{"id":21967,"date":"2016-10-08T16:40:58","date_gmt":"2016-10-08T21:40:58","guid":{"rendered":"http:\/\/olduvai.ca\/?p=21967"},"modified":"2016-10-08T16:40:58","modified_gmt":"2016-10-08T21:40:58","slug":"sorry-central-banks-risk-and-volatility-cannot-be-extinguished","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=21967","title":{"rendered":"Sorry, Central Banks: Risk and Volatility Cannot be Extinguished"},"content":{"rendered":"

Sorry, Central Banks: Risk and Volatility Cannot be Extinguished<\/a><\/h3>\n
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Central bank market intervention doesn’t extinguish risk–it simply transfers it to the system itself.<\/i><\/div>\n
The unspoken claim of central bank policy is that risk can be extinguished by intervention\/manipulation:<\/b>\u00a0once\u00a0the Fed has your back<\/i>, i.e. is supporting the market, risk disappears, and the easy profits flow to those who\u00a0buy the dips<\/i>\u00a0with supreme confidence in the Fed’s ability to magically turn risk-assets into risk-free assets.<\/div>\n
Unfortunately for the credulous investors who believe this,\u00a0risk cannot be extinguished<\/i><\/b>, it can only be transferred to others or to the system itself.<\/i><\/div>\n
This confidence in central banks raises a pernicious systemic risk: assuming the “100-year flood” can’t happen every 6 years or so.<\/b>\u00a0I have from time to time highly recommended\u00a0The Misbehavior of Markets<\/a>. The author, fractal pioneer Benoit Mandelbrot, explains in simple mathematical ways how\u00a0Modern Portfolio Theory,<\/i>\u00a0i.e. the management of risk, is based on a faulty conception of risk and statistical chance.<\/div>\n
In a nutshell:\u00a0while modern portfolio management is statistically based\u00a0<\/b>(all those “standard deviations” you always see referenced in quantitative analyses), the markets behave fractally. Fractals are known as the geometry of chaos, for they describe how seemingly stable systems can quickly, and unpredictably, degrade into chaos.<\/div>\n
But as Mandelbrot explains, “100-year floods” actually occur with startling regularity in all markets.<\/b>\u00a0Put another way: you cannot disappear all risk with fancy statistical models and credit default swaps, etc., that offload the risk onto others, i.e. counterparties.<\/div>\n
In other words, all you’re really doing is\u00a0masking the risk–you’re not eliminating it.<\/b>\u00a0And in hiding the real risk, you are lulling the market participants into a pernicious choice architecture in which their willingness to take riskier and riskier actions is rewarded and encouraged, while caution is punished.<\/div>\n
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…click on the above link to read the rest of the article…<\/p>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Sorry, Central Banks: Risk and Volatility Cannot be Extinguished Central bank market intervention doesn’t extinguish risk–it simply transfers it to the system itself. The unspoken claim of central bank policy is that risk can be extinguished by intervention\/manipulation:\u00a0once\u00a0the Fed has your back, i.e. is supporting the market, risk disappears, and the easy profits flow to […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[124,4075,127,14447,3728,4924,690,2773],"class_list":["post-21967","post","type-post","status-publish","format-standard","hentry","category-economics","tag-central-banks","tag-chaos","tag-charles-hugh-smith","tag-mandelbrot","tag-market-intervention","tag-oftwominds","tag-risk","tag-volatility"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/21967","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=21967"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/21967\/revisions"}],"predecessor-version":[{"id":21968,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/21967\/revisions\/21968"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=21967"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=21967"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=21967"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}