Nassim Taleb, Stan Druckenmiller talk crisis on Bloomberg TV

Our future may be a bit more fragile than "Anti-fragile", if the latest warnings from Nassim Taleb and Stanley Druckenmiller prove correct. 

The pair recently sat down with Bloomberg TV to voice their concerns over America's social and economic strains. Taleb believes we are still loaded down with the unsafe systemic risks and toxic leaders of our recent past. Druckemiller sees a crisis "worse than 2008" ahead. 

We have their full interviews for you here, so let's jump right in. 

Nassim Taleb feels we are at a point where we have not learned or benefited from the mistakes of our recent financial crisis. This has made our society more susceptible to fragility and will deepen the effects of future crises.

Moral hazard has increased as bankers have paid themselves larger bonuses with our (taxpayers') money. Quantitative easing has lifted asset prices. Median incomes, and the average person's standard of living, have been dropping while the top tier of society ("the 1 percent of the 1 percent") has been absorbing the lion's share of recent economic growth.

As Taleb puts it, we are now paying for the bad debts and disastrous trades made by irresponsible, bailed-out parties in the last cycle. We have transferred private problems and failures into public problems by transforming private debt into public debt. 

In order to improve our situation and ensure future prosperity, we need to face our mistakes and make our regulations and tax codes less complex. Complex regulations are a boon to lawyers and big businesses who game the laws to their benefit. To quote Taleb, we need "sound, minimal regulations and more skin in the game (personal liability) for those who make mistakes.".  

Recently retired from running public money, star hedge fund manager, Stanley Druckenmiller has stepped back into the spotlight to warn of a looming entitlement spending crisis in the USA. 

"Every once in a while, the world of investing and what's going on in the country will intersect". 

Druckenmiller recounts his conversations with US officials about previous storms on the financial horizon. Based on his past experiences, he figured it was better to keep quiet and manage his investors' money than get caught up in public debates over politically sensitive issues, like the fallout from the 2000s housing bubble. 

He now feels he needs to speak out to warn citizens about a coming bust of America's demographic bubble. Druckenmiller notes that in 2030, the average population of the USA will be older than the average Floridian is now. "I don't know about the timing of when markets will respond to this, but I know it will happen based on the fundamentals.". 

Stan also offers his thoughts on the valuation of the equity markets, bonds, risk assets and zero rates, and competitive currency devaluations. "Every single major country is now running stimulative monetary policies, basically modeled after the Fed.". 

One great piece of investing advice from Stanley Druckenmiller (and a recurring theme in this interview): "You've got to think in an open minded fashion and look out into the future to judge companies [and stock prices]. Try and imagine the world 18-24 months from now and not the way it is today. Then think about where securities prices will be to reflect that view".

Related posts:

1. Victor Sperandeo exclusive interview: gold, inflation, and trading the QE wave. 

2. Nassim Taleb on Antifragile at Google.

3. Jim Rogers on Street Smarts and outsized returns.

Nassim Taleb on Antifragile at Google

 

Authors @ Google presents Nassim Taleb, discussing the concepts from his latest book, Antifragile: Things that Gain from Disorder. 

Here, Taleb offers his view that the opposite of fragility is not "robustness", as commonly supposed, but anti-fragility. Whereas things that are fragile need to be handled with care and kept in a state of tranquility, things that are anti-fragile benefit from volatility. 

According to Taleb, fragility and anti-fragility can be measured, whereas risk cannot (in spite of what Ivy League academics with risk models may think). You'll hear why anti-fragile systems have benefits that outweigh their risks, and why some fragile systems are vulnerable to "prediction error" and hidden, intolerable risks which vastly outweigh any associated benefits.

Using the example of Seneca, a wealthy Stoic philosopher who often imagined himself to be poor, Taleb suggests we should always try to have more upside than downside from random events - "and then you're anti-fragile". 

So let's hear it for an anti-fragile world of "many highway exits and options". It sounds a lot better than a world centered around top-down planning by the supposed elites.

Related posts: 

1. Nassim Taleb on Antifragility at Princeton.

2. Econtalk interview with Nassim Taleb on Antifragility.

Nassim Taleb on Antifragility at Princeton

 

Nassim Taleb discusses the concept of Antifragility at Princeton. 

If you want to understand the long-term consequences of market interventions and other attempts to delay or remove stressors from real-world systems, watch this video. 

Taleb also makes clear that we are at an unprecedented point in history, in which those in power benefit on the upside while having no real risk (no "skin in the game") on the downside. In other words, our supposed "leaders" hold their positions and accrue benefits from them without having to display courage or face the consequences of their actions and decisions.

You can hear more from Taleb on this topic in an excellent econtalk interview from earlier this year. 

His new book, Antifragile: Things That Gain from Disorder is available on Amazon.   

Nassim Taleb on Antifragility

Nassim Taleb on Antifragility, interview at EconTalk (Hat tip: Nancy Miller).

Key early point from Russ Robert's chat w/ Taleb on fragility vs. "antifragility": 

"...Art [Devany] gave me a lot of ideas and suddenly everything flashed together, when I made the distinction between two types of systems, the organic and the non-organic.

The organic has the property that the difference between the living and the dead, the living and the non-living; the living, between living and a machine for example, requires stressors. That's how the complex systems communicate with their environment. You need a stressor. As with the bones, with your muscles, a lot of things. And usually overcompensate for the stressors--there is a mechanism in biology called hormesis. This table I have in front of me will never get better if I bang on it. Use it and lose it.

On the other hand, the human body gets better if it is exposed to the right amount of stressors. Of course, you have to define the stressor and the quantity of stress. But then that makes a difference between two worlds--the organic and the engineered. 

And now, if you can apply that to economic life--is economic life in the first or second category? If it's in the first category then we should have bailouts, top-down engineers, everything. If it's in the second category then sorry, you know, it doesn't work that way..." 

Enjoy the discussion, hope it stirs some reflection. 

Russia Forum 2011 w/ Nassim Taleb, Marc Faber

Russia Forum 2011, which recently took place in Moscow, featured a global investing outlook panel discussion which included famed investors and commentators, Nassim Taleb, Marc Faber, and Hugh Hendry.



Also on hand at the forum were economist, Nouriel Roubini, strategist, Russell Napier, and a panoply of international investors and business leaders. You'll find Roubini and Napier adding their thoughts in the outlook panel video above.

There was also a rather interesting panel, featuring Faber and Taleb, entitled, "Is Russia the Best or Worst in BRIC?".

As you'll surmise from the title, it's a panel debate on the strengths and weaknesses of each of the large BRIC (Brazil, Russia, India, and China) nations, with added focus on host country, Russia. So is there a strong case for investment in Russia at this time?

This conversation is worthwhile not only for the contributions from the aforementioned panel stars, but also due to the comments from other panelists and some key questions from the audience.

Pay special attention to Mario Garnero's comments on the effects of Brazil's past inflation on its middle class (this is important for those of us in QE, deficit-land US), as well as the questions on Russia's future from the native conference attendees.

If you'd like to take a look at last year's lively panel discussion and judge the panelists' comments against what took place in 2010, check out our related post links below.

Related articles and posts:

1. The Russia Forum 2011 - Russia Forum.

2. Panel discussion from Russia Forum 2010 - Finance Trends.

Nassim Taleb on fragility, black swans at EconTalk

Nassim Taleb, author of Fooled By Randomness and The Black Swan, joins Russ Roberts at EconTalk for a discussion on Black Swans, Fragility, and Mistakes.

You'll find an audio podcast of the interview, along with a transcript and some related articles & links, at the link above.

Be sure to check out this very worthwhile and wide-ranging discussion on the nature of debt, robustness in Mother Nature versus lack of robustness in certain man-made systems, and the harm that is levied on society by its overreliance on forecasting and vulnerability to the large mistakes made by "expert" forecasters who are not held accountable for their hubris and error-prone guidance.

Here's a choice quote from Taleb on the difference between small, relatively inconsequential mistakes and large-scale mistakes which impact the greater society:

"I want to live in a society in which human error doesn't penalize the multitude. This is pretty much my mission for the rest of my life: to try to figure out how to build a society in which people can make mistakes. Mistakes are inconsequential; that's my tinkering idea, because you make a lot of small mistakes and so society should be able to make a lot of small mistakes. Mistakes are like an option on discovery.".

Enjoy the interview and I hope it stimulates some thinking and action heading into the weekend.

Related articles and posts:

1. More podcasts with Nassim Taleb - EconTalk.

2. Russia Forum 2010: Nassim Taleb, Marc Faber, Hugh Hendry - Finance Trends.

Video: Russia Forum 2010

Must watch video of a panel discussion with Marc Faber, Hugh Hendry, Nassim Taleb, Michael Power, and others at The Russia Forum 2010.

As moderator, Marc Faber begins the discussion by asking the panel members how they would invest $100 million for the year ahead. A varied discussion on the global economy, geopolitics, inflation vs. deflation, risk, food and energy systems, and the rise of emerging markets ensues.

Great macro discussion with seeds of investing ideas and global macro trades sprinkled throughout. Don't miss this one, and thanks to Jay at Marketfolly for highlighting this discussion.

Features of the week

It's been a while since we rolled up a new "Features" post, but we're serving one up today. Enjoy our latest selection of Friday links.

1. Robert Murphy: busting the myth of "green jobs".

2. America's AAA rating at risk: David Walker.

3. Hayman Capital's Kyle Bass predicts sovereign defaults.

4. Global crisis 'vastly worse' than 1930s, Taleb says.

5. Distressed debt investors work fallout of buy-out boom.

6. An offer US banks could not refuse: Paulson's tactics.

See also: 10/15/08 post, "Treasury bank plan: not so 'voluntary'".

7. Deleveraging is the only real solution to the crisis.

8. TARP beneficiary says 'sham' bailouts help speculators.

9. Buffett knows how to avoid common value traps.

10. 'Buy and hold' is not dead (if properly defined).

11. A brief history and Dow Theory update: Tim Wood.

Have a great weekend, and thanks for checking in with Finance Trends Matter (click here to subscribe to our RSS feed). We'll see you all next week!

Bank rescue: a plan with no details

On Tuesday, US Treasury Secretary Tim Geithner introduced a $1.5 trillion bank rescue plan that aims to recapitalize the banking sector and spur increased lending to individuals and businesses.

The market's reaction to the plan (S&P 500 down 5% Tuesday) is the subject of some debate today. Did traders and investors show their disapproval of the rescue plan by selling shares, or was yesterday's decline simply a "sell the news" event?

Whatever the verdict on yesterday's action turns out to be, one thing seems clear. In the long run, some market participants are doubtful that the plan will achieve any good at all.

Another sticking point: when looking over some of the criticism of the Treasury's "Financial Stability Plan", complaints over a lack of detail seem to be a recurring theme.

From Breakingviews.com, "A plan with no details":

"After months of ad hoc bank rescue efforts, the markets hoped the new U.S. administration would deliver on its promise of a coherent, detailed plan for mending the financial system.

So when the Treasury secretary, Timothy Geithner, offered only a bare-bones outline, leaving crucial questions unanswered, investors were not amused. The S&P 500-stock index fell some 5 percent on Tuesday, while some banks' shares declined multiples of that. The disappointment squandered precious market confidence in the administration.

Treasury's outline of its now-renamed "Financial Stability Plan" sounds reasonable as far as it goes. The government will subject banks asking for more support to stress tests and more scrutiny.

It will purchase preferred shares that can be converted into common stock. It will establish a vehicle to co-invest with private investors in banks' troubled assets. It will boost the purchase of certain asset-backed securities. And it will offer greater assistance to hard-pressed mortgage holders.

But missing from the package are crucial details on how each of these initiatives will work. How will the stress tests improve on banks' own, and how are they going to be used - will they dictate which banks are saved and which are allowed to fail? How will the preferred shares be priced? How much of a subsidy must the government offer private investors to lure them to buy shaky assets? And so on..."

In recent days, noted investors and market observers such as Nouriel Roubini, Nassim Taleb, and Jim Rogers were interviewed by CNBC, where they all openly expressed doubts about the rescue plan. So we know how they feel about all this.

What's the average American's take on the issue? The huge comment thread at MarketWatch might provide some clues, and we're keeping an ear open for more.

Related articles and posts:

1. Geithner defends lack of details in financial plan - Bloomberg.

2. Jim Rogers says Geithner caused crisis - Bloomberg.

3. Geithner's first test is a disaster - MSN Money.