What Just Changed?

Authored by Charles Hugh Smith via OfTwoMinds blog,

The illusion that risk can be limited delivered three asset bubbles in less than 20 years.

Has anything actually changed in the past two weeks? The conventional bullish answer is no, nothing's changed; the global economy is growing virtually everywhere, inflation is near-zero, credit is abundant, commodities will remain cheap for the foreseeable future, assets are not in bubbles, and the global financial system is in a state of sustainable wonderfulness.

As for that spot of bother, the recent 10% decline in stocks: ho-hum, nothing to see here, just a typical "healthy correction" in a never-ending bull market, the result of flawed volatility instruments and too many punters picking up dimes in front of the steamroller.

Now that's winding up, we can get back to "creating wealth" by buying assets--$2 million homes in Seattle that were $500,000 homes a few years ago, stocks, bonds, private islands, offshore wealth funds, bat guano, you name it. Just borrow whatever you need to borrow to buy more.

(But don't buy bitcoin. No no no, a thousand times no. It is going to zero, Goldman Sachs guaranteed it.)

Ahem. And then there's reality: something has changed, something important. What changed? The endlessly compelling notion that risk has magically vanished as the result of financial sorcery is now in doubt. If risk hasn't been made to disappear, and even worse, can't be corralled into a shortable instrument like VIX, then--gasp--every asset and instrument might actually be exposed to some risk.

As I've noted many times here, risk cannot be made to disappear; it can only be transferred onto others or off-loaded into the financial system itself. Risk can be cloaked or masked, and indeed, that is the beating heart of financial alchemy: we can eliminate risk by hedging via exotic instruments.

Once risk has been vanquished, then we can safely invest in all sorts of high-yield ventures that were once risky: junk bonds, emerging market debt, private wealth funds and so on.

But if risk cannot be destroyed, then where is it? If we can locate and isolate it, then we can hedge it, right?

But what if risk has been pushed into the vast machinery of the global financial system itself? This was the unwelcome (and as yet unlearned) lesson of the 2007-08 Global Financial Meltdown: risk, we were told, was confined to the subprime mortgage corral, and if you avoided that corral, your exposure to risk was near-zero.

That turned out to be false. The belief that risk exposure is near-zero generates an irresistable desire to load up on high-yield riskier assets because, hey, why not? If risk is near-zero, why leave all that low-hanging fruit on the tree?

This is a self-reinforcing feedback loop: the higher the yields available on risk assets, and the lower the perceived risk exposure, the greater the incentives to move more borrowed money into ever-riskier assets, which then pushes systemic risk ever higher.

The end-game of this self-reinforcing feedback loop is collapse, as risk inevitably emerges where it is least expected. Home mortgages were safe and boring. Well, not quite, after financial alchemy was applied to vanquish risk and thus unleash enormously profitable financialization.

Nobody knows where systemic risk might emerge, or how much risk exposure is lurking in assets. What was once safe is now less certainly safe. So where do you earn those fat returns without risk, the returns the world has come to see as entitlements due capital everywhere, at all times?

The illusion that risk can be limited delivered three asset bubbles in less than 20 years. Each bubble collapse caused more structural damage, and each central bank "save" introduced higher levels of systemic fragility, which is another way of saying systemic risk.

Though no one in the financial sector dares say this in public, the possibility that central banks can no longer sustain the illusion that risk has been vanquished is now front and center. If risk can't be corralled and quantified, then it can't be offset with any degree of confidence. If risk can't be corralled and quantified, it can't be offloaded onto unsuspecting others without the possibility that the system itself will collapse once the risk that's been piling up in the global machinery manifests.

Something has changed, but nobody dares talk about it. That tells those who listen to what's not being said something of great value.

*  *  *

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ParkAveFlasher Mon, 02/12/2018 - 11:10 Permalink

In my experiences of living through multiple downturns, crashes, etc. it's always more fun when you take your hands off the safety bar.  Just a thought on this quiet Monday.


Oldwood Consuelo Mon, 02/12/2018 - 12:04 Permalink

Graphs are a snap shot in time and not necessarily predictive.

One can't wonder what derision the first apes who attempted running upright on their two rear legs received. A contemporary graph would have predicted it end in disaster judging from current analysis.

Money is not real, it is a social construct dependent only upon a general consensus of value. It's failure is completely dependent upon our perspectives regardless of historical graphs.

Risk. What are our odds of dying from the flu versus domestic terrorism? It really doesn't​ matter the facts of it, only our perception. Millions die every day from a sundry of causes, most preventable. Do we care? Has the world ended? 

In reply to by Consuelo

2banana Mon, 02/12/2018 - 11:23 Permalink

Want changed in 2009???

Hmmm?  What could it be?  Who had a filibuster proof senate, a super-majority in the house and a far left wing marxist in the white house?

taketheredpill Mon, 02/12/2018 - 11:40 Permalink


Central Bankers will "come to the rescue" ONE LAST TIME.

Once risk assets break down.  The Central Bankers will come back to DO SOMETHING.

Cut Rates?  Good Luck with that.  Close to Zero or negative already.

QE?  Been done.  But...since that's all they got....just need to do MOAR.


Bye Bye Treasury Market....so long US Dollar.

LawsofPhysics Mon, 02/12/2018 - 12:35 Permalink

LOL!!!  Are hard-working producers still accepting fiat currency from useless paper/digit pushing fucks like Charles?


Then nothing has changed!!!

"Full Faith  and credit"

HaveDream Mon, 02/12/2018 - 13:08 Permalink

The core nature of the world system is that the state-bank alliance of elites use state power to artificially prop up the value of the money and other financial assets they issue.  As long as confidence holds in these assets, the elites benefit.

Eventually, the assets become so overvalued that they crash -- especially because short-term incentives for members of the elites are to destabilize their own system, and especially since conditions must be covered up by ever bigger deception.

At that point, average people lose jobs, savings and business, especially since the economy has already been distorted by the demand during the financial inflation phase.  (It has been producing too many luxuries, capital goods, whatever, that are no longer in demand after the crash.)

Don't expect your economics prof to say this.

Imagery Mon, 02/12/2018 - 13:20 Permalink


Notice where your GDP - even as "rigged" as it is from teh USSA Bureau of Lies & Scams - is at inflection point at the end of your dataset?  Yes, the country has met the point where more unbacked debt does not generate more GDP even of the fabricated kind.

This is clearly reflected in a post with charts HERE that I made wiht more recent datasets.  Further, since LTCM Frauds & Thefts were "Incorporated into" the system, the EssandPee and DJIA have been diverging ever so greatly from the real underlying eCONomy.  This is also shown at the link above where we have now "levered" the system to atleast 3:1 over the real economy.

USSA:  THE Rehypothecation Nation.



sevensixtwo Mon, 02/12/2018 - 13:40 Permalink

Not the status quo about who gets worshipped and who get ridiculed.  Who gets obey and whose desires get ignored.  When they ask what is good and what is evil, they don't ask me, they ask my enemy.  All of that is still the same.  The unabashed, open mutiny continues full steam ahead.  Those mutineers do not have my proxy to use their own discretion about when the mutiny should end.  It should end now and then they should ask me for instructions about what to do next.

Exponere Mendaces Mon, 02/12/2018 - 17:42 Permalink

Please don't buy Bitcoin.

It deserves to go to people who understand and deserve its benefits/yields. This choad certainly doesn't "get it", and will be happy as a pig sitting in its own shit for mediocre returns on "safe" investments.

How to tell you're too old -- when a new asset class comes along and you cling to your dusty portfolio out of fear.