by Drazen Jorgic on Aug 12, 2010 at 10:35

Nassim Nicholas Taleb, the hedge fund manager and best selling author, is betting against US government bonds as he argues the move is a ‘no brainer’.

Taleb, who wrote ‘The Black Swan’ and ‘Fooled by Randomness’, said he was ‘betting on the collapse of government bonds’ and that investors should steer clear of stocks.

“I’m very pessimistic,” he said at the Discovery Invest Leadership Summit in Johannesburg, according to Bloomberg.

Runaway deficits

Taleb said the main danger to the global economic system is government deficits.

In a recent interview, he explained his fears about the impact of what the governments are doing, stating: ‘As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never.

‘It’s the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realised there was a huge bias in the way people estimate deficits and make forecasts. Typically things cost more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

‘The problem is getting runaway. It’s becoming a pure Ponzi scheme. It’s very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.’

Interest rate risk

While some investors have started quietly mooting the prospect of the US being unable to keep up repayments on its debt, Taleb said the risk is around interest rates, especially with bonds which are not short-dated.

He said: ‘Because governments can print more of their own currency, the risk comes from a rise in interest rates rather than a government default. When you have hyperinflation, deficits, or debt problems, with short-term bills you can catch higher interest rates to compensate you for the inflation or whatever return you’ve missed.

‘By staying in cash or hedging against inflation, you won’t regret it in two years.’

Taleb now believes that ‘every single human being’ ought to bet against US Treasuries, describing the move as a ‘no brainer’.