Taleb Warns On 'vicious' Debt Crisis

[TwoWolves]

http://www.citywire.co.uk/selector/-/news/comment/content.aspx?ID=400421&re=9446&ea=230316&ViewFull=True

Black swan author Nassim Taleb says the world debt problem is worse now than at the height of the credit crunch and investors should ditch equities and US Treasuries and back hard assets.

In an interview with Bloomberg, which you can see here, the New York University professor who made his name predicting the credit crunch, says that governments have failed to learn the lessons of the banking crisis, allowing the debt problem to morph into a new and more ‘vicious’ form.

‘I had detected fragility in the banking system and it is still there and we need to do something about it,’ he said. ‘We have had a couple of years since the meltdown and the risks have increased and taken a much more vicious form.’

He warns that economists and investors are continuing to espouse theories not backed by empirical evidence, such as the pricing of assets and risk, and says the globalisation has made events less predictable as the world has become more inter-connected.

Taleb brands the government bailouts of the financial system and the transferal of debt from the private to the public sector a fast-track to increasing moral hazard and is scathing about the profits made by the banks over the past year.

‘Look at all of the money they made with our backing- it is like they spat in our faces,’ he said. ‘’We have a lower tax base than two years ago because less people are in work than two years ago and are now depending on economic forecasting by governments. Obama is forecasting a deficit of $4-7 trillion depending on the parameters you use but a small glitch can mean the deficit for the next 10 years swells to $20 trillion.’

He points out that Greece was forecasting debt to GDP of 3%, which has since risen to 14% and counting.

‘The same thing will happen to the US- typical government underestimating,’ he says.

Taleb says that the escalation of the debt crisis will be sparked by what he says as the inevitable failed auction of Treasuries and the subsequent contagion around the world.

‘There will not be enough buyers of Treasuries and the government may have to print them,’ he says. ‘Before you know it you wake up to hyper-inflation without having had any inflation. I am extremely worried about government debt and long-term interest rates. A rise in interest rates can be extremely punishing. Governments want a bit of inflation, it would help everyone, but hyper-inflation penalises the stockmarket.’

So what does this all mean for investors?

‘I don’t recommend investors use long-term Treasury bonds as a repository of value- go very short-term,’ he says. ‘If you are European and think the dollar is a going to be a good hedge- both [the euro and the dollar] are going to have the same ills.’

If you back his perception that hyper-inflation is likely, then move into hard assets.

‘A good collection of metals and land, but agricultural land, not speculative real estate,’ Taleb says.

Perhaps his highest scorn is held over for equities.

‘’I recommend not thinking about the stockmarket,’ he says. ‘It is a big hoax that has disappointed people over the last decade making their retirement plans, thinking it would appreciate.’

‘Use it as something to play with for entertainment and nothing more.’

[bobthe~]

Who would have thought our very own CGNAO was Taleb?

[_w_]

No it's not Taleb.

That guy is CGNAO:

Richard Russell, the famous writer of the Dow Theory Letters, has a chilling line in today's note:

Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.

http://www.businessinsider.com/dow-theorist-richard-russell-sell-everything-liquid-you-wont-recognize-america-by-the-end-of-the-year-2010-5

[OnlyMe]

There are more savers than borrowers, the savers are spenders too (or were in many cases), the bankster's debts have been lumped on everybody.

Going to be puke making for the economy as a whole for a long time. A year or two for the readjustment and collpase of demand as those spending go from pillar to post trying to dodge artificially bred inflation and reduced income?

Looks like it. The UK pre-election has just been a total head fake and spin, plus a dollop of wasted new money which rather than saving the economy has skewered it.

[Toto deVeer]

Who would have thought our very own CGNAO was Taleb?

Eh? CGNAO?

[bricor mortis]

Eh? CGNAO?

One time HPC site doomster poster advising folk to get into hard assetts ( shiny yellow ones )

[Si1]

why aren't the businesses underlying equities 'hard assets' any more than a certificate on a quantity of gold in a vault somewhere is?

[Harry Sacks]

why aren't the businesses underlying equities 'hard assets' any more than a certificate on a quantity of gold in a vault somewhere is?

Because most of them are massively leveraged, have unfunded future liabilities, are vulnerable to commodity spikes and IR fluctuations, consumer confidece....etc...

[OnlyMe]

why aren't the businesses underlying equities 'hard assets' any more than a certificate on a quantity of gold in a vault somewhere is?

Becuase they have been distorted by their funding mechnisms and the trading mechanisms surrounding their valuations and the interest rate environment in which they are valued.

More smoke and mirrors now than ever. Almost total fakery on some markets.

See Dow 1,000 point drop the other week - fat fingers my ****, it was a measure of how utterly out of control the whole system is.

Edited May 18, 2010 by OnlyMe

[Toto deVeer]

One time HPC site doomster poster advising folk to get into hard assetts ( shiny yellow ones )

Oh, thanks. Looks like it was good advice, in hindsight.

[bobthe~]

Oh, thanks. Looks like it was good advice, in hindsight.

Yes but rather monotonous. Every piece of bad news or ambivalent news was accompanied by a picture of an atom bomb and every comment on the shiny stuff included a rocket piccy.

Edit:

His posts were also opaque and no explanation was given for his conclusions, which added a sort of religious mystique that appealed to some here. I don't think he or she ever engaged in the debate.

Edited May 18, 2010 by bobthe~

[scepticus]

Because most of them are massively leveraged, have unfunded future liabilities, are vulnerable to commodity spikes and IR fluctuations, consumer confidece....etc...

however plenty of them have huge cash piles, little debt and produce some rather important items, and are 'systemically important' businesses.

why do you think buffet bought trains?

[bricor mortis]

why do you think buffet bought trains?

Some sort of Hornby fetish ?

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

Can't Roubini and Taleb be recruited to leaders of some kind of world economic goverment, until the crisis is over. There's little hope without them at the fore.

[jonpo]

Becuase they have been distorted by their funding mechnisms and the trading mechanisms surrounding their valuations and the interest rate environment in which they are valued.

More smoke and mirrors now than ever. Almost total fakery on some markets.

See Dow 1,000 point drop the other week - fat fingers my ****, it was a measure of how utterly out of control the whole system is.

I love you guys who think its all rigged ... more opportunities for the rest of us ... keep drinking the kool aid lads

[bobthe~]

I love you guys who think its all rigged ... more opportunities for the rest of us ... keep drinking the kool aid lads

Never mind that. reply to my post and it will be3000 for you me laddy.

[Game_Over]

Markets are clearly too complex to be rigged or even gamed successfully.

What governments trying to perpetuate fantasy economics describe as a rigged market is actually economic reality in operation.

Swap a wheel barrow full of Euros for a loaf of bread Guvnor?

[interestrateripoff]

This year will prove interesting.

[Traktion]

...

See Dow 1,000 point drop the other week - fat fingers my ****, it was a measure of how utterly out of control the whole system is.

Apparently, "fat fingers" were ruled out after it was investigated. It was the real deal and I bet the "plunge protection" team were busy in the following few hours.