Nassim Taleb Says Fed Should Do 'Minimum Harm' and Expresses His Concerns About Deficits

the topic of the moment is president trump's tax records and as usual yes you have an unconventional point of view the implication for many is that is that the fact that he appears to have lost so much money is 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 except for insulting 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 99 entrepreneurs fail for everyone who succeeds that you show on bloomberg tv okay for every person you saw on blubrick tv have 99 who failed who had absolutely no money probably uh not even driving a taxi so these people so you're insulting failure of entrepreneurs and i think it's similar it's similar to insulting a soldier because he or she have lost a finger or a limb in battle okay it's it's within the same class of things shaming risk takers when we need these risk takers so how should people look if if we again we're taking these trump tax records it loses hundreds of millions you want to comment on trump comment on trump but don't go in and insult entrepreneurship okay risk-taking risk-taking people who make this country great okay insulting risk-taking for the sake of harming trump is not acceptable strategy it's not acceptable for all it of course beyond that it is it is a a shameful 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 okay he said they're lucky not looking at a cemetery or failed entrepreneurs it is insulting so the lesson is that we should look at someone's losses and say thank goodness somebody is willing to lose money that's exactly the point this is what made america great is what continues to make this country i mean you both you and 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 a sideline collecting a salary who's going to bring that salary entrepreneurs risk takers now seen this is part of a bigger conversation about capitalism as you know ray dalio uh the founder and chairman of bridgewater associates has ignited the debates over the state of american capitalism he says there's something wrong with it what do you say i like ray 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 it's absence of skin and gain that is wrong absolutely going back to risk-taking going back to risk-taking absence of accountability you have people making decisions all right that harm others without being harmed that's not capitalism that's corporatism who are you talking about what i was saying the structure that we have today because rey has skin in the game ray hat's kind of game with his is fun 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 person is jay powell now the chairman of the federal reserve yeah but but he's more responsible okay because he he understands the job of the federal reserve should be minimum harm not uh 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 volker okay not yet okay he hasn't shown uh uh yet 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 descent 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 it's crony capitalism that's not capitalism crony how do you fix it there are a lot of the i wrote a whole book on it the the skin in the game i wrote 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 uh 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 society in a way to be smaller companies is that the minute you decentralize to be like germany when you're decentralized what happened why do you have large companies because a company becomes powerful start leaching on a state and then you have a positive feedback in companies so 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 tort system but then when the companies 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 death of companies now seems some people think we can fix yes what's wrong with capitalism so to speak um by employing new forms of monetary policy modern monetary theory for example i said that's lunacy a lot of risk-taking you know saying something may work okay you got to look at consequences if it doesn't work now we know the consequences is that theory is wrong i mean first of all sort of like how do we know that if we uh we don't experiment with i don't know some nuclear devices won't be harmed 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 and we've got to bring old paul worker he's what 95 years old you got to bring him back because he's without him we'd be in trouble now so and you know what happened these days about hyperinflation when there appears to be so little inflation understand but the problem of uh inflation is that very non-linear so like the ketchup bottle nothing comes out and then suddenly things jump out so you have to worry about it but i'm more concerned about the general more general situation today actually that than than talk of mmt because people realize it doesn't make a lot of sense 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 okay so explain which one is wrong because there's okay so which one is wrong okay so unemployment or the deficit so in other words which would the story is delivered by which one of the two i think that we have a problem okay a committed deficit because if we have a recession that deficit would explode and if we have an expansion raising rates will visibly the mechanism of growth you know is going to raise the cost of servicing that servicing that debt 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 um so 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 unemployment goes deficits are very hard but employment gets people elected to office at office controlling deficits does not uh maybe but but but at some point people are not as stupid as we think you see they they understand if you reason with them if you deliver the right message to take germany germany they're obsessed with deficits they are because their grandparents or great-grandparents okay live through hyperinflation exactly and they remember they know what can happen they don't want it to happen okay people in argentina people in turkey people in zimbabwe people in iran people a lot of places okay you know sometimes uh communicate with them and they tell them what happens when they have hyperinflation the same are you at all concerned about the direction of the us china trade talks i i have no it's not my i mean it will take me i usually talk about topics that that take me about 20 years of reflection so not that one that's not fine something that given our relationship with you know in interviews i'm sure in 20 years we could talk about it would you be here to talk about it but i'll i'd like to talk about effectively that that it is very foolish today to engage in any form of investment without considering huge tail risk because what would happen is again it's like ketchup in a bottle they have risks risk risk risks accumulate typically nothing comes out and then suddenly something may come up okay so people have drawn parallels between what's happening in 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 uh u.s financial assets drawing a parallel between that and what happened before the financial crisis yes now the conditions look very similar because well we have a lot of a lot of debt but that has shifted from private to public yes which is worse because public debt doesn't go away private debt you can always turn it into equity or punish you you can restructure yeah exactly private debt is generated not by people who are responsible for the death but there is more civilization but there's still an awful lot of debt on corporate balance sheets they are they're blowing them out growing but i'm worried about public debt i'm worried about both public that is generated by people without skin in the game and goes out of control politicians in other words politicians and and civil servants so and bureaucrats so you may have so what i'm saying that what's going on the point is not to think what will happen but what is the prudent policy the proven policy of course but in order to in order to inspire prudent policy you have to give people a sense of what the future may hold so what's going to precipitate what's going to precipitate a public debt crisis we know it precipitated a private debt crisis because we can replay the movie of the financial crisis my my uh my idea is i'd rather be very poor at the timing and good at the hedging all right so you want you want your business that's my business but that's also you know my philosophy in life okay you don't want to have try to depend on specific predictions of catalysts for that crisis it can happen in an hour or it may take uh years 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 we recommend people now okay so we're actually getting down to the 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 that's catastrophic insurance if you know how to do it if you don't know how to do it buy it or buy it you can buy it you can no 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 know pencils down cancels down unless you know how to hedge all right and and and you people do a few people do because at this stage of the game you would recommend that people have no exposure to financial assets listen you're not obligated to export financial assets of course not it's not proven well people want to save for retirement i understand but you want to save for retirement that's not prudent you know because you got to look at both sides of the story you may end up with no money what's the proof now there's more location then if you're at the moment if you're trying to save time cash what i'm saying is that i engage in financial markets if and only if i have tail hedge protection and it's done right otherwise don't engage in financial markets even in treasury no especially treasury bonds interest rates the upside from interest you know from from uh from from holding a bond that yields to 1.4 percent the upside is limited and the downside is well that's only if you're interested in capital appreciation if i hold to maturity i'm still getting a four percent yield yes but there's a the thing is what if you want to get out but that's one our problem with with holding to maturity a lot of people don't know the horizon of their investments because they think how many people get married thinking they're married forever half marriage is dissolved before so it's the same thing you think you're gonna be married to that investment for 10 years you may have other things you 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 you you know your investment horizon okay is not doesn't match your explicitly stated investment horizon it's very hard for people to understand that so what point of the investment cycle does it make sense for people individuals to hold financial assets so hold i mean i would say i would i'd rather have very low return or close to no return than have a huge negative return well sure catastrophic loss you nobody can recover a lot of people wish in 2007 and 2008 uh early 2008 a lot of people wish 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'll be the first to buy all right and then but but and the other thing is i hate gold but i'll tell you skin in the game tell you what i own i own gold some gold that's it some other uh some other financial instrument that uh would benefit from uh a collapse in one market such as some other it's complicated derivatives but uh 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 uh bounce long-term bonds if you're going to go into bonds or very short term and tailor scheduling if you know how to do it that'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 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 their profession and extremely naive okay in their investment strategy people have this notion that their savings need to be a income generating a primary income generating machine rather than preserve a preservation machine what the first rule is your savings as a preservation thing and second if you have some fat some extra then you could play with them what about these poor public pension funds with defined benefits that have to generate you know actuarially 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 uh have higher exposure to uh risky assets coupled with more tail risk protection so in other words you need to be able to generate something in the double digits to survive otherwise if you have the point that we've looked at markets then to happen is that markets go up and then crash crash you want but net they're good okay but to be able to sustain a crash to live through probably 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 consistency in the middle doesn't work well you should have a portion of your portfolio environment 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 by puts and it's done it's much harder than that

Channel: Huber Hernandez

Views: 34,299

Rating: 4.8000002 out of 5

Keywords: nassim taleb, nassim nicholas taleb, taleb

Id: pZ7Gy22AIHs

Length: 17min 30sec (1050 seconds)

Published: Thu Aug 27 2020