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