By James Phillipps | 12:25:26 | 18 May 2010
Black swan author Nassim Taleb says the world debt problem is worse now than at the height of the credit crunch and investors should ditch equities and US Treasuries and back hard assets.
In an interview with Bloomberg, which you can see here, the New York University professor who made his name predicting the credit crunch, says that governments have failed to learn the lessons of the banking crisis, allowing the debt problem to morph into a new and more ‘vicious’ form.
‘I had detected fragility in the banking system and it is still there and we need to do something about it,’ he said. ‘We have had a couple of years since the meltdown and the risks have increased and taken a much more vicious form.’
He warns that economists and investors are continuing to espouse theories not backed by empirical evidence, such as the pricing of assets and risk, and says the globalisation has made events less predictable as the world has become more inter-connected.
Taleb brands the government bailouts of the financial system and the transferal of debt from the private to the public sector a fast-track to increasing moral hazard and is scathing about the profits made by the banks over the past year.
‘Look at all of the money they made with our backing- it is like they spat in our faces,’ he said. ‘’We have a lower tax base than two years ago because less people are in work than two years ago and are now depending on economic forecasting by governments. Obama is forecasting a deficit of $4-7 trillion depending on the parameters you use but a small glitch can mean the deficit for the next 10 years swells to $20 trillion.’
He points out that Greece was forecasting debt to GDP of 3%, which has since risen to 14% and counting.
‘The same thing will happen to the US- typical government underestimating,’ he says.
Taleb says that the escalation of the debt crisis will be sparked by what he says as the inevitable failed auction of Treasuries and the subsequent contagion around the world.
‘There will not be enough buyers of Treasuries and the government may have to print them,’ he says. ‘Before you know it you wake up to hyper-inflation without having had any inflation. I am extremely worried about government debt and long-term interest rates. A rise in interest rates can be extremely punishing. Governments want a bit of inflation, it would help everyone, but hyper-inflation penalises the stockmarket.’
So what does this all mean for investors?
‘I don’t recommend investors use long-term Treasury bonds as a repository of value- go very short-term,’ he says. ‘If you are European and think the dollar is a going to be a good hedge- both [the euro and the dollar] are going to have the same ills.’
If you back his perception that hyper-inflation is likely, then move into hard assets.
‘A good collection of metals and land, but agricultural land, not speculative real estate,’ Taleb says.
Perhaps his highest scorn is held over for equities.
‘’I recommend not thinking about the stockmarket,’ he says. ‘It is a big hoax that has disappointed people over the last decade making their retirement plans, thinking it would appreciate.’
‘Use it as something to play with for entertainment and nothing more.’