Naseem Taleb Puts on his Black Swan Mask
Naseem Taleb received much attention as the author of The Black Swan which was published in 2007. In his book, he criticized the risk management methods used by the finance industry and warned about financial crises. This Halloween, he made an appearance on Bloomberg News for an interview. He started the interview wearing a black swan mask that a friend had given to him. The black swan is a metaphor for unpredictable events or the inability to predict the timing of likely events.
Taleb described how the global aggregate debt burden has increased since the financial crisis of 2008-2009. Although it is not as heavily concentrated in a single sector such as housing, the overall credit risk in the system is higher and the global economy is “more fragile today” than in 2007. What is drawing more of Taleb’s attention these days is government debt. While the debt levels of many countries are rising to unsustainable levels, most of his comments were directed at the US Government. Some of his comments follow:
Governments, they think they can borrow for free. But they have had to borrow a lot. We (US Government) have had to borrow more than $1 trillion dollars (per annum)...and we're paying some $300 billion in interest (per annum).
You can enter a spiral. In my mind, it's when governments have to borrow more and more to pay interest - like a Madoff scheme. The minute you enter that phase, there's nothing healthy about it from an economic standpoint.
But we've accumulated an additional $10 trillion in debt since the crisis. Plus we have hidden liabilities that should count as debt - like social security, you have hidden liabilities when you have to bail out firms, you have hidden liabilities from student debt...you have a lot of things, if you've committed to some expenditures, on top of debt you have hidden liabilities that should act like debt.
Years ago we had a debt crisis...in 82' it started in Latin American countries...today it's hitting the core, it's no longer the periphery...look at countries like Italy...it's getting closer to us.
The solution for overwhelming government debt in the past has been inflation but Taleb believes that once inflation takes hold, you can’t control it. Taleb provided a warning about the stock market as well: “You cannot maintain high valuations in the stock market with higher interest rates.”
Portfolios are currently positioned to have a lower allocation to equities than normal, high credit quality and relatively low duration for fixed income, and a meaningful allocation to physical precious metals bullion.
If you have any questions or comments, please contact me.
Robert G. Kahl
CFA, CPA, MBA