Nassim Taleb, Inflation and Markovian Prices
Taleb digs in and continues attacks on anything Bitcoin adjacent
In my last post, I covered Nassim Taleb’s recent reversal on Bitcoin. In 2018, he espoused on Bitcoin as a promising candidate to deliver sound money. But by 2020, he was openly calling Bitcoin a Ponzi scheme. In the last post, I argued it had to do with a disagreement with an author for a book about Bitcoin for whom Taleb wrote a forward.
Since then, Taleb has continued his war path on everything Bitcoin adjacent by attacking people pointing out a sudden price increase in commodities that coincides with the US government increasing the money supply by 24% over the last year.
Taleb is right! Copper, and many of these commodities are lower than they were, historically:
And he wanted to make sure everyone knew it:
In the comments people pointed out prices like lumber are at all time highs (note: log scale):
No one is arguing the prices in commodities is making food unaffordable. They’re arguing that the sudden rise is worth considering in the context of monetary inflation.
Besides, it can’t be coincidental that all commodity prices are trough the roof. But Taleb seems to have laser focus on insulting people with laser eyes on their Twitter avatars.
If there were some idiosyncratic increases in commodity levels I would agree with Taleb. But pretty much all commodities have increased considerably over the last year, and many over the last 3 years.
But my main issue with Taleb’s handwaving is that he’s being dishonest when using historical price levels to argue that this is noise or a return to average. If it were to pre-covid levels, I would be more likely to agree since the price level could be explained by change in demand. But these levels are concerning.
Commodity prices are Markovian
The Markov property means that something is memoryless and is fully encapsulated in its current state.
Consider a tic-tac-toe board. How the board got to a particular state is irrelevant to the state going forward:
You can say a tic-tac-toe set exhibits a Markov property.
Similarly, commodity prices are information about the state of the world. They encapsulate all the information about the good, from weather conditions to civil unrest that may affect its supply. They also include information on past events and future expectations. A dramatic change in price tells us something.
When articles reported Game Stop stock increasing 5 fold earlier this year, no one would say: “A standard way to deceive using statistics. Game Stop is just catching up. Game Stop stock is LOWER than it was in 2011!”. No, the price encapsulates its current state, past, present and future. Any movements from that level have to be explained in context of its latest price.
To be fair, some prices are less Markovian than others. For instance, interest rates are path dependent. Telling me an interest rate is 5% means something entirely different if they were no higher than 3% over the last year or if it has just come down from 8%. But in general, commodity prices are mostly Markovian.
Taleb knows this, as does his favorite protagonist, Fat Tony. In fact, Fat Tony owes much of his wealth on this knowledge:
Now the question is whether there is an expectation of inflation, causing the price level to rise. Although there are articles published daily that discuss the topic, and I’m certainly doing my part, government yields and futures indicate that there is no expectation of short or even medium term inflation.
Different agencies' predictions differ, but most put US CPI inflation within the range of 1.6% to 2.8% percent in 2021 and around 2% in 2022. Almost all agencies concur in predicting that CPI inflation will decrease in 2022 compared to 2021. Over the longer term, up to 2024, CPI inflation in the US is expected to be around 2.3%.
What would Fat Tony think?
Consider the following parable in The Black Swan:
Assume that a coin is fair, i.e., has an equal probability of coming up heads or tails when flipped. I flip it ninety-nine times and get heads each time. What are the odds of my getting tails on my next throw?
Dr. John refers to the question as trivial and gives the mathematically correct answer of one half. Fat Tony calls Dr. John a sucker and says, “no more than 1 percent, of course … the coin gotta be loaded.”
So let me rephrase this parable:
Assume that a money policy is reasonable, i.e. Fed officials say is not likely to fuel inflation. Year to date, the price of crude oil, natural gas, sugar, corn, wheat and cotton are up between 5% and 30%. What are the odds of us seeing inflation in the near future?
Final thoughts
I’m again dismayed by Taleb’s obsession with taking down anything Bitcoin adjacent. He’s even spared with Twitter accounts with ~200 followers right before blocking them and making his feed private.
No target is too small for Taleb.
I think what bothers Taleb about Bitcoin advocates is that many have substantial skin in the game. Taleb doesn’t have the conviction to take a position in its collapse. So he feels threatened.
Ironically, “have fun staying poor” essentially means “I have more skin in the game than you”.
Similarly, Taleb’s Fat Tony would certainly not be fooled by Fed proclamations that everything is under control in terms of money supply and inflation. Sure, increase the money supply by 24% in one year, fat tails be damned. The more central planning the better.
Taleb dances around these topics, making statements that are factually correct but ignore the bigger picture. We’ve increased fragility through central planning of the monetary supply. This is a recipe for black swan events and fat tails, something that Taleb has spent a lifetime thinking about.
Normally he would be voicing concern, but he has dug his heels in and sided with the intellectual yet idiot (IYI) class in handwaving away whats so obvious to everyone else.