Nassim Nicholas Taleb on Bloomberg, May 9th, 2019.

the topic of the moment is president Trump's tax records and as usual yes you have an unconventional point of view the implication attorney and the same is that is that the fact that he appears to have lost so much money he's a bad thing that somehow disqualifies him from being the president I don't think it's an unconventional point of view but I you know I think it's entirely normal to feel that insulting entrepreneurs because you hate Trump is not a good idea it's very shameful exactly salting entrepreneurs entrepreneurs this country was built by entrepreneurs because it makes it respectable to lose money for the in the pursuit of you know help it helps economic growth and other things ninety-nine entrepreneurs fail for everyone who succeeds that you show on Bloomberg TV okay for every person you saw a goobric TV have ninety nine to fail absolutely no money probably not even driving a taxi so these people so you're insulting failure entrepreneurs and I think it's similar it's similar to insulting a soldier because he or she have lost a finger or limb in battle okay it's within the same class of things shaming risk takers when we need these are speakers so how should people look if we again we're taking records it loses honey you want to comment on Trump comment on Trump but don't go in an assault entrepreneurship ok closely that risk-taking and risk-taking people who make this country great ok insulting risk-taking for the sake of harming Trump is not acceptable strategy it's not acceptable it flaws everything else we're all it of course is beyond that it is it is a whole it's like biting the head that fed you with that look at the New York Times how many people have tried and failed and you know to get a newspaper that pays them a salary ok they're not looking at cemetery or failed entrepreneurs it is insulting so the lesson is that we should look at someone's losses and say thank goodness somebody's willing to lose money exactly the point this is what made America great what continues to make this country I mean you both of you I came to this country because we like the fact that it makes failure acceptable I've lost a lot of money I'm proud of it because at least it's a lot better than sitting on the sidelines collecting a salary who's gonna bring that salary entrepreneurs risk takers now seen this is part of a bigger conversation about you affable ISM is you know where a Dalio the founder and chairman of Bridgewater associates has ignited a debates over the state of American capitalism he says there's something wrong with it what do you say I like right there that as a person I like him personally but I think this point of view is profoundly mistaken because it's not capitalism that's wrong its absence of skin and game that is wrong absent it's going back to risk and going back to its taking absence of accountability you had people making decisions all right that harm others without being harmed that's not capitalism that's corporatism what we're talking about what I was saying the structure that we have today is Ray has skin in the game gray hats kind of game with his a son but but he doesn't really project it to society where we have centralization of people in Washington making decisions like Alan Greenspan that affect this whole country and when people you know are harmed they don't pay the price well that one isn't is Jay Powell now the chairman of the Federal Reserve yeah but but he's more responsible okay because he understands the job of the Federal Reserve should be minimum harm not policies that may entail side effects more generally Jay Powell gets that better than Alan Greenspan he that gets it a lot better but of course he's not the great vault Volcker okay not yet okay he hasn't shown no let's go back to the core problem is you want to live in a society that is decentralized enough that people who make a mistake are also harmed by their decision by their mistake not just inflict harm on bailed out and what happened is we have evolved into thanks to a large state to a situation of corporatism those close to the state are bailed out as crony capitalism that's not capitalism crony capitalist it there are a lot of the whole book on it the skin in the game I know the whole book about it it's good in the game so for those who haven't read the book okay so the idea is is locally first of all it's shameful to make a recommendation without being harmed okay if something goes wrong a forecast without having some skin in the game since being harmed by it how you structure a society in a way to be but make some smaller companies is that what happened is the minute you decentralize to be like Germany when you decentralize what happened when you have large companies because the company becomes powerful start leeching on a state and then you have a positive feedback then companies are not necessarily smaller companies but less powerful companies if you have you'll have less powerful companies this in this country as a consumer I have enough power against I used to have enough power against companies because he has a legal thought system but then when a company's become large as they are now all these giants they can control Washington control the law via lobbyists and perturb the natural mechanism of life and deaths of companies now seems some people think we can fix yes what's wrong with capitalism so to speak by employing new forms of monetary policy modern monetary Theory fails that's lunacy yeah a lot of risk taking it you know saying something may work ok you get a look at consequences if it doesn't work now we know the consequences is that theory is wrong yes I mean first of all it's sort of like how do we know that if we we don't experiment with I don't some nuclear device it will be harm so we know that it's not it's not a prudent policy okay to engage in things that may create hyperinflation and once you have hyperinflation then again that we've got to bring old Paul Volcker he's what 95 years old we got to bring him back because he's without him would be in trouble now so and you know it's about hyperinflation when there appears to be so little inflation but the problem of inflation is that very nonlinear so I'd like to catch a bottle nothing comes out and then suddenly things jump out so will you have to worry about it but I'm more concerned about the general more general situation today actually the talk of MMT because people realize doesn't make a lot of sense is that we're in a situation where you we have record low unemployment or they say so they claim plus what do we have we have a huge deficit yes we do ok so explain to me knowing which one is wrong because there's ok so which one is wrong okay so unemployment or the deficit so in other words will the story is delivered by which one of the two I think that we have a problem ok it come in deficit because if we have a recession then deficit would explode and if we have an expansion raising rates will [ __ ] visibly the mechanism of growth you know it's gonna raise the cost of servicing that servicing that that we already have north of 300 billion of just interest you know from previous debt at record low interest rates so you can imagine the results of so we're not in an enviable situation so this is why I'm worried you're worried yes are you worried I'm worried I'm worried mostly about deficits I don't go deficits are very hard is good employment gets people elected to office that office controlling deficits does not maybe but but but at some point people are not as stupid as we think see they they understand a few reason with them if you deliver the right message to take Germany Germany's are obsessed with deficits they are because of grandparents or great-grandparents okay live to write for inflation values exactly and they remember they know what can happen they don't want it to happen okay people in Argentina people in Turkey people Zimbabwe people in Iran did a lot of places okay you know sometimes communicate with them and they tell them what happens when I have hyperinflation this scene are you at all concerned about the direction of the us-china trade talks I have no it's not much I mean it'll take me I usually talk about topics that take about 20 years of reflection so not that one that's not something we need well given our relationship was you know in interviews I'm sure in 20 years we can talk about it will you be here I hope but Allah I'd like to talk about effectively that it is very foolish today to engage in any form of investment without considering the huge tail risk because what would happen is again it's like ketchup in a bubble they have risked risk risk accumulate typically nothing comes out and then suddenly something may come out okay so people have drawn parallels between what's happening financial markets today the amount of risk-taking the nature of the risk-taking the reach for yield the flood of foreign capital yes into particularly US financial assets drawing a parallel between that and what happened before the financial crisis yes now the conditions look very similar there could well we have a lot of a lot of debt but that has shifted from private to public yes which is worse because public that doesn't go away private debt you can always turn it into equity or punished you can restructure yes I'm a private debt that generated not by people who are responsible for the debt but there is more but there's still an awful lot of debt on corporate balance sheets everything they are their mouth growing but I'm worried of a public that worried about both public that is generated by people that skin in the game and goes out of control politicians in other words all sessions and and civil servants so and bureaucrats so you may have some what I'm saying that what is it gonna prove that the point is not to think what will happen but what is the prudent policy is you know in order to in order to inspire prudent policy you have to give people a sense of what the future may hold so were state what's going to precipitate it public debt crisis we know I precipitated a private debt replay the movie of the financial crisis my my my idea is I'd rather be very poor at the timing and good at the hedging all right so you want you want at your business that's my business but that's also you know my philosophy in life okay you don't want to try to depend on specific predictions of catalyst for that crisis it can happen in an hour or it may take years all right but definitely we are in a precarious situation I don't know what that malfunctioning plane will crash but it will eventually crash so you need some kind of protection from tail hedging that is done intelligently not like foolishly or stay out of the financial markets which what we recommend people now okay so we're actually getting down to this advice part of the conversation so if you're a professional investor and you want to take risk you want exposure you need to have you believe that one needs to have tail risk protection and they're not all insurance if you know how to do it if you don't know how to do it step by it or buy it you can buy it you can know it's not easy because a lot of people think they deliver it and they run out of money quickly or something okay it is very delicate situation I recommend that individuals utensils down cancels down unless you know how to hedge all right and and new people do a few people do because at this stage of the game you recommend that people have no exposure to financial assets listen you're not obligated to expose of financial assets of course not it's not prudent well I don't want to save for retirement I understand that you want to save for retirement that's not prudent you know because you got to look at both sides of story you may end up with no money what's the Brunell money is always more location than if you're at the moment if you're trying to save cash what I'm saying is that I engage in financial markets if and only if I have tail hatch protection and it's done right otherwise don't engage in financial markets even in Treasuries of know especially Treasury bonds interest rates the upside from interest you know from from from from holding a bomb that yields 20.4% the upside is limited and the downside is that's the only if you're interested in capital appreciation if I hold the maturity I'm still getting the 4% yield yes but there's a the thing is what if you want to get out for this one our problem was with only two maturity a lot of people don't know the horizon of their investments because they think how many people get married thinking of they're married forever half marriages dissolved before so it's the same thing you think gonna be married to that investment for 10 years you may have other things may change your mind you may have a financial condition you may want your cash out look what may happen to you liquidity in other words look of you you know your investment horizon okay is not doesn't match you're explicitly stated investment horizons it's very hard for people to understand that so at what point of the investment cycle does it make sense for people individuals to hold financial [ __ ] I mean I would say I would I'd rather have very low return or close to no return then have a huge negative return well sure catastrophic loss you keep nobody could invent covered exactly exactly a lot of people wish in 2007 and 2008 early thousand which they had no investments okay yes this is true but anybody who bought at the bottom in March of 2000 the point is if you have a crisis I would be the first to buy all right and then but but and the other thing is I hate gold but I'll tell you what skin and again tell you what I own I own gold some gold that's it some other some other financial instruments that would benefit from a collapse in one market such as it's complicated derivatives but and and I would have and I have some yeah the usual assets in my portfolio but I try to avoid stocks and I try to avoid bounce long-term bonds if you're gonna go and to bonds over very short term and tail risk a dream if you know how to do it it's the it's not a bit it's not a very appetizing menu for people who are looking to generate a reasonable rate of return if you see all my books I recommend people focus on their own job and not try to make money with their money but try to conserve because they could be very very very shrewd at the profession and extremely naive okay in their investment strategy people have this notion that their savings need to be a income generating primary income generating machine rather than preserved preservation machine whatever rule is your savings as a preservation thing and second if you have some fat some extra then you could wait with delay with it what about these poor public pension funds with defined benefits that have to generate you know there's actually a seven or eight percent return every year tail risk hedging is necessary for these people so they don't because the problem is if you if you have a crisis then then you have to generate much higher return later so you need to be able to have a higher exposure to risky assets coupled with more tail risk protection so in other words you need to be able to generate something in the double digits just survive just so as if you have the point that we've looked at markets tend to happen is that markets go up and then crash crash you walk but net net they're good okay but to be able to sustain a crash to live through cycle you could probably take more risk if you have the right protection or the right hedging as opposed to being conservative and just trying to generate exactly in the middle doesn't work well you should have a portion of your portfolio in borrow and exactly at higher risk but then have good protection against that high risk done properly it's not a lot of people think they can call a broker buy puts and it's done it's much harder

Channel: Huber Hernandez

Views: 17,754

Rating: 4.9148936 out of 5

Keywords: nassim taleb, taleb, skin in the game

Id: wpsFAf9Ep8Q

Length: 17min 30sec (1050 seconds)

Published: Wed May 15 2019