Nassim Taleb, famous author of “Fooled by Randomness”
and “The Black Swan”
, was so distressed by the Federal Reserve’s roll-out of quantitative easing part 2 that he ended his media black-out and interviewed with Erik Schatzker on Bloomberg Television a few days ago.
Anyone familiar with Taleb will not find any new themes or critiques in this interview. However, he dropped a few interesting analogies that are always good to hear, and his sense of urgency definitely showed. As always, I recommend you watch the interview for yourself (11 minutes and clearly edited), but here are just a few paraphrased highlights that struck me (re-ordered into themes):
On risk:
- Bernanke does not understand risks, he is risk-blind in his analysis of the situation. He crashed the plane because he did not know about hurricanes. (Me: I would refine this comment to say “Bernanke does not care about the same risks that Taleb cares about”)
- Bernanke talks about returns, but says nothing about the risks. He is like a pilot who talks about speed, but not about safety.
- Quantitative easing may work, but should it fail, the risks are humongous.
- Assuming there is a very small risk, retirees are the ones bearing this risk. The Federal Reserve is printing money to bail out bankers and people who took on ill-advised mortgages. Punish those who got us into this mess and not the “other people.”
On non-linearity:
- The economics establishment has not been able to understand non-linearity.
- The Fed is printing and printing and sees no effect, just like hitting a ketchup bottle over and over and nothing comes out. Then, suddenly, the ketchup comes spilling out all at once, all over your fries, the table, your face, everything. (Me: in a linear system, if any ketchup is going to pour out the bottle, then each shake of the bottle will produce a proportionate amount of ketchup).
- QE is like going short an out-of-the-money option on hyper-inflation.
On what should the Fed be doing: (he was not as crisp here as he should have been)
- There is no free lunch: you cannot solve a risk problem by risky methods: increasing deficits on future generations and debasing the currency.
- There will be pain – what the Greeks are facing, we will eventually face too.
- We need to break the debt that is in the system.
On gold:
- The Fed’s business should be price stability, but they are not fulfilling what we want from a currency that replaced gold.
- If you see gold tripling in price, up 40% in the past few years, money is not going to transfer to goods and services, it will go into things.
Taleb also promoted his new book: The Bed of Procrustes: Philosophical and Practical Aphorisms
.
Most poignant quote: “I feel now as jittery as I did when I was in Lebanon, when I was a child, at the beginning of the civil war.” Taleb explained that when he first came to the U.S. he felt stability as the currency in his native country Lebanon went from three to the dollar to 1500 to the dollar.
Be careful out there!
Full disclosure: no positions
It seems like a lot of people struggle to understand non-linearity, or make the mistake of thinking about the problem linearly when it’s not. But it would seem that having an understanding of non-linearity would be pretty damn important these days.
The more I learn about these non-linear phenomena that Taleb and others talk about, the more I see them in everyday life. I’m especially intrigued by the idea of a self-referencing feedback loop, because I think this is one of the dominant forces in the market.
I think Taleb’s analogy of money-printing as a short OTM option position on hyperinflation is apt, and anyone who understands options would hopefully understand the dangers of such a position. Limited upside, very unlimited downside.
Great summary post!