{"id":59665,"date":"2021-10-04T16:14:47","date_gmt":"2021-10-04T21:14:47","guid":{"rendered":"https:\/\/olduvai.ca\/?p=59665"},"modified":"2021-10-04T16:14:47","modified_gmt":"2021-10-04T21:14:47","slug":"risk-was-never-low-it-was-only-hidden","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=59665","title":{"rendered":"Risk Was Never Low, It Was Only Hidden"},"content":{"rendered":"

Risk Was Never Low, It Was Only Hidden<\/a><\/h3>\n
\n

The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion.<\/i><\/p>\n

Judging by euphoric gambler–oops I mean “investor”–sentiment and measures of volatility, risk of a market drop has been near-zero for the past 18 months.<\/b>\u00a0But risk was never actually low, it was only hidden. When it emerges, it’s a surprise only to those who mistakenly thought risk had vanished.<\/p>\n

As Benoit Mandelbrot explained in his book\u00a0The (Mis)behavior of Markets<\/a>,\u00a0crashes are an intrinsic feature of systems like stock markets.<\/b>\u00a0These risks are not generated by specific human actions or sentiment but\u00a0by the system itself<\/i>.<\/p>\n

Just as humans make subconscious decisions and then conjure up quasi-rational justifications for their choice after the fact, market participants always conjure up some event or decision as the cause of the crash.<\/b>\u00a0Favorites include central bank policy error,\u00a0black swan<\/i>\u00a0events (“bolts from the blue”), earnings surprises, technical levels were breached, and so on.<\/p>\n

Mandelbrot’s insights reveal why markets crash without any policy error or other fabricated- after-the-fact justification:<\/b>\u00a0as those who witnessed the collapse of Japan’s massive credit-asset bubble in 1989-1990 observed,\u00a0markets just stopped going up and started falling<\/i>.<\/p>\n

Risk is a reflection of many dynamics, but the key dynamic few participants seem to understand is the\u00a0inherent instability of complex systems<\/i>:<\/b> surface tranquility is not an accurate reflection of the actual state of stability or risk, no mater how long the period of tranquility stretches.<\/p>\n

The human mind rebels at the dominance of quasi-random crashes, as our hubris and need to be in charge generates an\u00a0illusion of control<\/i>:…<\/b><\/p>\n

\u2026click on the above link to read the rest of the article\u2026<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Risk Was Never Low, It Was Only Hidden The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion. Judging by euphoric gambler–oops I mean “investor”–sentiment and measures of volatility, risk of a market drop has been near-zero […]<\/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":[24078,2299,8766,587,690],"class_list":["post-59665","post","type-post","status-publish","format-standard","hentry","category-economics","tag-charles-hugh-smith-2","tag-control","tag-illusion-of-control","tag-of-two-minds","tag-risk"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/59665","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=59665"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/59665\/revisions"}],"predecessor-version":[{"id":59666,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/59665\/revisions\/59666"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=59665"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=59665"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=59665"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}