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“Markets Have No Purpose Any More” Mark Spitznagel Warns “Biggest Collapse In History” Is Inevitable

“Markets Have No Purpose Any More” Mark Spitznagel Warns “Biggest Collapse In History” Is Inevitable

After making over $1 billion in one day last August, and warning that “the markets are overvalued to the tune of 50%,” Mark Spitznagel knows a thing or two about managing tail risk.

The outspoken practitioner of Austrian economic philosophy tells The FT, “Markets don’t have a purpose any more – they just reflect whatever central planners want them to,” confirming his fund-management partner, Nassim Taleb’s perspective that “being protected from fragility in the financial system is a necessity rather than an option.”

“This is the greatest monetary experiment in history. Why wouldn’t it lead to the biggest collapse? My strategy doesn’t require that I’m right about the likelihood of that scenario. Logic dictates to me that it’s inevitable.”

While some money managers are critical of a strategy that “sells fear,” The FT reports there are others who share Mr Spitznagel’s views that another reckoning is imminent.

Among those who share his worldview is former US presidential candidate, Senator Rand Paul, and his father Ron Paul.

The elder Paul wrote the introduction to Mr Spitznagel’s 2013 book, The Dao of Capital. “As one of the leading voices in the country on economic policy, Mark has been a key friend and ally, and I’m thankful for his always-ready advice,” Senator Paul told the FT. But most investors will be praying he is wrong.

Universa started in January 2007 after its success during the financial crisis, when it reportedly gained about 100 per cent. The firm now protects about $6bn of investor money, backed by about $200m-$300m of capital (the firm declined to say exactly how much because of regulatory issues). Fees are paid on the nominal amount insured against calamity, rather than the capital invested.

…click on the above link to read the rest of the article…

Why the fight for GMO labeling is (possibly) over

Why the fight for GMO labeling is (possibly) over

Ever since it became clear that Vermont’s law for mandatory labeling of foods containing genetically engineered ingredients would actually go into force this summer, the big question has been how many food companies would choose to label their products and how many would choose simply not to sell in Vermont.

There is a third choice which purveyor of canned fruits and vegetables, Del Monte Foods, announced recently. The company will eliminate all genetically engineered ingredients from its foods, obviating the need for special labeling. This won’t be too difficult since there are very few genetically engineered fruits and vegetables.

While the Vermont law is huge victory for the proponents of labels, the U.S. Congress could still pre-empt state labeling laws, something it failed to do earlier this year. But as more and more of the public demands to know which products have so-called genetically modified organisms or GMOs in them and as the number of products on grocery shelves with non-GMO verified labels increases, growers and processors may have no choice but to acquiesce. They may be forced by circumstances either to label their products (or automatically be suspected of trying to hide something for not doing so) or to eliminate GMO crops and ingredients for fear of losing customers regardless of what happens in Congress or in other states.

Nassim Nicholas Taleb, author of The Black Swan and other books on risk, explains why this is so in a draft chapter of an upcoming book called Skin in the Game. His investigation begins with why nearly every packaged drink in the United States is labeled certified kosher.

 

…click on the above link to read the rest of the article…

Who’s Anti-American?

– Maryland’s State Song

SamJ’accuse…     Illustration by James Montgomery Flagg

Guilty as Charged

BALTIMORE – Yesterday, one dear reader wrote in to say we were “cynical” and “anti-American.”

Today, we rise to defend our reputation… such as it is. Cynical? Nah… We’d need a big dose of positive thinking and earnest optimism to be cynical. According to the Oxford English Dictionary, people who are cynical are “suspicious,” “doubting,” and “skeptical.”

We’re way beyond that. We’re pretty sure that the system is rigged… and rotten. Elections are exercises in solemn deceit. And the Fed’s management of the economy is a mixture of delusion and self-serving scam. We don’t have much doubt about it. That’s just the way it is.

As for “anti-American,” our accuser needs to clarify the allegation. Is he talking about the Deep State? The empire? Or is he talking about the 50 sovereign states… and the Old Republic? Or the language? The culture? Reality TV… the Kardashians… NASCAR racing… Old Faithful and the mighty Mississip’?

No one can be anti-America; America is too many things to too many people. But if he’s talking about the federales who control half our national output… tie us in knots with Obamacare, National Labor Relations Board rules, and all their other dopey programs… and stomp around the world trying to justify their trillion-dollars-a-year security budget…

…if he’s talking about Hillary, Bernie, The Donald, the Bushes, et al… and all the 535 members of the U.S. Congress… and the 2,783,000 zombies on the U.S. payroll…

…click on the above link to read the rest of the article…

 

Economics Is Like A Religion – Just Faith In Theory

Economics Is Like A Religion – Just Faith In Theory

Everyone is missing the serious problem that ultra-low interest rates have created for retirees.

Pension funds are still assuming that future returns will be in the 7½–8% range. And as people get older and have no practical way to go back to work, pension funds that are forced to reduce payments in 10 or 15 years (and some even sooner) will destroy the lifestyles of many.

So what made Europe and Japan agree that negative rates-with all their known and unknown consequences—are a solution to our current economic malaise?

I have been trying to explain this by comparing economic theories to a religion.

Everyone understands that there is an element of faith in their own religious views, and I am going to suggest that a similar act of faith is required if one believes in academic economics.

Economics and religion are actually quite similar. They are belief systems that try to optimize outcomes. For the religious, that outcome is getting to heaven, and for economists, it is achieving robust economic growth-heaven on earth.

I fully recognize that I’m treading on delicate ground here, with the potential to offend pretty much everyone. My intention is to not to belittle either religion or economics, but to help you understand why central bankers take the actions they do.

The No. 1 Commandment of a Central Bank

Central bankers are always-and everywhere-opposed to inflation. It’s as if they are taken into a back room and given gene therapy. Actually, this visceral aversion is also imparted during academic training in the elite schools from which central bankers are chosen.

This is our heritage; it’s learning derived not only from the Great Depression but also from all of the other deflationary crashes in our history (not just in the US but globally).

…click on the above link to read the rest of the article…

Antifragile Food Systems

Antifragile Food Systems

‘The alpha person at a gathering of “high status” persons is usually the waiter.’

In the film, No Escape, Owen Wilson and Lake Bell’s characters play a stereotypical USAnian couple, Jack and Annie Dwyer, cast abroad like fishes out of water. He is a corporate engineer in charge of putting a water plant into a fictional Southeast Asian country. She is the dutiful wife, bringing along to the temporary assignment two young children and their favorite kitchen appliances.

When civil war suddenly erupts before they have even gotten past jet-lag and they find themselves in an urban killing field, hunted by machete-wielding guerillas who are really angry about the way Jack’s corporation has stolen and monetized their water rights, they must run for their lives, which they do for the next hour or more of screen time.

That’s the plot, but the film is less about why the couple got into their predicament or why this small country has decided to murder all its foreign tourists than how Jack and Annie and their children absorb the changed circumstances, adapt to their precarious situation, and do what it takes to survive. Theater audiences are rooting for them, despite their complete lack of preparation.

In Antifragile: Things that Gain from Disorder, Nassim Nicholas Taleb distinguishes antifragile from words like robust or resilient by saying that when something is antifragile, it benefits when things go bad. Taleb is a recovering Wall Street quant trader. He understands hedges and shorts, and indeed, wrote the textbook on dynamic hedging in 1997. His subsequent books, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (2001) and The Black Swan: The Impact of the Highly Improbable (2007) redefined at how traders look at risk and how people should think about risk in life choices.

…click on the above link to read the rest of the article…

Nassim Nicholas Taleb on the Real Financial Risks of 2016

PHOTO: GETTY IMAGES

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.

…click on the above link to read the rest of the article…

Market risk; model smash

Market risk; model smash

Seeing the market crash from a few weeks ago, it is clear how quickly the markets can ferociously thrust past one’s risk models.  Risk models that failed to safeguard against risk when it absolutely mattered the most.  Models that left many large hedge funds hemorrhaging – top funds which by definition were supposed to protect their investors during the August tumult.  Instead when markets broke bad, a lot of things “went wrong”.  And stayed that way.  In this article, we explore a number of the large U.S. market crashes since the mid-20th century, and show how the recent bust compares.  We learn why relying on tail risk models whose approximations presume to work consecutively at all times, can lead to failure.  The key for investors (if they must be active) is to always remain vigilant.  Professor Nassim Taleb recently expressed it nicely:

The *only* way to survive is to panic & overreact early, particularly [as] those who “don’t panic” end up panicking & overreacting late.

And there were many who wound up in panic mode, in recent weeks.  Expeditiously selling at a loss, under record volume on August 24 (China’s Black Monday).  Let’s first consider what an overall market crash look like.  We quickly show a symmetrical V-shaped illustration here.  This illustration also shows a rise in fear on the way down, with peak panic near the bottom (the orange star), then followed by up-moves that mirror the previous down-moves.  We will need to review this overall shape in a future article.  But for now we discuss simply the left side of the illustration (the solid brown down-arrows).

…click on the above link to read the rest of the article…
 

 

 

Progress in an Uncertain World

Progress in an Uncertain World

Strong Towns is often accused of offering doom-and-gloom diagnoses of problems but being light on solutions. “You don’t tell us what we can actually DO to fix our insolvent cities,” goes the response. “You’re just so negative all the time.” This is not true, but I also don’t think it’s true that these criticisms are made in bad faith.

Rather, I think we have articulated a vision of what should be done to build Strong Towns, and done so in great detail. But that vision is heavy on experimentation and small-scale risk-taking (with potentially great rewards). It is heavy on civic engagement and grassroots action. And it is notably light on technocratic policy interventions: to the extent we talk about policy, it’s often about what policy makers should NOT do, not what they should.

There is a good reason for this, and those with a technocratic mindset (i.e. that the problems of cities will be fixed by top-down, data-driven policy tinkering) would do well to consider it.

The City as Ecosystem

Chuck occasionally has called mathematician and risk analyst Nassim Nicholas Taleb the “patron saint of Strong Towns thinking.” I strongly urge anyone who has not read Taleb to pick up his books—Antifragile if you’re only going to read one, but also Black Swan and Fooled by Randomness. They are deeply intellectual and cross-disciplinary, but not overly wonky: accessible and entertaining for non-academic readers.

The central thesis of Taleb’s work is that complex systems are inherently unpredictable and prone to “Black Swan” events: unforeseeable and unprecedented cataclysmic changes. It’s not that we haven’t figured out yet how to completely predict their behavior; it’s that it is far from even mathematically possible for us to do so. Think of a natural ecosystem. Global weather patterns. The stock market. The human body. A city.

…click on the above link to read the rest of the article…

 

Risk Experts Who Predicted 2008 Financial Crash: GMOs Riskier than 2008 Crash … “The G.M.O. Experiment, Carried Out In Real Time and with Our Entire Food and Ecological System As Its Laboratory, Is Perhaps the Greatest Case of Human Hubris Ever”

Risk Experts Who Predicted 2008 Financial Crash: GMOs Riskier than 2008 Crash … “The G.M.O. Experiment, Carried Out In Real Time and with Our Entire Food and Ecological System As Its Laboratory, Is Perhaps the Greatest Case of Human Hubris Ever”

Risk analyst Nassim Nicholas Taleb predicted the 2008 financial crisis, by pointing out that commonly-used risk models were wrong.  Taleb – a distinguished professor of risk engineering at New York University, and author of best-sellers The Black Swan and Fooled by Randomness – Taleb became financially independent after the crash of 1987, and wealthy during the 2008 financial crisis.

Taleb noted last year that most boosters for genetically modified foods (GMOs) – including scientists – are totally ignorant about risk analysis.   Taleb said that proliferating GMOs could lead to “an irreversible termination of life [on] the planet.”

This month, Taleb – and tail-hedging expert Mark Spitznagel, who also made a hugely profitable billion dollar derivatives bet on the stock market crash of 2008 – wrote in the New York Times:

Before the crisis that started in 2007, both of us believed that the financial system was fragile and unsustainable, contrary to the near ubiquitous analyses at the time.

Now, there is something vastly riskier facing us, with risks that entail the survival of the global ecosystem — not the financial system. This time, the fight is against the current promotion of genetically modified organisms, or G.M.O.s.

Our critics held that the financial system was improved thanks to the unwavering progress of science and technology, which had blessed finance with more sophisticated economic insight. But the “tail risks,” or the effect from rare but monstrously consequential events, we held, had been increasing, owing to increasing complexity and globalization. Given that almost nobody was paying attention to the risks, we set ourselves and our clients to be protected from an eventual collapse of the banking system, which subsequently happened to the benefit of those who were prepared.

…click on the above link to read the rest of the article…

When a Black Swan Flies Over Wall Street’s House of Cards

When a Black Swan Flies Over Wall Street’s House of Cards

A black swan is Wall Street lexicon for an unpredicted event. The author of that concept, Nassim Taleb, opines that most of the major moves in stock market history originated as black swan events coming out of nowhere, with a random, stochastic disorderliness that pushes markets into wild gyrations and implosion.

But subliminally, everyday, CNBC and Bloomberg market mavens reassure us that the market hovers only a few percentage points off all time highs, that unemployment is moderating, and projected GDP, if not robust, is certainly positive.

Still, outliers like Ron Paul endlessly pontificate that we are living in a fairy tale house of cards.

The Fed has pumped about $4.6 trillion into our economy—“quantitative easing,” a term Ron feels is printing money out of thin air. What bothers the former Congressman is that the Fed won’t submit to a real audit, and he suspects it is hiding something far darker. “If the Fed has nothing to hide, it has nothing to fear.” [1]

So what is it hiding? The Fed may have surreptitiously lent $16 trillion to foreign banks completely under the radar and without any approval of anyone. Says Bernie Sanders “No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the President.”[2]  The Fed may have done exactly that.

Just to keep these numbers in perspective, the total value of the entire U.S. economy, $17.4 trillion, is less than what the Fed may have been printing, unaudited, and all by its lonesome since 2008.

…click on the above link to read the rest of the article…

 

 

Olduvai IV: Courage
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Olduvai II: Exodus
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