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Nassim Taleb Says The Financial System Is Now Riskier Than It Was Before The 2008 Crisis
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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I'd say he's right on. The market will prove him right in the near future.
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?
I would suggest that buying gold is pretty much the same thing as shorting treasuries at this point.
TBF is an unlevered TBT.
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.)
SH and DOG are both -1x (unlevered).
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.
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.
You should teach -- oh, you do!
Thanks.
+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
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.
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.
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.
DoChen,
Who knows, but we all see the flock of white swans.
- Ned
I'm not worried about the black or white swans. It's the flock's shit that I'm worried about!
I'm worried about a flock of seagulls -- and Iran, Iran so far away.
Shorting Treasuries is asinine right now.
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
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.
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.
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.
Hard to catch the turn? It will happen one night while we sleep, those who still can sleep...
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.
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.
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.
exactly what i was trying to convey.
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.
Ah, but does FNMA really care about a tad more negative cash flow?
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."
Great anecdote. The systems doom lies in simple little things like that. Very sad.
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.
There's an episode of Curb Your Enthusiam where Larry David kills a black swan. Might be relevant here.
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)
Hey! easy there.
Pink Floyd and Leonard Cohen.
Who else is there?
Me!
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.
TBF
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?
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 :)
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.
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...
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.
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...
When porn just won't do...
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.....
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
UFC 2.73%
Taleb vs. Geithner
Don't miss it!
I bought 2 tickets (front row) to this event... only to find out they were forged and duplicated endlessly.
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.
Makes sense. None of the problems that precipitated the 2008 "crisis" have been addressed.
Extend & Pretend piles on more and more risk until................
Gawd r u shitting me? When Gross starts getting redemptions yes its time to short bonds but they cant issue them fast enought BECAUSE OF THE PAYDOWN IN MGT BONDS! and to a lesser degree corporates.
Taleb talks about intellectual laziness and pays less attention to the math in bond land himself!
Is it not the case that when Gross starts getting redemptions it is the US$ that is being "redeemed".
It is true is it not that US Bonds will have demand as long as the US$.
So it is not whether or not that there is demand for US Bonds.
The case is.
Is there demand for US$.
The currency wars are being played now.
Let’s hope they don’t get physical.
Sure it is more risky. I thought the United States did not negotiate with terrorists? So now we have bribed the bankers with taxpayer money. We have provided them with more QE and now they will tank the markets even further in order to induce and frighten the Fed and government into unleashing unprecedented QE and stimulus spending. For this reason alone we should have permitted them all to fail in the first place but now they hold all the cards (cash) because we delivered it along with incredible power directly into their hands.
Right on the button Mr. McCloy--especially the reference to negotiating with terrriosts because that is exactly what our banking fucksticks are; they simply are not in the middle east. There is a dire need for a showdown ala the O.K. Corral. Basta es Basta!! Milestones
Very true indeed. When one reads history and digs one finds it's been this way for quite some time. They are more confident and obvious now having a firmer grip on the yoke then in times past.
They did not mention his other trade recommendation from February, which was to go long precious metals and short the S&P. There's a great video of him with Faber, Hendry and a couple others if you can find it.
2010 Russian Summit
Tyler WTF? Di you just leave the dark side? :(
What's next?
Big caps? Strong balance sheets? Eh-beh-duh?
About the only thing I haven't read yet is the possibility that China actually enters a recession....
that I think is the one thing that would end all this right away.
wish I could get a clear idea of what is really happening in china...lots of conflicting info, hard to know what to believe.
My gut says it's a bubble.
Taleb to the bond markets; "Release the Kraken!"
Here's my question for Nassim... He recommends shorting treasuries, but once you close out that position you are going to get paid back in FRN's. If the treasury market collapses like he's predicting (which I agree it will at some point) that becomes a zero-sum-game given that the USD will capitulate as well. He suggests holding cash, and hedging against inflation, but he doesn't openly recommend buying gold. In fact, unless I am wrong, I don't think he's ever publicly suggested buying gold. Anyone have any interviews or comments to the contrary?
In anticipation of being paid US FRN's, I'd be buying a mix of FX and Gold. Never mind if Nassim said buy gold or not. You could also buy T-Bills to manage current cash (w/implied short of TBF position). Afterall, that's what you would do with cash from a short sale, right?? If you already believe in a major US Tsy gaffe forthecoming, you must consider what to do with USD denominations now and later.
Yeah I agree, that's definitely the assumption I would make. Use the proceeds from a short sale to buy gold and other commodities, but since he doesn't explicitly say it I thought I might be missing something.
"he doesn't openly recommend buying gold. In fact, unless I am wrong, I don't think he's ever publicly suggested buying gold."
Nassim wakes up one morning with a head of black swan in his bed - when gold hits $55k.
"Nassim wakes up one morning with a head of black swan in his bed - when gold hits $55k."
Placed there by someone wearing a ZH T-Shirt.
Or a FOFOA t-shirt... Hmm, maybe I'll mention that to him...
Just heard Dow -260.
Anyone with investable assets, needs to have some physical gold.
You are wrong!
Interest rates won't jump 10% overnight but rather slowly
There will be scampering for cash when everything else falls due to liquidation
Cash will be great to buy things during that time when everyone wants cash and sells things at whatever price
Like buying S&P at 666, no one would lend you money when it was there against any collateral
You can be dead on right but if your timing is off you look like an idiot.
Nassim Taleb is right on but he seems to be having trouble finding the correct time frame through no fault of his own as the actions of Obama, Bernanke, Geithner, et al, seem to be totally unpredictable.
CORRECTION:
"as the actions of Obama, Bernanke, Geithner, et al, seem to be totally unpredictable"
Not unpredictable...unfathomable. They are quite predictable.
Not sure I would short treasuries... It sounds great in theory but this is a breakout from a symmetrical triangle that occurred on April 27th. There appears to be some serious strength here. I wouldn't short until there's a noticeable change in trend.
Agreed. I will not open a short on 30-yr treasuries until the yield goes negative.
You shouldn't bet against any organization that every time they borrow money from themselves their cost of borrowing goes down.
I am most amazed the Fed said they are setting a benchmark of $2T for its portfolio. They must be using double-speak there because QE2 cannot happen if that is the case. I must have read it wrong.
The $2T is a floor, not a target. Plenty of room left for QE2 to sail right on.
Wow, thank you. I had skimmed the article and glad you corrected me here. I guess my brain couldn't comprehend that $2T of anything could be the floor. Stupid brain, I have to learn to think like a banker more.
Well...I guess its full speed ahead then!
Can't there be a Black Swan good event? WhHy does a black swan always have to denote something negative?
btw. I'm surprised Al Sharpton is going after Nassim for his racist use of the color 'black'. White swans can be quite feisty, too.
Absolutely can, there are positive Black swans too. You should have exposure to those so you'll benefit when they happen and limit your downside to negative ones at the same time.
Right he says expose yourself to good black swans and yet I've yet to hear of a way to do that. I mean what should I expose myself to palladium in case all that Cold Fusion stuff is true? (I already have, but I'm not putting much into that...)
I guess what I'm asking is what is a concrete example of that?
Gold (and silver?) as well as any physical things that hold value in tough times (like shotgun shells) are the best black swan exposure I know of.
LOL every event is good for somebody. For example, the meteorite that wiped out the dinosaurs along with most other life on Earth 65 million years ago was good for mammals in general, and (eventually) human beings in particular.
However, given that the stock market, being (under normal conditions) a capital-raising mechanism, must generally appreciate in value to make it worthwhile for risk capital to get in the game, maybe a "Black Swan good event" should more properly be called a "White Swan event".
But white swans are just regular, everyday swans. The significance of the black swan is that is unusual and unexpected, at least by some. So an unexpected good event should not be called a white swan as that undercuts the basis of the analogy.
Red swan?????
Or crimson? Love crimson!!!!
Boy, I wish CNBS could get some video "on air" right now and usher in "Flash Crash II"!
http://www.ajc.com/news/atlanta/crowd-waiting-for-housing-589653.html
What a link. Amazing that they couldn't think of a better way to GIVE OUT the forms. Absurd. Perhaps that's what the FEMA camps will look like?
Prelude to more serious events perhaps, very soon.
What an interesting thought. Instead of rounding up the herd in order to encamp them, all they have to do is to announce "Free Housing" and the herd will drive itself right into that box canyon.
Or is it really a cliff edge?
The last line here is my favorite part of the article.
I gots to get me some of them rose-colored glasses. Or more beer. I'm not sure which.
Wow theyre all poor african americans... is that common around there?
DOW/SP500 daily charts are now bearish.
So the downtrend I first mentioned in early May this year, can now resume.
http://stockmarket618.wordpress.com
Nassim has said to own a basket of metals, like platinum, silver, copper, etc, as a hyperinflation hedge, just this year. In fact, it was a linked speech on ZH, which also included an appearance by everyone's favorite Scottish hedge fund manager. That's where he also discussed shorting treasuries.
You can short treasuries with a futures account. It's discussed very simply here: http://www.ehow.com/how_4914529_short-treasury-bonds.html
I remember him saying that actually. Seems odd that he so rarely mentions Gold and Silver. I wonder why that is especially given the FRN payout paradox others have mentioned via shorting Treasuries...
This whole mess is just beyond comprehension. I just hope Ben and Timmy are smarter than they seem and have another agenda other than the one that seems so obvious. How the hell do expect to solve a debt crisis by adding more debt? Something else has got to be going on, this is just too dumb to believe.
You have an underlying assumption there. It's a common one in financial circles. That is that they want a positive outcome for the USD and by extension the USA. I'm not certain they do.
Carrol Quigley had an interesting statement in his book Tragedy and Hope:
I personally believe this is a setup to enshrine the SDR as the world reserve currency with the BIS as the Global Central Bank.
Too far fetched
I'd say this is just a way to bring in VAT like everywhere else
Bad for consumers though but they are the sitting ducks now!
But how would that help USA's only activity - i.e. consumerism ?
I am not a big fan of shorting bonds. They probably should drop. But I'd rather hedge in gold. There is no point staying in the fiat sandbox when you are talking about governmental insolvency. If bonds take a dump, the dollar is probably not going to be looking too good either.
I tend to line up with Nassim philosophically. Trouble is, the whole Black Swan concept starts to lose its appeal and utility when there are obviously more black swans flying around right now than there are mosquitoes in the Everglades.
I agree with you, there are so many Black Swan possibilities it is frightening. I look for them to appear like falling dominoes. Obama and the other morons will use them as excuses and point blame elsewhere. They are continuing to blame Bush while they mirror him and worse.
Prepare for the worst because it is coming faster than we think. We always hear about the velocity of money, well the new buzz will be the velocity of catastrophes.
Of course it's more risky. When you incentivize consolidation in systemically important industries, how do you expect it to become less risky?
My Favorite Swan:
http://www.youtube.com/watch?v=W7z-M92N4L8
Uh, that's a black "schwanz"
The character played by Peter O'Toole is named Alan Swan, but that was an excellent play on words on your part.
Then of course "Peter" and "O'Toole" lead the mind in particular direction as well.
Energy and commodities are good insurance against good news.
Well the Financial System is rather large in scope, it would be good if he could narrow down the cause and effect.
After July 4th weekend equities went straight up. A preamble to financial earnings, but then on that futures expiration Friday, took a shot to the head, only to recover the next week. So perhaps the system issues are not well condensed in his time frame example.
Anyway what we need is a little more insight, after all he wrote the book, right.
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So the financial sector is riskier, in what way exactly? In this context, what exactly does a bond collapse look like? What are the warning signs?
So lets try and extrapolate shall we.
Systemic risk for BHCs are real but should have been contained with prior lessons learned about reserve requirements, capital ratios, leverage and derivative exposure. These should have been addressed to reconcile any SIVs. The risk with the banking sector is if prudence did not win out over greed.
After all that was done by the Admin and FED to off load bad debt and increase profits, what bank is not in a position to withstand another leg down? Could it be that not properly regulating derivatives has once again created the risk of chain reaction bank insolvencies?
I believe that, even after all that has been done for the big banks, the financial sector will once again lead the decline in equities. It is really hard to fathom that, after all the money spent, nothing was fixed.
So we watch and wait.
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The Taleb statements made, provide too much linkage without proper explaination. From equities to FED actions to Treasuries to economic weakness to inflation to crisis. Okay, but what about the inbetween parts of how these unfold in the 2 year time frame.
Lets take another look.
The FEDs MBS actions are just PR. What are the MBS proceed reinvestment amounts? The FED just wanted to look politically proactive before the elections. A token gesture.
The bond crisis, in my opinion, will be a state municipal bond crisis first, before any Federal Bond crisis.
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So ZH brought up the WAR distraction strategy. But lets look at this. In terms of money going to the military, we do not need another war. Defense is getting huge budget amounts right now, there is no need to prime the pump here. The WAR economic stimulus is already in place.
No, the game is set until after the elections.
Mark Beck
duplicate....
You don't have to buy gold. You can buy storable tangibles you are going to need anyway. Not beans, but more like socks, t-shirts, laundry detergent, whatever you are going to buy anyway.
After all, that's what the gold is for, isn't it? To buy stuff after the dollar crashes? So why not buy the stuff now? Fill another bag every time you shop.
Worst case is, you buy the detergent on sale and have to use it over the next six months. Or, since that means the entire world economy didn't collapse, perhaps that's the best case!
Gold doesn't hurt, either. Silver, tungsten ingots, etc.
Military aggression vs. China?