Taleb Was Interviewed on Charlie Rose Last Night

Taleb is a philosopher, professor ...best known as an author.

"Only 4 pages of this book "Black Swan" is about finance." (Taleb)

Today's Wall Street/World Finance community: Hidden Risks in the system coupled with increasing Complexity in the world coupled with so much Ignorance at the Top. Fooled by the illusion of stability. Bernanke's paper, "The Great Moderation," showed Bernanke was the "turkey." (Turkey is fed by a butcher for 1000 days, then zap.) Turkey is the risk management department. Turkey is financial department. Economics department.

Fooled by the illusion of stability.

Surprise for the turkey. Whole idea is not to be a turkey.

Before the discovery of Australia there was no reason to believe there was anything other than a white swan.

Black Swans in history:

The Great War

100 years of great moderation and stability in Europe (before WWI)

Class of people provide us with all these analytics...

Medieval doctors killed more patients than they saved.

Financial economists are comparable today. They can produce risk measurements that were extremely faulty.

Who is the turkey?

Bankers are the turkeys.

Banks were accumulating a humongous amount of risk thinking there would never be a storm because of the metrics. You have a lot more confidence because of the metrics.

Portfolio theory.

Who got it right?

[Mario] Rubini
Bob Schiller (of Yale) re real estate.

Like a house of cards. Fragility comes from the structure, not a particular component of the structure.

I was looking at a plane flown by a pilot who did not know anything about storms. And the next storm all planes will crash at the same time.

Globalization causes this fragility. All banks are interrelated.

Bubbles caused by debt not asset inflation. A lot more vicious than asset bubbles.

Risk comes from rare evants.

Metrics could not deal with rare events. System was way too fragile.

When my book came out, I started listening to the criticism and nobody attacked my central point. "I was hoping they would!" Gave me confidence to "go for the jugular" ... make a big "bet." [But it's clear from his demeanor he's an adviser, not a punter. So he himself did not get rich from such "bets."] I'd been waiting since 2003.

I made money for my clients. I protected them. I didn't get hurt. Nobody in my family members had bank preferred. People "close to me" were in 100% in cash.

90% in safe cash and municipal bonds. 10% in high risk.

Better than having whole portfolio in medium risk because metrics do not properly measure risk.

With cash you have your powder dry.

Capitalism II

Banks will be utilities.

You want to be able to get cash when you go to Detroit or LA.

Different class of risk-taking. On condition that society will not bail us out.

More symmetry.

A lot of hedge funds will disappear. Never made a penny for their clients.

The Bernanke/Greenspan Era.

Survivor for a different class of people.

Began with Regan Administration?

Over time we have had a switch -- 35 year, or 29 year old analysts -- looking at your numbers and running, in fact, your company. You want to look stable. If someone gives you a metric you can game it. If you own bonds that do not blow up very often your metrics look great.

Orthodoxy of markets being smart. Markets are stupid. Can be fooled by numbers.

Markets are horrible at predicting rare events.

[Mario] Rubini:

Worse than Rubini thinks. We switched from an envirnment of inflation and fear of inflation...


Everybody's referring to one precedent: 1929, which did not involve a lot of countries.

Today one event in America, factory closes a day later in China.

Collapse will occur quickly.

Hedge funds have to deleverage. Selling over time. "Inventory to go."

Someone turning 64:

his 401(K) today is 1/2 its value or worse than it was.

What's he going to do? "Not going to buy stocks." He needs cash to pay for his retirement, his rent and cigars, whatever. He has to sell.

Inventory to go. Who's going to buy? Not me.

Pension Funds, university endowments, everybody is/are suffering.

Some kind of independence from asset values under Capitalism II.

Independence from asset values.

Banks become utility companies. A lot less debt. A lot less speculation. Dentists go back to making money in dentistry, not stocks.

Massive inflation coming.

Paulson is doing a good job.


http://www.charlierose.com/view/interview/9713

The Black Swan

http://www.nytimes.com/2007/04/22/books/review/Easterbrook.t.html?scp=2&sq=black%20swan%20taleb&st=cse