Taleb: Short U.S. Government Bonds

By David Berman

Put author Nassim Nicholas Taleb and economist Nouriel Roubini in the same room (actually, a conference in Moscow) and you can pretty much count on them saying something scary.

Bloomberg News reported that Mr. Taleb, the influential author of The Black Swan, has taken widespread concerns about U.S. government bonds one step further: “Every single human being,” he said, should bet that U.S. Treasury bonds will fall. Or, put another way, everyone should short U.S. government bonds.

Bloomberg: “Taleb said investors should bet on a rise in long-term U.S. Treasury yields, which move inversely to prices, as long as Bernanke and White House economic adviser Lawrence Summers are in office, without being more specific.”

Ah, without specifics, it’s hard to know what Mr. Taleb is referring to. By referring to Mr. Bernanke, it’s not a long shot to conclude that Mr. Taleb believes that ultra-low interest rates have inflated a bubble in fixed income products, as yields plunge.

Bloomberg itself has strung together a few other points Mr. Taleb has made recently to get at his underlying thoughts. For example, in a recent television interview, he said: “Deficits are like putting dynamite in the hands of children. They can get out of control very quickly.”

And: “The problem we have in the United States, the level of debt is still very high and being converted to government debt.”

While saying that everyone should be shorting U.S. government bonds might be one of the more provocative things said about fixed income recently, Mr. Taleb is by no means the only one concerned about bonds. Jeremy Grantham, chairman of international investment firm GMO LLC (and whom we wrote about earlier this week), noted in his latest quarterly investment letter that “fixed income seems badly overpriced.”

Mr. Grantham estimates that, as a group, U.S. government bonds will return just 1.1% a year over the next seven years, after inflation is taken into account. He estimates that short-term government Treasuries will lose 0.6% a year.

Go back a little more and you can see that Warren Buffett, chairman of Berkshire Hathaway Inc. (BRK.A), warned about government bonds in his annual letter to shareholders last year: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s,” he went on. “But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”