Nassim Taleb discussed the current misconceptions related to COVID, monetary policy issues, markets, investing, the economy and the outlook ahead for all of us. COVID has made the world better against pandemics, we can say more robust, but has also shown the fragility of big cities, debt based economies, the risk of zombie companies not going bust etc. The main risk is that the stimulus keeps companies alive that should go bust, while the stimulus collapses the dollar over the long-term.
On inflation, current monetary policies are inflationary in the long-term, even if we might see short term deflation which is normal. On investing, Taleb says to be hedged with tail risk hedging.
Q3 2020 hedge fund letters, conferences and more
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Stock Market News: Dollar Collapse Is The Biggest Risk - Nassim Taleb
Nassim Taleb Interview
Good day fellow investors. I recently listened to a Bloomberg interview with Nassim Taleb and in 49 minutes they discuss the current market situation, the biggest risk to the current financial environment, which is the dollar collapse, the dollar losing its reserve currency status. That's the most underappreciated risk. And in this video, I want to summarise the 15 minute Bloomberg video, and also explain backing up with data, what Nassim said about what's going on what are the risks, and how you should protect yourself in this environment.
We're going to cover all the topics that matter today from the economy, the fed, the currencies, and then how to invest also touch a little bit on what Nassim is doing with his universal investment fund. But in short, think about the worst relationship you have been in your life. It's likely that relationship that from day one, you knew it was not the right one, but you stayed with it because you were lazy, you were just kicking the can down the road, you didn't want to be alone, bla bla bla. That relationship, the longer it lasted, the more painful it became.
Thus, the cost of breaking up increases, the later you do it. As time passes, you are not wanting to cut, you're just staying there because of the enormous cost that would be to do so. But eventually, it's either divorce, hopefully divorce and not cancer that separates you and gets you out of that bad relationship, if you don't cut it immediately. And that is Nassim's message that now the Fed is kicking the can down the road and not allowing for companies that should be bankrupt, the to go bankrupt quickly, to get out of that relationship, that toxic relationship immediately.
No zombie companies, companies that should be bankrupt are still with us. And that is costly. That leads to the Fed bailing out everybody else, who will bail out the Fed? Well, the dollar with it collapse.
For those who don't know Nassim Taleb, he is the author of "The Black Swan" that came to the fragile system we had. Then he also made "Antifragile", which is our thinks and how things should be built that benefit from disorder, those things that are getting stronger with this recession, like this YouTube channel, thank you for that, subscribe, and then also have skin in the game. If you want to be resilient, then you have to have skin in the game. Let's start with discussing all the topics.
On COVID, there are effects and we are wearing masks, which means that we are much better prepared to the next pandemic. We have seen copper installations, things like that. So the world is really improved, got more resilient or antifragile thanks to this pandemic. On the other hand, we see a lot of stimulus, which means that the financial system, is it getting stronger?
Is it antifragile or it's just kicking the can down the road and getting weaker, weaker and weaker? That's the question we're going to also answer today. Prior to the crisis, airlines were splashing money on buybacks. So when the crisis came, they didn't have any money to save themselves. Now they expect to be saved by the Fed, but the Fed has saved them all.
Also those that would go bankrupt even in a normal environment that is not creating a stable, resilient, antifragile system for the future. And then also the huge amounts of money, the low interest rates are allowing for red hot blank check companies, special purpose acquisition companies to raise billions and billions.
Now with all the free money with investors not knowing where to put all the free money that is printed. Even this special purpose vehicles, special purpose acquisition companies are booming because on free money, all those that take risk get there chance now, but this risk taking really weakens the system in the long term.
The dollar and New York City's collapse
Also, Nassim Taleb mentioned New York's cities, how fragile they are, and how this crisis really emphasises that ended probably long term cities will really feel the consequences of this crisis because nobody wants to live in a 40 square feet apartment somewhere in New York, when lockdowns come or things like that, plus office jobs, etc, etc. It's likely that one third of New York City businesses will go bankrupt or close permanently.
On the economy. Of course, things are getting a little bit better, but still not as good as things were earlier, the Fed's goal is that things to return to pre-COVID levels. And for that they are stimulating, they're doing whatever they can, but we'll see whether they are sacrificing the dollar to lower the unemployment rate to previous levels. Also, it's not just in the United States, same situation is all over the world with high unemployment, high stimulus, and money printing wherever they can.
Stimulus and the slow collapse of the dollar
Now, there are two economic scenarios that we can see forward, which is that COVID stays for longer, or COVID disappears. Whatever happens, what is the solution to all the economic aches? They are more stimulus. And it's constantly talking about stimulus free money and that leads somewhere in the long term, it's inevitable, sooner or later. US budget deficit soars to 3 trillion record, which is incredible, especially when compared to past budget deficits.
We can also say that the United States have entered socialism, because socialism is a system where the government acquires the tools of production and makes sure everybody has an income. We have recently seen the Fed with secondary market corporate credit facilities, acquiring corporate bonds, the tools of production, and everybody received a basic income or stimulus, or whatever you want to call it, but everybody received money. This is typical for socialism.
And once people get used to that, it's very difficult to go back to something else. Plus corporate bonds, zombie companies stay alive that should go bankrupt. And this is against the American spirit that made America so great in the past, because America is about failing, fast, cutting the costs for shareholders, for people, for investors, for entrepreneurs fast, and then really starting again, starting new, but the longer you kick the can down the road, like it used to be done in communism, that you are piling, piling no matter what, we know what happened there.
Zombie debt and dollar collapse
And this is also a risk that is piling up there. Nobody wants to talk about it, because you don't feel good about it. So you're probably going to cut the video here. But this is what is going on. We don't know when it will happen. But likely sometime somewhere, it will happen. It also depends on what happens with other currencies. So relatively, we don't know who will win. But absolutely, it's likely that all currencies are losing have been losing and will continue to lose.
And the longer this lasts, the more costly it will be for everybody to save what has to be saved or to pay for all the bad that has been done. Just an example here. When I analysed Enbridge, I looked at the free cash flows, or the oil and gas companies in US shale, and if you look at the free cash flows over 2010 to 2017, didn't improve much.
You can see that constantly negative but there has been so much free money, low interest rates, and all these companies have been kept alive so that bigger companies can make even more money so that investors can make more money but it's all on a house of cards, taste of the free money out there.
A lot of them in a different environment would not be there at all. This is also one of the repercussions of low interest rates and free money. And especially now with stimulus where companies can get those stimulus check, stimulus loans that keep them alive for longer. And if you're a manager, of course, you want to stay alive for as long as you can.
The consequence, the Fed's assets will likely go up 10 times over the last 12 years. 10 times, that's huge. That will have huge repercussions on the value of the currencies. But we haven't yet seen inflation. However, whatever happens, whether there is COVID or no COVID, that these policies that we are having now that are becoming the norm, everybody expects the Fed, oh the Fed will bail me out, I will get money etc. These are inflationary policies.
Now, when I say inflation, when we have seen we are seeing deflation, well, that's also different. These guys have been pumping oil and gas, oil and gas prices are low. But thanks to low interest rates, so oversupply over investments, yes lead to lower prices. However, if you want things that you want, those things are getting pricier and pricier, bicycles, medical care 4-5%, cable and satellite TV, books, food at home. So renting also increased in price.
However, the things you don't need have declined significantly from shoes, food at work, at school, woman's dresses, suits, jackets, coats, airline fares, huge declines. So yes, we are in a deflation, but it's very different with where and what you are looking for. And then when it comes to money, these things that you want matter more than the things you don't want.
Corporate collapse and the dollar
Also, when we look at that corporate debt as a multiple of earnings, we are at very, very high levels because everybody is getting crazy on taking as much debt as possible, thanks to the lower interest rate. No matter the times, annual earnings or repaying the debt, the Fed will bail us out.
And even Nassim said that growth backed by that is not real growth. So everybody's taking that doing buybacks, lowering the number of shares outstanding, pushing stock prices higher, financial engineering their growth, but that's not real growth, because all of that piles up and sooner or later, the chicken come to roost. When will that happen? Nobody knows. But this is something that's not sustainable. And that's the main Nassim Taleb message.
When Talib was asked what will be the crash trigger? He says that as those policies are inflationary, sooner or later, the Fed will have to start increasing interest rates to prevent further inflation. And when they started doing that in 2016-17-18, this was the answer of the S&P 500. We have seen a crash December 2018. Then, okay, new policies that helped because they said okay, no more increasing rates. Actually, they already started to lower rates half 2019, prior to the COVID crisis, so the crisis was already there. And if they are forced to increase interest rates, that could be ugly for a lot of institutions, and players out there.
Inflation and dollar collapse?
And then discussing again, deflation. If you look at inflation, it's never linear, it's always volatile, and it's always unexpected and it's usually preceded by deflation. Early 1900s deflation than inflation. 1930s, deflation than inflation. Low inflation 1960s, boom, big inflation 1970s. Also in Argentina, we have seen deflation 2001 and then a huge spike in inflation.
So really think about this. Now everybody says okay, there is no impact on inflation so we can print money, we can print money, we can print money, this creates deflation for a short period of time. How long nobody knows. And then inflation, when the Fed loses control, then it starts that's the main message. Don't expect linearity. Don't think, oh, now there isn't, tomorrow it might be and that's the main risk. Further, nobody will buy bonds, if you know that there is inflation so there is high uncertainty. When will that happen? Nobody knows. So what will happen? What will tomorrow look like? We don't know. But high levels of uncertainty will likely lead to high levels of volatility. And that's something we have to be prepared for.
On the dollar, people forget that hundred 50 years ago, the reserve currency of the world was the British pound, where 60% of world trade was priced in British pounds. Now we are somewhere there with the dollar. And that's also something that changes. If we look at the investments in China, we see how those keep growing over the years growing and growing, especially foreign investors invest there. Why? Because this is China, China is at the centre of Asia, we have 5.5 billion people, they're developing and growing. And these are natural for servers. We can like we don't have to like, we don't have to think it will be something but this is what's going on. This is their reality, and you can't avoid it. And they have their own currencies.
China is working to be the dominating player there something to think about long term, also related to investments, you don't have to invest in the Chinese one, you never know what will happen. But there are other place to be diversified. There. Now, it's very easy to think, okay, there is no inflation, let me buy those special purpose vehicles. Because all those new IPOs go up, go up, let me invest in those tissue, a lot of equity. Let me take more risk. Let me chase that yield. That works until it doesn't. And when it stops working, it won't be linear. That's unfortunate, but certain.
How To Invest
And then when it comes down to Taleb, he says that the cause of inflation, it's crazy not to be in stocks, or other real assets, I would add. But Talib also says that it's crazy not to be hedged. And the key is to buy insurance before the fire starts. What he does is tail risk hedging. But I would also add that perhaps diversification is something that we as retail investors can do, because not many of you, I think, is are specialists in tail risk hedging.
When you think of diversification, think of this. So we have united states and one side, globally diversified globally, portfolio diversification, lowers the risk, even academics have shown that and increases or keeps the return the same over the long term. So that's something that's a message that I want to give you to think about over time. It's not that it will happen tomorrow, I hope so. I hope you have the time to take advantage of what you are and balance yourself over the long term.
Dollar collapse: Conclusion
Or you can just keep chasing the returns, Apple stock is bound to go up. So Tim Cook just got a new offer of 1 million new shares by 2025 tied to share performance, so he will do whatever he can and that's what they want to push Apple shares higher. This means more buybacks, more debt with free money. Let's do that. But it will last until it doesn't. And I'm very surprised what will happen to in 2025 where he leaves with another 100 200 or 114 million or even more with disgust also Apple so please check that video out on tail risk catching.
This is what Nassim Taleb is an advisor here for universal investments this their return in the first quarter of 2020. Really amazing. You can research it if you want to do more derivatives options constantly playing that game constantly being hedged. I don't know whether we can do it. But we can be diversified but by not chasing what Wall Street does. Wall Street as Nassim Taleb says prefers for dollars of earnings rather than $3 of earnings, no matter the risk.
So I'm thinking if you are in $3 of earnings, that's something interesting already because it diversifies away from the $4 of earnings that Wall Street chases and Berkshire I'm sure certain it's at $3 of earnings. Yes, the stock is not outperforming the s&p 500 over the last 10 years, but everybody else is chasing returns. For more risk, always keep in mind risk and reward. What am I doing? I'm looking at commodities. Commodities are cheap now if there is inflation, some commodities should do good. And you can check more on my website. Thank you for watching. Subscribe, click the like button, because it helps the YouTube algorithm and I'll see you in the next video.