When Risk Converges with Reward

When GM's UAW workers took a wage cut to keep the company solvent, the risk of loss (their jobs) converged with the reward (profitability). Workers sacrificed to render the company capable of repaying its publicly financed bailout.

In the same way, when energy prices "unexpectedly" reverse on the fundamentals, the risk (the liability of causing detriment) converges with the reward (capital gains). Keep in mind that the reward is taxed at an extraordinary low rate for hedge funds and their managers. The low rate is supposed to keep workers employed with low inflation by keeping as much capital as possible available for economic expansion. By this measure--keeping the tax rate low--the risk is assumed converged with the reward, and the interest of the workers does not diverge from the interest of the unencumbered capital.

Workers subsequently sacrificed their income to bail out GM. Prices, however, continued to rise and the risk continued to diverge from the reward. The divergence creates investor value that eventually accumulates into a crisis proportion, indicated by the "unexpected" reversal that converges the risk with the reward.

Convergence occurs when the value accumulated is distributed in the form of capital and converted into accumulated wealth. The converged accumulation not omly measures the marginal value of the risk proportion but also represents an accumulated liability that is exculpated with an "unexpected" valuation.

The workers took the risk, and the capital took the reward. The risk was diverged from the reward, invested in commodity futures to extend the value of the risk into a crisis proportion (reduction of the workers' incomes). Eventually, the accumulated risk converges with the accumulated reward, technically indicating the crisis proportion.

Technical analysts use convergence and divergence indicators to suggest the probable direction of risk and reward. While risk is supposed to directly correlate with reward (high margins justified by the amount of inherent risk assumed), risk can be organized to diverge from the reward and achieve an inverse correlation (low risk yielding high reward).

Organized consolidation of industry and markets diverges risk from the reward. When, for example, big energy companies score record profits, pay no taxes, and receive huge subsidies, the risk of loss is minimized to maximize the margin, which is increasingly required to economically participate as either a producer or a consumer. (Remember that despite the minimized loss, the risk of loss is still, nevertheless, fully assumed. Avoided economic risk accumulates into a gamma-risk dimension in which its consumption is politically determined. The avoided risk assumes the dimension of political theater, like we have now with oil company executives, for example, appearing before Congress. The actors, in their assumed roles, rationally argue a political settlement in their self-interest that is considered Pareto Optimal--producing a settlement that does not render any one party less well off.) The more consolidated (horizontally and vertically integrated) these companies become (which includes the effective operation of government), the more the risk diverges from the reward.

As the risk diverges, the more efficiently the externalities can be networked to control costs (cut labor) and command prices (cut income). Since controlling the externalities is the business of government, a successful divergence also reduces the risk of legislative and judicial liability fully assumed with expanding the margin by causing detriment (unemployment with rising prices, for example, which is the result of more consolidation and less competition, like we have now). We see, then, government policies and programs that allow for consolidation of the capital and strong deflationary tendencies that produce large budget deficits (welfare) we cannot afford without raising taxes (and the debt ceiling since the income needed to pay the debt is being deflated with higher prices commanded by the consolidated capital).

For big business, government is an externality to be organized--to be consolidated into the corporate body--in order to fully hedge the risk. The risk of loss is fully assumed (it is fully converged in priority)--that is, consolidation knowingly creates value by causing detriment (by making someone less well off), and to prevent retribution of that value, the risk must not be allowed to converge with the reward.

Deriving benefit by causing detriment is a civil if not a criminal offense. A sudden 5% correction for the price oil, and an imposed CME limit on the downside, for example, is described by Wall Street analysts as "unexpected" because the reward (billions of dollars in capital gains) is assumed to be fully converged with the risk.

Until it manifests, the unexpected is by definition a risk of unknown proportion. Although the huge profits naturally present a huge risk, their so-called "unexpected" value suggests the billions rewarded are equally unexpected and the liability (the billions not spent to increase supply but, instead, reduce the incomes needed to buy it) is an unintended, but naturally occurring detriment. An unregulated market, it is argued, naturally yields this detriment to efficiently capitalize the supply needed to keep inflation low and resist the recessionary trend it causes. These defensive arguments are, of course, nonsense. Both the benefit and detriment are fully intended, and the risk is diverged from the reward to be politically settled within the current debt-reduction debate.

We need to remember what Wall Street tends to forget--the reason the price for a barrel of oil moved down was because the supply, including gasoline inventories, moved up. When the price keeps rising, like it has been for gasoline, the supply expectedly accumulates. Conservatives call this "adding supply" and falsely refer to it as "supply-side" economics when it is really demand-side command and control (you know, like communists do, rationing goods through price controls). Since we do not believe in price controls on command, valuations cannot be credibly based on it; and so, maybe that would explain the unexpected, empirical value of the inventory--it is based on false assumptions.

The Commodity Futures Modernization Act does not add supply. It reduces demand. Profits continue to accumulate along with the supply until the risk converges with the reward--that is, until the risk of liability reaches a probable proportion.

Manipulating prices to produce profits by causing detriment, rather than adding supply like investing is supposed to, accumulates a gamma-risk proportion, politically settling what would otherwise be a natural disaster. The power elite would not be a Pareto-Optimal beneficiary of such a disaster, and so, for example, the debt ceiling will be raised to accommodate the gamma-risk proportion.

When the risk is fully gamma and the reward is retributively valued, the risk converges with the reward. Currently, for example, we see interests representing consolidated capital engaged in all manner of rhetorical device to prove positive what is an empirical failure. It indicates the risk in a gamma proportion (what Wall Street analysts call a late-cycle adjustment), and if allowed to continue will result in disaster.

A late-cycle adjustment, like we have now, indicates profits have supported equity values in a zero-sum proportion, meaning that they are really negatively valued (what analysts call a late-cycle compression, which indicates negative equity). All the risk was not accounted for--it is not modeled to admit the liability of the divergence. Trillions of dollars are being applied to short the economy--that is, investment is being made not to expand the economy, but to "compress" it (deflate it), turning equity into debt, yielding negative equity. What is being in-vested is austerity, not prosperity.

Empirically tested, supply-side equity throughout the Bush administration was not positively valued. The empirical result was The Great Recession; and since 2008, equity valuations--stocks, for example--are not just overvalued (irrational), the equity is actually negative (deliberately "derivative" and divergently detrimental in zero-sum).

Since analysts tend not to model the liability of the divergence, each unit positively scored actually represents more than a unit of negative equity (which represents the entropic value discussed in the previous article). This accumulated, negative value provides risk-value to be arbitraged, technically indicated by convergent signals (a "death cross," for example). Each unit accumulated, contrary to supply-side modeling, for example, yields more than a unit of losses. Instead of economic expansion and a balanced budget with less need for government spending, we have "compression." The result is stagflation and huge budget deficits like we had in the Reagan years, and later during the Bush administration that, combined with the Commodity Futures Modernization Act, led to the Great Recession.

A late-cycle compression accumulates risk value. It does not avoid risk and increase shareholder value in the public interest as CEO's of big oil companies contend, for example, when arguing to protect their low taxes and high subsidies. These so-called "supply-side" measures, instead, imperil shareholder value with false modeling (the value does not "trickle down" in the assumed measure), which eventually presents as "unexpected" risk. That so-called unexpected value accumulates into upper-class incomes through exclusive, innovatively inscrutable, risk-transfer instruments, deliberately deriving that value from the crisis proportion it causes. This is where the risk converges with the reward--the risk cannot be avoided with continuous accumulation of its value (with continuous consolidation of capital, industry, and markets).

So, you see, while equity appeared to be gaining for the middle class during the last fifty years or so, systematically it was actually being lost. Although the Hamiltonian model assumes the loss, this model is not discussed as a practical, operational model. It is an historical artifact to be studied for academic edulcoration, avoiding the real value consumed that Hamilton's nemesis, Thomas Jefferson, warned would result in a counter-revolutionary consolidation of power with an anti-republican effect.

The risk historically, accumulatively, converges with the reward, as Jefferson knew it would; and while Republicans avidly argue to conserve the foundation of our exceptional, American heritage, Democrats, meanwhile, are busily arguing the public interest to keep consolidated capital from being hoisted on its own petard. It is, of course, the Republican role to resist, but there is a third party currently present to genuinely resist Democrats. While both parties know real resistance will consume risk rather than politically avoid it (Bernanke, for example, warning that not raising the debt ceiling will incur catastrophic risk), keeping it fully assumed in the gamma dimension, concurrent with this late-cycle compression, is politically risky as well.

Both parties face a growing negative sentiment that is not fully represented in the risk proportion and its political settlement. This unsettled, risk proportion is less divergent, and being less avoidable, the tactics used to negotiate the political settlement become more extortionist. Raising the debt ceiling (avoiding disaster) is contingent on both budget and tax cuts, for example. Since all the probable options are disastrous (when risk converges with reward), equity values and other asset classes are negatively valued going forward.

Acting in self-interest is rational, assuming that everyone knows what their self-interest is.

When the convergence occurs--as industry and markets become more consolidated, and capital is formed in a gamma-risk proportion with large margin requirements--it is apparent that self-interest is a political, not an economic, determination.

Truth, and self-determination, is not found by trying to prove what you think it is, but by discovering it. This empirically practical concept of testing the truth is to be found everywhere in America's Constitution. It ensures freedom by the rule of law, not of men, and is in this way exceptional.

Truth is as indicated, constitutionally confirming or disconfirming what men think it is, wisely converging it with what we divergently think it might be, or perhaps, unexpectedly, should not be.

America's founders recognized that truth is absolutely not dogmatic. By making the Constitution amendable, truth is confirmed by the founders to be a process of discovery.

Bromides abound about the way things should or should not be. Tired phrases like "that's life" or "that's just the way it is" is a lazy, common-sense wisdom that does not pursue truth but self-determines a common fate resigned to an untested, natural condition. It is a fate our founders naturally rejected when the king said it was his divine right to determine. "The way it is" unexpectedly converged with the way it apparently should not be, with "the way it should be" yet to be determined (tested).

Even today, monarchs are discovering the natural right to self-determine, and as we progress, by virtue of tested means, we discover truth to be what we always knew it to be. A natural fate in the pursuit of freedom is not at all unexpected.

Not only will the truth set you free (enable self-determination), but the pursuit of freedom finds it--it tests it; and when you find it, the risk of loss fully assumed is the risk of loss fully consumed. The risk fully converges with the reward, and freedom with the truth--the expected value--of your self-determination.

It is possible not to be in persistent pursuit of preventing dystopia. When the angst-principle is fully assumed (like between kings and their subjects), and the risk of loss is fully consumed with life, liberty, and the pursuit of happiness (the revolution), is when risk converges with reward.