Taleb: The Stock Market Is a Hoax

 |  Includes: DIA, QQQ, SPY
by: Roger Nusbaum

Nassim Taleb has popped up on the radar in the last couple of days as some have opined that a trade for 50,000 options by Universa, a fund that Taleb advises in some capacity, may have contributed to the Crash of 2:45 pm. The Wall Street Journal picked this up and FT Alphaville poked some fun at the whole thing.

Barry Ritholtz posted a video from Taleb's recent appearance on Bloomberg, after the Crash of 2:45 pm. In it, Taleb was asked about whether a trade by Universa was responsible. He sort of denied it and then said that focusing on what caused a blip on a given day is the wrong focus and he is correct. His analogy was to focus on the camel's back not the straw.

Below are a few comments I pulled out of the interview that I wanted to comment on.

He said we've learned nothing from the crisis thus far and that the system is now more fragile; we have increased moral hazard. Have we really increased moral hazard and dumb behavior? Well, what do you think will happen the next time the financial system faces a meltdown? My take is that they won't bail out banks as a repeat of 2008, but there will never be a repeat of 2008. In the next crisis, and there will be another one at some point, financial institutions will have taken way too much risk because of completely different factors than in 2008 and they will "have to" bail them out. And this, of course, could be some delayed result from the fix being implemented now. Is there anyone outside of Washington DC who doesn't realize this?

Next up was a comment that black swan events depend on the viewpoint of the person involved. He said that Thanksgiving is a black swan for the turkey (this is a reference from his book) but not the butcher. I would not focus too much on predicting what the next black swan will be (this would seem to be impossible by definition and the term has probably become over used) and instead focus on what the next bad black swan event will do to the market and probably your portfolio. Some sort of lightning fast crash, although it probably won't happen again, is obviously the worst time to sell. I try to have a couple of things that could go up in the face of a longer term panic down, longer than 20 minutes, but the crucial thing is to recognize a panic when it comes. In the last few years that I've had this site I almost always put a post in the middle of it, as I did last Thursday noting the panic hopefully with a little humor.

The other interesting thing to me was what he thinks people should hold. He said the stock market is a hoax. He would also avoid long treasuries which is not an off the wall idea by any means. He would hold a collection of metals, though he was not specific which is why he used the word collection. If I understood correctly he would also own soft or ag commodities and farmland which he differentiated from real estate.

Comments like "the stock market is a hoax" are over the top, probably, but can be a catalyst for thinking about asset allocation and the volatility of asset classes which is always useful even if you disagree with the conclusions that Taleb, or anyone else, draws.