by The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion. Judging by euphoric gambler–oops I mean “investor”–sentiment and measures of volatility, risk of a market drop has been near-zero for the past 18 months. But risk was never actually low, it was only hidden. When it emerges, it’s a surprise only to those who mistakenly thought risk had vanished. As Benoit Mandelbrot explained in his bookThe (Mis)behavior of Markets, crashes are an intrinsic feature of systems like stock markets. These risks are not generated by specific human actions or sentiment but by the system itself. Just as humans make subconscious decisions and then conjure up
Topics:
Charles Hugh Smith considers the following as important: 5) Global Macro, 5.) Charles Hugh Smith, Featured, newsletter
This could be interesting, too:
Nachrichten Ticker - www.finanzen.ch writes Krypto-Ausblick 2025: Stehen Bitcoin, Ethereum & Co. vor einem Boom oder Einbruch?
Connor O'Keeffe writes The Establishment’s “Principles” Are Fake
Per Bylund writes Bitcoiners’ Guide to Austrian Economics
Ron Paul writes What Are We Doing in Syria?
The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion.
Judging by euphoric gambler–oops I mean “investor”–sentiment and measures of volatility, risk of a market drop has been near-zero for the past 18 months. But risk was never actually low, it was only hidden. When it emerges, it’s a surprise only to those who mistakenly thought risk had vanished.
As Benoit Mandelbrot explained in his bookThe (Mis)behavior of Markets, crashes are an intrinsic feature of systems like stock markets. These risks are not generated by specific human actions or sentiment but by the system itself.
Just as humans make subconscious decisions and then conjure up quasi-rational justifications for their choice after the fact, market participants always conjure up some event or decision as the cause of the crash. Favorites include central bank policy error, black swan events (“bolts from the blue”), earnings surprises, technical levels were breached, and so on.
Mandelbrot’s insights reveal why markets crash without any policy error or other fabricated- after-the-fact justification: as those who witnessed the collapse of Japan’s massive credit-asset bubble in 1989-1990 observed, markets just stopped going up and started falling.
Risk is a reflection of many dynamics, but the key dynamic few participants seem to understand is the inherent instability of complex systems: surface tranquility is not an accurate reflection of the actual state of stability or risk, no mater how long the period of tranquility stretches.
The human mind rebels at the dominance of quasi-random crashes, as our hubris and need to be in charge generates an illusion of control: rather than accept that markets can crash more or less “out of the blue” without any black swan or other trigger, we place our faith–yes, faith–in central bank policies, readings of sentiment, technical indicators and the like.
This illusion of control blindsides us to the reality that no policy tweak can stave off the quasi-random meteor strikes that are intrinsic features of complex systems. Wallowing in our hubris-soaked illusion of control, we believe that if there were no pilicy errors or black swans, markets could move smoothly higher forever. That is a fundamental misunderstanding of the systemic foundations of markets.
The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion. Financial oblivion awaits those ensnared in the quasi-religious faith of Federal Reserve power and other hubris-soaked illusions of control.
You Might Also Like
The Market Crash Nobody Thinks Is Possible Is Coming
2021-10-01
The banquet of consequences is being served, and risk-off crashes are, like revenge, best served cold. The ideal setup for a crash is a consensus that a crash is impossible–in other words, just like the present: sure, there are carefully measured murmurings about a “correction” but nobody with anything to lose in the way of public credibility is calling for an honest-to-goodness crash, a real crash, not a wimpy, limp-wristed dip that will immediately be bought.
The U.S. Economy In a Nutshell: When Critical Parts Are On “Indefinite Back Order,” the Machine Grinds to a Halt
2021-09-15
A great many essential components in America are on ‘indefinite back order’, including the lifestyle of endless globally sourced goodies at low, low prices. Setting aside the "transitory inflation" parlor game for a moment, let’s look at what happens when critical parts are unavailable for whatever reason, for example, they’re on back order or indefinite back order, i.e. the supplier has no visibility on when the parts will be available.
The Upside of a Stock Market Crash
2021-08-24
A drought-stricken forest choked with dry brush and deadfall is an apt analogy. While a stock market crash that stairsteps lower for months or years is generally about as welcome as a trip to the guillotine in Revolutionary France, there is some major upside to a crash.
Seven Things Nobody Talks About that Will Eventually Matter–A Lot
2021-06-14
Perhaps it shouldn’t surprise us that everything that will eventually matter is ignored until it does matter–but by then it’s too late. Here’s a short list to start the discussion: 1. The Federal Reserve has transformed the American populace into a nation of dismayingly over-confident gamblers.
FOMO Is Loco
2021-05-26
We can also posit a general rule that those who inherit wealth and succumb to FOMO are eventually less wealthy while those who are wealthy and take a pass on FOMO / hoarding at the top of the manic frenzy increase their wealth.
Sickcare is the Knife in the Heart of Employment–and the Economy
2021-05-18
We need to change the incentives of the
entire system, not just healthcare, but if we don’t start with healthcare, that financial
cancer will drag us into national insolvency all by itself.
American Healthcare is a growth industry in the same way cancer is a growth industry:
both keep growing until they kill the host, which in the case of healthcare is the U.S. economy.
While a great many individuals in the system care about improving the health of their patients,
the healthcare system itself only cares about one thing: maximizing profits by any means
available, including sending many patients to an early grave via medications which corporations
declared "safe" and rigged the political-regulatory-research systems to comply.
I call this maximizing profits by any means available
If You Don’t See Any Risk, Ask Who Will “Buy the Dip” in a Freefall?
2021-04-20
Nobody thinks a euphoric rally could ever go bidless, but as Greenspan belatedly admitted, liquidity is not guaranteed. The current market melt-up is taken as nearly risk-free because the Fed has our back, i.e. the Federal Reserve will intervene long before any market decline does any damage.
The “Helicopter Parent” Fed and the Fatal Crash of Risk
2021-04-14
All the risks generated by gambling with trillions of borrowed and leveraged dollars didn’t actually vanish; they were transferred by the Fed to the entire system. The Federal Reserve is the nation’s Helicopter Parent, saving everyone from the
consequences of their actions.
Tags: Featured,newsletter