Category Archives: Economy and Meltdown

Taleb On "Skin In The Game" And His Disdain For Public Intellectuals

Nassim Taleb sits down for a quite extensive interview based around his new book Anti-Fragile. Whether the Black Swan best-seller is philosopher or trader is up to you but the discussion is worth the time as Taleb wonders rigorously from the basic tenets of capitalism – “being more about disincentives that incentives” as failure (he believes) is critical to its success (and is clearly not allowed in our current environment) – to his intellectual influences (and total disdain for the likes of Krugman, Stiglitz, and Friedman – who all espouse grandiose and verbose work with no accountability whatsoever). His fears of large centralized states (such as the US is becoming and Europe is become) being prone to fail along with his libertarianism make for good viewing. However, his fundamental premise that TBTF banks should be nationalized and the critical importance of ‘skin in the game’ for a functioning financial system are all so crucial for the current ‘do no harm’ regime in which we live. Grab a beer (or glass of wine, it is Taleb) and watch…

 

Via Redmond Weissenberger of the Ludwig von Mises Institute Of Canada,

A must see interview with Nassim Taleb


Nassim Nicholas Taleb is a former trader and hedge fund manager, a best-selling author, and a ground-breaking theorist on risk and resilience.

Taleb drew wide attention after the 2007 publication of The Black Swan: The Impact of the Highly Improbable, which warned that our institutions and risk models aren’t designed to account for rare and catastrophic events. Among other things, the book cautioned that oversized and unaccountable banks using flawed investment models could bring on a financial crisis. He also warned that the government-sanctioned housing finance agencies, Fannie Mae and Freddie Mac, were sitting on a “barrel of dynamite.”

One year after The Black Swan was published, a global banking crisis was brought on by the very factors he identified.

Taleb doesn’t identify as a libertarian, but he often sounds like one. He has argued that we need to build a society where major actors have “skin in the game” and our public intellectuals can bloviate without subjecting the rest of us to the consequences of their bad ideas. He supported Ron Paul in the 2012 presidential election and has cited the libertarian economist Friedrich Hayek as an influence.

Taleb has called New York Times columnist Thomas Friedman “vile and harmful” and coined the phrase the “Stiglitz Syndrome” after Nobel-prize winning economist Joseph Stiglitz, which refers to the phenomenon of public intellectuals being held utterly unaccountable for their bad predictions. Paul Krugman and Paul Samuelson are among Taleb’s other Nobel laureate bête noires.

Taleb’s new book – Antifragile: Things That Gain from Disorder Taleb’s new book is Antifragile: Things that Gain with Disorder, which argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success.

Reason’s Nick Gillespie sat down with Taleb for a wide-ranging discussion about:

  • why debt leads to fragility (5:16);
  • the importance of “skin in the game” to a properly functioning financial system (10:45);
  • why large banks should be nationalized (21:47);
  • why technology won’t rule the future (24:20);
  • the value of studying the classics (26:09);
  • his intellectual adversaries (33:30);
  • why removing things is often the best way to solve problems (36:50);
  • his intellectual influences (39:10);
  • why capitalism is more about disincentives than incentives (43:10);
  • why large, centralized states are prone to fail (44:50);
  • his libertarianism (47:30);
  • and why he’ll never take writing advice from “some academic at Cambridge who sold 2,200 copies” (51:49).

Marc Faber Fears 1987 Redux As "Markets Will Punish Interventionists"

“Regardless of what the markets do near-term, a correction is overdue,” Marc Faber tells Bloomberg TV’s Betty Liu. From discussing Europe’s ‘apparent’ stabilization – “anything can go up when you print money”; to US equity exuberance – “a correction is overdue and February is a seasonally weak month”; Faber sees no change from Geithner’s handover to Lew as he opines: “The only thing I know is one day the markets will punish the interventionists, the Keynesians and the monetary policy that the Federal Reserve and ECB has enforced because the markets will be more powerful one day. How will this look like? Will the bond market collapse or equity markets become a bubble, which would be embarrassing for the Fed’s sake if the U.S. market became a gigantic bubble and at the same time the economy does not recover.

 

 

 

Faber: on whether he agrees with George Soros that Europe has been stabilized:

“It has been stabilized for now, but the big question as he said is the imbalances have not been solved and these could come back and harm the markets and the euro at some point in the future. In terms of stock markets, I have advocated one year ago between April and June of last year to buy European stocks in Portugal, Spain, Italy, Greece and France because they were extremely depressed. Since then, the markets have rallied very sharply. Greece is up from the lows by 100%. That tells you anything can go up when you print money.”

On whether he’s getting out of European markets:

“Not really because we made the secular low roughly one year ago, but I have argued that it is the time right now to reduce equity positions. I think the markets are at the difficult juncture between overbought and a euphoric state. I am not ruling out that they could go up somewhat more like in 1987, going up 40% between January and August, but we also fell 40% in two months’ time. So the gains were wiped out quickly. In March of 2009 we are close to 1500. We had already a huge bull market, and a lot of the good news has been discounted already.”

On whether there will be a correction on the S&P:

“I think regardless of what the markets do, near-term, a correction is overdue and usually February is a seasonally weak month…It will be interesting to see how the correction unfolds.”

On why he’s not going big on any short in the market:

“The problem with shorting the markets nowadays is that you have this huge intervention by governments. Look at bonds of Italy Portugal and Spain–they rallied last year, there was a huge profit opportunity, and I admit that I missed it, but the profit opportunity came about as a result of government intervention. I feel the markets are — some people say it is intervention. I can call it manipulation. If manipulation continues, you do not know how far they will go. The only thing I know is one day the markets will punish the interventionists, the Keynesians and the monetary that the Federal Reserve and ECB has enforced because the markets will be more powerful one day. How will this look like? Will the bond market collapse or equity markets become a bubble, which would be embarrassing for the Fed’s sake if the U.S. market became a gigantic bubble and at the same time the economy does not recover.”

On Tim Geithner’s legacy and whether anything will change under Jack Lew:

“I doubt there will be much change. To be fair to Mr. Geithner, he inherited a colossal mess. he is involved in politics and he has to listen to what the politicians want to do. He did an ok job. Where it is not ok is that basically nobody that has committed financial fraud or contributed to the fraud was prosecuted.”

Visualizing The Euphoria

Drip…drip…drip… day by day, stocks leak higher, gradually inching up to record nominal highs; credit yields compress to record lows (and spreads near record pre-crisis tights); and volatility compresses (realized and implied) to near all-time-record lows. We have discussed the positioning of the market (S&P 500 futures at their net longest since 2007), crowded nature (JPY Shorts and NKY Longs), and sentiment (AAII Bulls near record highs). But, it is Credit Suisse indicator of risk appetite that should be worrisome for most investors. With Credit Risk Appetite well beyond any previous record high and Global Risk Appetite at its highest since 2006, perhaps it is time to consider the hedging discussion we had yesterday? With the euphoria dramatically dislocated from fundamentals and empirical world wealth trough-to-peak moves indicating a turning point, the lack of bearish arguments is deafening.

Record High Risk Appetite!!

 

Extreme large disconnect between ‘euphoria’ in markets and Global fundamentals (IP)…

 

and the last three global troughs in world wealth suggest we do not have much more upside to come…

 

Charts: Credit Suisse

Weekly Bull/Bear Recap: Jan. 21-25, 2013

From Rodrigo Serrano of Rational Capitalist Speculator,

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

 

Bull

+ Existing home sales may have underperformed the consensus forecast, but for good reason.  A lack of homes for sale (supply), particularly at the low-value end, was the culprit.  This development will help maintain upward momentum in home prices throughout 2013.  Moreover, New Home Sales may have printed a negative MoM growth-rate, but this was due to a huge upward revision in November and doesn’t deter the bigger picture of continued growth for the sector in 2013.  Overall, inventory levels remain very lean.  Higher home prices will result in a positive wealth effect for consumers and help support consumption.  Furthermore, low inventory levels will act as an incentive for homebuilders to hire, buttressing economic activity.

+ The U.S. job market is clearly on the mend from the looks of the jobless-claims data.  At roughly 352K, the 4-week average is now at its lowest level in almost 5 years.  This development is a harbinger for a solid January payrolls report, due in a week from today.  

+ The bears’ strongest point, a stalling manufacturing sector, isn’t confirmed at all by Markit’s latest preliminary PMI reading.  For January, the overall index rose from 54 to 56.1, a 10-month high.  Furthermore leading indicators in the report, such as New Orders, point to further expansion in the months ahead.  

+ The world’s largest economic bloc, the European Union, is clearly stabilizing.  Germany’s manufacturing PMI rises to the highest in almost a year, while consumer confidence in the European region expands for the second month in a row.  Both reports are for January.  Meanwhile, the ZEW Center for European Economic Research reports that investor confidence in Germany skyrocketed 24.6 pts, hitting a level not seen in more than 2.5 years (same story for Euro-area confidence).  Finally on the financial front, investors are giving the thumbs up at recent reforms in Spain and Portugal; both countries issue bonds to strong demand —- meanwhile, many banks that participated in the LTRO at the zenith of the crisis, are now repaying their loans quicker than expected, a sign of confidence that the worse is over.  

+ China continues to surprise to the upside.  The country’s manufacturing PMI, released by HSBC, hits a 2-year high in January.  Furthermore, Copper is about to break out of its multi-year triangle to the upside (see 3-yr view).  

+ The Conference Board’s U.S. leading indicator points to strengthening economic growth in the months ahead, rising 0.5% in December. “Housing, which has long been a drag, has turned into a positive for growth and will help improve consumer balance sheets and strengthen consumption,” says Conference Board economist Kenneth Goldstein.  

 

Bear

– Manufacturing has stalled and is looking to contract soon, as the Federal Reserve Bank of Richmond reports that its manufacturing index slumped to a 6-month low in January.  This report follows news of weakness in the sector from the New York and Philly Federal Reserve Banks.  Housing, which now only accounts for only 3% of U.S. GDP economy will not be able to pick up the slack (manufacturing accounts for 12% according to the National Association of Manufacturers)…  

– …furthermore consumption, which accounts for roughly 70% of the economy is set to shift down a gear as consumers hunker down as they face an expiring 2-year payroll tax holiday.  Bloomberg’s Consumer Comfort, which confirms recent falls in the University of Michigan and Conference Board consumer confidence surveys, falls to a 3-month low.   

– Complacency reigns in Euroland as Draghi states that the darkest times have passed.  Are we really out of the woods?  Investors are ignoring worrisome developments.  Spanish unemployment hits a record high while stories of corruption within the country’s government swirl about, creating political uncertainty at the flashpoint of the debt crisis.  Meanwhile in France, Europe’s second largest economy, recession is knocking on the door and could result in another flashpoint.

– From a technical perspective, stocks are very overbought at these levels.  Now is not the time to make risk-on bets as the S&P 500 also approaches multi-year resistance and many macro risks remain lurking in the background.

image  

—(Source Bespoke Investment Group)

– Common sense says that constant intervention and warping of financial markets by central banks will inevitably come back to haunt investors and the global economy.  Warnings grow of a credit bubble as rampant central bank intervention has masked the true cost of money.  The subsequent adjustment will undoubtably be painful.

Bob Shiller's Healthy Dose Of Skepticism

In a week dominated by prognosticators pointing reflexively to a nominal price index flashing green on their TV as indication that all is well in the world, Bob Shiller provides some much-needed healthy skepticism on not just the state of the housing market but the broad economy itself. While Bloomberg TV’s Tom Keene presses his short-term anchoring-biased view of a world heading for much better growth and a US housing recovery that will seemingly save us all; Shiller warns we have seen this before (in 2009’s housing market) and that the housing decline could go on. When Keene tries to translate the market’s performance into economic performance expectations, Shiller responds “you are talking to wrong man.” From the fact that we should be growing super-normally now to return to ‘normal’ market conditions to his view of many more years to go in this stagnation, four minutes of Shiller’s historical prescience is the perfect foil to the tick-watching talking-heads exuberance (especially in light of today’s dismal new home sales).