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There Is No Risk Left... Anywhere

Tyler Durden's picture


Many have argued that sovereign CDS markets 'caused' the problems in Europe - as opposed to simply 'signaled' what was in fact being hidden by cash market manipulation. But as the IMF notes in a recent paper, there are times when the CDS market leads the cash bond market and other times when it lags. But as far as looking at risk in Europe and the US, based on a wonderful model that uses Markov-switching to predict what the probability of the world being in a low-risk or high-risk state, we are as 'low risk' as we have been since the crisis began. Each time that level of complacency was reached before, equity markets have rapidly sold off. What is perhaps most notable is the systemic compression of every risk indicator, first VIX (Kevin Henry and the fungible excess reserves of every prime dealer whale), then the liquid SovX index (via Greece CDS auction uncertainty and 'naked' short bans), then the Euro TED Spread (via LTRO), then individual Sovereign CDS (via Draghi's 'promise'). The result, the 'free-market' signal of risk is non-existent.

Look carefully at the Nov 2011 period onwards and the step by step compression of each risk indicator (from high probability of high-risk to low probability) - crushing the free market's signals...


The last three times the 'model' was so complacent about risk, Q3 2008, Q2 2010, and Q2 2012, the S&P 500 rapidly lost around 40%, 17%, and 11% respectively.


Charts: IMF


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Thu, 04/11/2013 - 21:54 | 3439223 vmromk
vmromk's picture

Free markets ?
There will never be "free markets" as long as Bernanke isn't dangling from the hangman's gallows.

Thu, 04/11/2013 - 21:58 | 3439239 Spirit Of Truth
Spirit Of Truth's picture

The calm before the storm?

Thu, 04/11/2013 - 22:26 | 3439321 TheFourthStooge-ing
TheFourthStooge-ing's picture

The kook* pimping his site?


*like at least several thousand other people at any given moment, he just knows that he's the reicarnation of Jesus.

Also,  he's so afraid of the Russians.

Thu, 04/11/2013 - 22:30 | 3439340 The Shootist
The Shootist's picture

Ehh, hate these ppl. Phrophecizing crap.

Thu, 04/11/2013 - 22:08 | 3439276 wee-weed up
wee-weed up's picture

Uncle Benny-Big-Bucks...

what's not to like...  I play his crooked game, and I'll never fail!

Thu, 04/11/2013 - 22:25 | 3439332 TheFourthStooge-ing
TheFourthStooge-ing's picture

Jump in, everyone! The water's fine!

Fri, 04/12/2013 - 01:02 | 3439672 StychoKiller
StychoKiller's picture

Call me crazy, but what's to prevent a country like Slovenia from buying CDS's that payoff if they should default, and then default?

Aren't they in trouble over the fiddlin' small amount of less than 10Billion Euroz?

Thu, 04/11/2013 - 23:17 | 3439440 Groundhog Day
Groundhog Day's picture

the last time this model led to a 40%, 17%, 11% drop, so now it should be around 5%.  Then we are off to the racees to 1700 spx and 16k dow


Fri, 04/12/2013 - 00:19 | 3439591 WTF_247
WTF_247's picture

That is not the plan, stan.

2% drop then its over.  The Fed has mandated that it will step in and aggressively purchase futures contracts on any 2% dip.  You obviously did not get the memo and you likely have messed up your TPS report.

Fri, 04/12/2013 - 03:16 | 3439814 lewy14
lewy14's picture

[innocent girl crying and whimpering...] vol... please vol...

[vlad ben looks up at sky] Vol?.... [shakes head] No vol.

Fri, 04/12/2013 - 03:33 | 3439828 Ghordius
Ghordius's picture

"Many have argued that sovereign CDS markets 'caused' the problems in Europe"

hemm... it's nice to defend CDS as the canary birds in the mine, but the problems in Europe did start with derivatives like CDS, which, paired with debt, were packaged in "risk-free" bundles

defending the mind-spawn of Mistress Blythe Masters? in my eyes, a kind of romantic "free market" view that forgets that investment and casino betting are two different things

face it, lending/borrowing it an act of trust between two parties which need - only if really necessary - an honest intermediator

instead, "ze markets", i.e. unscrupolous intermediators, have more and more exploited new techniques like originating debt, for example by making liar loans and then immediately packaging it in order to sell it to the next, greater fool, who then sliced, diced and packaged it further with derivatives in order to sell it to the next, even greater fool - who does not mind because it's "other people's money" anyway, and his bonus is his only real driver

take Greek debt, as example... who produced most CDSs on them? Greek banks. Who adviced them? The Squid. What was the result?

nope, CDSs and other derivatives have to be forbidden... again. defending them is pure ideology

in fact, keeping the "chain" between creditor and debtor as intact and as short as possible should be anyway a priority

Tyler, this is a pill you haven't swallowed, yet - think about it

Fri, 04/12/2013 - 06:21 | 3439927 malikai
malikai's picture

I'm just gonna ask.

Has there ever been a CDS that paid out?

Fri, 04/12/2013 - 07:37 | 3440009 Ghordius
Ghordius's picture

that's not even relevant, imho - it's the accounting frauds committed with derivatives that matter

Fri, 04/12/2013 - 09:29 | 3440351 jayman21
jayman21's picture

It matters to people who buy CDs.


I know the CDS paid out on some of the MBS deals according to The Big Short.

Fri, 04/12/2013 - 09:42 | 3440419 YHC-FTSE
YHC-FTSE's picture

That's as perfect an answer as it gets to describe the debt chain and the fantasy island counterparty  insurance that accompanies it. 

Fri, 04/12/2013 - 17:18 | 3442805 NaN
NaN's picture

Ghordius makes a good point. CDS without a public exchange and rules to ensure ability to pay is like nuclear power brought to you by penny pinchers with oversight by ostriches. This point cannot be made too often.

I think CDS might work as long as it is treated just like other insurance and is not excepted from gambling rules. The systemic consequential risks must be included based on the weighted rank of the firm to firm linkages. Google search uses page rank every day, but I have yet to hear about the financial system risk being fully modeled. 

In the informative Gary Gorton interview at he makes the point that FDIC was opposed by economists for 77 years before it became reality. So far, having FDIC has proven helpful in providing sufficient dampening at the retail level over the ideologically pure caveat emptor approach.


Fri, 04/12/2013 - 06:10 | 3439917 Go Tribe
Go Tribe's picture

Right. All past charts and models are obsolete. This time IS different and that's why the markets are up. The printing press solves everything if you're in the U.S.

Fri, 04/12/2013 - 06:59 | 3439966 SmallerGovNow2
SmallerGovNow2's picture

printing press solves everything.... until it doesn't....

Fri, 04/12/2013 - 10:13 | 3440570 markettime
markettime's picture

No risk unless you are invested in gold and silver. They are getting smashed this morning! 

Thu, 04/11/2013 - 21:55 | 3439235 fonzannoon
fonzannoon's picture

No Risk baby! We have passed through the event horizon and the other side was investment nirvana!


Actually two out of three of those scenario's keep the S&P above 1,300. Is that so bad?

Thu, 04/11/2013 - 22:00 | 3439251 pods
pods's picture

I hope so fonz, my daughter would love a Unicorn.


Thu, 04/11/2013 - 22:11 | 3439275 fonzannoon
fonzannoon's picture

You remember when the big dumb redheaded guy kept telling Braveheart "It's a trap or ya blind!!" Then he punched Braveheart in the face. Then Braveheart went ahead, got captured and got torn apart by the horses and his balls were ripped off?

Braveheart should have listened to his big dumb redheaded friend.

Thu, 04/11/2013 - 22:16 | 3439306 1C3-N1N3
1C3-N1N3's picture

Lol, Fonz. You've been bringing it. If you're ever in the southern IL/southern IN area, I'll treat you to all the 9% pale ale you can stomach.

Thu, 04/11/2013 - 22:27 | 3439338 fonzannoon
fonzannoon's picture

thanks man. I can stomach 2. I am probably heading to a Cubs/bears game in Sept. if anyone is around there I would be happy to grab a brew with them.

Thu, 04/11/2013 - 22:47 | 3439377 1C3-N1N3
1C3-N1N3's picture

Right on. I'm a Pittsburgh fan, did a nickel in RBS's risk department (lol) there -- but my old man is a lifelong Cubbies fan. He still takes a strike in beer league softball because of Glenn Beckert (coincidentally a Pgh'er, as well as Ron Paul).

I think more than a few ZHers (who don't currently do so) could engage in a camaraderie night.

Fri, 04/12/2013 - 00:02 | 3439557 Leto II
Leto II's picture

ZeroCon 2013?

Fri, 04/12/2013 - 01:53 | 3439751 resurger
resurger's picture

I wont be shocked to see S&P 2,000 by year end.

Thu, 04/11/2013 - 21:56 | 3439238 Next to Arch Stanton
Next to Arch Stanton's picture

Every morning I wake up wondering if today's the day....will markets overwhelm stupidity?


It's getting tiring taking an ass-pounding on gold stocks lately.  I still like the look of stacks though.

Thu, 04/11/2013 - 22:10 | 3439291 cherry picker
cherry picker's picture

It seems the world media insofar as the financial sector is concerned is bi-polar or as they used to call it manic depressive.

One day everything is looking good, the next it seems we are facing Armageddon.

It has been like this for years and it may take years for it to change one way or the other.

Maybe the sheeple are smarter than we.  At least they are enjoying tuning out of this stuff that we have no control of anyway.


Fri, 04/12/2013 - 06:55 | 3439961 SmallerGovNow2
SmallerGovNow2's picture

"Maybe the sheeple are smarter than we."

Uuummmm.... No....

Thu, 04/11/2013 - 22:04 | 3439266 NoWayJose
NoWayJose's picture

One place where there is risk is a possible silver shortage.  Comex physical vaults are being emptied, at the same time the US Mint is backlogged in their production.  Makes you wonder where the US Mint is getting their silver to meet the demand for ASE's.  There can't be too many silver miners willing to hand over $27 silver.  Interesting note on the Comex supplies is that the only vault NOT being emptied is JP Morgan, who has such a big short silver position that they likely don't want to let any get out the door.  I wonder how much longer until the US Mint starts secretly tossing Canadian rounds into the furnace...

Thu, 04/11/2013 - 22:18 | 3439312 Stanley Lord
Stanley Lord's picture

Comex is empty now. The entire commodity complex backed by warehouse receipts has been a scam for years. After Katrina the NYBOT coffee warehouses were flooded, stocks wiped out- no problem, keep trading.

Fri, 04/12/2013 - 01:14 | 3439694 Lore
Lore's picture

I heard that too: the pantry is bare. It's a mystery how shipments keep getting filled fairly quickly.  Sooner or later, with orders continuing at the present rate, a whistleblower will surface with one hell of a scandal.

Fri, 04/12/2013 - 06:28 | 3439934 Bicycle Repairman
Bicycle Repairman's picture

"a whistleblower will surface with one hell of a scandal."

The truth doesn't matter.  Everyone knows it.  The FED is handing out free money and either you grab some or die.

Thu, 04/11/2013 - 23:30 | 3439462 otto skorzeny
otto skorzeny's picture

TexPrecMetals is out of silver eagles- even monster boxes.

Thu, 04/11/2013 - 22:06 | 3439271 Kirk2NCC1701
Kirk2NCC1701's picture

If it's too good to be true... [fill in]

Thu, 04/11/2013 - 22:13 | 3439299 chubbyjjfong
chubbyjjfong's picture

...wear a condom.

Thu, 04/11/2013 - 22:07 | 3439273 EmmittFitzhume
EmmittFitzhume's picture you're telling me NOW is the time to short the market????

Thu, 04/11/2013 - 22:09 | 3439284 q99x2
q99x2's picture

I found some risk: Bitcoin Last price:$78.05000

The race to the bottom has begun.

Spectators take your seats.

Fri, 04/12/2013 - 00:01 | 3439552 Kirk2NCC1701
Kirk2NCC1701's picture


Thu, 04/11/2013 - 22:08 | 3439285 HD
HD's picture

Stop giving me hope Tyler.


Thu, 04/11/2013 - 22:08 | 3439287 sumo
sumo's picture

The Manufacture of Consent has evolved.

Manufacture of Consensus has taken over Finance. Walter Lippman would come in his pants with approval:


Thu, 04/11/2013 - 22:13 | 3439297 butchee
butchee's picture

And yet everything is risk.....go figure.

Thu, 04/11/2013 - 22:19 | 3439310 eddiebe
eddiebe's picture

I guess it's all in how we look at it. Personally I feel like there is risk everywhere.

Thu, 04/11/2013 - 22:32 | 3439344 The Shootist
The Shootist's picture

That's why there's Allstate and mandatory insurance.

Thu, 04/11/2013 - 22:41 | 3439369 chump666
chump666's picture

Risk free markets!!! hahahahaha

C'mon Nemesis time to chop some f*cking arrogant heads off

Thu, 04/11/2013 - 22:57 | 3439404 Ms. Erable
Ms. Erable's picture

Risk is for muppets.

Thu, 04/11/2013 - 23:00 | 3439407 yogibear
yogibear's picture

Every day you wake up you can expect another 50 to 100 pts on the DOW. Now that's truely amazing!

You have Bernanke, the fed and media all boasting about it as well.

Thu, 04/11/2013 - 23:18 | 3439443 thismarketisrigged
thismarketisrigged's picture

tomorrow should be another fascinating market day.


futures currently are slightly red, but i fully expect green across the board tomorrow when jpm and wfc manipulate there earnings tomm so the market moves higher.


there is always something in the market each day that makes you shake your head.

Fri, 04/12/2013 - 00:05 | 3439564 bnbdnb
bnbdnb's picture

They should report negative earnings. Let them drop 10% for better long positioning!

Fri, 04/12/2013 - 00:25 | 3439598 WTF_247
WTF_247's picture

Neg earnings is actually more positive than anything.  The market reacts more violently up to neg than anything else.  Its the new normal.

This is the first cycle I have ever witnessed that all neg news at all time highs keeps pushing it more.  Usually its after a correction or recession that you get that kind of sentiment shift.  They do not even sell for a few days then recover and keep going.  The dip part never really materializes.

Thu, 04/11/2013 - 23:41 | 3439497 bnbdnb
bnbdnb's picture

But it is different this time. Now the 1% own in excess of 90% of all things paper. It used to only be 80%.

Fri, 04/12/2013 - 00:33 | 3439610 djrichard
djrichard's picture

As an engineer, I remember creating state machines from Markov chains.  So what this article is telling me is that we have a fairly simple state machine for the market.   Have to laugh; such state machines work perfectly until some unanticipated event comes along. 

In the mean time (while we're waiting for that unanticipated event), do we need anything more exotic then the simple state machine from this article?  I think not.  Some of the players in that space might want to watch out.

Fri, 04/12/2013 - 04:31 | 3439867 Lady Heather...UNCLE
Lady Heather...UNCLE's picture

Risk is assymmetric. For the insiders, there is none, for the rest of us, it is very large. Benny will advise the morgue and the squid of an impending comment to clean out new entrants to the buy/no risk game. Their capital is wiped out immediately and then...wash, rinse, repeat.

Fri, 04/12/2013 - 04:59 | 3439882 falak pema
falak pema's picture

Now you're getting it, the current frigid and schizophrenic market is the logical conclusion to the neo liberal meme of invisible hand of the market; as invisible as QE-infinity.

What Reaganonmics has sowed we now reap and it ain't "invisible hand"; far from it.

Its very heavy handed to save their OWN necks.

Capitalist Caesar has crossed the Rubicon. He is now out in the open, his pretence to defend Senate precisely that : pure pretence; like capitalism and free market meme. 

And don't say that THIS is not capitalism; no more true than saying the catholic church was not christianity nor Imperial Rome wasn't Caesar's child. It takes paroxystic social upheaval to set that sort of wrong right. 

It's now written in the blood of innocents and that is indelible in the eyes of history as its a runaway train wreck heading to its own impending doom.

Not saying that capitalism will die but it will not survive as current Pax Americana's version. Paradigm change coming bigtime.

The moving finger writes; and, having writ, moves on...nor all thy piety nor wit...

Fri, 04/12/2013 - 06:22 | 3439926 Disenchanted
Disenchanted's picture

blue skies (1927)

smiling at me

nothin but blue skies

from now on...

Fri, 04/12/2013 - 06:32 | 3439935 Clowns on Acid
Clowns on Acid's picture

The VIX has only another 11 pts to ZERO ! Just like in the old USSR  ! can't wait for the bread lines.


Fri, 04/12/2013 - 06:48 | 3439953 SmallerGovNow2
SmallerGovNow2's picture

IMF paper?  And we started giving a shit about anything IMF since when?

Fri, 04/12/2013 - 17:32 | 3443000 NaN
NaN's picture

Researchers at IMF have access to plenty of data and are allowed the academic freedom to write papers with views that do not reflect the official position of the IMF. That freedom does not extend to airing dirty laundry or bringing into question the purpose of the IMF, of course, so reading between the lines is needed at times.


Fri, 04/12/2013 - 07:32 | 3440003 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

It feels so good to be saved !

Blink blink.


Fri, 04/12/2013 - 09:20 | 3440323 RiverRoad
RiverRoad's picture

And that's why Jamie is RICHER than we are!!  Dance, Jamie, dance....

Fri, 04/12/2013 - 10:24 | 3440632 kiwione
kiwione's picture

That's from an IMF paper, but ultimately from this researcher, it seems :

Do NOT follow this link or you will be banned from the site!