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.

8 comments

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“It’s “a no brainer” to sell short Treasuries”
“Every single human being should have that trade.”

Errrr…Salmon, it’s good that you have the intellectual nous to cut’n'slice things etc etc, but this time you’re reading too much into it. That’s investment advice, believe me.

Posted by ottorock | Report as abusive

Since treasury yields are about zero, they can only go up, which doesn’t require a lot of brains to see. What does require brains, or preferably a crystal ball, is knowing WHEN those interest rates will go up. Without a good idea of when that will happen, you could lose money shorting treasuries.

Posted by OnTheTimes | Report as abusive

What’s the deal lately with Russia and “Russia Today,” the Russian-Government run english speaking television show?

First they put a Gawker writer on(introduced as “the editor of Gawker.com) to talk about Haiti, then they have Jagdesh Bhagwati on talking about god knows what?

Now they’ve got Taleb over there at a conference?

Posted by Uncle_Billy | Report as abusive

Why does anyone take anything that comes out of his mouth seriously? Based on his own reasoning, we shouldn’t:

“George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does. Soros is vastly more robust. I am not saying Buffett doesn’t have skill—I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.”

And what about the robustness of the statistical evidence offered suggesting that Mr. Taleb’s investment performance is anything other than luck? As far as I can tell, there’s one big payoff surrounded by a sea of funds that have bled to death.

Posted by framed | Report as abusive

When I saw that at Bloomberg, it made me consider going long TLT, or even EDV.

Taleb knows how to get attention, but much of what he says is muddled. And his strategy is never made clear. He insists he makes small bets a very long odds. But the result he claims in 2008, ca. 100%, is just 2:1.

If, as he explains it, he accepts losing until the pay off of the black swan event, his performance was miserable. If he started his fund in 2003 and lost 10% each year til 2008, making 100% than would just bring him to even. Big freaking deal.

Posted by Bob_in_MA | Report as abusive

Too many people are saying this trade is a no-brainer. The yield curve is very steep already.

Posted by DavidMerkel | Report as abusive

You miss Taleb’s point. There is a big difference between T-bills and the 10 year or further out on the curve. There is nothing inconsistent in these two statements by Taleb. Long term US yields are not the same as 90 day paper.

Posted by zerulian | Report as abusive

http://2010.therussiaforum.com/news/sess ion-video3/comment-page-1/#comment-85

everyone should watch this panel… Can anyone figure out what the trade Hugh is talking about is?

Posted by roga | Report as abusive