White Swan
Black swan events describe economic events that come as a complete surprise and have a major impact on the landscape. The next crisis, however, may be developing right under our noses.
“A white swan! It’s a white swan event,” Taleb said during the interview.
He believes the economic risks we currently face are obvious. After years of ultra-low interest rates in the U.S., we have piled on unsustainable levels of debt.
Now that interest rates are climbing, this debt is due and some borrowers may not be able to afford repayments.
“The risk is right in front of us. If you see a fragile bridge, you know it’s going to collapse at some point,” Taleb said. “So you need to fix it. How do you fix it?”
The solution, he says, is to reduce debt and take measures that are beyond “cosmetic.” In Taleb’s view, two segments of the global capital market are extremely vulnerable: real estate and new technology.
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Read MoreNew technology
Taleb doesn’t buy into the hype surrounding artificial intelligence. He believes the startup ecosystem is built on shaky ground.
“The methodology of the startup business has changed,” he said. “In the past, you used to be selling your future cash flow. Now, you’re selling future funding.”
After a sharp decline over the past year, startup valuations seem to be on a modest upswing, according to TechCrunch. Similarly, the NASDAQ is up around 31% year to date. Much of the excitement lately in the tech sector has been about new generative artificial intelligence and large language models.
However, Taleb believes the industry is in a risky and volatile state.
“It’s going to be very unstable,” he said while advising professional investors not to be “naked long” on stocks.
Taleb pioneered the strategy of long-tail hedging, which protects his fund’s investors from black swan events. The fund loses money in most years but makes a huge profit on short bets against the market when a crisis erupts. The strategy is akin to an insurance policy on stock market crashes.
Real estate
Taleb said that real estate prices are particularly sensitive to rising interest rates.
“More than $100 trillion in real estate valuation,” Taleb said. “But we’re not at 3% mortgages anymore. We’re at 7% and going north.”
Commercial landlords are already struggling, with even major corporations like Brookfield suffering mortgage defaults in recent months. Collectively, $1.5 trillion in mortgage debt is due within the next two years while rates are significantly higher than before. This creates a risky environment for real estate investors.
Taleb’s analogy about “a fragile bridge” perfectly captures the property market right now, which is why investors should proceed with caution in this sector.
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