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Resyndicating Risk Is Not Eliminating It


And the fact that private-sector investors don't see it is deeply troubling.

In science they say that matter can neither be created nor destroyed.

I believe the same thing is true about risk. To me, there's no such thing as less risk or more risk, just different risk. How many times have those seeking riskless investments (and therefore accepting lower returns) found themselves soon thereafter with the risk of insufficient funds in the future? And how many Goldilocks "just right" economies have been followed by the arrival of a group of bears?

Risk is.

At the risk (pardon the pun) of boring Minyanville readers, I want to rewind the tape to a year ago. At that time, public sentiment was that the economy required the intervention of the public sector to take on the large risks that existed in the financial system. And the public sector responded, ballooning the Fed's balance sheet, injecting TARP funds into bank capital structures, and so forth. And as a result, risk moved from the private sector to the public sector.

Since March of this year, the Fed's balance sheet has declined, TARP funds have been replaced by privately held common stock, and of late, the UK and US governments are even considering selling their common stock holdings in Royal Bank of Scotland (RBS) and Citigroup (C) respectively.

To the average Joe on the Street, there's the perception that risk has come down significantly. And, as measured by corporate spreads and equity values, on the surface this would appear to be true.

But let me put a different notion out there. What if what has really happened over the past six months just been a resyndication of existing risks from the public sector back into the private sector? What if the same economic and political risks that were present back in the spring have just been moved off the shoulders of Uncle Sam, other Developed Nation Governments, and Emerging Market Sovereign Wealth Funds into the 401(k)s and investment portfolios of Main Street? (And here I'd note this morning's announcement that the Singapore SWF is selling its stake in Citi.)

To me, this is more than a theoretical question, particularly as Washington knows that the best way to levitate markets is dollar devaluation.

But it raises two important issues:

First, do those who now hold the risk realize it? And second, did they buy it at the right price?

Of late, I'd offer that "no" is the answer to both questions.

Most people I speak with believe that the risk is gone and therefore the price is right.

But what if they just can't see the risk?

For reasons that long time Minyanville readers are well aware, I do not believe that the fundamental risks from the spring are gone at all. Postponed? Maybe; but gone? Absolutely not.

But for private-sector investors, I'd argue that their investment risk is far higher today than it was in March. And the fact that they don't see it is deeply troubling.

Resyndication of risk is not the elimination of risk.
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Position in SKF, SPY, and JPM.
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