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Understanding Risk in the 21st Century

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The mainstream (corporate) media is nothing less than the unofficial accomplice of the banking crime syndicate which is running/ruining our markets and economies. Nowhere is this despicable relationship more apparent than in its deliberate efforts to grossly misinform investors on the critical subject of risk.

I partially dealt with this issue in a previous commentary titled Volatility Does Not Equal Risk. In that article I did something which you will never, ever see the mainstream do: I provided an explicit and detailed definition of the term “risk”.

I would encourage even those readers who read the original piece to re-read it, as I simply don’t have the space to repeat that multi-paragraph definition here, and (as I always stress) definition of terms is a crucial prerequisite to understanding any concept. Equally important, that previous piece clearly distinguishes the entirely distinct concepts of “volatility” versus “risk”. In contrast, one of the principle propaganda assignments given to the mainstream media has been to entirely blur the distinction between volatility and risk.

In its simplest form, “risk” (in the realm of investing) refers to two interrelated probabilities: the probability of suffering a loss on the investment, and the potential magnitude of such a loss. Conversely, “volatility” (i.e. what an investment does in between the day one buys and the day one sells it) is totally irrelevant. A simple example will illustrate this principle.

A hypothetical investment which moved straight to zero in a perfectly smooth, linear progression has (literally) zero volatility, while (by definition) represents maximum risk: a 100% loss. As we see, there is no rational connection or logical relationship between volatility and risk – they are entirely independent concepts. For convenience (and future use), let’s label this hypothetical investment “bonds”.

Critics will argue that I’m being unfair and discriminatory in singling out the bond market with such a label. However, as readers will see shortly, choosing to be a 21st century bond-holder is nothing less than one of the most foolish bets in the history of markets. To illustrate this obvious point it is necessary to provide some historical context. Again, this is something in which the mainstream media never, ever engages.

One hundred years ago (roughly at the time the Federal Reserve was created) Western economies were strong and healthy, and their sovereign governments were all totally solvent. Thus when those governments borrowed money (i.e. “issued bonds”), being a holder of that debt was a very safe investment.

In addition, the “inflation rate” (i.e. the speed with which our currency is being destroyed by money-printing) was very low at that time, meaning that bond-holders were able to make a real profit on the interest being paid on their bonds. It was a smart time to be a lender.

Flash ahead 100 years. Today Western governments are totally insolvent. Their economies are totally crippled (from spending too much on interest payments on debt), and are thus generating woefully insufficient revenues. If Western governments were corporations, nearly every one of them would have already been forced into bankruptcy proceedings, as their soaring debt-levels and collapsing revenues mean that as a simple matter of arithmetic virtually all of these governments are already past the point of no return.

Deluded readers and media “experts” will argue that I’m being overly alarmist in my conclusions. Again some historical context is in order: an example I’ve already used in past commentaries.

In the 1980’s, as Canada’s debt-to-GDP ratio was surging toward 70%, it’s Conservative government was seen as a poster-child of fiscal irresponsibility; and Canada was seen to be in an official “debt crisis. Today (with another Conservative government at the helm), as Canada’s debt-to-GDP ratio soared above 80%, the same (corporate) media has labeled Canada a model of fiscal prudence and financial stability.

How can the same talking-heads talking about the same country refer to a debt-to-GDP ratio below 70% as a “debt crisis”, while a quarter century later they refer to a debt-to-GDP ratio above 80% as representing admirable fiscal management? Simple. A quarter century later, all of the other Deadbeat Debtors are now in significantly worse shape than Canada (such as the U.S., with its own debt-to-GDP ratio above 100%) – and the dishonest media is trying to hide that fact.

Short of a total restructuring, it is not even theoretically possible for any of these economies to return to solvency – given their rising debt-levels (and debt payments) and declining revenue profiles. Debt-default (i.e. bonds going to zero) has now gone from a question of “if” to the much simpler question of “when”.


Here there is nothing “hypothetical” about the bond market, as we have already seen with Greece. Indeed, mere days after defaulting on 75% of its debt the market was already speculating about “the next Greek default”. And as I first informed readers more than two years ago (at the beginning of the Greek Default Farce), in fundamentals terms the mighty U.S. economy is clearly more insolvent than Greece.

It would be negligent of me, however, to cease my condemnation of Western bond markets (and the dishonest shills who pimp for them) here. For unique in the realm of investing, bonds offer investors not merely one, but two separate ways in which they can suffer a 100% loss. Yet again some historical context is in order.

Let’s assume that to commemorate the creation of the Federal Reserve roughly a century ago (and it’s role as “protector” of the U.S. dollar) that the U.S. government issued a 100-year bond. Let’s put aside the fact that those bond-holders would now be sweating it out, wondering if the U.S. would “go Greek” on them and default on the bond before it matured.

Instead, let’s focus on the other, huge loss those bond-holders would have already absorbed: specifically the 98% loss in the value of the U.S. dollar (in which those bonds are denominated) over that period of time. Here the dishonesty of the media borders on the criminal.

As these corporate talking-heads incessantly pump the bond market, crowing about “record prices for U.S. Treasuries”; these pimps never, ever disclose the massive currency risk (and cost) which each bond-holder takes on from the first minute they purchase a bond. A bond with a nominal price of “infinity” denominated in a worthless currency has a value of zero. Every bond-holder implicitly assumes two risks the day they purchase a bond: the risk that a (deadbeat) borrower won’t repay them, and the risk that the underlying currency will lose some/most/all of its value.

Of course, as we now see, in the 21st century neither of those two possibilities are “risks”, rather they are certainties. As these governments all engaged in their countdown to debt-default, they are simultaneously (and explicitly) engaging in “competitive devaluation”: racing to see which government can drive their currency to zero the fastest.

Again, media talking-heads and market Sheep will accuse me of hyperbole. “Who cares about suffering a 100% loss over 100 years? I don’t plan on living that long anyways.” The mainstream media is nothing if not consistent in broadcasting its “don’t worry, be happy” message.

However for those of us who choose to live in the real world the situation is much more dire. More than 75% of the loss in value of the U.S. dollar has occurred in just the last 40 years, since Nixon assassinated the gold standard in 1971. The rate of collapse of our currencies has obviously been accelerating in recent decades. And as I recently pointed out in my “Subway example”; that rate of collapse has accelerated still further as we began this millennium – thanks to competitive devaluation.

Thus a bond-holder buying a 50-year bond in 1970 or a 10-year bond in 2010 is taking on roughly the same level of currency risk as the buyer/holder of a 100-year bond, a century earlier. The only real issue surrounding 21st century Western bonds is how do our corrupt/incompetent governments drive them to zero first: through debt-default or the total destruction of their (our) fraudulent paper currencies?

Then there is the gold market. Buy yourself an ounce of gold, and then strap yourself in for a ride on the Volatility Rollercoaster, courtesy of the Wall Street banking cabal – and their eternal battle against “honest money”. However as I already explained/demonstrated, volatility is irrelevant.

A holder of an ounce of gold 2,000 years ago could buy himself the a top-quality toga in ancient Rome. In more recent times, an ounce of gold will purchase a fine, man’s suit – whether we are talking about the 1800’s or the 21st century. While media fear-mongers “warn” investors again and again and again about gold’s (irrelevant) volatility, it has simply increased in value every year for the past decade. And (even more recently) as the talking-heads shriek about the “falling gold price” what they inevitably fail to add is that the price of gold (as of this moment) is more than $80/oz higher than one year ago.

Yet what do we consistently hear from the media propaganda-machine? Western bonds (and most specifically U.S. Treasuries), which give Chumps two different – but equally certain – ways of losing all their money are referred to as “a safe haven”. Meanwhile gold, which has provided thousands of years of perfect wealth-preservation, and more than a decade of uninterrupted gains is referred to as “a risk asset”. It’s literally impossible to get any more dishonest than that.

Protecting one’s self from risk is always one of the most important, if not the most important priority when it comes to investing. In times of crisis (like today), when “playing defense” is the only sane approach to financial management, risk management is an even higher priority. This begs the question: how can a person protect one’s self from “risk” if they have no idea what risk really is?

For any investor who heeds the Siren’s Song of the dishonest bond-shills in the mainstream media, it is a 100% certainty that they have absolutely no comprehension of this critical concept. Living in an era of maximum risk in the marketplace, this is nothing less than a fatal deficiency.

Learn about risk. Manage your risk (properly). Or perish. It’s really that simple.

Comments (4)Add Comment
written by david sites, May 19, 2012
Jeff, great reply. After an analasis of the choice, One should "Act Now" before it is too late.
The dollar under the Federal Reserve Bank's leadership has lost a Minus
-97% of its purchasing power. Over the same time frame,Gold has gone up a Positive +8,000 percent. The differential gold to dollar price is going up at an fast accelerating price as the past 10 years demonstrates. One should "Act Now", as time is running out to be even 'Be able to Act'.
Jeff, you have gone overboard in the last 2 years to warn investors of the coming Peril in the bond and Fiat money markets. Many KoDo's to you.
Jeff Nielson
written by Jeff Nielson, May 18, 2012
Jeff: good post; especially the last sentence. It is, after all, not only being aware of the various risks out there but, more importantly, using your ability to connect the dots and thereby manage it with the least pain. Or, to put it another way, using you knowledge and maturity to balance risk with greed. I exited the market 11 months ago, locked in some good profits, but missed the continued QE ramp through the summer. Mostly, I was knowledgeable enough (thanks to you and others) to see the headwinds and the black swans circling and made a risk-based more than a greed-based decision.

Thanks for the feedback Apberusdisvet!

You've identified one of our key missions here at Bullion Bulls Canada: to get people to think for THEMSELVES. Indeed, we have been TRAINED to be Sheep for so long that many/most people have COMPLETELY lost that capacity (for the moment).

We NEED to be able to think for ourselves for TWO reasons:

1) As events deteriorate, we may not have TIME to seek the advice of others before needing to make important decisions.

2) The ability to THINK implies the ability to ACT. While many others are mere "deer in the headlights", those able to think for themselves SHOULD not succumb to similar mental paralysis.
written by Andy Bergeron, May 18, 2012
Jeff: good post; especially the last sentence. It is, after all, not only being aware of the various risks out there but, more importantly, using your ability to connect the dots and thereby manage it with the least pain. Or, to put it another way, using you knowledge and maturity to balance risk with greed. I exited the market 11 months ago, locked in some good profits, but missed the continued QE ramp through the summer. Mostly, I was knowledgeable enough (thanks to you and others) to see the headwinds and the black swans circling and made a risk-based more than a greed-based decision.
written by Sneed Hean, May 17, 2012
Excellent column.

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