Everyone who believes risk has disappeared has fallen for the con.
One of the maxims of this site is: risk cannot be made to disappear, it can only be cloaked, hedged or offloaded onto others. In other words, when the magician makes the white rabbit disappear, the physical rabbit does not in fact vanish; it is merely transported out of sight of the enthralled audience. Judging by this year’s version of Santa Claus’s reliable year-end stock market rally, risk has vanished, not just in stocks but in bonds, junk bonds, housing, commercial real estate, collectible art–just about the entire spectrum of tradable assets (with precious metals and agricultural commodities among the few receiving coals rather than rallies). And so it is with risk in markets. Risk is now viewed as something that can be reliably sold as a more or less guaranteed source of easy profits. In the present-day perception that risk has been eradicated from the markets, it makes little sense to hedge against risk; hedging is a waste of capital when there’s no risk in sight.
This post was published at Charles Hugh Smith on WEDNESDAY, DECEMBER 20, 2017.