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

From Bloomberg:

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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.”

I’m with Hendry

Taleb thinks hyperinflation is a strong enough possibility to justify way OTM bets on gold (long) and bonds (short). The one bit I agree with is the long gold / short stocks play (though I think gold is likely to fall with stocks, just not as much), and I suspect that deflationist Hendry would concur.

Hendry thinks that deflation is here to stay, that nations will start to default, and that the market will at least start to worry about sovereign defaults by nations like Germany and the US (even if they don’t actually default, he’ll make money in that situation as the price of insurance goes up).


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(The video cuts off when Hendry passes the mic, and I don’t have a link to the rest. If anybody else does, please post it.)  (EDIT: http://2010.therussiaforum.com/news/session-video3/ Minute 24:00 and after. Thanks Charles!)

Hendry makes a point I’ve made myself: the euro is like gold for countries like Greece (they can’t print it) so it will have to default.

Hendry says his porfolio is inspired by Nassim, but basically the opposite. He’s fed up with other people’s opinions. The hedge fund guys are “so uncool.” He doesn’t talk to brokers, and he reads nobody else’s research.

Debt loads are bound to squeeze all of the vitality out of the risk takers in the market.

UK interest rates are at the lowest since the Bank of England was established in 1692. He is betting that the central banks won’t raise rates in the next 4 months and he will make 4x his dough if right.

He thinks the sovereign default scenario today is like the mortage bond situation three years ago.

Now, who is the true contrarian? Is hyperinflation really a black swan right now? Every chat board on the net has been buzzing about it for years. When Taleb said every human being should short treasuries, every human being agreed with him!

Mish takes Peter Schiff to the cleaners

Mish has composed a detailed post on the many ways in which the vociferous Peter Schiff has been dead wrong on just about everything in this crash (the two actually had a little debate in December 2007). Mish’s post is essential reading for anyone who is considering following Schiff’s investment advice. In his own way, the man is usually just as wrong as the Pollyannas that he challenges on bubblevision.

Here is an excerpt:

Schiff’s Investment Thesis

  • US Dollar Will Go To Zero (Hyperinflation).
  • Decoupling (The rest of the world would be immune to a US slowdown.
  • Buy foreign equities and commodities and hold them with no exit strategy.


12 Ways Schiff Was Wrong in 2008

  • Wrong about hyperinflation
  • Wrong about the dollar
  • Wrong about commodities except for gold
  • Wrong about foreign currencies except for the Yen
  • Wrong about foreign equities
  • Wrong in timing
  • Wrong in risk management
  • Wrong in buy and hold thesis
  • Wrong on decoupling
  • Wrong on China
  • Wrong on US treasuries
  • Wrong on interest rates, both foreign and domestic

That’s a lot of things to be wrong about, especially given all the “Peter Schiff Was Right” videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.

I will admit that I was nearly taken in by Schiff’s thesis back in 2006 when I first became bearish on the economy and stock market. I even opened an account for someone with his firm, but the only thing I did with it was short the US market — I took none of his brokers’ advice on favored mining juniors.

I owe Mish and Robert Prechter a huge debt of gratitude for beating some sense into me with solid logic. Readers can easily check my archives to see my pre-crash stances on commodities, gold stocks, Treasuries, the dollar, the Swiss Franc and the Euro and the inflation/deflation debate. I can report that things have turned out very well for those who went against the crowd of contrarians, swallowed their fear of the dollar, and shorted not just US stocks but almost everything else in sight. All the world was a bubble.

On the need to stay nimble

Yes, the deflationists were right and hopefully all made some money or at least avoided terrible losses, but nobody can afford to get cocky. The markets do not trade on fundamentals on anything but the longest time-frames, so the ability to read the prevailing mood and adjust accordingly is a critical part of asset management. So is the willingness to contradict yourself and change your mind.

I see now that this deflation can last even longer than I had suspected, and that there may be even ways to avoid hyperinflation, such as negotiated Treasury debt forgiveness, but there is no need to try to guess about outcomes that are years away when you know how to read the signs as they come and remain humble and liquid enough to change your stance as needed.

By the way, Mish manages client accounts

Mish is an investment advisor representative with Sitka Pacific (not Euro Pacific!), a firm that manages private accounts on a percent of assets fee basis. I am not a client, but I would not hesitate to suggest giving them a call. I am working on setting up my own firm of this type, which offers many advantages over hedge or mutual funds, especially when set up with the protections that Sitka Pacific has included. My own style of trading is somewhat different from any of the strategies Mish uses (for example, I am willing to go net short or to a majority cash position), and of course I am not always in agreement with Mish on every aspect of the markets.

Don’t worry about the Fed printing…yet.

Here are a couple of charts that illustrate the significance of what the Fed has undertaken lately. First, look at the change in its balance sheet this year from about $870 billion, almost all in Treasuries, to $1.5 trillion, with fewer Treasuries, more repos and swaps, and an alphabet soup of new credit facilities:

Source: Federal Reserve Bank of Atlanta’s Macroblog (yes, a Fed branch has a blog).

For the inflation/deflation issue, what matters at the moment is that all that new credit (not much new currency, only about $30 billion more in actual notes) is just sitting in banks. Unlike in the Greenspan years, nobody worthy of credit wants to borrow the new funds, since they can’t generate positive returns on investments, and the banks aren’t lending to people with bad credit anymore.

How do we know it is not being lent out? The Fed is actually pretty transparent as far as nefarious government sponsored entities go, and provides a lot of useful data through the FRED website. Here is the sum of loans and investments at US commercial banks:

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As you can see, lending has gone flat after an enormous expansion. And this is just the past 5 years — check out the longer view for a graph that would have knocked Mises’ Austrian socks off:

When you hear “credit bubble”, think of the above.

Workers of America, Unite! (to fight the evil of lower prices)

Inflation, in the end, will have to come from massive government spending programs. The Greater Depression will have a scaled up New Deal. Keynesianism is still all the rage, and when the bailouts have had time to fail, expect Obama to start handing out trillions to government contractors through various new Orwellian-sounding departments and administrations.

For the dollar, the Treasury market will be the canary in the coal mine. It is rallying now from safe-haven buying, as it should, and it could even go a lot higher, but when it turns, grab your gold and run. Nothing is so damaging to an economy as government work programs and the kind of inflation that they create. This is what happened in the Wiemar Republic. The government was the main employer, and it paid workers (and foreign creditors) with freshly printed cash.

In the US, I imagine that the public finance system will continue to operate as it always has: 1) Taxes, income from which will continue to drop in the depression; 2) Bond sales, but there is a limit to the world’s appetite for notes from a bankrupt creditor; 3) Federal Reserve money creation for the purchase of bonds that the public does not want. This last part is how fresh cash gets into circulation, and how the government indirectly funds itself through printing. When public demand for Treasuries dries up, you can bet the government’s demand for funds will be greater than ever, so then we will see what Bernanke can really do with a printing press.

Jim Rogers: the future of the US involves exchange controls and politicians with Swiss accounts

Take a minute to chew on this interview of Jim Rogers by Keith Fitz-Gerald at Seeking Alpha:

(Rogers) “If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn’t let the Chinese buy the oil company, wouldn’t let the [Dubai firm] buy the ports, et cetera.

But I’m really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they’re somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.

Before World War II, Japan’s yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That’s a collapse. That was also a bottom.

These are not predictions for the U.S., but I’m just saying that things have to usually get pretty, pretty, pretty, pretty bad.

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation.  And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.

[Q]: Treason? Wow, I didn’t know that.

Rogers: Yes…an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies.  Anything. You could even use other people’s currencies.

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by ’39 they had full-exchange controls...”

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[Q]: Is there a specific signal that this is “over?”

Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.

[Q]: They’ll move their own money.

Rogers: Yeah, because you look at people like the Israelis and the Argentinians and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.

[Q]: We saw that in South Africa and other countries, for example, as people tried to get their money out.

Rogers: Everybody figures it out, eventually, including the politicians. They say: “You know, others can’t do this, but it’s alright for us.” Those days will come. I guess when all the congressmen have foreign bank accounts, we’ll be at the bottom.

But we’ve got a long way to go, yet.

In respect to the future of the US and what to do about it in your personal life, Rogers and I are on the exact same page. I once had the chance to ask him if he thought we could go through a phase of deflation along the way, and he said no, that Bernanke would buy stocks, bonds or real estate and do whatever it took to avoid deflation, and of course end up destroying the currency.