Risk Indicator Signals Support for Recovery and Resistance for Equity Values

The Obama administration's highly visible move into a nominally non-ideological policy space is manifestation of a gamma risk indicator dangerously overvalued.

The risk "bubble" (a measureable accumulation of otherwise diffused value) gives any third element outside the bivariate too much power to reduce the probability of the targeted outcome (the probable, predictable variation).

Gamma risk--the underlying risk that free-market mechanics will be modified, with the more modification yielding more accumulation of the value--is unavoidable. However, our binomial political system, instead of managing the risk to maintain a diffused value, will try to avoid it. The probability for continued accumulation is, then, still high, and this is where the investor finds reliable predictive utility--a technical indicator that cannot be manipulated into a false positive or negative. The risk is unavoidable--it is gamma.

For example, an analyst notices a popular trend for less government with the probable result (value) being an accumulation of popular sentiment for the Republican party. According to popular theory, that will reduce the gamma risk.

Rather than being reduced, however, the risk is increased, and because the risk value is unexpectedly inverted, it reaches a massive, crisis proportion.

The probability is then for realignment, but that will not reduce the gamma risk. At best, it will keep the risk from continued accumulation (like slowing job losses with a recovery package).

All along the way, the gamma risk is an easily measureable and predictable value largely ignored by the model of bivariate ideology, and it will continue to be ignored with highly predictable results.

While the popular sentiment for managing the gamma risk will retrace some of the accumulated equity value, it will be short-term because the value of the gamma risk has prior support. The value will be managed indirectly because managing it directly recognizes the risk and, especially, the source of the risk.

Indirect management means that the slope of a populist retrace will be long and slow (taking more time than a binomial party is likely to survive). Equity values will tend to dip in order to finance the recovery without inflation and reduce the excessive risk in the short term. The fundamental support the long slope provides will add volatility.

The accumulated, non-fundamental value will have to be shared, undergoing a short retrace with less funds available to push overvaluations. Consolidation of firms will occour in the dip to retrace the lost value longer term, and the gamma risk will have been conserved.

Having neither been abated or avoided, with the objective being, at this point, for government to spend less, but not too much less to avoid a double dip, the risk, and the manifest double dip, will be shifted to the future.

A current high level of excessive gamma risk bodes bad for equity valuations. A declining value is a buy signal. A rising value, sell.

Quants (whether left or right wing) fail on the accumulation of gamma-risk value because the variable must be hidden to prevent "the risk" being technically corrected into a distribution. The working hypothesis is: the more value accumulated and consolidated the less the gamma risk with an accumulation of power. The hypothsesis and the analytical models derived from it are entirely wrong and will fail a predictive utility.

Measuring the gamma risk is a measure of deviance from the free-market model of pluralism. As the risk accumulates the stability of a free-market ontology diminishes. The legitimacy of power--the means of rewards and deprivations--must be managed by an administrative elite that compounds the primary elements of power into a third analytical model: the bureaucratic model that adjusts the level of gamma risk.

For example, former treasury secretary, Paulson says there was no indication of a housing bubble. He told President Bush the risk was low when it was excessively high.

Whether prime or sub-prime, the alpha and beta risk to home equity and loan values was accumulating along with the benefit of an accumulating capital that resulted in a liquidity crisis. The gamma risk accumulated to a dangerously high level and presented as "the bailout" that avoided "the systemic risk" (the gamma risk).

The gamma risk was not avoided, it was shifted to the future where it is being politically bivariated to manage it into an alpha and beta economic measurement of risk. Market valuations will be determined by the allowable variation of the risk dependant on an easily predictable bivariation of variables punctuated by a crisis of ignorance, deliberately modeled to recurrently ignore an excessively accumulated gamma risk.