Nassim Taleb Says The Financial System Is Now Riskier Than It Was Before The 2008 Crisis

Tyler Durden's picture

Nassim Taleb is out making waves once again, this time at the Discovery Invest Leadership Summit in Johannesburg today, where he said he was “betting on the collapse of government bonds” and that investors should avoid stocks. To be sure this is not a new position for Nassim, who in February had the same message, when he said that "every single human being" should be short U.S. treasuries. Indeed since then bonds have gone up in a straight line as the bond bubble has grown to record levels, and with the ongoing help of the Fed, is it any wonder. The only question is when will this last bubble also pop.

More from Bloomberg:

“I’m very pessimistic,” he said at the . “By staying in cash or hedging against inflation, you won’t regret it in two years.”

Treasuries have rallied amid speculation the global economic recovery is faltering, driving yields on two-year notes to a record low of 0.4892 percent today. The Federal Reserve yesterday reversed plans to exit from monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated. The Standard & Poor’s 500 Index retreated 16 percent between April 23 and July 2, the biggest slump during the bull market.

The financial system is riskier that it was than before the 2008 crisis that led the U.S. economy to the worst contraction since the Great Depression, Taleb said.

Will the Black Swan author be correct? Perhaps (and given enough time, certainly), although as virtually everyone is expecting a dire outcome in both the public and private sector, courtesy of the untenable balance sheet, the surprise will most certainly have to come from some other place. And with even The Atlantic now posting cover stories on the Iran war spark, it is increasingly less likely that geopolitics will be the issue. Is every possible dire outcome priced in? If so, Taleb should focus his formidable intellect on answering just what the market is missing.

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Mad Mad Woman's picture

I'd say he's right on.  The market will prove him right in the near future.

turkbevi's picture

I couldn't agree more...but how should a small investor go about shorting treasuries? TBT doesn't make sense as a long term option as its value gets eaten up with the monthly roll over of contracts.

I am not sophisticated enough about forex investing. Can someone point me in the right direction?

Adam Selene's picture

I would suggest that buying gold is pretty much the same thing as shorting treasuries at this point.

Bring the Gold's picture

Thanks added it to watch list.

Honest question from someone still learning. Are SH and DOG levered and therefore decaying over time? Thanks in advance to the great minds at ZH. (I hear flattery gets you everywhere.)

lettuce's picture

SH and DOG are both -1x (unlevered).

JuicyTheAnimal's picture

Wasn't that book all about how people can't predict what is going to happen?  So then he goes around giving predictions?  I'm confused. 

NotApplicable's picture

His theory isn't that people can't predict the future, but they prefer the comfort of conventional wisdom (read: ignorance) to the discomfort of contrarian thinking, so they rarely make an honest attempt, instead preferring to believe that all swans are white, while reality is different.

These false beliefs, reinforced by the herd, create an aura of knowledge where none exists, massively skewing perception of cause and effect to the point where risk is dismissed as nonsense, and nonsense is promoted as the gospel, because of the fallacy it engenders, post hoc ergo propter hoc.

In Taleb's view, it is this flaw that blinds people to the existence of the black swan, making it impossible for them to accurately measure risk/reward in their actions. His advice, is that you need to recognize this added layer of risk (CNBS, anyone?), and plan around it, as its results are far more catastrophic than conventional wisdom suggests.

One of my favorite passages in the book is where he talks of his trading days and a meeting discussing economic forecasts. Here he explains to his co-workers (or attempts to) that even though their consensus was that the market might go up a few percent, he was placing bets the other way, as the potential payoff was far, far greater than if they bet on the upside and were right.

In other words, understanding black swans are all about understanding the odds of them and their ramifications.

Just because you can't predict when US Treasury market will collapse doesn't mean it will go on forever. In the end, it's all about sustainability.

I agree with other posters though, that a payoff in Fed notes is no hedge against a bond market collapse.

CrockettAlmanac.com's picture

You should teach -- oh, you do!

Thanks.

maddy10's picture

+100

So a Hurricane in US is a blackswan even though everyone has been fed with news [ad nauseum] about a busy season

With floods in India, pakistan,vietnam, malaysia, china

Drought in Russia, kazakh,australia

Severe weather patterns in North america could trigger 2008 like food crisis

with so much liquidity sloshing around, one can have roller coaster rides in the futures markets

Terra-Firma's picture

Does that mean we should short firms subject to high Risk low probability events that have premium brand valuation? Rationale being these firms have more to loose then gain. Think BP.

IF that hypothesis is valid as a general theory, then we should also be shorting the US as far as empires go.But I'm not counting out the US just yet.

I think the possibility of something randomly good happening also exists because while the US shows traits of some of the worst of the worst, it also has undeniably demonstrated traits associated with the best of the best.

I think it has something to do with freedom; and boy are people going to be pissed when they wake up to the mess their "elite" have made. And wake up they will. It all depends on when the alarm clock goes off.  Speaking of, was that Hungry that gave the IMF the finger?

Good job Zero Hedge +100

Love the mindbombs with the crop circles. I hope that goes supper mainstream.

Anonymouse's picture

FWIW, I saw about a dozen black swans in Rotorua, New Zealand last year.  I guess they warehouse them there to be released on the world (via helicopter, perhaps) when needed.

DoChenRollingBearing's picture

Ah, yes.  But, as always, not even Taleb can predict the future.

I wonder what the Black Swan, maybe a little one, is going to the straw (or boulder) that is going to be the match that brings this all down.

Getting to be a farce now.

New_Meat's picture

DoChen,

"I wonder what the Black Swan, maybe a little one, is going to the straw (or boulder) that is going to be the match that brings this all down."

Who knows, but we all see the flock of white swans.

- Ned

metastar's picture

I'm not worried about the black or white swans. It's the flock's shit that I'm worried about!

CrockettAlmanac.com's picture

I'm worried about a flock of seagulls -- and Iran, Iran so far away.

jm's picture

Shorting Treasuries is asinine right now.

VWbug's picture

exactly.

There will be a time when it will be the trade of a lifetime, but taleb is waaaaaaaaaaay  early

and this coming from a guy who is always early...maybe I am finally learning

Slash's picture

treasuries and the $ are the same thing. Bond bubble will not "pop" unless we have a currency crisis at the exact same time. People need to lose "faith" (if they even have any left) first and start dumping bonds for the market to collapse......at that point though, unless you can get your winnings from the trade into gold/silver before they go parabolic (unlikely, no one will be selling), you'll just have won yourself a whole bunch of newly worthless pieces of cloth.

The bond market will always be supported by the banking system circle jerk.

SteveNYC's picture

Agreed. Long 7s and 10s was my "trade of the year" so far this year. I'm done for the year, no opportunities right now in my opinion (I don't trade short term, I'm sure there are many day-to-day wins to be had, I just can't do it).

At some point, the tide will turn and it will be a mega-trade. But not for the near future. Outright deflation first....then "Heli-Ben" may turn it all upside down.

VWbug's picture

right, but my concern is the turn will happen so quickly it will be hard to catch.

well, if it was easy, we'd all be on our yachts right now I suppose.

Dagny Taggart's picture

Hard to catch the turn? It will happen one night while we sleep, those who still can sleep...

Rainman's picture

Long the middle and short the long. Some gorrilla is on it. Follow him and lay down nearby for a while. Get up and move when he even so much as twitches. That's the restless state of the bond trader.

aerojet's picture

Anyways, how can a regular Joe Retail investor effectively short T's anyways?  And don't say ETFs, those are nothing but a huge scam.

43 Steelie's picture

You can't. It's the same in theory as buying CDS on the U.S.A. from a US Bank payable in USDs.

There is only one way to short treasuries and it gets discussed ad nauseum on this site (for good reason mind you). I won't mention it again. 

Slash's picture

exactly what i was trying to convey.

tired_of_manipulation's picture

You may not be able to directly short treasuries, but one way to be 'short' would be to borrow money yourself via a mortgage or similar at a fixed rate.  The value of your debt will plunge if interest rates go up - your bank may let you 'buy back' the debt at a fraction of the amount owed.  

I've read that in the late 70's / early 80's banks had programs for letting you buy back your mortgage debt in exactly this way - the negative cash flow on a loan at a lower rate than they could borrow was killing them.  If you really think interest rates are going up significantly, borrowing a bunch of money at fixed rates to buy something with stable value or cashflow (farmland?) is the way for the average person to go. 

mrhonkytonk1948's picture

Ah, but does FNMA really care about a tad more negative cash flow?

Miss Expectations's picture

As a small farmer once told me (he wasn't small, his farm was) and worth considering:

"The trouble with farming is that you buy everything retail and sell everything wholesale."

 

Bring the Gold's picture

Great anecdote. The systems doom lies in simple little things like that. Very sad.

VWbug's picture

that's a good point, by borrowing money you are essentially 'selling' a bond, and it could be a fantastic thing, IF as you say you get a low rate, long term, fixed and finally, IF you can buy an income producing asset.

If asset prices fall you could well buy a great piece of RE at a fire sale price, problem is the timing.

As always, banks will not lend when it is most needed, and won't lend without ridiculous amounts of collateral.

So, you'd need to arrange the loan ahead of time, before the crash, and have collateral to put up right away, then wait for the crash to bring asset prices down.

It could be done, but it ain't easy.

HedgingInfiniteRiskIsNotPossible's picture

There's an episode of Curb Your Enthusiam where Larry David kills a black swan. Might be relevant here.

A_MacLaren's picture

For TPTB:

Pink Floyd called you out.

Pigs (Three Different Ones) (Waters) 11:26

Big man, pig man, ha ha charade you are.
You well heeled big wheel, ha ha charade you are.
And when your hand is on your heart,
You're nearly a good laugh,
Almost a joker,
With your head down in the pig bin,
Saying "Keep on digging."
Pig stain on your fat chin.
What do you hope to find.
When you're down in the pig mine.
You're nearly a laugh,
You're nearly a laugh
But you're really a cry. (crime)

Young's picture

So should we try to short the TLT or equivalen futures contract? Hope someone can enlighten me, I'm hopelessly clueless when it comes to shorting bonds... But technically I'm not sure I agree with him here, seems to be some way to go on the upside.

VWbug's picture

yeah or buy the short version, TBT, but ETF's are all paper so better not do that, you could buy puts , but puts are derivatives and they are all worthless so better not do that, guess that only leaves 1 investment possible, physical bitchez!

or was that gunns and ammo? canned food?

damn I forget, anyway we're all doomed so why worry?

Young's picture

Thanks guys! I didn't know there was a short non leveraged version of it, I only knew about the TBT (which I don't trust). I have a fair amount of options experience so I'll be looking into the alternatives :)

rubearish10's picture

Beware options since premiums are juiced. I'd stay away from any levered instrumnet because you don't know how long it's gonna take for the "real" reversal. Perhaps some long dated OTM puts like the 65's of '12 but TBF works very well in here.

Young's picture

I concur, the TBT is out of the question. Concerning the options, I'm not thinking about it right now, this "bubble" seems to be able to go way more out of proportion...

VWbug's picture

I was being facetious, I do think TBT or TBF are good ways to play it, but I am a day trader and not a 'believer' that all derivatives are worthless. (some are for sure)

Agreed that options are not the best way, time value will kill you, more so in this trade than any trade i can think of, as the timing will be murder.

 

ZeroPower's picture

How are premiums juiced currently? If we're going along with the mean reversion trade of the past 2-3 months, premiums are at their relative lows right. Id be a buyer of some options around here...

MayIMommaDogFace2theBananaPatch's picture

physical bitchez

When porn just won't do...

Roy Bush's picture

What kind of retard would short US Gov't paper when the Fed, with infinitely deep pockets, is buying everything under the sun.  A fool and his money.....

 

 

maddy10's picture

Fed is checking out whether anyone in the world dares to call their bluff

by just rolling over MBS with 30 Yrs no net addition into their balance sheet

But who is buying those MBS anyway? citi  ,AIG I suppose with money from the other pocket

Somehow entire financial system is getting Fed-ised but no one's Fed-up

hedgeless_horseman's picture

UFC 2.73%

Taleb vs. Geithner

Don't miss it!

 

homersimpson's picture

I bought 2 tickets (front row) to this event... only to find out they were forged and duplicated endlessly.

LePetomane's picture

The big question is whether the Fed possesses the foresight to know the point at which enough inflationary stimulus is enough.

 

Given the real estate bubble, a predilection towards public sector employment (if only to keep unemployment down, never to buy votes!), and an unspoken desire to make their debt burden more managable (wink wink), the possibility of overshooting the Easy Button exists.