Nassim "Black Swan" Taleb On The Real Financial Risks Of 2016

Tyler Durden's picture




 

Authored by Nassim Nicholas Taleb, publish op-ed via The Wall Street Journal,

Worry less about the banking system, but commodities, epidemics and climate volatility could be trouble

How should we think about financial risks in 2016? 

First, worry less about the banking system. Financial institutions today are less fragile than they were a few years ago. This isn’t because they got better at understanding risk (they didn’t) but because, since 2009, banks have been shedding their exposures to extreme events. Hedge funds, which are much more adept at risk-taking, now function as reinsurers of sorts. Because hedge-fund owners have skin in the game, they are less prone to hiding risks than are bankers. 

This isn’t to say that the financial system has healed: Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller. Zero interest rates turn monetary policy into a massive weapon that has no ammunition. There’s no evidence that “zero” interest rates are better than, say, 2% or 3%, as the Federal Reserve may be realizing. 

I worry about asset values that have swelled in response to easy money. Low interest rates invite speculation in assets such as junk bonds, real estate and emerging market securities. The effect of tightening in 1994 was disproportionately felt with Italian, Mexican and Thai securities. The rule is: Investments with micro-Ponzi attributes (i.e., a need to borrow to repay) will be hit. 

Though “another Lehman Brothers” isn’t likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices. Dubai is more threatened by oil prices than Islamic State. Commodity people have been shouting, “We’ve hit bottom,” which leads me to believe that they still have inventory to liquidate. Long-term agricultural commodity prices might be threatened by improvement in the storage of solar energy, which could prompt some governments to cancel ethanol programs as a mandatory use of land for “clean” energy. 

We also need to focus on risks in the physical world. Terrorism is a problem we’re managing, but epidemics such as Ebola are patently not. The most worrisome fact of 2015 was the reaction to the threat of Ebola, with the media confusing a multiplicative disease with an ordinary one and shaming people for overreacting. Cancer rates cannot quadruple from one month to the next; epidemics can. We are clearly unprepared to deal with such threats. 

Finally, climate volatility will produce some nonlinear effects, and these will be compounded in our interconnected world, in which disruptions are more acute. The East Coast blackout of August 2003 was nothing compared with what may come.

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Sun, 01/03/2016 - 21:05 | 6993042 Soul Glow
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Is Taleb considering central banks as "banks"?  Because I do, and they are topped off with risk with their epic holdings of toxic debt.

Sun, 01/03/2016 - 21:07 | 6993058 Money Boo Boo
Money Boo Boo's picture

the CB's have stifled a giant fart for 8 years, the blowback on that release will smear the world in shiite.......wait a minute

Sun, 01/03/2016 - 21:23 | 6993124 Escrava Isaura
Escrava Isaura's picture

 

 

Nassim Taleb:

There’s no evidence that “zero” interest rates are better than, say, 2% or 3%... C’mon. Compound zero versus 3%.  

Investments with micro-Ponzi attributes (i.e. need to borrow to repay). Again Taleb, c’mon. There’s no investments. How can you tell? It’s all artificially high, so the bust period will be deeper than it would otherwise. 

 

Borrowing is all we have left. It’s so out control that SLF discontinued this chart: https://research.stlouisfed.org/fred2/series/TCMDO

 

 

Sun, 01/03/2016 - 22:53 | 6993545 DownWithYogaPants
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Warning! Retard alert!  Escrava opened mouth

Sun, 01/03/2016 - 23:14 | 6993623 Escrava Isaura
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Your post tells more about yourself. Total waste of energy.


Sun, 01/03/2016 - 23:19 | 6993636 DownWithYogaPants
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ah come on Escrava. You know you're a moron.  We all know it too.  Why not embrace your clownish existence.  If you can't beat the rap then embrace it. 

And every comment I've seen of yours has been a total waste of energy so I am not sure what your point is.

Mon, 01/04/2016 - 01:13 | 6993941 popeye
popeye's picture

Thats rather unnecessary isn't it?

 

You don't agree? So move on or state your contrary view. Abuse is infantile, not humorous.

Mon, 01/04/2016 - 19:05 | 6997568 Born2Bwired
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and no one wants to read it.

Sun, 01/03/2016 - 21:07 | 6993059 I Will Explain All
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"Terrorism is a problem we’re managing"

Aren't We literally breeding terrorists faster than any time in history?

 

Kind of like how the Fed is managing the economy?

Sun, 01/03/2016 - 21:09 | 6993070 Money Boo Boo
Money Boo Boo's picture

Ponzism....it's the real terrorism

Sun, 01/03/2016 - 21:10 | 6993072 AngrySparky
AngrySparky's picture

I am so f*cking sick of hearing about "climate"

Sun, 01/03/2016 - 21:12 | 6993088 Money Boo Boo
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americans generally don't want to hear about anything that effects profit margins, they'll make up any bullshit excuse to make it not real

Sun, 01/03/2016 - 21:17 | 6993109 JenkinsLane
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"The whole aim of practical politics is to keep the populace alarmed - and hence clamorous to be led to safety - by menacing it with an endless series of hobgoblins, all of them imaginary."

 

HL Mencken

Sun, 01/03/2016 - 21:47 | 6993245 holdbuysell
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Didn't see your post until after I posted mine below to this very effect. Spot on.

Sun, 01/03/2016 - 21:43 | 6993233 holdbuysell
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Eventually they'll move on to the alien invasion crisis after the effectiveness of terrorist and climate crises grow old and lose their fear factor (and thus the populace's willingness to support, especially when they see the price tag to support).

Mon, 01/04/2016 - 01:20 | 6993962 popeye
popeye's picture

Maybe, but isn't that a risky approach?

 

Its like the little boy calling "wolf". Repetition breeds contempt. Then one day when a real danger threatens, it is dismissed without consideration or analysis.

 

The smart money will continue assessing each warning (of any threat) on its merits. Better to be vigilant than negligent.

Sun, 01/03/2016 - 21:11 | 6993083 Proofreder
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Bunch of Black Swans coming

a ClusterFlock for sure !

Sun, 01/03/2016 - 21:21 | 6993128 DeadFred
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No earthquakes or volcanoes on his list. A big one in the right place will take the whole world's derivatives with it.

Sun, 01/03/2016 - 21:33 | 6993172 willwork4food
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Or tsunamies. Rest assured they are waiting for the next big "natural event" to occur before the gloves come off.

Sun, 01/03/2016 - 23:07 | 6993589 nidaar
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Neither nuke events like Fukushima. Hence it is peculiar to hear something like "Cancer rates cannot quadruple from one month to the next" from someone associated with the "black swan" analogy...

Sat, 01/09/2016 - 18:45 | 7023390 translator zero
translator zero's picture

Worry less about the banking system, but commodities, epidemics and climate volatility could be trouble

That's why the pending shitstorm in the banking system and price inflation will be such huge "Black Swans" to Taleb, cuz he'll be like, "Who could have seen this coming?"

Give him credit though, he did figure out that the climate can be volatile, and sudden volatility makes for Black Swans. But I knew that in kindergarten.

 

Sun, 01/03/2016 - 21:12 | 6993085 Well Hungarian
Well Hungarian's picture

He ought to start selling some,of what he is smoking.  Don't worry about the banks, but buckle up for climate change?  Another member of Obummers choom gang speaks!

Sun, 01/03/2016 - 21:51 | 6993270 Automatic Choke
Automatic Choke's picture

right.  some of his books are good, and i had pretty good respect for him for awhile, then he started throwing down the standard party lines.  i read this in WSJ and couldn't believe it....  what a wanker.

 

Sun, 01/03/2016 - 23:02 | 6993574 ebworthen
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The fact that otherwise intelligent people think we have an effect on the Climate (versus Pollution - two very different things) means that the Central Banks and their Police States can double or triple current debt levels and keep the "dream" alive.

Fukushima financial markets, but they can keep making electricity until the reactor blows, then they can lie more.

Mon, 01/04/2016 - 13:08 | 6995893 NaN
NaN's picture

Of course Humanity is changing the planet, there is no better explanation for what is observed. Just saying "it's not our fault" is not a valid hypothesis.

Sun, 01/03/2016 - 21:35 | 6993182 lordbyroniv
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Never trust a Muslim.

 

Never.

Sun, 01/03/2016 - 22:26 | 6993416 opport.knocks
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And what does that have to do with the article? The author is not a Muslim, I believe his background is Greek Orthodox.

I have gone to school and worked with Muslims and they are all honest, stand up people.

Mon, 01/04/2016 - 13:34 | 6996015 lordbyroniv
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And I bet you believe Barack Obama is a Christian too.

 

lulz

Sun, 01/03/2016 - 21:36 | 6993190 kerfuffled
kerfuffled's picture

Sounds like UN Agenda 2030 Hired Taleb.

Sun, 01/03/2016 - 21:37 | 6993197 Mewa
Mewa's picture

Keep telling yourself that those HFT are working well creating liquidity while ETF start their implosions....Algos have it all figured out until the power goes off....then those banks holding that big pile of derivatives go pop again only this time the Fed automatically comes in and destroys the currency.....Rest of the world wont be so forgiving this time to wear the problems of US corruption. 

Dollar reset......no room to take interest rates down this time...

Sun, 01/03/2016 - 22:28 | 6993444 Farqued Up
Farqued Up's picture

Why not, their puppeteers all came out of Golman, too.

Sun, 01/03/2016 - 21:38 | 6993206 Yancey Ward
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That's ok, in the next crisis, commodity firms of all kinds and Brazil will be allowed to reorganize themselves into banks so that the big central banks can bail them out.

Sun, 01/03/2016 - 21:57 | 6993290 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

hes right..good time to start eyeying up instruements to get exposure to commoditie swings and natural disasters and such 

 

if an earthquake along the san andreas fault were to ever happen All State & State Farm would get fuking killed 

 

 

Sun, 01/03/2016 - 22:05 | 6993329 BiPolarFrenchman
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No need to worry about the banking system, nothing to see here...

Sun, 01/03/2016 - 22:41 | 6993353 opport.knocks
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I see - this was written for the WSJ, so he could not say anything too controversial to spook the advertisers or subscribers.

We are already in the early stages of WWIII and the BRICS are openly challenging US petrodollar supremacy. The US has responded with asymmetric warfare against them all (not so much India, yet) and is desparately trying to get one or more of it's proxies to start something bigger with Russia. And that potent combo does not make it onto the 2016 risk list?

Sun, 01/03/2016 - 22:13 | 6993365 yellensNIRPles
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Fucking asshole. I took some positive messages from his book Black Swan around the time it was released because I'm able to read between the lines, but this is a bunch of fuck-all, sprinkled with a bit of 'don't worry about the banks you dumb sheep motherfucker'.

Fucking useless prattle that serves no one in any way. I could have written a more substantive article wasted at 4AM while tugging one out.

I am hereby done with N.N. Taleb.

Mon, 01/04/2016 - 08:52 | 6994704 spacehedgie
spacehedgie's picture

Wasn't Black Swan the book in which he complained about the financial press (like FT and WSJ) editors butchering his articles and texts beyond recognition? Or maybe it was in the Fooled by Randomness.

Anyway, I'm still giving him the benefit of doubt. This isn't likely to be his original text. This is what WSJ editors butchered his text into.

Sun, 01/03/2016 - 22:59 | 6993562 TVP
TVP's picture

The average fringe basement blogger posts more substantive content and insightful analysis than this....juvenile rambling, what have you.  

 

 

Sun, 01/03/2016 - 23:01 | 6993568 besnook
besnook's picture

well, he covered his bases for the sighting of the next black swan so he can take credit for ipredicting it again. is war a black swan or just black?

Sun, 01/03/2016 - 23:30 | 6993679 Zero-risk bias
Zero-risk bias's picture

Surely, any instability or unseen eventually which may in part be attributed to the underpinnings of the global tectonic market valuations will be offset and managed by handheld technology.

I have apps that can give me financial and meterological information at the push of a button. Besides. we can all send pictures to our friends.

Sun, 01/03/2016 - 23:36 | 6993701 kiwimail
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He lost me on the first sentence. "First, worry less about the banking system."  Has he forgotten about the quadrillion in derivatives?

Mon, 01/04/2016 - 00:26 | 6993839 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

us tax payer as collateral, brehs

 

 

Mon, 01/04/2016 - 02:18 | 6994114 vega113
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He didn't say that bank are fine now. He just said that since banks are prepared for the last crisis, the next crisis will be a bit different. Obviously, the largest holders of debt now - are CBs and states. However, before any crisis would have any chance to strike, we could have some false flag event - like something related to envrironment, or epidemic. Then everything will be blamed on this. There's will be no bank crisis as everybody will be occupied with something else. Then the banks will get more bail outs.

Mon, 01/04/2016 - 00:19 | 6993823 Boing_Snap
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Taleb uses derivatives for his trading strategies and it appears he has blinders on in regards to the leverage and money debasement that is once again running rampant. How many commercials has one seen lately for 7-8 year car loans, with $1-5000 cash back, that's basically Cheetah loans for 110% equity. 2006 on steriods.

I'm recalling about 3 years ago golfing with some bankers, one of whom was a manager of a large Canadian bank's corporate finance, I had some knowledge on the subject and we struck up a conversation about Mortgage backed securities and CDOs. He stated in no uncertian terms that all of those instruments were back in the system, and growing by volumes. I told him that a report that the Canadian banks were at the Fed's window in 2008 along with all the other banks in the world, and his bank was insolvent then, that took him back, he gave a funny smile and no rebutal. Silence is acquiessence, not to deny is to affirm.

No doubt the criminals are expecting another bail out, are you ready for another 30-50% haircut to your portfolio? It happens every 5-9 years, basically a collapse of the credit system or economy.

 

Mon, 01/04/2016 - 00:27 | 6993842 jcdenton
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I suggest Taleb doesn't know shit ..

http://eagleonetowanta.com/

Mon, 01/04/2016 - 01:01 | 6993896 Soundgardener
Soundgardener's picture

Taleb's analysis is irrelevant; he's a God botherer.

Regarding Wanta, Viking Press needs to raise their game, or he should find another publisher. Very poor writing and presentation, e.g:

      "In this process Lee Wanta did amass trillions of dollars that were designated to go back to the American
        people by President Reagan."

Letting a comment like that go without explanation rings warning bells; the shitty writing and presentation doesn't help.

Mon, 01/04/2016 - 05:32 | 6994278 williambanzai7
williambanzai7's picture

Taleb has a trading book too. I don't believe he is not betting against the banks in various ways. The cheaper it is to bet against the banks the better it is for him. You can't fault him. This is how he makes his living.

Mon, 01/04/2016 - 05:51 | 6994292 Ghordius
Ghordius's picture

+1, WB7, though I have a different perspective on that. Taleb (one of my favourite living philosophers, btw) uses derivatives for his trading book

like the hedge funds. now, there is a widespread sympathy for hedgefunds here because they do indeed have "skin in the game"

but our modern, post-1999 derivatives are... products of a banking system gone wild. they were long banned for a whole set of reason

the typical derivative is a two-sided bet. a bank has a customer that wants to place a bet, the bank produces a "back to back" set of bets that look innocuos, this way, and then tries to find the second customer for the opposite side of this bet. here in the eurozone, we witness lots of so called "wealth managers" that are kicked out of banks when they refuse to push derivatives to their clients

they are still dangerous, those bets. they can still kill banks. except that megabanks are "systemically important" and so can't fail, and have to be bailed out with taxpayer (or bank customer) money

even your "bet against the bank" is, depending how you do it, most probably a subdidized and guaranteed bet... with Other People's Money

if you see the megabanks as the evil squids, I agree. but I see all those betting derivatives as their tentacles, and this makes those hedgies part of the problem

keep the financial casino and the banking systems separate, I ask. return the Glass-Steagall, for starters

I don't mind you betting against the banks. I do mind paying for your bets, both as a subsidy before and a bail-out or bail-in afterwards

I do not mind Taleb making a living. but if I am paying for it, I would like to be treated as a customer or employer, instead of the idiot holding the bag, later

and this imho simple request... is terribly difficult to get through to people that anyway see finance as a matter of making bets, or claim that the fault is all in regulation, and the state, period

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