THE GREAT SNAKE OF RISK

Via Jesse

Here is a link to a paper from Artemis Capital titled Volatility and the Alchemy of Risk. It does a decent job of describing the setup for a hyper-correction that may occur based on the systematic mispricing of risk and market manipulation by the Banks, both global and central.  In other words, the third collapse of a major financial asset bubble since the repeal of Glass-Steagall in 1999.

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At some point in this correction I expect the Bankers to try and stop it, and restore confidence, in the manner of what was done in 1929.  They will have more time and ways to do this than in 1987, if they wish to avail themselves of it.  Circuit breakers, cooling off periods and all that.  Still, fortunes may be lost, and made.

That no one can see it coming is utter rubbish, although the timing is problematic.   But as Walter Bagehot once famously observed, ‘Life is a school of probabilities.’

Or in other words, as Dirty Harry phrased it, “you’ve gotta ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?”    Since we have established the principles of too big to fail (or jail) and government bailouts, they may indeed be feeling rather lucky, playing heads I win and tails you lose with other people’s money. And that is the moral hazard of the system as it feeds the snakes of Wall Street today.