Taleb vs Treasuries

By Felix Salmon
February 4, 2010
The Black Swan, Nassim Taleb explains his barbell investment strategy:

Instead of putting your money in "medium risk" investments (how do you know it is medium risk? by listening to tenure-seeking "experts"?), you need to put a portion, say 85 to 90 percent, in extremely safe investments, like Treasury bills -- as safe a class of investments as you can manage to find on this planet.

Today, he's saying something rather different:

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In The Black Swan, Nassim Taleb explains his barbell investment strategy:

Instead of putting your money in “medium risk” investments (how do you know it is medium risk? by listening to tenure-seeking “experts”?), you need to put a portion, say 85 to 90 percent, in extremely safe investments, like Treasury bills — as safe a class of investments as you can manage to find on this planet.

Today, he’s saying something rather different:

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific.

This is Taleb at his most quotable and least helpful. Of course most human beings shouldn’t get involved in shorting anything. What’s more, Larry Summers actually put on that trade — that long-term interest rates would rise — while he was at Harvard, with disastrous consequences. Even no-brainers can lose you billions.

In any case, if 90% of your assets are in safe Treasury bills and a large chunk of the other 10% is being put to use shorting Treasury bonds, essentially what you’re doing is putting on a curve steepener — at a point in time when the curve is already as steep as it’s been in some time. What’s more, unless you’re extremely leveraged, you’re never going to get rich shorting Treasuries. And I’m sure that Nassim would never recommend that kind of leverage.

Taleb isn’t actually giving investment advice here, although it might sound as though he is. He’s just making a rhetorical point that Bernanke and Summers are bound to make some kind of a mistake in trying to steer the US economy — and that such mistakes are likely to result in higher long-term rates. The problem is that, as we saw during the most recent crisis, every so often an economic disaster results in lower long-term rates. So overall I’d say that following Nassim’s investment advice from his book is definitely preferable to following off-the-cuff comments he’s making in Moscow.

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