Friday 16 November 2012

Don Coxe - Nassim Taleb, Black Swans & Financial Collapse

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Today 40-year veteran Don Coxe told King World News, “Historians 1,000 years from now will write about this time period.”  Coxe, who is Global Strategy Advisor to BMO ($538 billion in assets), spoke with King World News about a fascinating encounter with Nassim Taleb, and the incredible danger investors face today.

Here is what Coxe had to say:  “I’d like to tell you a story about the summer of 2007.  I was speaking at a conference for the BMO Financial Group out in California, and the other speaker was Nassim Taleb.  His book had only come out a few months before (titled), ‘The Black Swan,’ which of course I read.”

Don Coxe continues:

“But by the time he was at the conference he was a big name indeed.  We had a good turnout and I spoke first.  I spoke on the theme of the commodity boom.  Then he spoke.  But in between we had about a 20 minute break, and he was talking with me quite excitedly about the situation of derivatives in the banking system.”

He said, ‘The whole system will crash within a year.’....

“He (Taleb) said, ‘It’s all rooted in the fact that they are using the Black-Scholes Model for their risk appraisal.  Those guys should never have gotten the Nobel Prize in economics for it, but now they are using that.  They are using that in the banking system for their value-at-risk.  And these guys don’t know anything about how much they’ve got at risk and they are going to bring down the whole financial world.’

That was what he predicted.  So he went on with his speech, and unlike me, because he’s a university professor, he uses slides.  He’s really clever about them and he had good, cute slides to back up his talk.

So he (Taleb) was going on about one of the things that what was lacking in the system was the wisdom that can come with age.  He said, ‘We need more seniority in the system.  This comes from the same root as the Roman Senate, and here’s the picture of the Roman Senate in operation.  That was the key to the wisdom of Rome and the success of Rome as the first great global empire.’

Well, I looked at that picture and I recognized it instantly.  We got to the question period and I said:

‘Professor Taleb, the picture that you showed was of Cicero attacking Catiline in the Senate.  And Catiline was a rebel and a treacherous crook who was backed by Julius Caesar, who was still out in Gaul and on his way into Rome.  Cicero destroyed Catiline.  He was expelled from the Senate.  As a result of that, when Caesar came into Rome, they decided that Cicero was too much to put up with, and Marc Antony garrotted Cicero.  As Cicero was dying he said, ‘The people’s memory is short.’

So I said, ‘My question for you professor is, Cicero, was his black swan event giving this  attack on Cataline, which ultimately led to his destruction?  Or was Marc Antony’s order and the garrotting his black swan?’  Well, he (Taleb) reeled, and he said, ‘I got this off the internet.  I thought this was just a picture.  I didn’t know this was a major event.  I am going to be more careful.  This was a good lesson for me.’

When Cicero was attacking Catiline, it didn’t occur to him that he was creating a risk for himself, that was going to ultimately lead to his death.  Similarly, for investors, the concept of the black swan is that they are assuming a risk which they don’t understand.

So that problem still exists with us, although not on the scale that it did back when the banks were levered up 50 to 1.  They didn’t know what they had on their own balance sheets, and those of us who had money with the banks didn’t know the risks we were assuming.  So in that sense it is a better world.  But anyway, I thought it was a great story to share with your listeners (and readers).”

Coxe went on to tell me that “Historians 1,000 years from now will write about this time period.”

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