Famed author and former trader says the market is not ready for high interest rates
Former banker Nassim Taleb, best known for his bestseller “Black Swan,” has advised market players to brace for drastic changes worldwide, due to rising interest rates.
In an interview with Bloomberg TV, aired on Tuesday, he said that over the past 15 years, investors have grown used to near-zero interest rates, introduced to drag Western economies out of the 2008 financial crisis. This triggered a number of asset bubbles, with assets trading much higher than their true value. Taleb estimates these at more than half a trillion dollars, calling them “illusionary wealth,” with market valuations out of proportion to companies’ cash flow.
“What do zero interest rates bring? Tumors. All these years, assets were inflating like crazy. It’s like a tumor, I think it’s the best explanation, because you’re happy with the growth, but it’s uncontrolled growth, and then ‘boom’,” Taleb said, explaining that “tumors” include everything from Bitcoin to soaring real estate prices.
According to the analyst, if a company earns less than 4.75% of its value – the current short-term interest rate in the US – it is losing money. And with interest rates likely to grow further due to lingering inflation, asset bubbles are likely to burst.
“It doesn’t rain money anymore… Disneyland is over, the children go back to school. It’s not going to be as smooth as it was the last 15 years,” he warned.
Taleb argued that it is hard to justify current stock market levels unless US interest rates “miraculously” return to near-zero levels, which the Fed will not allow as it has “realized zero-rates don’t work” and create only “cosmetic growth.”
“The stock market is way too overvalued, for interest rates that are not 1%… and this is unsustainable… The stock market has to adjust to normal levels,” he stated, warning that it will take some time before the situation stabilizes.
“Things won’t be fine for a while. We have the weirdest valuations in history,” Taleb added.
Nassim Taleb is known as a writer and economist. He has published three economic bestsellers, and introduced the concept of a ‘Black Swan,’ referring to hard-to-predict and rare events that have significant consequences for financial markets.
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