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- Nassim Taleb sees asset prices dropping, interest rates staying higher, and headaches for investors.
- The "Black Swan" author said the stock market is hugely overvalued relative to current rates.
- Taleb cited Warren Buffett as a guide for investors, and dismissed bitcoin as an inflation hedge.
Investors should brace for asset prices to plummet, interest rates to remain elevated, and outsized returns to dry up, Nassim Taleb has warned.
The Universa Investments adviser and author of "The Black Swan" said that stocks and other assets are too expensive relative to interest rates. US investors can now earn a risk-free, 4%-plus annual return from government bonds and savings accounts, he noted.
"The stock market is way too overvalued for interest rates that are not 1%," Taleb told Bloomberg on Tuesday. "I think that we may have a collapse in many, many prices."
Inflation spiked as high as 9.1% last summer, prompting the Federal Reserve to hike rates from almost zero to upwards of 4.5% to curb the pace of price increases. Higher rates incentivize saving over spending and investing, and make it more costly to borrow, which can relieve upward pressure on prices. Yet they can also temper demand and sap economic growth, increasing the risk of a recession.
Taleb predicted that inflation would cool, but rates would remain above 2% or 3%, as the Fed will be wary of slashing them any further.
"Interest rates at zero bring tumors," he said, explaining that they drive the prices of bitcoin, real estate, and other assets to unsustainable heights, and also exacerbate inequality.
The statistics guru and former hedge fund manager noted that until recently, unprofitable companies could fund their growth with cheap debt, and secure bloated valuations as cash was plentiful and investors had few other good options. Now that borrowing costs are higher and safer assets once again offer solid returns, those days are over, he said.
"It doesn't rain money anymore," Taleb said. "Disneyland is over," he continued, warning the period ahead won't be as smooth as the past 15 years.
Buffett and bitcoin
Taleb nodded to an old-school stock picker as a reliable guide for investors going forward.
"Warren Buffett is still alive, thank God," he said. "He will teach us how to invest."
Buffett, the CEO of Berkshire Hathaway, specializes in identifying undervalued businesses. He famously invests in them for the long term, based on fundamentals such as the value of their assets and the size of their cash flows.
Taleb also trashed bitcoin, saying the most popular cryptocurrency has failed as a hedge against inflation. It tumbled along with other risk assets when rates rose and liquidity dried up last year, he pointed out.
"All these claims about bitcoin seem to be made to feed people even more naïve than those who have been working in finance with zero interest rates — namely teenagers who know a lot about computing and don't understand finance," he said. "That's the bitcoin crowd."
Taleb is one of several market commentators to issue dire warnings in recent days. Universa chief Mark Spitznagel rang the alarm on the "greatest tinderbox timebomb in history," GMO cofounder Jeremy Grantham cautioned the S&P 500 could plunge 50% in a worst-case scenario, and "Big Short" investor Michael Burry simply tweeted, "Sell."