Taps Coogan – March 27th, 2022

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Legendary trader, risk analyst, author, and the patron saint of options traders, Nassim Taleb, recently spoke with the Greenwich Economic Forum about the tail risks associated with pandemics and wars, as well as investing in an inflationary environment. In contrast to investors like Ray Dalio, who have declared “cash is trash,” Mr. Taleb says that investors who do not know how to tail risk hedge should not invest as he believes inflation fears risk reversing the accommodative monetary policy that has driven years of asset inflation.

Some excerpts from Nassim Taleb:

“I haven’t seen anything in history that says that people get better at handling uncertainty…. The way systems learn… is through evolution. How does evolution happen? Not by convincing people, by replacing them with better people… Companies don’t get better. They go bankrupt and their replacements are better…”

“We had the illusion that monetary policy could solve a structural problem. In fact, it makes it worse. They learned to lower rates… Greenspan at some point in time started pushing it. It doesn’t work… It saves your job (as policy maker) because it may work for a few weeks or years, but what’s a side effect of lowering rates? It’s pretty much the hedge fund industry. The rich people having a lot of money. It creates social inequality. It increases the value of all assets that have… any story to them and it creates Bitcoin. Bitcoin was thought to be a hedge against inflation. It turns out to be a reverse hedge because it’s created by low interest rates…  What we know from these policies is that we have had something like $150 trillion, somewhere between $100 trillion and $200 trillion, of valuation inflation over the past ten years… in things directly coming from the fact that it costs nothing to invest.”

“You may face an environment where what has been working in the past (for hedging) may no longer work. So you need hard hedges, not soft hedges, and I recommend that people who cannot hedge their tail just not invest… The best hedge, I think, you may have if you are not equipped to do tail hedges is being in cash when there is fear of inflation because assets are the ones who go first.”

The risk to financial asset prices is not inflation, but the policy reaction to inflation.

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