Taps Coogan – September 20th, 2022

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It’s been a long time since legendary trader, risk analyst, author, and the patron saint of options traders, Nassim Taleb, sat down for a genuinely market specific discussion, preferring as he has to stick to technical discussions and talks about his acclaimed books. So, it was a pleasant surprise to see him sharing his views on markets and monetary policy with CNBC in the past few days.

Mr. Taleb was unambiguous that the past 15 years of zero-or-lower interest rates were an anomaly that has “destroyed the economic structure,” that rates need to rise further to be considered “normal,” and that there is more downside for markets.

 

Some excerpts from Nassim Taleb:

“I think that we’ve had 15 years, 14-and-a-half years, of Disney Land that basically has destroyed the economic structure. Think about it: no interest rates. So, anyone who is 40 years old… has no experience in markets… They don’t know what the time value of money is…”

“The Fed overshot by lowering interest rates too much. The first 100 basis points worked, the second, much less. At zero interest rates… for a long period of time, you are hurting the economy, you are creating bubbles, creating tumors like Bitcoin…, or hedge funds that exist that shouldn’t have existed for 15 years. So now we need to go back to normal economic life… People with experience remember that there was at one time such a thing as the discount rate, the time value of money, that your investment had to earn cash-flow. All these notions escape the new generation…”

Responding to a question about whether interest rates are now at a normal level:

“No, 3%-5% is a normal level. Then you have room to go up or down from there.”

“The last 15 years were not good years. That generation of people that have the wrong instincts, the wrong methods, those people that made a lot of money for the last 15 years, are basically the least fit for real markets…”

On what he would recommend if he were Jay Powell:

“I would be careful to raise slowly or stop, but I would be careful not to use monetary policy on the downside by lowering rates too much because that’s what brought us here.”

“Remember, when you lower rates you create financial bubbles without necessarily helping the economy.”

“This is a white swan. People are pricing things at a discount rate close to zero and now suddenly they discover that there is a time value to money. What does that do to equities? Think about it… (Multiples) have to come down a lot more and go to normal levels and then we can start speaking… It’s not going to come down in an orderly way… When uncle points are hit, then you start seeing volatility… We’re still far away from uncle points…”  

In a separate comment on Twitter, Nassim Taleb noted “Basically experience in finance with a discount rate near zero is like having studied physics except without gravity.”

Sounds about right. There is more to the interview so enjoy it above. 

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