Are There Any White Swans?

Here is a fascinating video with Marc Faber, Nassim Taleb, Hugh Hendry and others on February 5 in a group discussion Where is the Money in 2010 � What are the Risks?

It's a long video, about an hour, but well worth a play. Be sure to click on the lower right corner to play the video in English.

One widely quoted excerpt from the debate was the statement by Nassim Taleb: �Every Human� Should Short U.S. Treasuries.

Nassim Nicholas Taleb, author of �The Black Swan,� said �every single human being� should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It�s �a no brainer� to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. �Every single human being should have that trade.�

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific. Nouriel Roubini, the New York University professor who predicted the credit crisis, also said at the conference that the U.S. dollar will weaken against Asian and �commodity� currencies such as the Brazilian real over the next two or three years.

No White Swans?

The ultimate irony in Taleb's suggestion is that his book rails against the hubris of predictions and models, instead speaks of the "impact of the highly improbable". In his book and at the conference, Taleb encourages people to bet on the highly improbable because in his view the highly improbable happens far more often than anyone thinks.

He recommends one-way bets on hyper-inflation, not just inflation. I have a question: Why is "swan theory" so one sided? Is a further deflationary collapse impossible?

By telling �every single human being� that betting against treasuries is the right thing to do, Taleb is effectively predicting a 100% certainty "there are no white swans".

Finally, Taleb suggests playing it safe with 80% of one capital and rolling the dice on long shots with the other 20. However, at 20% a crack, if the bets do not come in, one is going to quickly run out of funds.

I believe Hugh Hendry got the better of this debate on a number of issues. Hendry was the sole panel member taking the deflation side of the bet and the sole panel member not bullish on China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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