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Nassim Nicholas Taleb on the Real Financial Risks of 2016
Worry less about the banking system, but commodities, epidemics and climate volatility could be trouble
How should we think about financial risks in 2016?
First, worry less about the banking system. Financial institutions today are less fragile than they were a few years ago. This isn’t because they got better at understanding risk (they didn’t) but because, since 2009, banks have been shedding their exposures to extreme events. Hedge funds, which are much more adept at risk-taking, now function as reinsurers of sorts. Because hedge-fund owners have skin in the game, they are less prone to hiding risks than are bankers.
This isn’t to say that the financial system has healed: Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller. Zero interest rates turn monetary policy into a massive weapon that has no ammunition. There’s no evidence that “zero” interest rates are better than, say, 2% or 3%, as the Federal Reserve may be realizing.
I worry about asset values that have swelled in response to easy money. Low interest rates invite speculation in assets such as junk bonds, real estate and emerging market securities. The effect of tightening in 1994 was disproportionately felt with Italian, Mexican and Thai securities. The rule is: Investments with micro-Ponzi attributes (i.e., a need to borrow to repay) will be hit.
Though “another Lehman Brothers” isn’t likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices. Dubai is more threatened by oil prices than Islamic State. Commodity people have been shouting, “We’ve hit bottom,” which leads me to believe that they still have inventory to liquidate.
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Global Warming/alternately Climate Change Guide for Dummies
Global Warming/alternately Climate Change Guide for Dummies
QUESTION:
Can you go into more detail about the time frame for global cooling, and its ramifications, what to do to prepare oneself etc…
Obviously this is going to affect everyone, everywhere.
craig
ANSWER: This downturn should be greater than the last one in the 1700s according to our models. Volatility rises so the swings in climate become much more dramatic with the turn of these cycles. It is similar to a stock market crash. Once it breaks, the volatility rises and market prices appears very choppy. So there will be a burst to the upside, followed by new lows on the downside. I am in Paris. Nowhere near as warn as the States. People are wearing jackets on the street. Northern Europe never really warmed up this year. When I was here in the Spring, I had to go buy sweaters for it was much colder than I expected.
These cycles in climate were originally discovered from ice core samples from the North Pole which revealed a 300 year cycle in climate defined as the energy output of the sun. When I saw the presentation presented by Harvard scientists back in the 1980s, I immediate saw their chart was close to the 309.6 year cycle in the ECM. The sun has been documented now that it is a thermodynamic system which beats like your heart. The cycle defines maximum and minimum over a 300 year period and explains migrations and the rise and fall of civilization.
The last downturn was pretty bad. They also seem to line up with the revolution cycle. It probably aggravates society and they move toward civil unrest. Some 2500 men died at Valley Forge from exposure during the winter encampment. Clearly, this is the cycle that has driven war by conquest and is linked stimulated by a change in climate that has marked a reduction in food supply.
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