Hint: Less than nothing
Risk and complacency both grow, until the point of implosion. The more people get conned into the delusion, the more lethal the outcome - i.e. essentially everyone this time. Because Wall Street only generates systemic risk, they don't "get paid" to manage it - "I am taking the blue pills now"...
Financial alchemy doesn't reduce risk, quite the opposite, it merely suppresses short-term volatility, encouraging ever-greater risk.
Noise Versus Signal
Econo-dunces have improperly defined risk as short-term price volatility which is really just noise, not risk at all. Real financial risk is defined as the improper pricing of an asset relative to ever-accumulating leverage and hence likelihood of a "Minsky" liquidation event. This "asset stress" model below improperly uses prices to define risk.
The subprime era was defined as "low stress" which is a wholly misleading definition of risk:
The subprime era was defined as "low stress" which is a wholly misleading definition of risk:
Heads I Win. Tails You Lose
Under the present "system", Wall Street collects the bonus accruing from the ever-greater financial leverage, meanwhile, broader society is then stuck with the accumulation of systemic risk encouraged by the malincentives.
Binary/Instantaneous Repricing of Risk Visualized
Options Implied Volatility versus Stock Market
Prior to Lehman, during the subprime era, risk was mis-priced by the market, albeit far less mis-priced than it is now:
Options Implied Volatility versus Stock Market
Prior to Lehman, during the subprime era, risk was mis-priced by the market, albeit far less mis-priced than it is now:
Today's Mis-pricing of (stock market) risk
Credit Risk Versus the Stock Market
An entire year of divergence
We've never seen this before
"Everyone" thinks that the bubbles can continue indefinitely, which is where I 100% disagree with the consensus. A society that doesn't learn from its past mistakes, takes ever-greater risks, until it gets buried deep.
