Fresh from Davos, Nassim Taleb and Nouriel Roubini Summarize Their Warnings

By Dr. Duru written for One-Twenty

February 9, 2009

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Nassim Taleb and Nouriel Roubini were apparently big hits in Davos. The world's economic bigwigs lined up for hours just to hear them spread the love about the planet's broken financial system. Taleb and Roubini appeared on CNBC to answer questions about their current warnings and advice. I was quite surprised to see Taleb showed up on CNBC given that in his book "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets," he heavily disparages the financial media and makes it clear he goes out of his way to ignore their "noise." The interviewers were collectively horrible (and there were FIVE of them), but do not let that get in the way of hearing what Taleb and Roubini had to say. You get the sense that the interviewers just want to fish for signs of a bottom in the market rather then hear out and discuss the logic of Taleb and Roubini. (Click here for two separate videos of the interviews).

Here is my own highlight of what Taleb and Roubini had to say. I believe they are both "on point."

  1. The same people who did not see the financial crisis coming are still in charge. The same bankers who got us in trouble, are being given more (taxpayer) money. They all need to be thrown out and replaced by people who saw the crisis coming. (He nominated Roubini!)
  2. Banks will need to be nationalized.
  3. The financial system needs to be more robust against "black swans." This will require living with less debt.
  4. We need to eliminate the socialization of risk, privatization of profits.
  5. Taleb is 100-200% in cash (so he has some shorts), so he can pick up the pieces when opportunity arrives.
  6. Taleb believes deleveraging has just begun. There are 4-5 years to go because of the massive deleveraging still required.
  7. We should get out of the mentality that we need to build debt on top of housing to drive the economy.
  8. Investors should deleverage portfolios. Instead of dedicating 2x to equity, keep more cash and allocate a small portion to out-of-the-money options since you never know what is going to soar (or crash I imagine).
Roubini (note that he tried to shed the nickname Dr. Doom)
  1. The condition in labor markets is crucial (in other words, unemployment numbers are NOT lagging indicators right now).
  2. We need to resolve problems in the financial system: nationalize insolvent banks, clean them up, and sell them back to private sector.
  3. We need to invest in real (productive) physical and human capital (in other words, stop misallocating so much capital to housing).
  4. Going forward, the economic news will be worse than expected. This produces about 20% further downside risk in the stock market.
  5. Invetors should stay in cash until about 12 months from now.
  6. About $3.6 trillion in write-downs are needed to get through this crisis. We are through $1 trillion so far.
Be careful out there!

Full disclosure: None. For other disclaimers click here.

DR. DURU®, 2009