Taleb - When Money Dies

Today at Econopolis, we took some time off and went birdwatching in Brussels. We had the pleasure to listen to Nassim Taleb who apart from black swans gave us a lecture in (human) nature.

Taleb's main message was that we live in extremistan as far as financial markets are concerned. Black swans are unavoidable with the unfortunate huge consequences for the business cycle as a result : things are nowadays more thanever interconnected and the economics of "speed-internet" can cause bank runs such as was the case with Iceland. The point of the exercise for an investor - or economic agent in general - is to differentiate between "robust" and "fragile" environments. On this, Taleb already summed up 10 commandments; they carry a lot of straightforward guidance and topics (eg moral hazard, wrong bonus incentives) which were at the centre of today's debate :

http://www.fooledbyrandomness.com/tenprinciples.pdf

In addition, Taleb made some very good points on (human) nature and the difference with today's economic thinking. Just a brief review on some of his aforisms :

1) Forecasting GDP is a form of mental treatment. It's a useless exercise and even meaningless when GDP is based upon debt creation

2) Economists don't like redundancies in contrast to nature (the elephant !) ; everything has to be optimized in true Ricardian spirit. Optimization annex specialization however make the system vulnerable and black swan prone (Irish famine 1860 example). So it's better to build in some spare unused capacity (read : better to be over-insured when it comes to portfolio investing).

3) Forecasting returns is even more dangerous. What does modern economic thinking concludes when an asset is "forecasted" to give a 6% return and borrowing cost are at 4% ? You borrow and create a leveraged position until the music stops to play and you are wiped out (so many examples here with currency carry trades, the US real estate catastrophe where prices could only go up, Lehman leveraged @ 42 and LTCM @ 50....)

4) Private debt in the end solves itself ; when private debt is transformed into public debt, the problem becomes permanent.

On the debt issue, Taleb was very straightforward during the session. He is very suspicious about the US and the way things are handled right now, with frequent non-friendly references to Bernanke & Geithner : they did not see it coming and they make the wrong conclusions using remedies which brought us into trouble in the first place. Last week, Taleb in Washington during an interview said the following : "How the world will look like in 25 years, I don't know ; I do know however that the FED won't exist anymore ; it will be replaced by something more organic, briefly, by something which makes more sense".

And this brings us back to today's reality. A lot of attention this evening on CNBC went to the FED minutes of the September's FOMC. The markets turned bullish after the release because it is quite clear that the FED is ready, willing and able to act on its next meeting early November. The only question remaining is how big QE2 will look like : half a trillion USD, 1 trillion, 5 trillion ? After the extensive coverage on the minutes, CNBC interviewed Adam Fergusson, author of "When Money Dies" ; His comments were quite illuminating :

1) Having embarked already on an adventure into unchartered territory, this is something which can easily get out of control ; where will this money printing lead to, where - and more importantly - how will it stop ? How terms like "callibrating" enter the QE debate is a mistery to me.

2) A Central bank's main pre-occupation should be to safeguard the currency in order to keep the public's trust. When central banks enter the stage of politics (unemployment target etc), we are in trouble.

When hearing such words, I can't stop wondering about things I overheard when doing some birdwatching in Brussels. It doesn't really sound "robust" to me.

http://www.bing.com/videos/watch/video/the-danger-of-printing-money/3xsyikwu