Taleb video: credit crunch not black swan, moral hazard now worse

From Bloomberg:


Some great comments on the OMB (“lying on their forecasts”), Geithner (“who has a mortage on a house not far from mine… who didn’t understand risk and real estate prices”), Summers (“uses wrong mathematics in his papers” and has “systemic arrogance”), and Bernanke (“the one who crashed the plane”).

He has praise for David Cameron, whom he thinks understands how to solve the crisis.

Plenty of fodder for inflationists and bond bears here: Hard assets like metals and agricultural land would be a good way to protect value. Forget the stock market and most real estate.

Does anybody, such as professors, now understand the issues he raises? No. Don’t go to business school, but if you go, don’t take any business class that has equations in it: “it’s all bogus.”

Blow-off tops everywhere

Everywhere I look this morning I see spikes in risk assets: copper, silver, oil, the pound, stocks, credit, etc.  Copper and oil are moving tick for tick in lock step at the moment. These really are all the same market.

I recently read about a strategy whereby a trader would start “trading campaigns” 25k to risk on very high payoff black swan events. If his first short-term options trade was a winner, he would do another with the proceeds, and if that trade also worked, one more, for a total of three trades. The math can actually be highly favorable for of such a strategy, since for a good timer, the payoff can be dozens of times the initial capital. All you need is one winning streak in 10 or so campaigns to come out way ahead. This trader had attempted 9 such campaigns, 7 of which were 100% losers, 1 of which was flat, and one of which was a 60-bagger. He had socked away the proceeds from the 60-bagger, and was still trading 25k at a time. I’m not saying I’ll adopt this method, but it makes a good point about humans’ tendency to underestimate and underprice the probability of large moves, as well as their irrational risk aversion when it comes to the possibility of losing 100% in any one trade.