Monday, June 1, 2015

The Siren Song of Self-Implosion: We're All Being Monetized Now.

No one has intelligent solutions to asinine problems
First, I'll begin slightly off-topic with a recent epiphany - four billion human beings have zero internet access, so everyone reading this blog is relatively "wealthy" whether they realize it or not. Sadly, the people who would most benefit from the anti-Globalization theme of this blog, have no access to it. Granted, in today's bastardized terms, wealth has been conflated with whomever owes the most money and has the biggest McMansion. The Age of Ponzi wealth.

Central Banks have kindly decided that everyone should be wiped out this time 
Back to the key point: What I mean by this is that the ROI from owning (near) "cash" (aka. money markets, t-bills etc. is essentially inflation-adjusted negative). In Europe they now have negative interest rates for anyone wanting to keep their assets liquid. For anyone near retirement, it's the kiss of death, they "have to" take risk, or never retire. It's a Faustian bargain. Traditional pension funds (defined benefit) that pay out at a predetermined rate, are either future state insolvent or forced to take on a level of historic risk far beyond their ability to recover from. Taking it a step further, in the financial markets, the most lucrative choice for the past three years has been to let it ride. The more risk embraced, the greater the returns. On the hedging side, the ROI from managing risk, has been deeply negative, causing thousands of hedge funds to fail since 2007. 

Black Swan versus Black-Scholes (B.S.)
We already know how this will all end: Extremely abruptly.
Harvard-risk will ultimately combine with extreme greed to end this shit show post haste. The exact mechanism will be via the Nobel Prize winning Black-Scholes option pricing model, which is the biggest piece of self-imploding bullshit in financial history, without any comparison. It gives Wall Street plausible deniability to onboard risk at a catastrophic rate. And we've been there, done that in 2008 - but didn't learn a fucking thing. The model's inherent asinine assumption is that current prices of options impute future volatility. Yes, you read that right: markets (aka. people) can now predict the future. Except when they can't, such as right before Lehman. CONSISTENTLY, volatility is mispriced before major events, and MISPRICED after major events (see below for two recent examples such as 2010 Flash Crash and 2011 debt downgrade). Diametrically mispriced. The model isn't just slightly fucked up, it actually serves to amplify risk.

The Monetization of Fear
Worse yet, Skynet is a force multiplier for this catastrophic clusterfuck because HFT volatility compression algorithms feed-back through the B.S. model which uses historical volatility to (under) price future risk. Yes, the model actually uses the past to predict the fucking future. So anyone hedging against real risk is being systematically monetized by algorithms that are artificially driving asset volatility to zero. 

Like now.

The wall of "What, Me Worry?"
Look Ma, No hedging
Index Put/Call Ratio:

The only choice: Be a fool now, or a bankrupt fool later.