What's the time, Mr. Wolf?
The gaming of risk assessment
Exuberant markets always become a game. Any sense of discipline has long since evaporated (if it ever existed at all, for most market participants) and market price becomes the sole barometer of the state of the “economy”.
Market behavior becomes like the children’s game, “What’s the time, Mr. Wolf?” Each day, the market inches forward trying to eke out further small gains in an attempt to beat peers at the game and be judged the “winner”, taking the chance that Mr. Wolf (i.e. accountability) won’t call “Dinner time!”, turn and wipe out all those incremental gains.
In other words, markets become a children’s game where participants constantly ‘push their luck’ in a real-time assessment of risk vs reward, but one without any discipline applied to the assessment other than, “How quick do I think I am at interpreting the turn accurately and then reacting to that?”
I’ve developed a new method of assessing at what stage of the game we’re in and, at present, it looks like Mr. Wolf could call “Dinner time!” and snare any number of players that they choose. I call it my Complacency Index:
You can see that prolonged complacency was present:
prior to the Asian & Russian crises of the late 1990’s & LTCM’s demise
in the credit excesses leading to the GFC of 2008
preceding Volmageddon in early 2018
prior to the COVID-19 crash
and is present in today’s “soft-landing”, AI driven, “U.S. exceptionalism” market.
It’s interesting to me that there there was an entire decade (the 1990’s) where risk ran higher than we have seen so far this millennium. But that was a different time. Interest rates were still coming off their extreme highs of the decade prior and we also had the Millennial generation joining the economy to underwrite the exuberance. These days however, we see more defined swings between risk-on and risk-off periods.
In any event, What’s the time, Mr. Wolf?