0% interest rates combined with Bernankenstein's "savings glut" (aka. money borrowed from factory slaves) means that money has never been cheaper and more at risk than it is now. This so-called "Financial Repression" has forced investors to put more and more money at risk to chase ever-decreasing returns. The end game is 3% bond yields on Spanish debt now almost equal to the "risk free rate" aka. Treasury yield.
RISK IS BINARY: DUMBFUCK IDEAS THAT SEEM TO GO ON "FOREVER", END SUDDENLY
In a world where volatility has been artificially suppressed, risk becomes binary - Capital that is ultra-cheap one day, will be unobtainable the next. In the context of asset levitation strategies that require ongoing flows of capital to maintain the illusion of solvency, that could be a problem...
Wall Street: History's Largest Call Option
Add all of the above context to Wall Street's overriding incentive to put as much OPM (Other People's Money) as possible at risk in order to maximize their one year (or less ) returns. Essentially, all of the strategies emanating from these greed-driven alchemists are call options, heads they payoff big, tails the fund manager walks away from the smoking crater.
In the short-term, the interests of big money managers and their investors are aligned i.e. maximize ROI. However, in the long-term, investors generally want not just return on investment, they want return of investment. Alas, as we saw in both Y2K and 2008, Wall Street provided good ROI, but failed to deliver return of investment, and in the end just walked away from the smoking crater.
The Age of Hazardous Immorality
Until this inherent incentive mismatch is resolved, no one has any reason to expect any other outcome except what we have already seen several times in the past decade. More importantly, the types of massively leveraged strategies that were invented in 2007 none of which have been curtailed, have only been repeated and amplified in this current cycle. By definition, the moral hazard resulting from a total lack of accountability encourages even greater risk taking with each iteration.
Why Only One Top Banker Went to Jail For the Financial Crisis (April 30th, 2014)
I skimmed the article, it consists of a long litany of lame excuses. The real reason no one went to jail is because we live in a massively corrupt society in which "white collar" crime is given a free ride by the criminal justice system. Now, if a black kid steals a candy bar, that's a whole different story.
Massive Capital Inflows + HFT Levitation = Artificially Suppressed Volatility
Why Only One Top Banker Went to Jail For the Financial Crisis (April 30th, 2014)
I skimmed the article, it consists of a long litany of lame excuses. The real reason no one went to jail is because we live in a massively corrupt society in which "white collar" crime is given a free ride by the criminal justice system. Now, if a black kid steals a candy bar, that's a whole different story.
Massive Capital Inflows + HFT Levitation = Artificially Suppressed Volatility
We see this asinine risk taking playing out on a daily basis, as artificially suppressed market volatility feeds back into the options market. As it was in 2007/2008, options were priced the cheapest at the top right before the collapse and were the most expensive at the bottom in 2009 right before the rally. This is exactly the opposite of what the "Efficient Market Hypothesis" would expect. This condition can only occur if there is massive amounts of capital being deployed to essentially sell insurance against collapse even as the risk of collapse occurs with every passing day.
MORAL HAZARD IN ONE PICTURE (aka. Insane complacency, as imputed from VIX)
The Inefficient Market Hypothesis (aka. Everything I learned in University Finance was bullshit)
S&P with Options VIX (Implied Volatility Index) aka. Fear Gauge
The VIX is the hedger's implicit cost of capital. When it's low, hedging is very cheap. When it spikes, hedging becomes totally prohibitive. As we see, it tends to operate on a somewhat binary basis which makes hedging after-the-fact what's known as impossible. The overriding incentive in a low volatility market is not to hedge. However, in the absence of hedging, a spike in the VIX will necessitate selling as the only means to protect capital.
Mis-Pricing of Capital and Binary Re-Pricing Visualized:
MORAL HAZARD IN ONE PICTURE (aka. Insane complacency, as imputed from VIX)
The Inefficient Market Hypothesis (aka. Everything I learned in University Finance was bullshit)
S&P with Options VIX (Implied Volatility Index) aka. Fear Gauge
The VIX is the hedger's implicit cost of capital. When it's low, hedging is very cheap. When it spikes, hedging becomes totally prohibitive. As we see, it tends to operate on a somewhat binary basis which makes hedging after-the-fact what's known as impossible. The overriding incentive in a low volatility market is not to hedge. However, in the absence of hedging, a spike in the VIX will necessitate selling as the only means to protect capital.
Mis-Pricing of Capital and Binary Re-Pricing Visualized:
There is no Fed "Put": 2008 Proved that...
The myth of the Fed "Put" (option) (aka. floor under the market) is a Wall Street fantasy. As we saw in 2008, there was no absolute floor under the market. Granted for those with a short-term time horizon it makes "rational sense" to be on the sell-side of these expiring insurance contracts, after all, the inbound flow of massive amounts of capital, where every dip gets bought, artificially suppresses volatility and thereby turns hedges into performance-dragging lottery tickets. On the other hand, selling fire insurance for cents on the dollar in the middle of fire season inevitably turns out to be a bad idea. As we've learned over and over again, risk grows as markets move higher.
Wall Street's short-term bonus incentive, combined with artificially suppressed volatility and moral hazard from bailouts, means there is no incentive to manage (now binary) risk
Due to these misaligned incentives and lessons that should have been learned already, unprecedented amounts of capital are now at risk for de minimis return. It's the end result of moral hazard i.e. billionaires and RomneyBots who are ALL IN on the globalized ponzi scheme thinking that the schmucks at large will always be there to bail them out.
Anyone who takes the blood money in this cycle is going to pay ten-fold.
NO BAILOUTS. NO WALL STREET. NO PROBLEM.
Anyone who takes the blood money in this cycle is going to pay ten-fold.
NO BAILOUTS. NO WALL STREET. NO PROBLEM.
