Investors’ stubborn optimism is being sorely tested these days by a slew of disappointing data, continuing missteps in Europe, plunging commodity prices and darkening clouds over once-promising parts of the global economy. Confidence is crumbling everywhere – and with good reason. More than three years into the sputtering recovery from the Great Recession, the U.S. is spinning its wheels again, much of Europe is already mired in the mud and China’s leaders face intensifying pressures to reopen the stimulus taps to avoid a hard landing for their slowing economy.
In response, stock markets around the world have taken a pummelling. U.S. equities ended last week with their worst day so far this year; and both the S&P 500 and Nasdaq slid into official corrections after falling 10 per cent from their 52-week highs. Bearish analysts, whose numbers seem to be growing, see steeper declines ahead. U.S. Treasury yields plumbed record lows and German two-year bonds briefly went negative, indicating worried investors are willing to live with small losses to park their money in supposedly safe harbours.
You know the situation couldn’t get much worse in Europe when people start treating orgy-loving former Italian prime minister Silvio Berlusconi as one of the saner voices. “We have to go to Europe and say forcefully that the ECB should start printing money,” Mr. Berlusconi told his Facebook fans. “Otherwise, if it doesn’t, we should have the strength to say ‘ciao, ciao’ and leave the euro, while remaining in the EU, or to say to Germany that it should leave the euro if it doesn’t agree.” Quitting the euro wouldn’t be the end of the world, he added. “Britain is a solid country and has never joined the euro.” It’s the part about Britain being solid where he loses me.
“I don’t know what to tell my clients about risk any more,” a distressed young money manager confided to me the other day. But his eyes lit up when I told him I was about sit down with Nassim Taleb, the former derivatives trader-turned-scholar and author of the seminal The Black Swan, to pose that very question.
It’s only natural that people would seek out Dr. Taleb, one of the world’s foremost experts on risk and uncertainty, for guidance in increasingly volatile markets. His book about extreme, rare and unpredictable events that can turn markets upside down appeared just months before the global financial meltdown, which he had long predicted – thereby disqualifying it for black swan status. Still, black swans became a popular description for everything from 9/11 to the Japanese nuclear disaster, saddled him with an uncomfortable celebrity status and spawned a plethora of protective hedging strategies, in some of which he was involved.
Today, he makes it clear that he has no interest in doling out specific advice. “I’m not an investment guru. I don’t want to be one.” His reticence stems at least partly from the fact he is often misinterpreted. Indeed, he begins an otherwise affable and relaxed conversation with a flash of anger over a Bloomberg story that depicts him as making an investment call favouring crisis-ridden Europe over the United States. He was not telling people to buy or sell anything, he insists, but making a long-term structural assessment during a lecture on fragility versus robustness in everything from portfolios, economic policies and public projects to governments and entire societies. Which happens to be the subject of his next book, coming in November. The U.S., he argues, is becoming more centralized, which makes it more fragile, while Europe appears to be moving in the other direction.
When asked for his opinion of specific market-moving developments, such as Spain’s worsening banking crisis, Dr. Taleb says: “I’m not interested in ambulance-driving. I’m into what structure I would like to have for all our grandchildren to grow up in.” That, it turns out, would look a lot like Switzerland, with its decentralized government, small central bank, lack of debt and greater local accountability.
Although he has become a favourite of David Cameron, Britain’s Conservative Prime Minister, he insists he has no interest in pushing a particular political ideology. “Don’t listen to me as someone giving political advice. Listen to me as someone giving risk advice. Build whatever political model you want. I don’t really care.”
He itemizes what would make governments, corporations, banks, households and even investor portfolios less fragile and thus better equipped to withstand future shocks. At the top of his list is minimal debt and deficits. “You’re more efficient if you borrow than if you don’t borrow. But the first problem and you’re gone.” Governments should not be driving growth through debt, and individuals should only borrow for such essentials as schooling and housing, and only if the latter is affordable and not speculative.
So say goodbye to consumerism and with it a large chunk of the U.S. economy, not to mention China and other markets that supply the credit-binging shoppers of the world.
Does he wish people would stop trying to find elusive black swans everywhere they look? Yes, he says. “My whole idea of the black swan is to stop looking for black swans and analyze the fragility and robustness of systems.”
And then a sliver of advice slips through. The less debt you carry, the lower your risk from mistakes. “If you have good cash in the bank and a diversified portfolio, you don’t care to know what will harm you.”