe.

And as the Federal Reserve governorship comes up for renewal in February, the prospect of Gary Cohn – former president of Goldman Sachs and Trump’s chief economic advisor in his role as director of the National Economic Council – grabbing the Fed chair can only summon the prospect of more legs for the “deregulation rally.” If that happens, the Minsky moment won’t be too far behind.