Nassim Taleb article - "White Swan" Risk

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Nassim Taleb article - "White Swan" Risk

Post by Fat-Tailed Contagion »

Talib is predicting a "White Swan" risk coming in form of debt spiral.

Jamie Dimon also suggesting same risk.

What are some best practices to prepare for this risk in portfolio construction?

[Article title: 'A White Swan Death Spiral' — 'The Black Swan' Author Nassim Taleb Warns US Faces 2008 Like Crash]
https://finance.yahoo.com/news/white-sw ... 50278.html



[Title clarified and link fixed by moderator Kendall.]
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Re: White Swan Risk

Post by jebmke »

Swans are dangerous. They can take your finger off.
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Re: White Swan Risk

Post by dcabler »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 3:44 pm Talib is predicting a "White Swan" risk coming in form of debt spiral.

Jamie Dimon also suggesting same risk.

What are some best practices to prepare for this risk in portfolio construction?

https://finance.yahoo.com/news/black-sw ... miracle.”
Link doesn't work
Regardless, you lost me at Taleb....

Cheers.
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Re: White Swan Risk

Post by tetractys »

First make sure the article is current. I’ve had a few chuckles reading doom and gloom articles and then noticing after the fact how outdated they were, and how far off on many points.

Next revisit your risk tolerance and your investment plan, I guess.
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Re: White Swan Risk

Post by snowday2022 »

Read his books, or try. Then you will know to ignore any more of his comments.
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Re: White Swan Risk

Post by auntie »

High risk does not equal high reward. It equals high risk of no reward.
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Re: White Swan Risk

Post by sport »

tetractys wrote: Sun Feb 11, 2024 4:06 pm First make sure the article is current. I’ve had a few chuckles reading doom and gloom articles and then noticing after the fact how outdated they were, and how far off on many points.

Next revisit your risk tolerance and your investment plan, I guess.
The article is 5 months old.
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Re: Nassim Taleb article - "White Swan" Risk

Post by Fat-Tailed Contagion »

https://asiatimes.com/2024/02/black-swa ... obability/

Hard to find an article without a paywall.
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

Taleb's provided some good quotes and concepts .. Otherwise, doesn't seem like a very reasonable chap to me (we've talked a few times – mostly about his blanket disdain for IQ tests).

[Off-topic economic policy comments removed by moderator Kendall.]
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Re: Nassim Taleb article - "White Swan" Risk

Post by Fat-Tailed Contagion »

Jamie Dimon also speaking about this "Predictable Risk" recently.

Fortune article: https://fortune.com/2024/02/11/american ... io-impact/
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Re: Nassim Taleb article - "White Swan" Risk

Post by Fat-Tailed Contagion »

So my question is how to design a portfolio to address and mitigate this risk?
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Re: White Swan Risk

Post by Fat-Tailed Contagion »

tetractys wrote: Sun Feb 11, 2024 4:06 pm First make sure the article is current. I’ve had a few chuckles reading doom and gloom articles and then noticing after the fact how outdated they were, and how far off on many points.

Next revisit your risk tolerance and your investment plan, I guess.
What is the best investment plan to address debt spiral risk?
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” | ― Benjamin Graham, The Intelligent Investor (75/25 - 50/50 - 25/75)
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Re: Nassim Taleb article - "White Swan" Risk

Post by Fat-Tailed Contagion »

[Off-topic comments removed by moderator Kendall.]

Question is there anyway to diversify away this risk in a portfolio?
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Re: Nassim Taleb article - "White Swan" Risk

Post by yules »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm [Off-topic comment removed by moderator Kendall.]

Question is there anyway to diversify away this risk in a portfolio?
Increasing your allocation to international funds!
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Re: Nassim Taleb article - "White Swan" Risk

Post by UpperNwGuy »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm Question is there anyway to diversify away this risk in a portfolio?
Probably not.
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Re: Nassim Taleb article - "White Swan" Risk

Post by SevenBridgesRoad »

More experts. More doomsdays. Pundits have been writing since the 1980's about how Medicare and Medicaid are unsustainable and will lead to a terrible national calamity, collapsing the country because of debt to our eyeballs and beyond. Yet, here we are; apparently it is sustainable and there's been no huge calamity. Something about humans wanting to consume doomsday news, and there are always those who will feed that need. If you have a BH portfolio and live below your means, you're as good as it gets. Chill.
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm [Off-topic comment removed by moderator Kendall.]

Question is there anyway to diversify away this risk in a portfolio?
Ray Dalio talks about this. And the reason I always listen with him is he's got this vast knowledge of market history, and with Bridgewater, they've got 1,500 of the top people in finance producing more data on the economy than the Federal Reserve.

So he's saying he'd stay away from bonds. This is while the likes of BlackRock are calling fixed income a 'generational opportunity', and the risk premium between stocks and bonds is very low – so Vanguard too are saying it makes sense to have more exposure to bonds.
[Off-topic comment removed by moderator Kendall.] So Dalio seems to be selectively in equities, and in cash (while rates are decent). Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
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Re: Nassim Taleb article - "White Swan" Risk

Post by DonIce »

SevenBridgesRoad wrote: Sun Feb 11, 2024 6:13 pm More experts. More doomsdays. Pundits have been writing since the 1980's about how Medicare and Medicaid are unsustainable and will lead to a terrible national calamity, collapsing the country because of debt to our eyeballs and beyond. Yet, here we are; apparently it is sustainable
Just because something has lasted for 40 years since some people pointed out a problem, doesn't mean that it is sustainable forever.

To keep this actionable, portfolio diversifiers for people that worry about government bond defaults / currency devaluation / etc include: equities, foreign assets, real estate, and gold.
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Re: Nassim Taleb article - "White Swan" Risk

Post by arcticpineapplecorp. »

Logan Roy wrote: Sun Feb 11, 2024 6:36 pm Ray Dalio talks about this. [Off-topic comment removed by moderator Kendall.] So Dalio seems to be selectively in equities, and in cash (while rates are decent). Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
you might want to read this:
Dalio appears decidedly less enthusiastic about starring in the journalist Rob Copeland’s phenomenal new book The Fund: Ray Dalio, Bridgewater Associates, and the Unraveling of a Wall Street Legend. The book is a page-turning portrait of a bully and [expletive removed - moderator oldcomputerguy] artist — and, more fundamentally, a damning indictment of the elite compulsion to conflate wealth with genius.
source: https://jacobin.com/2023/11/ray-dalio-h ... hit-profit
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Re: Nassim Taleb article - "White Swan" Risk

Post by Random Musings »

When it comes to prognosticating, perhaps a gray swan works best (grey for those across the pond).

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Re: Nassim Taleb article - "White Swan" Risk

Post by km91 »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm
Logan Roy wrote: Sun Feb 11, 2024 5:09 pm Taleb's provided some good quotes and concepts .. Otherwise, doesn't seem like a very reasonable chap to me (we've talked a few times – mostly about his blanket disdain for IQ tests).

Stan Druckenmiller gave some great talks over 2023 on the scale of the US's debt problem .. It's not a market call – it's just looking at the numbers, and the extent of reckless spending .. But when this translates into something breaking, or severely slowing down – this is at least a multi-year problem .. It might not be till the 2030s that it actually starts to bite.

The first part of the trouble is that the U.S. national debt stands at the famous $32 trillion level without factoring in these programs...
This is what really annoys me, how no one talks about it... Do you know that the $32 trillion assumes the federal government will never make another Social Security or Medicare payment? Only government accounting could think that the government is never going to make another payment, not one. Not to me... not to you guys when you get older.
If you actually accounted for those (big) government programs, Druckenmiller said credible estimates put the value of that debt at $200 trillion. And that's not all...

https://stansberryresearch.com/articles ... ckenmiller
Up to $34.22 Trillion since this article was written > https://www.usdebtclock.org/
Lol what does it actually mean to pay down the national debt. Our taxes would be raised, government services would be cut, and the government would send cash to the largest debt holders (life insurers, pensions, Vanguard, Blackrock, etc...) who would just want to stick that cash right back into Treasuries. $34T of national debt is $34T of assets to someone else in the economy
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Re: Nassim Taleb article - "White Swan" Risk

Post by er999 »

The article suggests that the response to this future crisis will be interest rates going up. If so, the appropriate response would be to stay short term in fixed income (that is, t bills). No one in the article is predicting a government default.

However, then you miss out on current good medium and long term rates. Like always, it shows that buying long term bonds is a bet on future rates. Medium term (like total bond) still
somewhat, but less so than long term bonds.

There has to be someone on every side of a trade and for those who think current long term rates are a bargain these are the people on the other side of the trade (likely those interviewed)
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Re: White Swan Risk

Post by muffins14 »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:13 pm
tetractys wrote: Sun Feb 11, 2024 4:06 pm First make sure the article is current. I’ve had a few chuckles reading doom and gloom articles and then noticing after the fact how outdated they were, and how far off on many points.

Next revisit your risk tolerance and your investment plan, I guess.
What is the best investment plan to address debt spiral risk?
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Re: Nassim Taleb article - "White Swan" Risk

Post by Kendall »

Several off-topic economic policy comments (US debt) had to be removed. Please stay on topic, which is investment choices available to individual investors and the pros and cons of different investing approaches.
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Re: Nassim Taleb article - "White Swan" Risk

Post by firebirdparts »

I thought periodic deleveraging events were inevitable and everybody knew that.

Are we talking about something else here? If not, did this event need a name? Can we start referring to 4/pi as the firebirdparts number?
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

arcticpineapplecorp. wrote: Sun Feb 11, 2024 8:59 pm
Logan Roy wrote: Sun Feb 11, 2024 6:36 pm Ray Dalio talks about this. [Off-topic comment removed by moderator Kendall.] So Dalio seems to be selectively in equities, and in cash (while rates are decent). Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
you might want to read this:
Dalio appears decidedly less enthusiastic about starring in the journalist Rob Copeland’s phenomenal new book The Fund: Ray Dalio, Bridgewater Associates, and the Unraveling of a Wall Street Legend. The book is a page-turning portrait of a bully and [expletive removed - moderator oldcomputerguy] artist — and, more fundamentally, a damning indictment of the elite compulsion to conflate wealth with genius.
source: https://jacobin.com/2023/11/ray-dalio-h ... hit-profit
Probably says more about the state of journalism today than it does Bridgewater .. I think it's impossible to deny Dalio's breadth of knowledge when it comes to macroeconomics and market history, and how succinctly he can put things and reason them out.

I've known several Bridgewater employees, and it's certainly got its own culture – and it's not the culture younger millennials and Gen Z were brought up in. They expect a lot from their employees, and it's certainly an environment for facts over feelings, and battle-testing ideas. Makes them an easy target for people whose workplaces involve sensitivity training. But when you look at what Bridgewater is designed to do, and how they go about doing it, there's no group on earth more relevant to 'Investing – Theory'
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

km91 wrote: Sun Feb 11, 2024 10:14 pm
Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm
Logan Roy wrote: Sun Feb 11, 2024 5:09 pm Taleb's provided some good quotes and concepts .. Otherwise, doesn't seem like a very reasonable chap to me (we've talked a few times – mostly about his blanket disdain for IQ tests).

Stan Druckenmiller gave some great talks over 2023 on the scale of the US's debt problem .. It's not a market call – it's just looking at the numbers, and the extent of reckless spending .. But when this translates into something breaking, or severely slowing down – this is at least a multi-year problem .. It might not be till the 2030s that it actually starts to bite.

The first part of the trouble is that the U.S. national debt stands at the famous $32 trillion level without factoring in these programs...
This is what really annoys me, how no one talks about it... Do you know that the $32 trillion assumes the federal government will never make another Social Security or Medicare payment? Only government accounting could think that the government is never going to make another payment, not one. Not to me... not to you guys when you get older.
If you actually accounted for those (big) government programs, Druckenmiller said credible estimates put the value of that debt at $200 trillion. And that's not all...

https://stansberryresearch.com/articles ... ckenmiller
Up to $34.22 Trillion since this article was written > https://www.usdebtclock.org/
Lol what does it actually mean to pay down the national debt. Our taxes would be raised, government services would be cut, and the government would send cash to the largest debt holders (life insurers, pensions, Vanguard, Blackrock, etc...) who would just want to stick that cash right back into Treasuries. $34T of national debt is $34T of assets to someone else in the economy
It's explained in the link, I think. Debt repayments start to weigh on economic growth. Raising taxes weighs on growth. Increasing money supply to buy debt no one wants to hold raises inflation. Lots of roads to stagflation, and an ever-greater chance of something in the economy breaking (e.g. housing market).
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Re: White Swan Risk

Post by Kenkat »

jebmke wrote: Sun Feb 11, 2024 3:46 pm Swans are dangerous. They can take your finger off.
They are also fairly lightweight for their size so I learned that if you happen to be holding a broom when they come after you, you can use the broom under their chest to flip them onto their back, at which point an understanding is reached of “I’ll steer clear of your nest if you don’t bother me when I have to work down by the lake”. It’s amazing what types of things you can learn from those high school jobs.

On the original topic, to paraphrase Gen. MacArthur, government debt doesn’t die, it just fades away. The people who have money will likely pay for it through higher taxes or more likely higher inflation, which is ultimately just another type of tax on wealth. So I would personally put some thought into protecting against future inflation, favoring things like TIPS, shorter term bonds and equities depending on your timeframe.
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Re: Nassim Taleb article - "White Swan" Risk

Post by Ricola »

Taleb is hoping for just such an event. He is involved in a hedge fund that bets heavily on devastating market events and loses money every day that they don't happen.
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Re: Nassim Taleb article - "White Swan" Risk

Post by protagonist »

From what I have gleaned from these forums in the past, I'm not a huge Taleb fan.

His main message regarding what he calls "black swans", their importance in driving events, and the importance of limiting one's fragility to such events if possible, is very sound and is an important message. But there is nothing new there....he is merely popularizing mainstream scientific thought that has been established for decades via chaos and complexity theory- the behavior of nonlinear complex systems. For that I give him credit as a popularizer but not as a philosopher or scientist.

My problem with Taleb is the other stuff I have read in this forum that he is alleged to have advocated (his own ideas), many of which seem frankly silly and off-the-wall, many seem flippant, and some of which seem hypocritical and possibly even dangerous. I have no doubt that he is a charismatic character and an entertaining speaker, but I can't help but wonder, given some of the things he is quoted as saying, why he is taken so seriously by people that I know to be knowledgable and intelligent.

He has been described by many as a "guru", and the problem with "gurus" is people follow them blindly, so they have the responsibilty to be careful. It's great for a guru to recommend that people meditate- but once you have their trust , responsibility comes with that trust. It's not so great, once you have their trust and become their guru, to convince them to drink the poisoned kool-aid.
Last edited by protagonist on Mon Feb 12, 2024 4:12 pm, edited 1 time in total.
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Re: Nassim Taleb article - "White Swan" Risk

Post by JBTX »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 3:44 pm Talib is predicting a "White Swan" risk coming in form of debt spiral.

Jamie Dimon also suggesting same risk.

What are some best practices to prepare for this risk in portfolio construction?

[Article title: 'A White Swan Death Spiral' — 'The Black Swan' Author Nassim Taleb Warns US Faces 2008 Like Crash]
https://finance.yahoo.com/news/white-sw ... 50278.html



[Title clarified and link fixed by moderator Kendall.]
This article project’s debt to gdp going from 123% to 129% by 2023

https://www.cbo.gov/publication/59512#: ... 0of%202033.

This forecast has debt held by the public (excludes intergovernmental borrowing) going from 99% of GDP to 116% of GDP by 2034

https://www.cbo.gov/publication/59710

Japan has a gov debt to GDP of about 264%.


https://tradingeconomics.com/japan/gove ... 0in%201980.

So am I confident that US debt to gdp going up another 20 pts is going to cause a catastrophe? Not really, but I don’t know.

How would one hedge against it?

If you thought this would be bad I suppose you could buy international. Or you could buy TIPS and lock in the current real interest rates. Or you could buy gold, which has generally been a bad investment.
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Re: Nassim Taleb article - "White Swan" Risk

Post by JBTX »

Logan Roy wrote: Sun Feb 11, 2024 6:36 pm
Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm [Off-topic comment removed by moderator Kendall.]

Question is there anyway to diversify away this risk in a portfolio?
Ray Dalio talks about this. And the reason I always listen with him is he's got this vast knowledge of market history, and with Bridgewater, they've got 1,500 of the top people in finance producing more data on the economy than the Federal Reserve.

So he's saying he'd stay away from bonds. This is while the likes of BlackRock are calling fixed income a 'generational opportunity', and the risk premium between stocks and bonds is very low – so Vanguard too are saying it makes sense to have more exposure to bonds.
[Off-topic comment removed by moderator Kendall.] So Dalio seems to be selectively in equities, and in cash (while rates are decent). Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
Dalio puts out some pretty interesting long term macroeconomic stuff. I enjoy reading it. The problem is it is impossible even if it is correct to determine exactly where we may be falling in one of his hypothesized multi decade or multi century cycles. It isn’t really actionable.

As to acting on his recommendations - he says one thing, but it could rapidly change. Cash is trash, until it isn’t. Tony Robbins puts out a book with an all weather portfolio supposedly endorsed by Dalio that includes bonds, and a year later Dalio calls bonds a terrible investment. One can debate his acumen as an investor, but it’s impossible to act upon his public statements.
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Re: Nassim Taleb article - "White Swan" Risk

Post by nisiprius »

JBTX wrote: Mon Feb 12, 2024 2:47 pm ...Tony Robbins puts out a book with an all weather...
"all seasons. The two are constantly confused. All Weather is the risk parity hedge fund. All Seasons is a long-only five ETF portfolio.
...supposedly endorsed by Dalio...
Robbins wrote: "I looked in Ray’s eyes, and a smile came across his face. 'All right, Tony. It wouldn’t be exact or perfect, but let me give you a sample portfolio that the average person could implement.' And then slowly he began to unfold the exact sequence for what his experience shows will give you and me the increased probability of the highest return in any market environment, as long as we live, with the least amount of risk." According to Robbins, Dalio didn't just endorse it, he designed it.
...that includes bonds...
55% bonds. 55%. 30% stocks, 7.5% each commodities and gold.
...and a year later Dalio calls bonds a terrible investment. One can debate his acumen as an investor, but it’s impossible to act upon his public statements.
Last edited by nisiprius on Mon Feb 12, 2024 3:29 pm, edited 1 time in total.
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

JBTX wrote: Mon Feb 12, 2024 2:47 pm
Logan Roy wrote: Sun Feb 11, 2024 6:36 pm
Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm [Off-topic comment removed by moderator Kendall.]

Question is there anyway to diversify away this risk in a portfolio?
Ray Dalio talks about this. And the reason I always listen with him is he's got this vast knowledge of market history, and with Bridgewater, they've got 1,500 of the top people in finance producing more data on the economy than the Federal Reserve.

So he's saying he'd stay away from bonds. This is while the likes of BlackRock are calling fixed income a 'generational opportunity', and the risk premium between stocks and bonds is very low – so Vanguard too are saying it makes sense to have more exposure to bonds.
[Off-topic comment removed by moderator Kendall.] So Dalio seems to be selectively in equities, and in cash (while rates are decent). Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
Dalio puts out some pretty interesting long term macroeconomic stuff. I enjoy reading it. The problem is it is impossible even if it is correct to determine exactly where we may be falling in one of his hypothesized multi decade or multi century cycles. It isn’t really actionable.

As to acting on his recommendations - he says one thing, but it could rapidly change. Cash is trash, until it isn’t. Tony Robbins puts out a book with an all weather portfolio supposedly endorsed by Dalio that includes bonds, and a year later Dalio calls bonds a terrible investment. One can debate his acumen as an investor, but it’s impossible to act upon his public statements.
I think Dalio and Robbin's All Weather portfolios made total sense – given all available market history before them – until they didn't .. Which is exactly what you should expect from anything legitimately pertaining to markets and economies .. You can't prescribe simple actions and rules, because they're always in the process of being written. (and that probably gets to the core of why I think factor investing and CAPE ratios are naive concepts.)

They made sense until experimental monetary policy pushed 2/3rds of them into negative real yields. And to his credit, Dalio didn't wait around to be proven wrong. He didn't do what most factor-based investors do, which is sit tight and repeat their mantra .. He said "you'd be absolutely crazy to hold bonds". So Bridgewater's portfolios changed course and sailed through a period that was terrible for most diversified investors.

Same with cash. "When the information changes, I change my mind." Suddenly cash was on yields higher than US stocks or bonds, and on a relative basis it's suddenly looking quite attractive. And Bridgewater has sailed through major periods of market disruption. I think the fact Dalio's views are quite difficult to translate into simple, actionable advice is also why they're worth thinking about. I got out of bonds in 2014 – a bit before Dalio started calling valuations 'absolutely insane' – and that proved to be a good decision, that didn't require me getting any market timing right (I was off by over half a decade). I started buying bonds again recently, but Dalio's perspective has factored into me going much more into TIPS, infrastructure and some cash, and keep duration quite short – even now, when the obvious thing to do is buy bonds and lengthen duration .. There's a good reason to be a bit cautious about that.
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Re: Nassim Taleb article - "White Swan" Risk

Post by chinchin »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:11 pm So my question is how to design a portfolio to address and mitigate this risk?
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UpperNwGuy
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Re: Nassim Taleb article - "White Swan" Risk

Post by UpperNwGuy »

Logan Roy wrote: Sun Feb 11, 2024 6:36 pm Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
Just to be clear, TIPS are bonds. Your post makes it sound like Dalio might favor TIPS even though he is against bonds. I don't think that's a good assumption.
JBTX
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Re: Nassim Taleb article - "White Swan" Risk

Post by JBTX »

Logan Roy wrote: Mon Feb 12, 2024 3:18 pm
JBTX wrote: Mon Feb 12, 2024 2:47 pm
Logan Roy wrote: Sun Feb 11, 2024 6:36 pm
Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm [Off-topic comment removed by moderator Kendall.]

Question is there anyway to diversify away this risk in a portfolio?
Ray Dalio talks about this. And the reason I always listen with him is he's got this vast knowledge of market history, and with Bridgewater, they've got 1,500 of the top people in finance producing more data on the economy than the Federal Reserve.

So he's saying he'd stay away from bonds. This is while the likes of BlackRock are calling fixed income a 'generational opportunity', and the risk premium between stocks and bonds is very low – so Vanguard too are saying it makes sense to have more exposure to bonds.
[Off-topic comment removed by moderator Kendall.] So Dalio seems to be selectively in equities, and in cash (while rates are decent). Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
Dalio puts out some pretty interesting long term macroeconomic stuff. I enjoy reading it. The problem is it is impossible even if it is correct to determine exactly where we may be falling in one of his hypothesized multi decade or multi century cycles. It isn’t really actionable.

As to acting on his recommendations - he says one thing, but it could rapidly change. Cash is trash, until it isn’t. Tony Robbins puts out a book with an all weather portfolio supposedly endorsed by Dalio that includes bonds, and a year later Dalio calls bonds a terrible investment. One can debate his acumen as an investor, but it’s impossible to act upon his public statements.
I think Dalio and Robbin's All Weather portfolios made total sense – given all available market history before them – until they didn't .. Which is exactly what you should expect from anything legitimately pertaining to markets and economies .. You can't prescribe simple actions and rules, because they're always in the process of being written. (and that probably gets to the core of why I think factor investing and CAPE ratios are naive concepts.)

They made sense until experimental monetary policy pushed 2/3rds of them into negative real yields. And to his credit, Dalio didn't wait around to be proven wrong. He didn't do what most factor-based investors do, which is sit tight and repeat their mantra .. He said "you'd be absolutely crazy to hold bonds". So Bridgewater's portfolios changed course and sailed through a period that was terrible for most diversified investors.

Same with cash. "When the information changes, I change my mind." Suddenly cash was on yields higher than US stocks or bonds, and on a relative basis it's suddenly looking quite attractive. And Bridgewater has sailed through major periods of market disruption. I think the fact Dalio's views are quite difficult to translate into simple, actionable advice is also why they're worth thinking about. I got out of bonds in 2014 – a bit before Dalio started calling valuations 'absolutely insane' – and that proved to be a good decision, that didn't require me getting any market timing right (I was off by over half a decade). I started buying bonds again recently, but Dalio's perspective has factored into me going much more into TIPS, infrastructure and some cash, and keep duration quite short – even now, when the obvious thing to do is buy bonds and lengthen duration .. There's a good reason to be a bit cautious about that.
If you are saying 55% of your portfolio is terrible a couple of years later I wouldn’t call it “all seasons”
Logan Roy
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

UpperNwGuy wrote: Mon Feb 12, 2024 3:36 pm
Logan Roy wrote: Sun Feb 11, 2024 6:36 pm Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
Just to be clear, TIPS are bonds. Your post makes it sound like Dalio might favor TIPS even though he is against bonds. I don't think that's a good assumption.
Some institutional investors (I seem to recall Dalio, and I think Swensen) categorise them as Real Assets. I do as well – they're in a part of the portfolio with gold and infrastructure.

I wouldn't presume Dalio's opinion there, but I wouldn't rule out that he's still keen on TIPS, despite not wanting bonds, because they do answer a slightly different problem.
the_wiki
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Re: Nassim Taleb article - "White Swan" Risk

Post by the_wiki »

I always assumed I was supposed to be invested like a big event can happen any day. If so, why pay any attention to doomsday predictions?
Logan Roy
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

JBTX wrote: Mon Feb 12, 2024 3:40 pm
Logan Roy wrote: Mon Feb 12, 2024 3:18 pm
JBTX wrote: Mon Feb 12, 2024 2:47 pm
Logan Roy wrote: Sun Feb 11, 2024 6:36 pm
Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:50 pm [Off-topic comment removed by moderator Kendall.]

Question is there anyway to diversify away this risk in a portfolio?
Ray Dalio talks about this. And the reason I always listen with him is he's got this vast knowledge of market history, and with Bridgewater, they've got 1,500 of the top people in finance producing more data on the economy than the Federal Reserve.

So he's saying he'd stay away from bonds. This is while the likes of BlackRock are calling fixed income a 'generational opportunity', and the risk premium between stocks and bonds is very low – so Vanguard too are saying it makes sense to have more exposure to bonds.
[Off-topic comment removed by moderator Kendall.] So Dalio seems to be selectively in equities, and in cash (while rates are decent). Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
Dalio puts out some pretty interesting long term macroeconomic stuff. I enjoy reading it. The problem is it is impossible even if it is correct to determine exactly where we may be falling in one of his hypothesized multi decade or multi century cycles. It isn’t really actionable.

As to acting on his recommendations - he says one thing, but it could rapidly change. Cash is trash, until it isn’t. Tony Robbins puts out a book with an all weather portfolio supposedly endorsed by Dalio that includes bonds, and a year later Dalio calls bonds a terrible investment. One can debate his acumen as an investor, but it’s impossible to act upon his public statements.
I think Dalio and Robbin's All Weather portfolios made total sense – given all available market history before them – until they didn't .. Which is exactly what you should expect from anything legitimately pertaining to markets and economies .. You can't prescribe simple actions and rules, because they're always in the process of being written. (and that probably gets to the core of why I think factor investing and CAPE ratios are naive concepts.)

They made sense until experimental monetary policy pushed 2/3rds of them into negative real yields. And to his credit, Dalio didn't wait around to be proven wrong. He didn't do what most factor-based investors do, which is sit tight and repeat their mantra .. He said "you'd be absolutely crazy to hold bonds". So Bridgewater's portfolios changed course and sailed through a period that was terrible for most diversified investors.

Same with cash. "When the information changes, I change my mind." Suddenly cash was on yields higher than US stocks or bonds, and on a relative basis it's suddenly looking quite attractive. And Bridgewater has sailed through major periods of market disruption. I think the fact Dalio's views are quite difficult to translate into simple, actionable advice is also why they're worth thinking about. I got out of bonds in 2014 – a bit before Dalio started calling valuations 'absolutely insane' – and that proved to be a good decision, that didn't require me getting any market timing right (I was off by over half a decade). I started buying bonds again recently, but Dalio's perspective has factored into me going much more into TIPS, infrastructure and some cash, and keep duration quite short – even now, when the obvious thing to do is buy bonds and lengthen duration .. There's a good reason to be a bit cautious about that.
If you are saying 55% of your portfolio is terrible a couple of years later I wouldn’t call it “all seasons”
Again, up until a few years ago, economists didn't even know that bonds on zero or negative yields were a possibility. It was experimental monetary policy. The basic principle of investing is to assess and understand what you're buying
billaster
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Re: Nassim Taleb article - "White Swan" Risk

Post by billaster »

Logan Roy wrote: Mon Feb 12, 2024 5:35 pm Again, up until a few years ago, economists didn't even know that bonds on zero or negative yields were a possibility. It was experimental monetary policy.
I can assure you that economists have a thorough understanding of negative numbers. And they have long had an understanding of negative interest rates.

Negative interest rates are a rare occurrence but not unknown. Switzerland had negative interest rates in the 1970s. Sweden and Denmark in 2009. The ECB in 2014. Japan in the 1990s and again in 2016. For a short time US Treasury bills were negative during the Great Depression.

Negative interest rates may be appropriate in an economic situation in which there is weak demand, slow growth and below target inflation. Extreme circumstances require extreme measures. If the shoe fits, wear it.
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Re: Nassim Taleb article - "White Swan" Risk

Post by nisiprius »

UpperNwGuy wrote: Mon Feb 12, 2024 3:36 pm
Logan Roy wrote: Sun Feb 11, 2024 6:36 pm Now he's not mentioned TIPS (that I'm aware of), but TIPS and real assets (e.g. infrastructure) seem to be what other likeminded money managers are favouring.). I'm in stocks, cash, TIPS and infrastructure. Average duration in TIPS is quite short, at 5-7 years.
Just to be clear, TIPS are bonds. Your post makes it sound like Dalio might favor TIPS even though he is against bonds. I don't think that's a good assumption.
Who knows? Who the heck knows? According to Bridgewater's publication, "The All-Weather Story," inflation-linked bonds are key components in two of the investment quadrants--

Image

and one of them is supposed to do well enough during any market conditions to carry the other three. It's not supposed to need changes and adjusting, it's perfectly balanced for all market conditions.

And yet the "All-Seasons Portfolio" he dictated to Tony Robbin does not contain any TIPS in it at all.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
ScubaHogg
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Re: Nassim Taleb article - "White Swan" Risk

Post by ScubaHogg »

km91 wrote: Sun Feb 11, 2024 10:14 pm Lol what does it actually mean to pay down the national debt. Our taxes would be raised, government services would be cut, and the government would send cash to the largest debt holders (life insurers, pensions, Vanguard, Blackrock, etc...) who would just want to stick that cash right back into Treasuries. $34T of national debt is $34T of assets to someone else in the economy
Well…no

Presumably if the debt were being paid down the net issuance of treasuries would go down. This seems self-evident.
There are more things in Heaven and Earth, Horatio, than are dreamt of in your Expected Returns
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nisiprius
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Re: Nassim Taleb article - "White Swan" Risk

Post by nisiprius »

ScubaHogg wrote: Tue Feb 13, 2024 6:35 am
km91 wrote: Sun Feb 11, 2024 10:14 pm Lol what does it actually mean to pay down the national debt. Our taxes would be raised, government services would be cut, and the government would send cash to the largest debt holders (life insurers, pensions, Vanguard, Blackrock, etc...) who would just want to stick that cash right back into Treasuries. $34T of national debt is $34T of assets to someone else in the economy
Well…no

Presumably if the debt were being paid down the net issuance of treasuries would go down. This seems self-evident.
It actually happened during the budget surplus years of 1998-2001. I was buying individual TIPS back then, and one year I was unable to buy on plan because they didn't issue any.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
alfaspider
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Re: Nassim Taleb article - "White Swan" Risk

Post by alfaspider »

The market doomsayers always remind me a of an old Robin Williams bit satirizing the TV psychic "Ms. Cleo":

"I don't know when, I don't know how, but something bad is going to happen!"
sc9182
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Re: Nassim Taleb article - "White Swan" Risk

Post by sc9182 »

That author must be in some
type of Swan spotting bidness - and why not make chunks of money while at it !?
km91
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Re: Nassim Taleb article - "White Swan" Risk

Post by km91 »

ScubaHogg wrote: Tue Feb 13, 2024 6:35 am
km91 wrote: Sun Feb 11, 2024 10:14 pm Lol what does it actually mean to pay down the national debt. Our taxes would be raised, government services would be cut, and the government would send cash to the largest debt holders (life insurers, pensions, Vanguard, Blackrock, etc...) who would just want to stick that cash right back into Treasuries. $34T of national debt is $34T of assets to someone else in the economy
Well…no

Presumably if the debt were being paid down the net issuance of treasuries would go down. This seems self-evident.
Right, the government would be returning all that cash to debtholders, and presumably all that cash would like to go right back into risk free Treasuries if given the choice. What's the difference between putting $34T of cash into the economy vs $34T of Treasuries, they are both debts of the federal government
ScubaHogg
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Re: Nassim Taleb article - "White Swan" Risk

Post by ScubaHogg »

km91 wrote: Tue Feb 13, 2024 9:19 am
ScubaHogg wrote: Tue Feb 13, 2024 6:35 am
km91 wrote: Sun Feb 11, 2024 10:14 pm Lol what does it actually mean to pay down the national debt. Our taxes would be raised, government services would be cut, and the government would send cash to the largest debt holders (life insurers, pensions, Vanguard, Blackrock, etc...) who would just want to stick that cash right back into Treasuries. $34T of national debt is $34T of assets to someone else in the economy
Well…no

Presumably if the debt were being paid down the net issuance of treasuries would go down. This seems self-evident.
Right, the government would be returning all that cash to debtholders, and presumably all that cash would like to go right back into risk free Treasuries if given the choice. What's the difference between putting $34T of cash into the economy vs $34T of Treasuries, they are both debts of the federal government
You can answer your own question by asking why debt holders would rather hold treasuries than cash
There are more things in Heaven and Earth, Horatio, than are dreamt of in your Expected Returns
rule of law guy
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Re: Nassim Taleb article - "White Swan" Risk

Post by rule of law guy »

Fat-Tailed Contagion wrote: Sun Feb 11, 2024 5:11 pm So my question is how to design a portfolio to address and mitigate this risk?
I have a white swan portfolio. my white swan is that govt long term rates will rise unsustainably [note to friendly administrators, this is a risk assessment that creates the need to structure my portfolio accordingly, it is not a comment on politics or anything off topic]. my white swan is not that equity prices are too high, as I think we are in for significant productivity gains going forward. to the extent that inflation continues, that is generally preferable to corporations than deflation so again not a principal worry.

so I have about 70% in short term treasuries yielding about 5.3%/yr whose principal will not be impacted by rising rates. I have about 30% in SPY and a few stellar individual stocks.

that is the best I can do and I dont pay anyone else 1% to do it. so far this has satisfied my investment objectives of wealth preservation with at least some capital appreciation.
Never wrong, unless my wife tells me that I am.
Logan Roy
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Re: Nassim Taleb article - "White Swan" Risk

Post by Logan Roy »

billaster wrote: Mon Feb 12, 2024 8:11 pm
Logan Roy wrote: Mon Feb 12, 2024 5:35 pm Again, up until a few years ago, economists didn't even know that bonds on zero or negative yields were a possibility. It was experimental monetary policy.
I can assure you that economists have a thorough understanding of negative numbers. And they have long had an understanding of negative interest rates.

Negative interest rates are a rare occurrence but not unknown. Switzerland had negative interest rates in the 1970s. Sweden and Denmark in 2009. The ECB in 2014. Japan in the 1990s and again in 2016. For a short time US Treasury bills were negative during the Great Depression.

Negative interest rates may be appropriate in an economic situation in which there is weak demand, slow growth and below target inflation. Extreme circumstances require extreme measures. If the shoe fits, wear it.
Negative rates, negative real yields, but afaik only ever as an emergency measure during periods of severe economic distress.

The reason QE was experimental monetary policy was that markets didn't know what would happen when yields hit zero, because there wasn't an example of it – at least during a period of relative economic stability. When German bunds went negative, I remember the commentary, and the surprise they were finding buyers .. So rules were being rewritten, and new ideas like MMT sprang up.

Which is to say: when Dalio's All Weather portfolio was drawn up, conventional wisdom was that bond investors required a positive return. That information changed, and Bridgewater's portfolios changed – and I don't think there is a fixed portfolio that would make sense in every possible future. I think there's always a relative limit on what it's worth paying for something.

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