Taps Coogan – June 12th, 2023

He’s said it before and he’s saying it again. Nassim Taleb, legendary trader, risk analyst, author, and the patron saint of options traders, recently sat down with Bloomberg to share his views on the increasing reactivity of the world due to increasing connectivity and to reiterate his view that, despite bearishness generally and specifically for real-estate and VC, he doesn’t see a return to Zero Interest Rate Policy (ZIRP).

 

Taleb on rates staying ‘normal’ for longer:

“Something that you take for granted, real-estate… Think about it. $130 trillion created in valuation, if that doesn’t go down by half or three-quarters, there is something wrong in the way we understand finance because you cannot carry a house if your income is $30,000 a year… In the past, you could carry a half-a-million dollar house. Now, you can’t anymore. So you have to calibrate to that unless you have inflation and I don’t think they have too much appetite to let inflation run…”

“The two sectors you have to worry about are real-estate and pseudo technology… I don’t know which is going to be the first shoe to drop…”

“(The Fed) should not be changing interest rates in the future , if you have a crisis, as fast as they did in 2008… Bringing interest rates from 6% to 1%, there is no evidence that it’s better than 6% to 3%. What does that tell us? It tells us that we are going to have to live in the future like our parents, grand parents, and great grandparents lived, which is a world where interest rates are not zero… It’s not the job of the Federal Reserve to fix the economy. The Federal Reserve… used a monetary approach for a structural problem. Lowering interest rates to zero to face an environment with too much debt did nothing to fix the situation except cosmetically… In the future we know we are going to have higher interest rates and we are not going to see these swings in interest rates that we are having now…”

While we couldn’t agree more with Mr. Taleb’s diagnosis, his belief that rates will stay above zero during the next recession assumes that the Fed has actually learned something from the last 15 years (or even from the inflation of the last three years). Perhaps that’s true, but I wouldn’t assert it as a certainty.