--- title: "Risk Was Never Low, It Was Only Hidden" type: "post" post_id: "24805" slug: "risk-was-never-low-it-was-only-hidden" canonical: "https://axisofeasy.com/oftwominds/risk-was-never-low-it-was-only-hidden/" markdown_url: "https://axisofeasy.com/oftwominds/risk-was-never-low-it-was-only-hidden.md" json_url: "https://axisofeasy.com/oftwominds/risk-was-never-low-it-was-only-hidden.json" txt_url: "https://axisofeasy.com/oftwominds/risk-was-never-low-it-was-only-hidden.txt" published: "2021-10-04T16:52:00+00:00" modified: "2021-10-05T14:28:05+00:00" author: "Charles Hugh Smith" categories: - "Of Two Minds" tags: excerpt: "The vast majority of market participants are about as ready for a semi-random \"volatility event\" as the dinosaurs were for the meteor strike that doomed them to oblivion. Judging by euphoric gambler--oops I mean \"investor\"--sentiment and measures of volatility, risk of a market drop has been near-zero for the past 18 months. But risk was never actually low, it was only hidden. When it emerges, it's a surprise only to those who mistakenly thought risk had vanished." site_name: "" publisher: "" language: "en-US" license: "" generator: "easyPress AI Discoverability" generator_version: "2.0.14" --- *The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion.* **Judging by euphoric gambler–oops I mean “investor”–sentiment and measures of volatility, risk of a market drop has been near-zero for the past 18 months.** But risk was never actually low, it was only hidden. When it emerges, it’s a surprise only to those who mistakenly thought risk had vanished. As Benoit Mandelbrot explained in his book [The (Mis)behavior of Markets](http://www.amazon.com/exec/obidos/redirect?path=ASIN/0465043550&link_code=as2&camp=1789&tag=charleshughsm-20&creative=9325), **crashes are an intrinsic feature of systems like stock markets.** These risks are not generated by specific human actions or sentiment but *by the system itself*. **Just as humans make subconscious decisions and then conjure up quasi-rational justifications for their choice after the fact, market participants always conjure up some event or decision as the cause of the crash.** Favorites include central bank policy error, *black swan*events (“bolts from the blue”), earnings surprises, technical levels were breached, and so on. **Mandelbrot’s insights reveal why markets crash without any policy error or other fabricated- after-the-fact justification:** as those who witnessed the collapse of Japan’s massive credit-asset bubble in 1989-1990 observed, *markets just stopped going up and started falling*. **Risk is a reflection of many dynamics, but the key dynamic few participants seem to understand is the *inherent instability of complex systems*:** surface tranquility is not an accurate reflection of the actual state of stability or risk, no mater how long the period of tranquility stretches. **The human mind rebels at the dominance of quasi-random crashes, as our hubris and need to be in charge generates an *illusion of control*:** rather than accept that markets can crash more or less “out of the blue” without any *black swan* or other trigger, we place our faith–yes, faith–in central bank policies, readings of sentiment, technical indicators and the like. **This *illusion of control* blindsides us to the reality that no policy tweak can stave off the quasi-random meteor strikes that are intrinsic features of complex systems.**Wallowing in our hubris-soaked *illusion of control*, we believe that *if there were no pilicy errors or black swans, markets could move smoothly higher forever*. **That is a fundamental misunderstanding of the systemic foundations of markets.** **The vast majority of market participants are about as ready for a semi-random “volatility event” as the dinosaurs were for the meteor strike that doomed them to oblivion.**Financial oblivion awaits those ensnared in the quasi-religious faith of Federal Reserve power and other hubris-soaked *illusions of control*. ![](https://www.oftwominds.com/photos2020/dinosaurs-meteor3.jpg) ***If you found value in this content, please join me in seeking solutions by [becoming a $1/month patron of my work via patreon.com](https://www.patreon.com/charleshughsmith)**.* ***My new book is available!***[*A Hacker’s Teleology: Sharing the Wealth of Our Shrinking Planet*](https://www.amazon.com/gp/product/B08HJWR4VC/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=B08HJWR4VC&linkCode=as2&tag=charleshughsm-20&linkId=d59f979f9ce8528a4e1fb991b155758f) 20% and 15% discounts (Kindle $7, print 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