Nassim Nicholas Taleb, author of “The Black Swan,” made headlines yesterday for saying, “every single human being” should sell short U.S. long-term Treasury bonds. He called the trade a “no brainer.”
Obviously, Taleb is worried about the country’s financial issues including the federal deficit, national debt, massive entitlement liabilities, the nationalization of Fannie and Freddie whose default ratios continue to grow, accelerating bank failures and insolvency at the FDIC, the impotence and potential insolvency of the Fed, and more.
However, Felix Salmon yesterday questioned the efficacy of such a trade and the sincerity in which it was recommended:
This is Taleb at his most quotable and least helpful. Of course most human beings shouldn’t get involved in shorting anything. What’s more, Larry Summers actually put on that trade — that long-term interest rates would rise — while he was at Harvard, with disastrous consequences. Even no-brainers can lose you billions.
In fact, Dr. Brett Steenbarger discussed how such “no-brainers” are bad trade ideas in a post yesterday titled, “The Salience Principle:”
Here is a little nugget of trading wisdom: the market systematically punishes salience. Show me a strategy that makes use of highly salient information (i.e., information that is likely to stick in the mind at first, casual exposure) and I’ll show you a strategy that underperforms. Market technician Joe Granville famously asserted that if it’s obvious, it’s obviously wrong. That’s the salience principle, and it’s why impulsive trades so often are losers.
In my experience “no-brainers” are some of the most dangerous trade ideas. Buying internet stocks became a “no-brainer” in the late 1990’s; buying real estate in the mid 2000’s was another example of people acting on “no-brainers.” As a rule, I try to stick to “brainers” only.
Salmon continues his analysis of Taleb’s “impulsive” recommendation writing,
If 90% of your assets are in safe Treasury bills [as Taleb recommends in his book] and a large chunk of the other 10% is being put to use shorting Treasury bonds, essentially what you’re doing is putting on a curve steepener — at a point in time when the curve is already as steep as it’s been in some time. What’s more, unless you’re extremely leveraged, you’re never going to get rich shorting Treasuries. And I’m sure that Nassim would never recommend that kind of leverage.
So Taleb’s message has to be taken more as rhetoric than specific advice, more a comment on the state of the U.S. economy than an actual trade idea. His concerns are valid; his trade idea probably isn’t.
In contrast to Taleb’s trade, Zero Hedge today reveals an interesting statistic in the market for long-term Treasury bonds that suggests they may be poised for a, “string of positive years.” In 2009, the long bond lost 11%. Over the past 80 years of data, however, the long bond has usually rallied the year after a losing year. Only 2 periods during this time (1955-56 and 1958-59) saw this pattern broken and on both occasions the loss was less than 3%.
Most traders will also remember the adage, “the trend is your friend,” and I don’t know if I’ve seen a more solid trend this one:
Disclosure: long TLT