Transferring Risk: Aversion and Inversion

Transferring risk is a mega industry. Not only are financial markets made to reduce perceived risk, but capital is invested to reduce fundamental, firm risk (the alpha risk).

Aversion to risk has developed into a highly technical means that results in an unexpected inversion of its indicators. The price of gold, for example, has been in an overbought condition despite the risk of inflation being low with a strong recessionary, if not a deflationary, trend.

Buying gold with the massive infusion of liquidity to resist deflation has supported both the recessionary trend and the price of gold into a market (beta-risk) bubble.

If a "market maker" wants to support the recessionary trend (unemployment) and gain capital at the same time, support commodities. The support suggests both a jobless recovery and a recovery indicated by rising commodities prices at the same time.

Rising commodity prices have been a false positive. Now, markets are worried about deflation. How can that be? The global economy is flush with anti-deflationary liquidity. The risk indicators are inverted.

If you are assessing the risk to do business, you will notice that the uncertainty (volatility of markets) does not stem from the public sector. It is doing what is fully expected--averting deflationary risk with inflation (currency devaluation). The source of uncertainty is from a consolidation of capital and risk in the hands of a few corporates in the private sector that far exceeds the monetary muscle of government spending.

According to the CFTC, the futures market is approximately a $34 trillion capital market. So, it is you versus trillions of dollars of market-making risk that can literally turn in a flash, likely determined by whatever position you have--if you are long, they are short...until you are trapped. Thus, for example, a government will protect its public policy position with the application of gamma-risk authority. Like Germany recently protecting (averting the risk to) devaluation of the Euro, by banning naked shorts on its largest financial corporates.

Germany is averse to the risk of infused capital (its devalued currency) being trapped in a speculative bubble rather than being trickled down. While the action is too late, it indicates the source of the uncertainty and instability.

Germany is also acting to invert the risk directed by the big demand for derivative-driven, risk-transfer products. In an effort to cause growth and economic stability, giving real support to the value of European debt, German authorities are doing what derivative markets purport to do.

The public and private sector are at odds (the risk aversion and inversion), struggling over who determines the distribution and timing of value (aversion), and the direction of the risk (inversion), causing a high level of uncertainty.

The aversion to, and inversion of risk (the uncertainty) has been transferred to gold, and will be transferred to other commodities with the assistance of highly technical, difficult to discern risk-transfer vehicles. The market for these aversion/inversion vehicles is made with the derivative/futures markets, which largely exist in the dark.

These denizens of the dark sneak up behind you and... surprise! The risk is suddenly reversed.

Black boxed, with the risk only apparent and available for manipulation to elite insiders who have the most credit-worthy access to the discount window, the market-risk makers command and control the distribution of the risk. Just as important is to control the narrative that explains the shifting patterns of risk, which controls both the direction of the risk and, even more important, mitigates what is otherwise a questionable free-market legitimacy.

The testable hypothesis of a free-market legitimacy is the only remaining liability of the averted (re-directed) alpha risk--the risk of accountability the averted alpha risk would otherwise provide without question, and without lengthy legal process. The more time spent applying accountability in public process, the more disconfirmed the free-market hypothesis.

To mitigate the probable risk of liability, market makers argue the use-value of making markets.

(Keep in mind that legitimacy is a critical function of power, and the exercise of power to a detriment without complaint or fear of reprisal is a measure of power. Use-value is an eristic for reconciling theory with practice; contending, for example, that reduction of alpha risk produces more useable value than the legitimacy of its full, theoretical value.)

Markets are made to hedge shifting patterns of alpha risk (that it averts) and beta risk (that it inverts). If markets are not made to absorb the risk, market makers contend, with trillions of dollars to manipulate the market, capital investment would be sub-optimal because there would be too much risk. They liquify markets by reducing the level of risk (by transferring the risk).

Pending financial reform will do well to redefine the problem by questioning the use-value of transferring risk.

Reform has been so far dominated with negotiating what the problem is, which indicates an aversion for inverting the current risk hypothesis to a more useful form of legitimate risk that distributes the austerity of the debt into a peaceful and prosperous pluralism.

Prosperity comes through retransformation of systemic risk into an alpha risk ontology, giving risk a real and present value that is peacefully verifiable.

Rather than conserving a fractile, geometric progression that appears to be the ontological legitimacy of a random walk, financial reform must consider the deficiency of the use-value eristic that falsely characterizes consolidation of risk being analagous to the legitimacy of an alpha-risk ontology.