Friday 29 Mar 2024
By
main news image

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Nov 16 - 22, 2015.

PROF-NASSIM-TALEB-02_pw_2311115

The current volatility in global markets makes for fewer panicked investors as it forces them to underinvest. To build an antifragile portfolio, Black Swan author Professor Nassim Taleb recommends holding cash and waiting for opportunities to arise.

 

The following is an excerpt from the interview with Taleb.

Personal Wealth: What are your views on the state of affairs in today’s global markets?
Nassim Taleb: Not good, and let me tell you why. We had the global financial crisis due to overleveraging. We implemented policies that were necessary to smooth the cycles and stop the pain — monetary policy by lending at cheap rates. The problem is, the crisis came from a lax monetary policy … people were not trained to handle uncertainties and bad companies were allowed to survive. They see the central bank as ‘someone who will help them when they have problems’. [Alan] Greenspan did in 1991 — giving the banks cheap money to replenish their balance sheets. And later, they asked the state to bail them out. The financial crisis happens, what do they do? They say, ‘Okay, we need to ease [monetary policy]. So, they put interest rates at zero.

There is no evidence that there is a difference between 3% and 0% on the economy’s recovery … but you can’t leave interest rates at zero forever. So interest rates are at 0% and who do they help? It helped inflate [the prices of] luxury apartment buildings, more than regular ones. In 2013, New York City [luxury] apartments went up on average by more than US$100,000. But medium-cost apartments went down by US$20,000. Basically, there was a re-allocation of money to the rich, thereby increasing inequality.

Let’s go back to the central point: you have to do something when there is a crisis. But if you go to the doctor and you have a problem, the doctor will give you painkillers. But it is unpardonable for the doctor to give you painkillers for many years without curing the underlying condition, which in this case, is too much debt. What happened during that period? Debt has swelled, but it is now government debt. That’s the problem.

How healthy we are today cannot be measured without putting back interest rates at where they were before, which is at least 3%. We have to do it for us to gauge whether we are out of the woods.

You said there is no inherent difference between interest rates of 3% and 0%. Then why do it in the first place?
They [policymakers] panicked. They kept lowering rates. But no one is finding it easy to borrow at 0%. So where did the money go? It went to the banks to fund themselves and in the US, to generate themselves a little annuity. The banks take free money from the government and try to give it back to the government to make 25 basis points. It is a joke. But [rates at] 0% is really a distortion — it is penalising investors without favouring borrowers, and such low rates are pushing people into asset classes, such as real estate, which only the rich can own.

Are we seeing cracks? Is there an impending global financial crisis?
The numbers look good in the US as far as employment [numbers are concerned]. And the US will not suffer as much as other countries from the US policy. That’s tragic because the rise in debt that we have seen in the US has also happened outside.

Which asset classes will suffer the most?
Luxury real estate. Typically, it is very sensitive to interest rates.

Is this real estate in the US alone?
It is worldwide. Some places in central London — it is crazy. Central London is not the smartest place to buy real estate when it is trading at such a high premium to the suburbs of London. But people tell you, ‘It is safe here’. Well, it was safe in Florida [too] before the big shock. Take 1994 and look at what happened. Real estate got hammered and it will happen again … it’s the same in New York. The luxury premium comes basically from the fact that the super rich have inflated wealth.

Fixed income will suffer a lot more than equities because equities in the end have delivered and the companies [in the US] are very healthy. Let me tell you why I like equities better. Let’s say we have too much borrowings and they raise rates. Raising rates is good but still, bonds will go down. Or they could realise that printing money could lead to inflation. Then, bonds will also go down. So both cases are bad for fixed income. Inflation is short-term bad, long-term good for stocks and the lack of inflation is also not that bad. So stocks appear to be the safer bet. Of course, [there is] speculative buying, but the companies are healthy and American companies are very good insofar as debt is concerned [and they are] very wise in their debt policy.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share