Universa’s Taleb on Inflation, Global Financial Markets, & Crypto

God did you pick this music oh look the surveillance nap awaits me perfect I'm glad that I find that we're finally getting to talk to one another it's been far too long far too long what happened why all these years my people couldn't get through your people we're doing this for Peter Carr Tom's secunda long ago one of our Founders said we got to do derivatives we got to do math and so we had Bruno De Pere Edo's dilemma and Peter Carr and the tragic death of Peter Carr yes way too early and it started at currant and this wonderful book Scott Patterson chaos Kings in it is where Mark spitznangel he's done okay done very well he goes I'm the dumbest guy in a block and he shows up at NYU current Peter Carr and others and you're on the faculty and he's learning derivative math with you there is a math at Quran now the same math as when you were teaching Mart's Mill no but but what we Mark and I have been doing has nothing to do practically with the mass thought and math Finance because everything they do is based on some fudging around the so-called normal distribution and what Mark and I said no nothing to do with normal distribution and matter of fact I just showed you an article publishing after 24 years showing what what we use for Price options use power laws most of the world is driven by Fatale processes and the normal distribution is not a very good fudge in some situation and what they teach you at Quran and what they teach you at outside Quran in the other building the the Richer building the business school is pretty much like fudging or another business called the union fudge right they don't even know that gaussian doesn't work so portfolio Theory it doesn't work I mean it works on paper 60 40 had a very good 2022. yeah okay the 60 40 actually we're lucky because we we published a technical paper showing why that 60 40 that whatever correlation makes no sense and mathematically and empirically and yet people use it because other people use it in a pension fund industry and and you know what happens when you use things when it becomes recursive and sure enough they had an Awakening but the interesting thing to figure it out why why that story of the 60 40 came because you were you'd put your money in bonds interest rates were very high and with the interest earned in bonds you would Finance your losses on uh you know the stock market so and also so that the trade did very well because not only we had a rally in the stock market over time but you had since volcker the great gain and bonds price up had the you know interest rates going overnight from 20 some percent to zero right and the long bond is much more dramatic because you know the duration so so so really it was it was just like the fudge story that looked theoretical but was not to a reality and right and everybody was happy until came 2022 and then we're gonna have I don't know if you know 2024 is coming oh really probably 2025 and that's going to be entertaining we got lots to talk about I lobbied for two hours with not seeing teleb that got voted down my people talked to Chelsea and she said time 10 minutes and we've been arguing here and we're going to go out a nice time you're networking afterwards so we're going to cut into Network time which I think is okay if it's not a gaussian bell if it's not a bell curve if it's not the curve of our high school Heights and our Heights in high school if it's a poisson distribution what's the left tail look like right now so is the left tail so the let me squeeze in some covet I was gonna tell me about the left tail and then we'll do covet who's running this thing okay um at no point in time in history no point in time will be more connected so I'm not going to talk about covet let's talk about anything else like a Google we've talked to covert in three minutes go left too so things are too connected that connectivity causes a tail events a reaction or reaction I mean we've never had such a short I mean shortages we had huge shortages you know after kovid and then we had huge gluts right after that so we had too much connectivity coming from sorry too much reactivity coming from such connectedness globalization is a very very good you know number is very happy with globalization they sell terminals everywhere put people out of poverty everything but you got to know what comes with it you know it's like every when you drink a lot of wine you've got headaches from wine so you got to make sure you know you're measuring the the side effects so that's a side effect of more globalization more winter they call effects that's fat tails more athletes making 50 million dollars a year when when when the average soccer player barely can you know can feed herself or himself so these things accelerated and and to give an example let me talk about coveitnesses so you know can I quote First no no what yeah quote I'm going to quote chapter 23 Taliban covet perfect nazim tele sprawled in his bed in the top floor of a house in Beirut breathing through an oxygen mask you were really sick oh yeah so I was I was yeah that was my my anti-covered thing was came much before my my crusade in favor of vaccines came after that episode but going back to the story was kovid that it took 330 years for the plague the Great Plague to travel from what's now of what Constantinople what's now Istanbul to Northern England one single weekend to travel around the world you see so you just to give you the idea that we're dealing with different uh uh reactivities to a system so once you know that you realize that one it makes everything fat tail so when when covet came we rushed to publish my friends and I in in infernals in in epidemiology Journal because about you know what happens when the process is fat tails why your analytics got to be different and we realize that even epidemiologists all right then no they would make economists look good well you you go after the Libertarians here on a policy basis you just say the Libertarians are out of control early in covet I did an interview with someone in England I think at Imperial College I can't remember and they had three differential equations going on the mathematics of covid and the epidemiology of of covet is is well did we get any wiser in finance not any new humility out of what we witnessed let me comment on Libertarians I'm not going against Libertarians about pseudo Libertarians because if you decide Hayek of the red Hayek no because Hayek was in favor of government intervention for deforestation uh Canadians dumping stuff over New York all right you know ashes or whatever it is and not a volcanoes and the same even from Isis was was in favor of an invention so I'm saying is that there are systemic things that we got to avoid the left tail and let people buy whatever vacuum cleaner they want so don't interfere with people personal matters or and and actually these Libertarians were against the government getting involved in Commerce they were not against the government getting involved in defense okay and and that's a matter of Defense so so I'm saying the libertarian will not interpret things their own literature largely because it attracted the crowd of people who probably have never read books so that was my my comment on Libertarians but to comment more generally on on on what we have learned from covet the system learned a lot from kovit we learned to use masks we have masks helped me today we learned it's like what I described in anti-fragile the adaptability of systems to shock that don't end it so for example we had covet was a tragedy many many died but we've got to be better off because should we have a bigger threat like a something that can kill faster we'll be ready we have zoom you know we can continue business as usual you know so we're better off than pre-covet and and that is Central maybe the economists are not better off than before because they they're academic maybe it's meologists that keep writing equations that make no sense but overall society as a whole is stronger and and a lot more capable of dealing with the threat of of large-scale pandemics I want to review how we got here because I think Talib has become so big in such a media guy that people forget the absolute shock of Nero tulip and John the high-yield trader long ago and far away there are exactly two books I've thrown at my children and said shut up and read it one was Fareed zakaria's post-american World which was revolutionary at the time not and I should note that both of these guys coming out of an old world view and the other was Fooled by Randomness and what's unique here folks is this is a guy who didn't do it once but is it twice three times four times skin in the game is there some is there a book in progress here are we working on it maybe maybe maybe I'm not sure you only know that you you you uh have a book when you finish the book that's that's how it happens and the book doesn't tell you how and when it will finish so so you follow until it's done it says right here Bloomberg invest so we're gonna get to invest part in rates here in a minute but could Nero tulip and John the high yield Trader could they exist today yeah of course New World the problem is Nero tulips are fewer and John the high heel Trader are much more numerous so to give you an example John hi the trader is a is a typical blown up Trader uh you know the times are different uh we live in an environment where we could we like to take risk we should be taking risks we only take daily risk not ordinary risk so they don't have the portfolio doesn't have volatility it just it's very stable goes up and then one day boom up the escalator down the elevator right so these these trailers are more numerous today thanks to what thanks to the great financial crisis and the reaction with the zero interest rate policy that really produced a generation I'd say 15 years as a generation in finance okay of uh the generation means manager to uh to trainee a whole generation of people who don't know what interest rates mean and it's back today and uh no they don't know what so what so what happens Etc I mean think about the past even negative cash flow businesses were selling you future cash flow they were selling and saying okay we're going to lose money and then later on we'll make money today what right before this crisis what were they selling you they're selling you yeah we're going to get someone to fund us so they're selling you funding it resembles the Ponzi okay we're not who cares about money and they're using the third round and whatever you know mechanism they did to fund themselves as a cash machine what negative cash flow what you want to buy a printer okay funding what we need to buy a new plant and funding so we had a an environment where that notion of everything you can learn from the great investors or or the wise people such as uh Warren Buffett and others anybody with gray hair would understand that your oxygen is cash flow okay you can have negative cash flow but you know that it must be compensated later on and they forgot they don't know about it so this is why you end up having tumors such as Bitcoin and and and and sorry he's like me he doesn't like it okay okay and but something that that that you take for granted real estate real estate is even worse how bad is it going to be cut to the chase think about it 120 30 billion a trillion dollars created during you know in value in valuation that's valuation uh that doesn't uh you know the the you know if that doesn't go down by half or three quarters there'll be something wrong in in in and the way to understand Finance because you cannot carry a house if your income is thirty thousand dollars a year you cannot carry a house you could carry in the past a half a million dollar house now you can't anymore so you got to calibrate to that eventually the real estate will adjust unless you have inflation and I don't think there they have too much appetite to let inflation run how long is it going to take us to relearn of real interest rates of an interest rate of a legit sharp ratio of a risk-free rate that management I mean what happened there's a cycle so the the the the John across the street from Niro tulip uh you know are now in the process of either dying a lot of them are dead but they don't know it that's what happens in finance or like everybody knows your bus except you so so a lot of I mean a lot of these VC so the two sectors you have to worry about real estate and uh and that pseudo uh technology all right all this you know non-sound technologies that absorbs so much money um you know I don't know what's going to be the first shoot to drop big time I I look at the Dynamics right now and you know we've been shocked on Bloomberg surveillance at the certitude of the end of the year they got that wrong just like the dollar call yeah dollars going weaker if guaranteed dollars going weaker can mere mortals have a plan now can they have just with a narissa 74 and the complete failure of our retirement system can mere mortals save for retirement they're not fancy like universe or spitznagel or Talia I mean and they have a plan well the problem is that and again that's the culture that uh a lot of people a lot of people partook in in the creation of such culture not just it was not just you know the the brokerage houses in the entire industry that you must make money out of your money rather than you must preserve your money you see and and that drove people to and to invest and think that they don't need to save a lot of money because their Investments take care of itself and now we're facing the hard reality with pensions severely underfunded with Social Security let's not talk about it but you understand what I mean okay we have so we have and and the stock market will be unable to deliver the promises that they have on paper so we are an environment where if the new environment people try to make money out of their business and preserve that for retirement rather than try to make money out of a retirement business and their day job is some kind of you know footnote in their life you just assume that the actual assumption will go up if we're going to move from zero rates up to wherever we had at the entire pension industry is going to see an actual rate pop up here to I don't see anything people really have gauge that no people don't realize that with interest rates up here that you not only you must you have higher requirements of what you need to earn from the market but at the same time the market got to adjust to that no discount rate so they're gonna either hit on both sides I the the whole the whole notion of prudence I mean we we're in the business of prudence Mark myself maybe you business recruiters you know and and and and you keep fighting the winners because it usually the winners are the foolish Risk Takers and then they they disappear and nobody hears by them and then new winners come in but but we keep fighting for prudence and but at an individual level someone got to teach people that if you're a butcher focus on making money selling meat okay don't try to make money from if you're a dentist a dentists are a problem because they all want to make money speculating and gold anyway so if you're a dentist Focus make money drilling teeth and preserve focus on preservation not making your money work or stuff like that so so we need we need to change the the general culture we do a chart here in a minute but I got to ask you what do you feel like the day Credit Suisse blew up you had a huge Heritage there Credit Suisse went under you wear that I worked for uh for many firms that have disappeared uh what do you think I mean come on I work for forecast it was SBC and UBS they co-opted that into UBS there were three big Banks when we were I did work for you now there's one left I I I did work for UBS and I did work for Creative Swiss versus Boston at a time and I never imagined nobody ever imagined that these firms would not be we're not going to be perpetual so it tells you something about the the structure of our world that can that when you invest in something never assume that a triple A is a triple A are they did Credit Suisse go under as a general statement because they didn't read you from full by Randomness to skin in the game maybe but more seriously were they working on a Quant model a probabilistic model even at the executive level okay that was a fiction okay let me tell you bluntly what happened with with the Swiss banks in general in the old days the Swiss never took risk they took your money and never gave you anything so that was that was a great business model I've lived it this is true it was the most boring system Libor plus 10 basis yeah yeah it's great by Design so it was by Design and you invested money with you put your money there because you knew they were boring okay my design then suddenly I don't know what happened someone someone in Zurich got said boring but this is too boring okay came in to the states and started dabbling with derivatives buying derivatives firms and saying we're going to do science okay and that was on that that day was when the Swiss cease to be Swiss Bankers okay State you know that and then stage two what accelerated is that effectively uh under the Obama Administration they figured out that you know what it's this tiny country banking secrecy you can scrape it from Washington you just get out and and you can bully them into changing business model well guess what they did change business model because of the the the the it's like they were successful in their model largely because of the money laundering a lot of people hiding and Americans hiding from there away from the tax authorities so basically that was a model of the Swiss that went away okay so they had to take more of these complex Bond risks and stuff like that I mean epilogue it's with no longer because the time I want to jump for this and we can off the strong language there about how they were creating revenue and particularly Revenue at the margin you and I are on the same page on this it's been an eventful week for Gensler of the SEC Gary Gensler looking at Finance looking at coinbase coinbase joined us here for Bloomberg invest and what I look back is to Ken rogoff who wrote an incredibly courageous book The Curse of cash it was one book of the year he had death threats off of it about the tension here of the criminality the flows of money laundering or however you want to call it in crypto you've been one of the loudest critics of Bitcoin 69 000 whatever to 26 000 is it on its way to death okay so I I actually have been the critic of of uh Bitcoin for reasons we won't like my principal reason is guess what it's not even good for money laundering so I'm taking notes continue it is it is too traceable you see gold you can re-melt bars you can do something but but Bitcoin is a book entry somewhere uh that any anyone with basic knowledge of Statistics can triangularize so that's the first comment the second one is that uh the uh it was transformed into a cult you cannot I mean the first time in history probably were mixing money and cult usually you do Cults with yoga Cults was uh with some something else called to his music but here is cult was a financial product the things don't go together well you see so because Finance has some gravity rules that eventually end up uh hurting that model so uh crypto will probably uh it's a fad I mean the the claims they make that uh they they they uh you know they're a refuge are false that they're good for transaction is false they're not even attracting the wrong the the the bad guys anymore uh and and and and and you know that the Federal Reserve can very quickly replace these cryptos you know and that's the next step is actually next month they're doing that uh right now that now immediate transmission so basically we put the crypto out of business if you think that crypto is there for transaction or the transaction story that transaction narrative is no longer holding I look at crypto and I look at it being hugely generational where older fossils are like really and the young you know we're thinking tulips and the younger are really there's a serious belief in crypto and Bloomberg I think has really done a committed effort to try to have a legitimate Dialogue on this what's the damage to the kids okay so let me tell you what someone says when someone says this is generational and you're talking about music is fine all right if somebody says this is the generation are you talking about what Finance it means that you're glorifying ignorance okay and you can't glorify ignorance with with random events with processes where the contrary you've got to glorify experience so that Cult of the youth that we have today of course is getting busted in in finance and and and and soon your the kids will no longer be interested in crypto they'll be interested in I don't know some I don't know some vegetarian uh diets or something else okay gentle parenting that's the the that's the next thing Chelsea do you have that chart up here I want to I want to look at the talibian world here let's see if we get there I sent 42 charts that's it perfect okay so this is how tall it makes money with spitznagel and that everything is fine and you're moving along three uh climate exponential moving averages you're on a log y-axis and you've got two standard deviations banded and then at the red circle whatever it is that's not that's that's one that's not it falls apart this is just 2020 yeah 2020 series I bought right near the red circle thank you but what I want to know now seem yes is what everybody wants to know when you're buying little bits of risk far out do you do you have an ability to see the event coming or are you know the way the way the way I mean I'm not supposed to talk a lot about these details you know what the SEC is powerful enough oh Mr Gensler will hold your question thank you okay no no no so I I want to be theoretical not uh very theoretical Please Please The Wait tell me what the way we do business is we buy options regardless of outside events and try to sustain a policy sustainable that will be permanently buying the options with with and and and sticking around so in other words you shoot for what amount you're going to buy to survive doing that strategy that's it we don't care about outside events there'd be risk of nuclear war risk of huge peace with Russia China and everybody was a big party would buy the option as a matter of fact there's one practical trick I'll tell people if you ever have a reason in mind to buy an option don't buy it because guess what it'll be price then so we just buy options we have absolutely no notion of the future right we just buy them because we have a this the experience of running this uh trade and and we stopped buying them of course the option if we can't buy them of the or of our model but so far in in 20 some years they still uh on the price of chronic dollar model okay one final question and I want you to take your time in this we're not in a hurry here we're going to networking afterwards and and now I got one final question it's important we've gone from zero rates to a new regime which sounds like the old regime of years ago the FED has been a pinata Central Bankers traditional economics has been a pinata here lots of criticism and such I think they put their pants on one leg at a time I I think they're like mere mortals like the rest of us did the Central Bank screw this up because of the pandemic or did they screw it up because of theory well the central banks messed things up because of a lack of understanding of how reactive the world is they didn't see inflation coming see they didn't see the inflation could come very fast it came very fast and they probably don't see the effect or they can't see the effect of the policies in the future which calls from The Following they should not be changing interest rates in the future if you have a crisis as fast as they did in 2008. because bring the interest rates from six percent say to one there's no evidence that's better than from six to three so what does it tell us tell us that we're going to have to live in the future the way our parents grandparents great grandparents lived which is a world where interest rates are not zero okay say social level you know and and and the monetary policy should be modulating slowly not abruptly and more centrally we should understand one thing it's not the job of the Federal Reserve to fix the economy the Federal Reserve because what they did is they use the monetary approach to structure a problem lowering interest rate to zero to face an environment that has too much debt that nothing to improve the situation except cosmetically what what I think I told you it was a novocaine uh policy I told you that in 2008 I told you what they did this novocaine 2008. now the novocaine is gone you may pay the price so in the future we know that we're going to have higher interest rates whether there's deflation inflation something we're not going to have and we're not going to have these swings and interest rates that we're witnessing now are we becoming more like Europe is the American full charge full steam ahead American exceptions exceptionalism there so that with this reversion to a normal rate environment all of a sudden I I think I think that I don't know you're going to become a lot more that like America in the past excuse me like the normal normal the normal environment does not command these swings of interest rates bringing them down to zero and then now because now they may have to raise them much higher than five percent oh so you you want to climb in June 14th are you out front end I had no idea but technical what can happen to you know I'm I'm not you know into fed washing but I I know that that uh they may have to raise because they're committed to killing inflation and and this notion oh yeah we're going to raise the race and it'll be okay it's not as simplistic how much do you have to raise and how high how how long you're going to keep interest rates High in my opinion interest rates at five percent at five percent is not that's not high okay that's normal historically Chelsea I got like 14 more questions can we just like break for lunch she's saying no I'm getting the hook chaos Kings I've not seem to 11 Mark spitznaker go back and it's a story about us that's not we didn't write it all right I know really I didn't know that of course I knew the better Storyteller than me but I haven't read the book by the way you ever read the book I mean I trust him and his good I can't read the book I can't read the story written about myself and I'm too selfish as an author to read other people's books start with Nero tulip and Fooled by Randomness this was a disaster not same tale of thank you and I know what's in it thanks

Channel: Bloomberg Live

Views: 32,264

Keywords: Nassim Nicholas Taleb, Tom Keene, Universa Investments LP

Id: mYUjqXAv2iU

Length: 30min 39sec (1839 seconds)

Published: Thu Jun 08 2023