Speaker 1: Joining us here is not seeing teleeb and Scott Patterson
Speaker 1: and celebration of a brutal book. I really can't say
Speaker 1: enough about this for Global Wall Street. I'm sorry. This
Speaker 1: is the adult book Chaos Kings. Bill Cohen, William Cohen,
Speaker 1: he wrote a book about Duke Lacrosse. It was Bill Cohen,
Speaker 1: just says Scott Patterson. He's done it again, which he
Speaker 1: did in twenty twelve, and with.
Speaker 2: Dark Pools and all that.
Speaker 1: And the problem we got here, David is we can
Speaker 1: spend the next three hours of TALEB.
Speaker 2: But you know we got to give some love here.
Speaker 1: Scott Patterson, who's only here because James Madison University'd be chapel.
Speaker 2: That happened your book in.
Speaker 1: Full disclosure, I'm totally enough, seems camp And knows that
Speaker 1: like Wicked in his camp. So when you set up
Speaker 1: your book, which is the TALEB team like JMU against
Speaker 1: the other teams, some French dude like you, how did
Speaker 1: you set up that polarity?
Speaker 2: Describe the tension of Chaos Kings.
Speaker 3: Yeah, well, it seems belief is that you can't predict markets,
Speaker 3: so you just need to prepare for extreme.
Speaker 4: Events all the time. The Black Swans.
Speaker 3: And I can trast that with another character, a French
Speaker 3: econophysicist named Didier Sornette, who uses advanced physics and other
Speaker 3: mathematical models to try to predict these big events.
Speaker 4: He calls them dragon kings, which technical term.
Speaker 2: Yeah, yeah, I call it Newtonian envig So he's a
Speaker 2: math guy, right.
Speaker 4: Yeah, he's a math guy. He uses some things that could.
Speaker 3: Be used to predict the explosion of rockets and transpose
Speaker 3: that onto financial markets.
Speaker 2: You gotta be kid. Here's the reality, folks. Now, see
Speaker 2: tallav changed the world with John and Nero in Fooled
Speaker 2: by randomness. Everybody else would have retired to.
Speaker 1: Turks and caicos or whatever. He went on to do
Speaker 1: Black Swan. And then you and I sat on the
Speaker 1: stairs of Saint Bart's on Park Avenue, and you described
Speaker 1: anti fragile to me. Now, seeing where is the humility
Speaker 1: among the quants in this great ballmarket.
Speaker 5: The point is you don't need humility. Humility actually is
Speaker 5: not necessary. I don't want people are arrogant. There's just
Speaker 5: got to be paranoid about the right things, namely how
Speaker 5: much our error costs you when it happens that ruined
Speaker 5: problem and uh and and and basically Scott's book is
Speaker 5: about ruined problems.
Speaker 2: Let's see.
Speaker 5: So you could be arrogant about everything, all right, you
Speaker 5: can be wrong all the time, it doesn't matter. You
Speaker 5: got to avoid you gotta avoid ruin the big things.
Speaker 5: You got to be right about the big sources of
Speaker 5: risk and and and the rest take care of itself.
Speaker 6: Could could I get your having come out of the pandemic,
Speaker 6: your perspective on what happened there largely uh, but within
Speaker 6: markets as well, the reaction to what we saw.
Speaker 2: The you mean the pandemic, the reaction to it. Yeah, okay,
Speaker 2: we we were.
Speaker 5: I mean Scott discusses what happened in the pandemic and
Speaker 5: and and how we were obsessing over it. I mean
Speaker 5: when we started the idea of universe, and when Mark
Speaker 5: started Universal, I was the passenger, you know, I was
Speaker 5: a retired passenger. But the name universe I means universal properties.
Speaker 5: And we're talking about some universality of these classes of
Speaker 5: tail uh, the processes that generate large tale events, and
Speaker 5: we call them, I call them grace wants. Hence that
Speaker 5: that's where the name universe came from. So the the
Speaker 5: we were I was obsessing even when I wrote the
Speaker 5: blacks one about pandemics and kept obsessing and he said, okay,
Speaker 5: I didn't remember the interview. Someone asked me, what what
Speaker 5: you have to worry about this and that you can
Speaker 5: worry for Think about some germ traveling on air France.
Speaker 5: Air France, you got good food and if they're bad germs,
Speaker 5: they travel along British air or they got food. So
Speaker 5: that was and sure enough, nothing had happened for one
Speaker 5: hundred years, or for close to one hundred years, right So,
Speaker 5: and people say, well, you know, just like financial risks,
Speaker 5: you know, people perception for risk before the crisis, say oh,
Speaker 5: we don't have to worry about these, they don't happen anymore.
Speaker 1: Sure enough, right, Scott Patterson, you've got you know, one
Speaker 1: of the sections is the Boston section that we could
Speaker 1: problem And the answer is flying blind.
Speaker 2: I mean, you've been doing this for fifteen years at
Speaker 2: the Wall Street Journal, trying to figure out the mathiness
Speaker 2: and the certitude. And I'm gonna wake up and win.
Speaker 1: We're gonna we're number six, We're gonna be number two
Speaker 1: or number one?
Speaker 2: What are we flying blind on? Right now?
Speaker 3: I think that you know, right now, there's obviously a
Speaker 3: huge amount of complace and see.
Speaker 4: In financial markets.
Speaker 3: Yeah, you know, we're hitting records time after time, and
Speaker 3: yet you look outside Wall Street and it looks pretty crazy.
Speaker 3: So there's all sorts of things that could happen. And
Speaker 3: I know Nasim wants to talk about China. I've been
Speaker 3: predicting China would collapse for two decades now, and they don't.
Speaker 2: Right, be careful. Cash flow lives there. My oldest son
Speaker 2: speak care Okay, China's not going to collect. Let's do this.
Speaker 2: We do China. David Gurr in the next section.
Speaker 1: Okay, we've got an extended conversation when nassee Telebin Scott
Speaker 1: Patterson Chaos.
Speaker 2: Kings is a book. Okay.
Speaker 1: You know I asked that question of Scott, and I
Speaker 1: seem to set you up here. We're flying blind, na
Speaker 1: seeing teleb and private equity and private credit.
Speaker 2: It's all the rage. Okay.
Speaker 5: The first thing I have to say that we have
Speaker 5: that problem in the West. Okay, wether individual government. You
Speaker 5: know you can have that. China has that, but you
Speaker 5: must grow. And the problem of the West is that
Speaker 5: we have an s curve of growth or of GDP
Speaker 5: or per capita, and it looks like we're at it
Speaker 5: on the top right of that curve. So it's concave.
Speaker 5: And people have two cars, they have two homes, and
Speaker 5: what do they want, I mean, have perieer watership to them.
Speaker 5: I mean, so the incentive to grow isn't there. So
Speaker 5: here it's a serious problem when you have low growth
Speaker 5: and a lot of that. And the problem is that
Speaker 5: Western you know, economies have never had more debt in
Speaker 5: history as a time where grows became concave simply the
Speaker 5: nature of growth. You grow fast when you're China because
Speaker 5: you got to pull people out of the provinces and stuff,
Speaker 5: and sentative living can still rise and make a difference.
Speaker 2: Now, see, they're not quantic Curt sweets years ago.
Speaker 1: There, our listeners, our viewers there there, they put their
Speaker 1: pants on one leg at a time. How did they
Speaker 1: hedge against your concave tensions that we're in right now?
Speaker 1: How do mere mortals hedge this?
Speaker 5: Okay, the whole thing is, it's not you hedge. If
Speaker 5: you're investing without a tail hedge, you're practically not investing
Speaker 5: because of the ruined problem. And that's what he discusses
Speaker 5: in the book. That's my first statement and the second
Speaker 5: one that people are way too static. They imagine either
Speaker 5: they have a memory that's that's that's either too short
Speaker 5: or or or or has problems updating that they don't
Speaker 5: realize that, for example, what's happening in China that the
Speaker 5: Nature index of publications that's very hard to gain. What
Speaker 5: China used to have one percent today it's in the
Speaker 5: twenties and rising. So tells you that's a leading indicator
Speaker 5: of what technologies may come out of China. So you
Speaker 5: realize that got to look back before seventeen fifty around
Speaker 5: when the Industrial Revolution started starting. So we're starting to
Speaker 5: shift and in eighteen thirty China had eight times the
Speaker 5: GDP of Britain. We're back there as soon it's gone.
Speaker 5: So we're going back now in times like reversing the
Speaker 5: downess of the West, not because the West is doing poorly,
Speaker 5: but because it got one of the work.
Speaker 1: David, we're going to China right now. Nasie's running the show.
Speaker 1: We're doing China here right now. We'll do the stock
Speaker 1: market opening your Formanus David Gern Shina with Scott Patterson.
Speaker 2: Well, Na, see.
Speaker 6: Scott, let me ask you more about you said you've
Speaker 6: been predicting the sort of dissolutionally have been seeing for
Speaker 6: twenty years. What stands out to you about this moment.
Speaker 6: We spent the whole week talking about these kind of
Speaker 6: unprecedented actions, the way they were delivered by the PBOC
Speaker 6: in China. What that says about the actual state of
Speaker 6: the economy there. Talk a bit about that and sort
Speaker 6: of your vantage and also just sort of how much
Speaker 6: varacity we can ascribe to the statistics that we're getting
Speaker 6: out of China.
Speaker 3: Well as to the veracity of the statistics. Who knows,
Speaker 3: you know, they keep doing this, they keep they hit
Speaker 3: a slow down and then they you know.
Speaker 4: Hit the accelerator.
Speaker 3: They've they've pulled you know, after the GFC, a great
Speaker 3: financial crisis, China pulled the entire world out of out
Speaker 3: of that situation by stimulus. You know, who knows how
Speaker 3: long they can keep it up. It's it's a big
Speaker 3: mystery for me. You know, my focus these days is
Speaker 3: on climate and the dominance of China and climate technology
Speaker 3: is astonishing, and that's the future of energy, it's the
Speaker 3: future of vehicles, it's the future of batteries, and they're
Speaker 3: you know, light years ahead of everybody.
Speaker 4: We're trying to catch up.
Speaker 3: Europe's trying to catch up, and that for China is
Speaker 3: a big, big advantage.
Speaker 1: I got to do a shout out here with the
Speaker 1: Wall Street Journal this week with a stunning effort. It's
Speaker 1: newest nuclear submarines sank setting back. It's military modernization. That
Speaker 1: was an incredible story. Out of your shop. Now on
Speaker 1: China again, continue, Aaron Freiberg for Foreign Affairs says, it's
Speaker 1: a Marxist Lendinist regime.
Speaker 2: Nobody in Beijing read fooled by randomness.
Speaker 5: No, But the point is the point is that China
Speaker 5: is in reverse. It's the reverse of Europe. If you're
Speaker 5: small in China, you can do whatever you want. If
Speaker 5: you're big, the government calls you up for a meeting.
Speaker 2: Right.
Speaker 5: So in Europe, if you're small, you're overregulated. You got
Speaker 5: you got like five tax inspectors bringing down your neck,
Speaker 5: you got to get all these permits. If you're big,
Speaker 5: then you own the government, okay, particularly the case in
Speaker 5: France and Germany, everywhere and practically everywhere in Europe. So
Speaker 5: China is a reverse. So they say, okay, it's capitalism
Speaker 5: okay for the small, and communism for the large and
Speaker 5: its effectively, it's not that much. There's you know, a
Speaker 5: centralized economy except for the top.
Speaker 1: So what about America into our fractured election?
Speaker 5: Okay, I don't know about whether the election makes a
Speaker 5: difference in many respects, but we have a problem. And
Speaker 5: that problem is that our debt servicing is increasing and
Speaker 5: I guess that you cross is more than military spending
Speaker 5: more already. Okay, So and it will continue to pay
Speaker 5: interest on that. Now you may say interest rates may
Speaker 5: be lower. I don't think we can go back to
Speaker 5: zero interest rate because zero interest rates Goll's here, all right,
Speaker 5: So we're going to go back to normal interest rates.
Speaker 5: So the dead problem is not going to go away.
Speaker 5: That service is going to keep increasing. And and the
Speaker 5: problem is if the East becomes and that's just China,
Speaker 5: just the East in general becomes powerful and becomes a
Speaker 5: target of for you know, retirement money and stuff like that,
Speaker 5: then the dollar would be in trouble.
Speaker 2: Okay.
Speaker 5: I'm just looking at it from risks to that point. Okay, Well,
Speaker 5: you got to solve that problem, Scott.
Speaker 1: What's the other side of the story here, the mathewness
Speaker 1: and certitude of Zurich, Switzerland.
Speaker 3: Yeah, you're foring to Didda Sornette, the Dragon Kings guy.
Speaker 3: You know, we were talking about China, predicting what happens
Speaker 3: in China. I just you know, after covering financial markets
Speaker 3: and talking to you know, hedge fund managers who twenty
Speaker 3: years ago were billionaires and now they're you know, buzzing
Speaker 3: tables at diners. I you know, this is where I
Speaker 3: come down on the Seams side, is I don't think
Speaker 3: you can predict markets.
Speaker 4: I think it's impossible.
Speaker 3: I think that they're you know, when you look at
Speaker 3: quant trading strategies are very short term, like over the
Speaker 3: course of a few minutes and seconds. Those are the
Speaker 3: only strategies that really survive long term. And even they
Speaker 3: you know, my first book, The Quants, showed how they
Speaker 3: almost blew up in the in the two thousands in
Speaker 3: a period of big d leveraging.
Speaker 5: So basically they're basically getting a higher dimensional bit than
Speaker 5: ask Okay.
Speaker 4: Yeah, they're trading.
Speaker 3: Didn't asked very rapidly, and that's that's good strategy. But
Speaker 3: you know, trading making big bets on your prediction of
Speaker 3: what China is going to do next quarter, next year,
Speaker 3: or you know what the FED is going to do
Speaker 3: this is very, very hard to do.
Speaker 1: My humility or David Gray is it's a once in
Speaker 1: a lifetime event. And you know, years ago in the
Speaker 1: old World, which is where taub is from, you know,
Speaker 1: eleven nine and all that, and over to the continent
Speaker 1: of Europe. You know, they're laughing at us about once
Speaker 1: in a lifetime event. You and I have gotten great?
Speaker 1: Doesn't eve any great, But the answer is there's a
Speaker 1: lot of once in a lifetime events.
Speaker 2: David, I have a.
Speaker 6: Question about young people in this industry, and it's inspired
Speaker 6: by a conversation I had with my friend Robert Smith,
Speaker 6: who is at NPR. He's now running the Night Badge
Speaker 6: of program at Columbia. I said, I was going to
Speaker 6: be talking to you today and he said, here's what
Speaker 6: you should ask him. He pulled up a tweet that
Speaker 6: you filed more than a year ago. Now, the story
Speaker 6: we haven't covered this week is Caroline Ellison of FTX
Speaker 6: getting sentence, going to spend two years in prison, and
Speaker 6: you tweeted about Sam begmanfreed when everything blew up. He said,
Speaker 6: the problem with people like SBF is knowing a tiny
Speaker 6: bit of statistics to pairrot about it, but not understanding processes.
Speaker 6: That is dynamics cross time. Shakespeare has survived nearly half
Speaker 6: a millennium by filtering by time. Then you close. Sam
Speaker 6: Begnfreed worked at Jane Street. You're right to Jane Street.
Speaker 4: He would have flunked my job interview.
Speaker 6: What does the naseum telef job interview look like?
Speaker 4: What do you ask somebody to supply for?
Speaker 2: I understand.
Speaker 5: Some basics thing like ruined problems and understand dynamics.
Speaker 2: So which is the same.
Speaker 5: You know that people, if you have tiny probability of
Speaker 5: losing money, you eventually would go out of business, Okay,
Speaker 5: because over time. So if you're aware of it, that's fine.
Speaker 5: If you're not aware of it, you've got a problem.
Speaker 5: The other one is sizing comes from sizing. Also, if
Speaker 5: you have the edge, you still have probably a one
Speaker 5: hundred percent of blown up if you don't size properly.
Speaker 5: So sizing is very delicate. Two basic things. And the
Speaker 5: third one is about fat tails, the difference between tintails
Speaker 5: and fat tails. And that's pretty much the theme of
Speaker 5: the Black Swan, the remedy and anti fragile and discussion
Speaker 5: of white people don't understanding and skinning the game. Okay,
Speaker 5: so the difference between fat tail and thin tail finance
Speaker 5: is not Gaussian. Now everybody claims, yeah, we know that. Yeah,
Speaker 5: if you know that, then why are you using Gaussian tools?
Speaker 2: What tools do you use?
Speaker 5: What do you suggest people in the street understand the
Speaker 5: parreto eighty twenty? It is very intuitive. You need to
Speaker 5: learn to know some mass but not enough, okay, to
Speaker 5: get to stuck to the You know, if you teach
Speaker 5: people a little bit of math but not enough.
Speaker 2: They go to the Coe. This not Sing's laughing at
Speaker 2: me here right now because he knows that.
Speaker 1: To Thudau David, thank you, Kerr and I don't speak
Speaker 1: before the show. In fact, we're not on speaking terms.
Speaker 2: I'm so glad I brought that up. Not seem but
Speaker 2: you know me on position sizing.
Speaker 1: Position sizing is everything, and right now we're living in
Speaker 1: a MAG seven world where everybody, whether they admit it
Speaker 1: or not, is Scott Patterson's four oh one k at
Speaker 1: the Journal is loaded up with Nvidia and all the
Speaker 1: rest of it not seeing tellt on MAG seven the
Speaker 1: anti position sizing.
Speaker 5: Okay, so I let me give you one one thing
Speaker 5: since I don't have a lot of feats.
Speaker 2: Yeah, I read tweet. I wrote a.
Speaker 5: Tweet saying that if someone gave you twenty four hours
Speaker 5: in advance the newspaper tomorrow's newspaper, that you would go bust.
Speaker 5: And actually someone just tested it. Victor hugg Formultive LTCN,
Speaker 5: who visibly know has long experience in the market, has
Speaker 5: tested it by giving people over fifteen years next day's
Speaker 5: newspaper and tell and giving them you can trade that
Speaker 5: today's price, knowing towards newspaper.
Speaker 2: And people didn't do well. Why.
Speaker 5: One of it is of course sizing. They don't know
Speaker 5: how to size the position right, whether they're right, They
Speaker 5: don't know how right they are because they can't figure
Speaker 5: out how much of it is noise, all right, and
Speaker 5: of course the sizing. So so the just you know,
Speaker 5: heard of the paper yesterday because it starts with my tweet.
Speaker 5: It's interesting to have a tweet turning into a paper
Speaker 5: by someone else, like for someone lazy like me, it's perfect,
Speaker 5: right because tweets I don't an airport's typically right, So.
Speaker 3: And that's not say, that's not how markets work. The
Speaker 3: markets work on anticipation of news events. Oftentimes when you
Speaker 3: you know you see the Fed cut interest rates, the
Speaker 3: market go down, Yeah, because it's already trade on that news.
Speaker 5: There's a fact Tony story and anti fragile all right?
Speaker 5: How people who anticipated the invasion of Iraq or the
Speaker 5: starting of the war against Saddam in nineteen ninety one,
Speaker 5: those what a dissipated? It went bust because guess what
Speaker 5: happened to oil prices?
Speaker 2: They collapsed?
Speaker 5: All right, So it's not figuring out the news. There's
Speaker 5: something more subtle about markets.
Speaker 1: I want to get one more question in a kiss
Speaker 1: Kings and Nassy, and then we've got to talk to
Speaker 1: you about it fractured your old world, your Europe with
Speaker 1: one two three the column conflicts, but I think there
Speaker 1: was Skim Patterson, you have such a history of writing
Speaker 1: of the tension of Wall Street.
Speaker 2: And your experience.
Speaker 1: Is anybody on Wall Street putting the tension and the
Speaker 1: outcome of it of your books into practice or we
Speaker 1: still want a to var, which I.
Speaker 2: Know Nasim loves var. Is anything changed on Wall Street?
Speaker 3: I think that's it's funny. No, I don't think that
Speaker 3: we learn our lessons. I think people are still using
Speaker 3: value at risk even though it just got just I
Speaker 3: mean it was a laughing stock in two.
Speaker 4: Thousand and eight. People look at this and like, oh,
Speaker 4: this is insane.
Speaker 3: We're cutting out five percent of the worst days every year,
Speaker 3: and like that doesn't matter. So yeah, no, I don't
Speaker 3: think we learned list. I wanted to come back to
Speaker 3: the question of an interview asking, you know at a
Speaker 3: hedge fund. Yeah. I spoke to a while back somebody
Speaker 3: who you know at Renaissance Technologies and the big quant
Speaker 3: shop Long Island. One of the questions they asked perspective
Speaker 3: employees is how does the toilet work? Which you know
Speaker 3: you're talking about dynamics. I thought that that's an inod question,
Speaker 3: interesting and the answer is to vacuum.
Speaker 1: I want to devote the rest of the time with
Speaker 1: great honor to all the people from Lebanon that have
Speaker 1: assisted David ger and I and what we see over
Speaker 1: the last weeks, days and indeed courtis and years led
Speaker 1: by Jumana Bricchecci over in Dubai, who has been really
Speaker 1: helpful to us here. Her show is Horizon out of Dubai.
Speaker 1: Look for that now. Seeing you have lived this, you
Speaker 1: were in your family or deputy prime ministers, you were
Speaker 1: involved with it. Out of the Greek Orthodox Christian sphere
Speaker 1: of a Lebanon I remember with great prosperity, it is shattered.
Speaker 2: What did you not know?
Speaker 5: I mean, I was Elebanon two weeks ago, and I
Speaker 5: go to Lebanon, I reside there part of the time.
Speaker 5: So what you see in pictures isn't doesn't map to
Speaker 5: and when you hear about the economy doesn't map to
Speaker 5: what's going on there.
Speaker 2: There've been a.
Speaker 5: Little slowed down by the slowed down by the Gaza War,
Speaker 5: some kind of rise and across all economic sectors in
Speaker 5: Lebanon on a more anti fragile basis. In other words,
Speaker 5: the collapse of the government of lebanon On economically gave
Speaker 5: rise to the centralized municipal power and to a lot
Speaker 5: more entrepreneurship. Okay, because the central bank was conducting a
Speaker 5: ponzi and the ponzi went away, and then suddenly people
Speaker 5: recovered and four years later you know, it's on amend
Speaker 5: and and you can see economic activity across all sectors.
Speaker 5: I mean restaurants, all full new restaurants opening up like
Speaker 5: every day, at least in my in my my neighbor
Speaker 5: is like forty to fifty years past year. I mean
Speaker 5: every day, every week, so so you have you have
Speaker 5: So what the perception of Lebanon from from the outside
Speaker 5: is quite distorted, given that I spent time there. The
Speaker 5: this war I think is I mean, there there is
Speaker 5: a problem. Okay, let's let's say there is a problem.
Speaker 5: The fighting is confined to Hizballah and the State of Israel.
Speaker 5: But but but of course their side effects outside. But
Speaker 5: something tells me that that if you go to a
Speaker 5: bigger war, if Israel wants to drive the US into
Speaker 5: a that war, and then then then think would would
Speaker 5: would blow up?
Speaker 2: Yeah? David, one final question, how.
Speaker 6: Do you engage the prospects of that happening?
Speaker 5: I think that the yes is resisting and the Iranians
Speaker 5: are trying to be nice, and there is a more
Speaker 5: considerate tone here. So we'll see, we'll see. I mean,
Speaker 5: from there, you can see how irrational would be for
Speaker 5: everyone to get involved in broader war, particularly that long
Speaker 5: term it's not going to help.
Speaker 2: Think about it.
Speaker 5: Israel had with Balla in two thousand and six, they
Speaker 5: got stronger, they they had they occupied the southern Lebanon
Speaker 5: and and has been stronger and stronger. So every every
Speaker 5: war is just like delayed training program for for his Mala.
Speaker 5: So Israel doesn't have it's its own interest. Okay, you
Speaker 5: can't destroy a you can't destroy you know, a ideology.
Speaker 5: You can you can destroy military installations.
Speaker 2: Coughing on.
Speaker 1: We got to leave it there, right not seeing Tella,
Speaker 1: Thank you so much. One of the protagonists of Chaos Kings,
Speaker 1: How Wall Street traders make billions in the new age
Speaker 1: of crisis, Scott Patterson, thank you so much for coming
Speaker 1: to today. This is a really really important book for
Speaker 1: global Wall straight not so much what to do, but
Speaker 1: what not to do. Scott Patterson's Chaos Kings setting up
Speaker 1: attension between two giants of investment