Nassim Taleb is on a big kick these days, offering up drastic ideas for how to fix the financial system.
Last week he wrote a widely-lauded op-ed on 10 rules to avoiding Black Swans.
Today he told Bloomberg why private equity and the stock market needed to tightly regulated and kept away from normal investors
“We want economic life to be organised to be as distant from that Madoff model as we can,” Taleb said, referring to Bernard Madoff, who pleaded guilty last month to directing the largest Ponzi scheme, bilking investors of about $65 billion.
LBOs are “too close to Madoff” because “you rely on new investors to pay off the other ones,” Taleb said. “The stock market has some mild Ponzi characteristics. We have to make sure that innocent people are not harmed by this Ponzi-attribute.”
What’s he talking about? LBOs “rely on new investors to pay off the other ones”? No, they don’t. And neither do mutual funds or hedge funds.
Sure, LBO investors have been killed lately, but not because of any Ponzi characteristics, but because their investors were burdened with so much debt, that the slightest hiccup in the economy killed them. What’s that got to do with a Ponzi scheme?
Now clearly, in stocks, you can only get money for your shares if someone is willing to pay you cash for them, which is why the market tanks if everyone panics at once. But this still doesn’t make it a Ponzi scheme. And it’s for this reason that investors like Warren Buffett advocate buying stocks that you’d be happy owning even if the stock market just closed down for several years.
But, honestly, trying to refute this nonsense seems like a waste of time, except that it’s Nassim Taleb saying this stuff, and everyone thinks he’s an oracle (he’s not).