A common theme among many of our insights is the reality that lurks behind the proposed perception of many of our economic, financial, and political leaders projections. From Spain not needing a bailout to Juncker's lies, from Bernanke's transitory inflation to Dimon's not needing TARP, the list is endless. Artemis Capital, whose insights we have discussed here and here, use the metaphor of the impossible object (e.g. Penrose Triangle or Necker's Cube) to explore the role of perception in modern markets, monetary policy, and risk while making note of the paradoxes in volatility and asset-pricing that should not exist.
Via Artemis Capital:
The paper uses the metaphor of the impossible object (Penrose Triangle, Necker’s Cube, and the art of MC Escher) to explore the role of perception in modern markets, monetary policy, and risk while making note of paradoxes in volatility and asset pricing that should not exist according to classic theory. Our cover illustration pays homage to M.C. Escher’s 1961 masterpiece Waterfall and is intended to be an artistic abstraction of the self-reflexive mechanics of modern monetary theory.
The fundamental characteristic of the impossible object is uncertainty of perception. Is it feasible for a real waterfall to flow into itself; or for a triangle to complete itself in both directions? The figures are subject to multiple forms of interpretation challenging whether our naïve perception is relevant to understanding the truth. The impossible object is of vast importance to mathematics, art, philosophy and as I will argue... modern pricing of risk.
Modern financial markets are a game of impossible objects. In a world where global central banks manipulate the cost of risk the mechanics of price discovery have disengaged from reality resulting in paradoxical expressions of value that should not exist according to efficient market theory. Fear and safety are now interchangeable in a speculative and high stakes game of perception. The efficient frontier is now contorted to such a degree that traditional empirical views are no longer relevant. The volatility of an impossible object is your own changing perception.
The modern investor must hold several contradictory ideas in his or her head at the same time and none of them really make any sense according to business school case studies.
Welcome to the impossible market.
- The market is no longer an expression of the economy… it is the economy
- Why volatility is cheap and expensive at the same time
- Why fear is a better reason to buy than fundamentals
- Risk-Free asset are Risky ----- how UST bonds have a risk-to-reward profile very similar to a collateralized OTM put option
- Known Unknowns / Unknown Unknowns
- Common sense says do not trust your common sense
Full paper below: