Nassim Taleb: Two lousy bets every investor should avoid

The “first thing” that investors should now avoid is U.S. Treasuries, and the second is the dollar, according to Nassim Taleb.

Mr. Taleb, a principal at Universa Investments LP, whose best-selling book, “The Black Swan” (Random House, 2007), argues that history is littered with rare events that can’t be predicted by trends, also said that he would rather hold euros than dollars, even as the Europe’s sovereign-debt crisis persists.

“Euros have Germany; the dollar has nothing,” he said at a recent conference in Moscow.

Mr. Taleb made similar comments at the same forum last year, saying: “Every single human being” should bet that Treasuries will decline because of the policies of Federal Reserve Chairman Ben S. Bernanke and President Barack Obama. Mr. Bernanke has pledged to inject dollars into the U.S. financial system and cut borrowing costs by buying $2.3 trillion of Treasuries and other assets, a tactic known as quantitative easing.

“As skeptical as I am about Europe, I prefer it by far to the United States,” Mr. Taleb said at the conference, which was hosted by Troika Dialog, a Russian investment bank.

The United States is just like Greece, only without the International Monetary Fund to enforce discipline, Mr. Taleb said. Greece came close to defaulting on its sovereign debt last year before receiving a bailout from the European Union.

“We have a very dire situation in the United States, and every day that goes by, it gets worse,” Mr. Taleb said.

“Every day that goes by, we’re spending money,” he said. “We’re increasing that cumulative debt.”

The U.S. government has said that it will sell $72 billion of notes and bonds this week.

Yields have climbed since the Nov. 3 announcement of the second phase of the Fed’s bond-buying program. The return on the 10-year note has risen about 92 basis points, according to Bloomberg generic data, while the yield on two-year Treasuries has more than doubled, adding 35 basis points to 0.68%.

The dollar climbed last week against 10 of the 16 other major currencies tracked by Bloomberg, including the euro and the New Zealand dollar.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. LLC, predicted the “end of the bull market” for Treasuries in a report published Jan. 7. In it, he wrote that bonds may need to be “exorcised” from model portfolios and replaced with “more-attractive alternatives.”

“The only happy thing that can happen in the U.S. is a bond riot,” where investors stop buying debt, Mr. Taleb said. This would “force some discipline” on the Treasuries market, he said.

Russia, the world’s third-biggest holder of short-term Treasury debt, behind Hong Kong and Japan, has trimmed its holdings of the securities by 25% since March 2009, according to Treasury Department data. The country held $55.2 billion of the bills as of the end of November, or 7.3% of the total outstanding, the data show.

The world’s largest energy exporter boosted its holdings of U.S. debt 200% in the six months following the September 2008 collapse of Lehman Brothers Holdings Inc. to a record $73.2 billion in March 2009. Treasuries surged during the global financial crisis, climbing 14% in 2008 as investors sought out the relative safety of U.S. government debt.

Rising real interest rates in the United States are a worldwide concern, said Bhanu Baweja, global head of emerging-markets fixed-income and currency strategy at UBS AG.

“The biggest accident the global economy could face is in the U.S. government bond market,” he said. “I’m also worried about U.S. Treasuries.”

Standard & Poor’s won’t cut its AAA rating on U.S. government debt “in the short to medium term,” Scott Bugie, managing director for financial institutions at the ratings agency, said last week.

Ten-year Treasury yields have dropped 21 basis points in the past year, while the yield on two-year notes has declined 19 basis points.