Monday, September 12, 2016

Risk Impairity: The Cost of Poverty Capital Is Priceless

Volatility represents the cost of capital. Currently it's free. Next it will be unavailable. The fatal assumption in all of today's leveraged "risk parity" strategies is that they assume that they won't move markets when they unwind, because that will cause a self-fulfilling collapse in asset values as leverage is unwound. In other words they assume zero risk asset correlation, which is unfortunate, since under Globalization, risk is 100% correlated to the downside...

MW: Sept. 12, 2016
Friday's Risk Asset Correlation Was On Par With 2008

0% Central Bank capital incentivized maximum leverage aka. minimum collateral. Meanwhile, that same capital generated the artificially low volatility that makes minimal collateral appear momentarily solvent. These combined effects have engendered extreme complacency and maximum leverage at the apex of maximum price risk. All under the false assumption of "minimal risk", due to low volatility being conflated with low risk. 

Upon unwinding this pyramid of minimally collateralized debts, each price level lower will bring about accelerating insolvency as re-priced asset collateral vanishes into thin air. Meaning that this momentum feedback loop only goes in one direction, while in the other direction, it dissolves.  

All of which is a long way of saying that volatility represents the cost of capital. And it will go from being *free* to being unavailable. Overnight.