Veriton Investment

Nassim Taleb Warns to Hedge Against Crash as Debt Crisis Looms

(Bloomberg) -- author Nassim Taleb said investors should insure against a stock-market crash as structural issues such as the US debt burden threaten to derail an otherwise unstoppable rally.

Even with US stocks making multiple record highs and corporate profits surging, Taleb, a distinguished scientist for hedge fund Universa Investments, warns that the real danger now comes from visible risks, so-called “white swans,” that most people ignore until it’s too late.

Most Read from Bloomberg

The Long Comeback of the Erie Canal

London’s ‘Superloop’ Buses Seek to Speed Suburban Commutes

The Federal Government Shutdown Adds to DC’s Economic Woes

Chicago Mayor to Unveil Budget That Addresses Trump Funding Cuts

In Chicago, a Soft Architecture Biennial for Hard Times

The US is already facing an obvious, predictable crisis — a white swan of mounting debt — and only an unexpected event of extraordinary magnitude could reverse it, according to Taleb.

“We are heading at some point in the future — yet there’s no way to avoid it unless there’s a miracle — toward a debt problem,” said Taleb, who spoke at the Greenwich Economic Forum on Wednesday. “When debt servicing becomes the largest item on your budget, you are in trouble. Whether you are an individual, a corporation, or a state — that’s a problem.”

While Universa Investments remains bullish on equities, Taleb insists that optimism must be paired with protection. “It’s a combination of extreme bullishness on the market coupled with obsessive need to hedge,” he said.

As for the next “black swan” event — the kind of extreme, unpredictable shock he made famous in his 2007 book of the same name — in today’s context the only kind of surprise left would be positive, Taleb said.

“The black swan for me, the unexpected, would be some miracle that gets us out of that funk,” he said. “Some miracle that suddenly makes the debt irrelevant. And there’s nothing on the horizon.”

Asked whether artificial intelligence could become that miracle, Taleb was cautious. “Maybe AI can probably help that,” he said, adding that technology also brings its own form of tail risk — the same kind of low-probability, high-impact disruptions that define black swans.

“AI can cause trouble,” he said. “In the past, technologies were very nice because they produced the dishwasher, and the dishwasher’s labor would go up in the scale to add more value.” Today, he noted, it is the top jobs that are threatened. “It is the skilled labor that has to downgrade,” Taleb said. “So AI can help, but at the same time it can hurt as well.”

Another white swan, Taleb argues, lies in America’s dependence on imported talent. He added that President Donald Trump’s tough stance on the H-1B visa applications could slow growth. “You should probably pay people to get H-1B visas,” he said. If immigration flows tighten, he warned, the impact on innovation and growth could be felt quickly.

For Taleb, the balance between a bullish market outlook and the need to hedge defines true risk management. “If you don’t survive crashes, you’re never going to make money.”