Black Swan: Fallen From the Pure Faith

This story in today’s Wall Street Journal has me scratching my head. (I know, it was reported a couple weeks ago as well, I’m a busy blogger). I read Black Swan. I thought it was absolutely brilliant. Nassim Nicholas Taleb has truly come up with one of the most useful and original ideas about markets that I’ve read in my entire career.

All that being said, what I’m reading about Universa betting on inflation is total incongruous with what I thought was Taleb’s philosophy: basically that the big events in life, history, and markets are almost totally unpredictable. Given this, the best way to invest is to bet on change. Not to bother with long-term predictions based on fundamentals as we see them today, because by the time the long term comes around, fundamentals will be wildly different.

Now I’ll admit. I’m not convinced Taleb’s method of investing (doing nothing but buying out of the money options) is a good trading strategy. But I am convinced that his general way of thinking is a critical addition to any trader’s mindset. Don’t assume that the world as we know it today will exist tomorrow. Don’t assume that just because you can’t think of a reason why the world will radically change, doesn’t mean it won’t. Just because you make an accurate prediction about a certain event, doesn’t mean you’ll be able to accurately predict the myriad of consequential events. Just because something seems impossible given what we currently know, doesn’t mean its actually impossible.

Taleb and his colleagues have never been more vindicated than now, when what seemed like a backwater portion of the mortgage market (sub-prime) touched off a series of events that almost crashed the whole capitalist system. Even among those that saw sub-prime as a problem, few imagined how this crisis would play out. And that’s was Taleb’s whole point. Its nearly impossible to see the Black Swan coming.

So now… Mark Spitznagel, who runs Universa, the hedge fund Taleb advises, is betting on inflation? I’m not going to rehash my own view on inflation, that’s not the point. The point is that Taleb is known specifically for not betting on markets and economic events. Any market/economic outcome that you can see ahead of time, even as a lesser possibility, it isn’t a Black Swan at all. Many people see inflation accelerating. Almost every client meeting I attend, I get a question asking about the consequences of hyperinflation. I don’t know that even an extreme version of a commonly held view can be called a Black Swan.

Second of all, Taleb and Spitznagel aren’t economists. They are mathematicians and traders. I don’t know that they are especially equipped to make an inflationary call.

So it makes you wonder. Is Spitznagel doing this because its his view of markets or his view of what’s marketable? I have a feeling its more of the later than the former. He’s brought in all kinds of new assets based on Universa’s huge returns in 2008. Now he wants to continue the trend. He knows that hyperinflation is a common fear, and his fund is known for thriving during a period of disaster. Its an easy fit.

It just doesn’t fit his purported philosophy. I remember an interview Taleb gave on CNBC during the winter when he derided the money bank executives had made, specifically arguing that they managed their banks to enrich themselves, not their shareholders… Mmmm…

Our methods are not as different as you pretend. I am but a shadowy reflection of you.

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