Corporate Credit:  Doubtful That It’s Different This Time

Life mimics nature — it is cyclical. The amplitudes and lengths of the cycles vary, but human behavior remains resolutely cyclical, despite the evident errors that past cycles produced. One might think that people would modify their behavior enough to avoid past mistakes, but it is apparently built into human nature to repeat them. The particulars are never the same, but the underlying patterns are the same.

So it is in financial markets. Credit extension practices are remarkably cyclical, despite the experience of prior cycles that should discourage errors. There is even a hint of this in the word itself. Credit is derived from the Latin word credere. It has multiple translations, but they include believe, trust, and imagine. The power of belief in the financial markets is enormous, and produces both undervaluation at times and, at others, excessive valuations.