Trying to Explain Nassim Taleb’s Views on the Economy and Markets

Nassim Taleb just had an interview on Bloomberg discussing the latest topics in finance:

1 nassim Taleb

Modern Monetary Policy – Monetary Policy 3

Trade wars

Budged deficits

Market risk

How to invest

It is a great interview but as often with such interviews, things are not explained in depth. I’ll try to add facts to Taleb’s thinking and you will see how that affects your investing!

The biggest risk for Taleb – Deficits and no skin in the game

Let’s start with deficits, from the Wall Street Journal:

2 budged deficit

In an environment with full employment, thus with the economy doing great, budged deficits are increasing!

3 unemployment

Unemployment rate US, Source: FRED

With a strong economy, the logical thing should be to have budget surpluses so that when a recession or slowdown eventually comes, you have the room to increase government spending. If you check below, during the late 1990s, the budget had surpluses but it seems now most politicians think that debt is something not to worry about now.

4 budged deficitis

Source: FRED

Accumulating deficits mean higher government debt. Total public debt in the US had doubled in the last 10 years, DOUBLED.

5 public debt

Source: FRED

Higher debt, leads to higher interest payments. Despite historically low interest rates on government lending, interest payments have skyrocketed due to the large amount of debt.

6 interest payments

Source: FRED

The US government has to pay $550 billion in interest per year, and to do that, it simply borrows more as the deficits are now at almost $800 billion and expected to hit $1 trillion soon.

7 budget deficit

Source: FRED

Such a situation is unsustainable and for Taleb, and probably for every other rational being, a huge risk that is piling up and will at some point in time blow up. If you borrow just to pay interest on your debt, you are close to a Ponzi scheme and we know how those things usually end up.

In the next recession, budget deficits will explode that will probably increase the borrowing rate and create a spiral of trouble as raising rates will cripple debt servicing. To solve such issues, government tend to print more money and you soon have hyperinflation.

Further, if you increase interest rates, the cost of debt for the government exacerbates. So, a normal option to cool the economy is something the FED can’t use at this point in time.

9 treasury

Source: FRED

A longer term increase in rates where the US borrowing cost go to 5%, where those were in 2007, would double interest payments on the debt, further increasing budget deficits.

The main problem for Taleb is that those who make decisions, like politicians have no skin in the game. What harm will Trump have from current budget deficits if those create havoc in 2029? The main problem for Taleb is that there is no accountability in the current capitalistic system.

The plausible solution to the above problems creates another huge risk.

Taleb on Modern Monetary Policy – Monetary Policy 3

We recently discussed Ray Dalio’s views on the plausible next monetary policy moves that involve helicopter money and a coordination between government spending and money printing. Taleb is against such things because of the risks that pile up where the main risk is hyperinflation.

Even if inflation has been really low over the past years and contained between 1.5% and 2.5%, Taleb mentions how inflation doesn’t work linearly and how just because it hasn’t materialized, it doesn’t mean the risk isn’t there.

8 inflation

Source: FRED

At some point inflation will ramp up, that will make things not manageable; think of Venezuela, Argentina, Zimbabwe. Taleb really agrees with Charlie Munger on this issue.

Don’t own equities

On market risk, Taleb discusses how people should not even own equities and should focus on their jobs as source of income and invest only for capital protection. He says that if you must hold equities, you have to do that and be hedged in a proper way against long tail risks. The problem is that few know how to do that, i.e. buying some puts is not the strategy because of the large cost attached to it.

But, he is clear that what is going on will at some point crash and that we should be ready for it. He also says that if there is a crisis, he will be the first to buy.

How to invest

On how to invest, he advises to avoid the middle, thus the zone where most people invest chasing income and yield and how you should invest in a barbell way where you hold most of your money in safe, wealth protective assets where he excludes equity and especially bonds.

10 barbel investing

Source: Seekingalpha

He mentions how public pensions funds need to hedge properly because if not those are doomed as they promise 7% returns and a crash would require them to reach much higher returns in the long term.

His message is that if you don’t know how to hedge for tail risk protection, you should not hold equities.

He owns some gold, land, some other financial instruments(derivatives) and avoids stocks, long term bonds – hold short term. Tail risk hedging if you know how to do it.

Morale of the story, risks are piling in the form of higher debts, hyperinflation is the probable solution and one should be hedged against tail risks. More about what are tail risks and how to possibly hedge, if we can do that in future videos.

Trade Wars

Oh, on the hot topic, I almost forgot, Taleb says how he loves to chat about things that took him 20 years of thinking to get to have something to say, so he really has nothing to say on trade wars, next year there will be something else people will chit chat about.

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Perfect Stock Market Portfolio

  • How to build a perfect portfolio
  • How to manage a stock portfolio
  • It is all about portfolio risk reward


Investing in stocks means you end up with a portfolio as having only one stock is too risky because you never know what might happen. Today, we’ll discuss MY PERFECT PORTFOLIO and 5 things to watch when building a portfolio in 2018!

Do you have a good investment portfolio?

Do you know what is portfolio management?

How to manage your portfolio?

Can you take advantage of market opportunities?

Is your portfolio hedged in a way?

Here is the video version of the article if you prefer:

I’ll try to answer those questions by showing how I go about portfolio strategy and the 5 key factors to watch when building a portfolio!

Best stock portfolio for 2018

We often discuss stocks, news, certain sectors but what is the perfect stock market portfolio in 2018? As I am building a Model Portfolio for my Stock Market Platform, I think an article on how to build a portfolio today would be really good. We don’t talk enough about portfolio management and how would my perfect portfolio look at this point in time!

What is a great stock portfolio?

A stock portfolio is a combination of various stocks that will lead you to satisfying investment returns no matter what happens in the economy and financial markets.

We are now in a goldilocks period, economic growth is strong, unemployment is low and stocks markets continue to go up. But as would ray Dalio say:

ray dalio

According to Dalio, there is a 60% chance for an economic slowdown prior to the next elections and we have seen Trump already preparing for that by putting the blame on the FED and higher interest rates.

So, a stock market or investment portfolio should be prepared for the financial world changing. Further, technology is changing the relationship between inflation and growth which is also something to think about when analyzing your finances and investments.

New interesting technologies include 5G, electric vehicles, data, etc. etc. So, apart from what might go bad, I also want to be open to what might go right in the next decade.

5 key portfolio management things to watch

Whether you only have a google finance portfolio or an actual money portfolio this exercise will help you understand the risk and reward you’re your stock market investments.

  • Focus on value investments

In an environment of low inflation, sky high stock prices, a long term investor has to keep his focus on value. What will be the things people will use also in a recession and what will be the technologies that will grow no matter what. Having value gives you protection from inflation and in case that stock prices drop you know you can easily buy more. A good example of such investments is where the price to tangible book value is around or below one. This means that the stock is trading at below what the company spent on its assets.

  • Portfolio valuations is key

Your long term returns depend on the earnings the stocks you have in your portfolio generate. The higher is the price to earnings (PE) ratio of your portfolio, the lower will be your earnings returns. The PE ratio of the S&P 500 is at 24.3 that implies a 4.11% earnings yield (100/24.3 = 4.11).

pe ratio

Historically, PE ratios have been lower, around 15, and this is why stocks market returns were higher than 6% in the last century.

stock market portfolio

So, if you can build a portfolio with better valuations but great assets, you will reach great financial results! Fortunately, there are great investing opportunities if you are willing to look for them.

  • Long term portfolio risk management is key

The stock market is usually very volatile, especially if you look at specific sectors. That is why you have to give yourself time to buy and prepare a portfolio. A few years, a healthy economic cycle, some market panics should do the trick. So, what I am doing with my model portfolio will take a bit to set up as it is a process and we have to wait for investment opportunities to come to us. Chasing stocks and buying just because it looks nice in a portfolio, simply increases the risk and lowers long term portfolio returns.

  • My Perfect portfolio exposure

The perfect portfolio exposure depends on volatility and risk and also hedges! It also depends on the risk reward of each position at the current moment so it is really a process through time, real portfolio management. But to give you an idea of how I see this at this moment in time, here it is:


20% DEVELOPED markets and global



8% ASIA (incl. Russia)





This will be around 20 stocks and a lot of those would be mixes. Further this does not include the cash balances in each position depending on the current opportunities and risk reward. Some stocks get hit extremely hard during a recession, while some simply continue to grow thanks to their amazing technology.

  • Portfolio risk and reward

In the long term, when it comes to stock market investing and portfolio management, even if only 5 things of 10 things only go right – the point is that you can make so much money on those five, if you do things properly, that you will not care about the losses. It is not rare that good stocks go up 10 or 50 times in a decade or two (multibagger stocks) that are the drivers of your portfolio returns. Careful risk reward portfolio management allows you to take advantage of such stocks.

Portfolio management – it is about risk reward and value

To conclude, with stocks and also with hedges – it is all about where can I get the most value for the smallest investment risk – that is what investing is all about.

For example, the risk reward of a portfolio hedge – a hedge is usually cheap when it is worth the most and the opposite way!

This is how I am going about building a stock market portfolio in 2018. Other things that matter are also your personal circumstances, the safety of your job, your monthly income, business, pension, country, wealth, healthy etc.

If you enjoyed this article please subscribe as I’ll continue with the portfolio management series where we still have to talk about things like:

  • Economic situation
  • Risk reward of investing at the moment
  • Likelihood of what might happen (technology, monetary easing)
  • Commodities (long term fair values)
  • Countries (some are cheap some expensive)
  • Sectors (some will implode some explode)
  • Portfolio weights (in the current environment)
  • Portfolio hedges
  • Currencies
  • Developed/emerging markets

It is all about buying when it is the best time to do so, selling around the positions when overvalued, or just reducing the portfolio exposure etc. at the and it all boils down to buying great businesses at the right time – the rest will take care of itself when investing.

Now, I will be opening positions when I find stocks that give me a 15% business return with limited downside and huge potential upside! For now, in my model portfolio, we have had one in commodities, one gold miner hedge, and two in Latin America with some more riskier plays in China.