199 Trillion Reasons Why Rising Rates Matter

The Prices Paid Index just rose for its fourth straight month to 78.1: its highest level since April 2011.

Why does this matter?

Because it's a MAJOR warning that inflation is coming.

You see, when inflation hits, it doesn't hit all at once. Instead it rolls out into the economy in stages.

The first stage occurs at the "production" level of the economy. In this stage, managers at large manufacturers/production companies will see a spike in the cost of goods and services they buy in order to supply their firms.

This cost is measured by the Prices Paid Index. Below is a chart from Investing.com which shows this metric. The trend here is obvious: UP.

Initially, corporations will "eat" these increased costs by continuing to sell their goods and services at the same prices (despite the fact that their costs are increasing).

However, if the Prices Paid Index continues to rise, eventually corporations are FORCED to rise prices on the goods and services they sell.

THAT's when inflation starts appearing on the retail side of the economy in the price consumers pay for things.

By the look of things, we're already there. As I noted yesterday, several of the Fed's OWN in-house inflation measures are roaring.

• The New York Fed's UIG inflation measure is currently clocking in at 3.06%.

• The Atlanta Fed's "sticky" inflation measure is growing at an annualized rate of 2.2%.

• Even the Fed's heavily massaged Personal Consumption Expenditures (PCE) metric is growing at 1.8% on an annualized basis, only slightly below the Fed's so-called target rate of 2%.

Even worse, the bond market has picked up on this. The yield on the 10-Year Us Treasury (the most important bond in the world.

This is not an isolated issue either..

The yields on the 10-Year German Bund, 10-Year Japanese Government Bond, and 10-Year UK Gilt are all rising to test their long-term downtrends.

If these trendlines break (as I expect they will in the coming weeks) it will mark the beginning of the end for The Everything Bubble.

All told, there is over $199 trillion in debt outstanding and an additional $500+ trillion in derivatives trading based on these bond yields.

So when this bubble bursts (as all bubbles do) we will experience a crisis many magnitudes worse than 2008.

What Reflation? Despite Massive Money Printing, Japan's Industrial Production Still Below 2008 Levels

Japanese industrial production dropped sharply in January 2018, Japan's Ministry of Economy, Trade, and Industry reported last month. Seasonally-adjusted, the IP index fell 6.8% month-over-month from December 2017. Since the country has very little mining sector to speak of, and Japan's IP doesn't include utility output, this was entirely manufacturing in nature (99.79% of the IP index is derived from the manufacturing sector).

Various reasons were given for the decline, as they always are, but more importantly it placed a great deal of importance on the February estimate. Was January a one-time aberration, or is there a looming break in trend?

The Ministry released estimates late last week that suggest the break might be more than a one-month transitory anomaly. Industrial Production rebounded in February, but only by 4.1%. That left the year-over-year change (not seasonally-adjusted) as +1.4%. It's the lowest gain since October 2016, down substantially from what increasingly looks like a mid-2017 peak (+6.5%).

Like so many other economic accounts around the world, Japan's IP statistic is often misunderstood or disingenuously deployed to sound off on the prospects of a turning point for Japan's economy.

It was that way at the beginning of Abenomics in late 2012, when IP turned positive then, too. Between November 2012 (when the yen first started to fall) and January 2014, a period including the launch of QQE, Industrial Production rose 10.5% in those fourteen months.

Over the prior thirteen months, dating back to October 2011, IP had contracted by almost 8%.

The change in sign was widely hailed as strong evidence that Abenomics was working, and that ultimately it would prove decisive in Japan's quarter century struggle with its economy.

If a weaker yen could so aggressively restart Japan Inc, what couldn't the BoJ accomplish given enough time?

But by focusing on the plus signs, the degree of Japan's difficulties was understated if not completely set aside.

Even at its peak in early 2014, Industrial Production was still 12% less than it was in February 2008. That 10.5% gain during QQE and early Abenomics wasn't really all that significant, and in the wider historical context never really appeared to be.

Rather than learn from what is a clear repetition in pattern, these mistaken impressions and interpretations were repeated once more in 2016. QQE and Abenomics had worked, so it was claimed, it just took a couple of additional years for the results to show. Between January 2014 and May 2016, IP dropped another 7.4%. It was easily blamed on the VAT tax in increase in April 2014, though no one ever explains why those negative pressures would take almost two and a half years to be worked through.

Since that time, it is again up now 8% through February 2018 and the media celebrates how BoJ will like other central banks soon be talking rate hikes and exits. The mere appearance of positive numbers is in this convention sufficient proof for efficacy no matter how much time may be involved in either direction.

A more conditioned analysis, however, would note the timing of each inflection: middle 2016 to current = Reflation #3; late 2012 to middle 2014 = Reflation #2. There was, as everywhere else in the world, a similarly proportioned rebound up until 2011 (interrupted by the catastrophic earthquake and then the monetary destruction later that year).

In other words, for almost all of Japan's post-crisis experience its IP statistic is contracting. The positives are far fewer than the negatives. They correspond easily with these obvious "reflation" episodes we find all over the world created by the abatement of destructive eurodollar impulses unleashed in intermittent fashion (nothing goes in a straight line).

Therefore, Industrial Production in Japan just may be the best "reflation" indicator there is anywhere in the world. If that is the case, and it's hard to argue otherwise, a potential rollover in it starting in the middle of last year would be quite concerning as itstands starkly against both inflation hysteria and "globally synchronized growth."

It also represents global economic shrinking and how this has been mischaracterized repeatedly over the last decade. There is no growth trajectory indicated anywhere in the industrial figures, an important description of the global economy rather than just Japan's experience with its own "deflationary mindset." Throughout all of it, IP swings from positive to negative and back again without ever moving out of that position; despite the passage of so much time even at these occasional peaks IP is always considerably below the prior 2008 peak.

Yet, despite three almost complete swings since then, every time it turns positive it is paraded around the world as irrefutable proof the Bank of Japan, therefore QQE, therefore technocratic central banking, is a complete and total success. The problem with that is not mere interpretation. These mistaken impressions, often offered intentionally, greatly diminish the urgency to actually do something about the greater economic problem(while at the same time clouding the economic situation in the first place).

And that problem is the Bank of Japan; Japan hasn't spent the last three decades struggling with its economy so much as trying to deal with an over-aggressive central bank that is actually powerless to fix the problem (as they understand it). We can relate. This is how Japan's single Lost Decade has turned to three, and how what was once believed to be a Japanese coincidence has become a global one (with the global economy working on its second lost decade).

An upturn is not unexpected, nor is it a recovery. The world desperately needs the latter, having experienced (three times) only the former. Japanese Industrial Production may be the best example of all of it.

Why Mainstream Economists Don't See Recessions Coming

In his article released on March 21 2018 - Economics failed us before the global crisis – Martin Wolf the economics editor of The Financial Times expressed some misgivings about macroeconomics.

Economics is, like medicine (and unlike, say, cosmology), a practical discipline. Its goal is to make the world a better place. This is particularly true of macroeconomics, which was invented by John Maynard Keynes in response to the Great Depression. The tests of this discipline are whether its adepts understand what might go wrong in the economy and how to put it right. When the financial crisis that hit in 2007 caught the profession almost completely unawares, it failed the first of these tests. It did better on the second. Nevertheless, it needs rebuilding.

Martin Wolf argues that a situation could emerge when the economy might end up in self-reinforcing bad states. In this possibility, it is vital to respond to crises forcefully.

It seems that regardless of our understanding of the key causes behind the crises authorities should always administer strong fiscal and monetary policies holds Martin Wolf. On this way of thinking, strong fiscal and monetary policies somehow will fix things.

A big question is not only whether we know how to respond to a crisis, but whether we did so. In his contribution, the Nobel laureate Paul Krugman argues, to my mind persuasively, that the basic Keynesian remedies — a strong fiscal and monetary response — remain right.

While agreeing with Krugman, Martin Wolf holds the view that, we remain ignorant to how economies work. Having expressed this, curiously Martin Wolf still holds the view that Keynesian policies could help during an economic crisis.

For Martin Wolf as for most mainstream economists the Keynesian remedy is always viewed with positive benefits — if in doubt just push more money and boost government spending to resolve any possible economic crisis. It did not occur to our writer that without understanding the causes of a crisis, administering Keynesian remedies could make things much worse.

The proponents for strong government outlays and easy money policy when the economy falls into a crisis hold that stronger outlays by the government coupled with increases in money supply will strengthen monetary flow and this in turn will strengthen the economy. What is the reason behind this way of thinking?

In this way of thinking, economic activity is presented in terms of the circular flow of money. Spending by one individual becomes a part of the earnings of another individual, and spending by another individual becomes a part of the first individual's earnings.

So if for some reason people have become less confident about the future and have decided to reduce their spending this is going to weaken the circular flow of money. Once an individual spends less, this worsens the situation of some other individual, who in turn also cuts his spending.

Following this logic, in order to prevent a recession from getting out of hand, the government and the central bank should step in and lift government outlays and monetary pumping, thereby filling the shortfall in the private sector spending.

Once the circular monetary flow is re-established, things should go back to normal and sound economic growth is re-established, so it is held.

The Problem with the Mainstream View

Given that the government is not itself a wealth generator, this means that whenever it raises its outlays it also lifts the pace of the wealth diversion from the wealth-generating private sector. Hence the more the government plans to spend the more wealth it is going to take from wealth generators.

By diverting real wealth towards various non-productive activities, the increase in government outlays in fact undermines the process of wealth generation and weakens the economy's growth rate over time.

The whole idea that the government can grow an economy originates from the Keynesian multiplier. On this way of thinking an increase in government outlays gives rise to the economy's output by a multiple of the initial government increase.

Let us examine the effect of an increase in the government's spending on an economy's overall output. Can such an increase give rise to more output as popular wisdom has it? On the contrary, it will impoverish producers. By means of taxation or other means such as borrowings, Government forces producers to part with their products for Government services i.e. for goods and services that are likely to be on a lower priority list of producers and this in turn weakens the production of wealth.

As one can see, not only does the increase in government outlays fail to raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general.

According to Mises,

…there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.¹

For most commentators including Martin Wolf, the occurrence of a recession is due to unexpected events such as shocks that push the economy away from a trajectory of stable economic growth. Shocks weaken the economy i.e. cause lower economic growth so it is held.

The True Cause of Recessions

Following the Austrian Economics School of thinking — which Martin Wolf seems to ignore —  as a rule a recession emerges in response to a decline in the growth rate of money supply.

Usually this takes place in response to a tighter stance of the central bank. Various activities that sprang up on the back of the previous strong money growth rate (usually because of previous loose central bank monetary policy) come under pressure.

These activities cannot support themselves — they survive because of the support that the increase in money supply provides.

The increase in money diverts to them real wealth from wealth generating activities. Consequently, this weakens these activities.  That is, it weakens the the wealth-generating activities.

A tighter stance and a consequent fall in the growth rate of money undermines various nonproductive activities and this is what recession is all about.

Given that, nonproductive activities cannot support themselves since they are not profitable, once the growth rate of money supply declines, these activities begin to deteriorate. (A fall in the money growth rate means that nonproductive activities access to various resources is curtailed).

Recession then is not about a weakening in economic activity as such but about the liquidations of various nonproductive activities that sprang up on the back of increases in money supply.

Obviously then both aggressive fiscal and monetary policies, which will provide support to nonproductive activities, will re-start the weakening process of real wealth generation thereby weakening the prospects for a meaningful economic recovery.

It is for this reason that economists from the Austrian School such as Ludwig von Mises and Murray Rothbard held that once an economy falls into a recession the government and the central bank should restrain themselves and do, as soon as possible, nothing.

Contrary to Martin Wolf, during an economic crisis what is required for the government and the central bank is to do as little as possible. With less tampering, the more real wealth remains with wealth generators, which allows them to facilitate a further expansion in the pool of real wealth.

With a larger pool of wealth, it will be much easier to absorb various unemployed resources and eliminate the crisis. Aggressive monetary and fiscal policies will only hurt the process of wealth generation thereby making things much worse.

As long as the pool of real wealth is still growing, the government and the central bank could get away with the illusion that they can grow the economy.

Once the pool starts to stagnate or decline the illusion of government and central bank policies is shattered.

The key reason why Keynesian economics fails to explain the occurrence of recessions is because it ignores the key factor behind this, which is the tampering policy of the government and the central bank.

______

1. Ludwig von Mises, Human Action, 3rd revised edition, Contemporary Books Inc, p. 744

Why Nassim Taleb Thinks Leaders Make Poor Decisions

Why do experts, CEOs, politicians, and other apparently highly capable people make such terrible decisions so often? Is because they're ill-intentioned? Or because, despite appearances, they're actually stupid? Nassim Nicholas Taleb, philosopher, businessman, perpetual troublemaker, and author of, among other works, the groundbreaking Fooled by Randomness, says it's neither.

It's because these authorities face the wrong incentives.

They are rewarded according to whether they look good to their superiors, not according to whether they are effective. They have no skin in the game.

Seasoned readers of Taleb will be pleased to see the so-called "experts problem" pop up in living color in Skin in the Game: Hidden Asymmetries in Daily Life, Taleb's latest collection of essays on risk, rationality, and randomness. According to Taleb, dentists, pilots, plumbers, structural engineers, and "scholars of Portuguese irregular verbs" are real experts; sociologists, policy analysts, "management theorist[s], publishing executive[s], and macroeconomist[s]" are not.

The difference is that, when people from the first list are wrong about something, it's obvious from the results and they suffer; they have skin in the game. Bad teeth, crashed planes, and leaky pipes are bad for business. People from the second list rationalize by substituting a different theory. They were not really wrong but just early, and, if they're lucky, which is to say skillful at apple-polishing, earn promotion after promotion by not failing utterly. (Financial advisors can argue that the fiduciary standard is the most powerful tool for putting them in the first list.) Skin in the Game is full of insights like this, some recycled from his earlier work but many of them new. It is well worth the relatively quick read.

Despite the many good qualities of Skin in the Game, Taleb's work, including the present volume, is often infuriating. He is too sure of himself, too unkind to his enemies, too full of bluster and obscure humor. Acting on his belief that some kinds of experts are worthless, he has populated the book's dust jacket with anonymous tweets instead of celebrity testimonials. Here's the first tweet: "The problem with Taleb is not that he's an ass— (spelled out in full on the jacket). He is an ass—. The problem with Taleb is that he is right." I agree.

Asymmetry, or why we are ruled by the most easily offended

In chapter two of Skin in the Game, entitled "The Most Intolerant Wins," Taleb asks why we seem to be governed by the most easily offended. You have to refrain from smoking in the non-smoking section, but you don't have to smoke (that is, refrain from not smoking) in the smoking section, which, by the way, is much smaller. Few people really care whether you say Merry Christmas or Happy Holidays, but the latter has become de rigueur in some circles. Almost all soft drinks are kosher.

The reason, Taleb explains, is that, for any given issue, there are a few people who care deeply about it and a great many people who do not. Those who care are spurred to action, even violent action in the case of religious or political passions. The rest of us, wishing to be left alone, rarely fight back with equal vigor. The results of this process include the increasing domination of Taleb's beloved, multi-religious Lebanon by Muslims, for whom conversion to Islam is irreversible. Conversion away from Islam is at least theoretically punishable by death; Christians and Jews don't much care if you leave the faith.

In ancient Roman times, Taleb explains, Christians were the intolerant minority that pushed their views on the Roman majority. That's how Christianity eventually became the official religion of the empire in 323 A.D. Times and players change but the principles of human nature remain the same.

Almost all soft drinks are kosher because it's relatively easy to make a drink kosher. So manufacturers put forth this small effort rather than have two kinds of each drink, one for observant Jews – a fraction of a percent of the total population – and one for everybody else.

If this argument sounds familiar, it's recycled in much more general form from Frédéric Bastiat, the great 19th century French economist. Bastiat wrote that, for any given government action, such as a tax levied to subsidize some activity, there are a few people who will benefit greatly by it and they will work day and night to see it enacted. The great many who stand to lose will typically only lose a few pennies and will put forth little or no effort to prevent it. Thus the number of rules, regulations, taxes, handouts, and special favors granted by government grows exponentially with very little acting to restrain the growth.

These are just a few of the asymmetries of daily life to which Taleb's subtitle refers. Once you understand the principle, you'll see it in everything.

Waiter, there's a fly in my soup

The New York deli called Lindy's is famous for its clientele of Broadway actors and comedians, and for having food so bad that it has inspired a bevy of jokes including the one that starts with, "Waiter, there's a fly in my soup." But, Taleb tells us, it is also well-known among mathematicians and other scholars as the place where the Lindy effect was first observed. This is the idea that the age of an inanimate object is a good indicator of its future longevity:

Broadway shows that lasted for, say, one hundred days, had a future life expectancy of a hundred more. For those that lasted two hundred days, two hundred more. The heuristic became known as the Lindy effect.

Likewise, Judaism, 3,500 years old, will probably last another 3,500; Scientology will be lucky to get another 60. Shakespeare will last longer than Stephen King. Even living things that do not age on a particular schedule, like trees, tend to follow this rule. It could be because the old ones, having survived, are anti-fragile, a concept from Taleb's earlier book by that title; they are not just robust, but gain further robustness from exposure to stresses. Or maybe, like Shakespeare, they're just better.

This principle is very powerful and Taleb applies it to many topics, with the Lindy theme running through the whole book. Academia, for example, sometimes resembles an athletic contest in which the hardest-working or most aggressive participants appear to win. It should not. "The winner is the one who finishes last," said the philosopher Ludwig Wittgenstein; that is, the academic whose theories are least easily overturned, most enduring, had the best theories.

Investors would do well to understand the application of the Lindy principle to their enterprise. Indexing as a concept is about 75 years old; value investing is even older. These great ideas are unlikely to be overturned any time soon. Instead, improvements around the edges are the best we can expect. The latest idea for earning alpha, whatever it is at the moment, will almost certainly turn out to be a flash in the pan, easily arbitraged away by the time it can be widely implemented.

Why are there so many employees?

To illustrate how the principle of skin in the game applies to labor contracting, Taleb compares the behavior of two private jet pilots. Bob is a freelance contract pilot who is sometimes useful to your little airline but is at other times too busy hauling Saudi princes to fancy resorts to do the work you need done. The result, an occasional stranded planeload of people, is disastrous for your business.

The other, a pilot-employee – I'll call him Bill – does more or less what you want, including working overtime in a pinch. Why the difference? Taleb writes,

People you find in employment love the regularity of the payroll, with that special envelope on their desk the last day of the month, and without which they would act as a baby deprived of mother's milk… [H]ad Bob been an employee rather than something that appeared to be cheaper, that contractor thing, then you wouldn't be having so much trouble.

Economics dictates that employment is just one of many ways to contract for labor, and a particularly inflexible one that requires you to pay the employee whether you can keep them busy or not. You've probably considered replacing employees with contractors in whatever business you operate or work. Yet there are a lot of employees! Taleb's tale provides a clue to why: "Every organization wants a certain number of people associated with it to be deprived of a certain share of their freedom." Employment is the only legal way to achieve that sort of dependent relationship.

What's the connection to skin in the game? We tend to think of freelancers and entrepreneurs, such as Bob the pilot-contractor, as risk takers, skin-in-the-game players. And they are. But, as Taleb reminds us, "skin in the game is not [about] incentives, but disincentives." You don't want the employee to do what is best for himself in the short run – that's what contractors do – so you set up an alignment of interest between his long-run welfare and yours. As an employee with a family and a mortgage, and considerable costs if he has to get another job and relocate, he has skin in your game.

That's why we have so many employees.

 

Two very different kinds of risk

Since investing is applied philosophy, Taleb's whole book is relevant to investors, but the most directly applicable part is Chapter 19, "The Logic of Risk Taking." He draws the distinction, fundamental but rarely fully understood, between ensemble probability andtime probability. (Like double-entry bookkeeping, this is one of those wonderful ideas that's obvious once you've heard it; less so in advance.) Ensemble probability involves a risk faced by a population at a given point in time, such as that of a hundred people visiting a casino once, where each person can make a one-time, double-or-nothing bet involving his or her entire fortune. In that single visit, about half of them will be ruined. The other half, having doubled their money, will be perfectly fine.

Time probability, in contrast, involves an ongoing risk faced by an individual over time. Consider someone visiting a casino 100 times in succession, also making a double-or-nothing bet involving his entire fortune. In 100 visits, that person will be ruined; usually ruin will occur after just a few visits. No one who behaves this way will ever be fine.

With ensemble probability, then, as Taleb explains, "the ruin of one does not affect the ruin of others." With time probability it's the opposite: once you get a sufficiently bad outcome, the game is over and you cannot become un-ruined.

This distinction is relevant to investing because the risks investors face involve time probability, not ensemble probability. In most aspects of life, we are accustomed to thinking about risk in the ensemble sense: a football team has a 2-in-3 chance of winning a game, a disease has a 10% mortality rate. So we are familiar with that kind of risk, and comfortable extending the concept to other aspects of life.

But, in investing, the state of a person's wealth at any point in time is contingent on her wealth at the previous point in time; returns are cumulative; investing exposes us to time risk, cumulative risk. We are not typically able to do the mental approximations needed to think about that – if the risk of getting in a car accident on the way to work is one in 10,000, what is the risk of driving to work 10,000 times? (It's not 100%, nor is it insignificant; it's 64%. You should go to work anyway.)

Thus, we need to be very careful when relying on intuition to tell us about investment risk. Investing involves more risk than you think. We also need to be wary of extrapolating from the past (and avoid the temptation that comes from the fact that it's so readily accessible). Paul Samuelson famously said that "we have only one sample of the past," meaning that far more things could have happened than did happen; there's only so much you can learn from studying history. But it's just as important that we will get only one sample of the future! The return pattern that we will experience is just one of the infinitely many possible ones, and it will not be the one that we "expect" statistically; it will be something different, possibly very different.

Are you an IYI? I hope not

Consistent with his famously combative persona, Taleb takes pot shots – frequent and vigorous ones – at intellectuals, or, in his acronym, IYI. An intellectual yet idiot (IYI) is someone who is beloved by the public for his or her knowledgeable airs but who is actually full of baloney, having no practical sense. Taleb considers Steven Pinker, author ofEnlightenment Now and a current darling, to be an example, and calls him a "journalistic professor," not the psychologist and linguist that he obviously is. (I'm reviewing Pinker's book, favorably, in an upcoming Advisor Perspectives.)

When one gets past the gratuitous insult, however – Taleb doesn't think much of journalists or professors – he has a point. When a real expert strays from his own field, he is susceptible to making the foolish mistakes of an amateur, except that an amateur is likely to be humbler.

 

Taleb has not convinced me that Pinker is a wandering amateur; maybe it's Taleb, not Pinker, who is wandering too far from the core of his knowledge. Intellectuals, whether or not IYI, must, when turning against their kind, be on guard against becoming AIYA: anti-intellectual yet ass­­­­—. (Pardon my French; Taleb inspires it.) At 16, I fit the description; I do not think Pinker does.

Dedicated to the one I love?

Book dedications are rarely interesting; they usually feature one's parent, spouse, or teacher. But, in an odd twist that allows us to see (a little) into Nassim Taleb's mind, he dedicates Skin in the Game to two well-known people whom I would have praised less lavishly. First, Ron Paul, "a Roman among Greeks"; second, Ralph Nader, "a Greco-Phoenician saint."

In a self-referential joke, Taleb's comment about Ron Paul reverses the dedication of his earlier book, The Black Swan, to the great mathematician Benoit Mandelbrot, "a Greek among Romans." It took me a bit of effort to find out, by searching through Taleb's tweets, that he admires the Romans' practicality:

As I came to realize...[,] the Romans were no-B.S. Fat Tonys; they resented grand theories and favored prudent and progressive tinkering. Much of what they built, from constitution, to Roman law, to bridges, to low income housing, to their literature, to their imperial administration (still around in the structure of the Catholic church), has survived 2000 years.

Paul, a doctor and former congressman from Texas, is an honorable man who often stands alone in objecting to his colleagues' expedient political follies. I'm not sure (and Taleb doesn't say) why that makes him a Roman, but maybe an encomium is deserved; I would not have singled him out.

But Ralph Nader a saint? He certainly sacrificed personal income, and subjected himself to harassment, when making the case that U.S. auto companies were making dangerous cars; he had skin in that game. But Nader has a dark side. Despite having taken a poverty vow and very publicly living like a monk, he revealed a personal fortune of $3.8 million in his 2000 presidential election filing – not a large fortune but not monkish either. He has also founded nonprofit organizations that do research of dubious quality, and his latest crusade is a meaningless fight against share buybacks (an important mechanism for enabling investors to get cash flow out of their portfolios). Nader is an odd choice for sainthood.

Skin in the game everywhere

Like many authors who've discovered a principle that they believe applies in many aspects of life, Taleb isn't shy about discussing every aspect he can identify. They include the role of looks in choosing a surgeon: don't choose a dignified, handsome one – one who looks more like a butcher "had to have much to overcome in terms of perception." Military interventionism? He's against it, arguing that policy analysts who make war from comfortable offices don't know what it's really like on the ground and have no personal stake in the consequences. Religions, at least at first, demand extreme sacrifices from their adherents because their leaders know they can only hold the tribe together if its members can see that fellow members have sacrificed too: "The strength of a creed," Taleb writes, "did not rest on 'evidence' of the powers of its gods, but evidence of the skin in the game on the part of its worshippers."

This campfire-style storytelling makes the book seem, in places, more like a collection of loosely related essays, as I referred to it at the outset, than a coherent book. This approach has an upside and a downside. It's easy to read parts of the book without losing the train of thought, since many of the parts were written as magazine articles and stand well on their own. The downside is that, if you try to read the book as a coherent whole, you'll find it too full of interruptions and asides.

Conclusion

Taleb's writing is nothing if not lively. What other philosopher, let alone investment writer, creates characters like Fat Tony, a worldly-wise trader who cares little for book learning; Yevgenia Nikolayevna Krasnova, a neuroscientist with three philosopher ex-husbands who writes a runaway best-seller called A Story of Recursion; and Nero Tulip, a thinly disguised version of Taleb himself? Taleb entertains, educates, and infuriates all at once, a heady combination for readers who score high on curiosity but frustrating for those who are just in a hurry to gather information and get on with it. This is Sunday afternoon, not Monday morning, reading.

Mercifully, Skin in the Game is also relatively short, unlike Taleb's previous book,Antifragile. It can be consumed effectively by a casual reader and does not require sustained attention.

Skin in the Game is not Taleb's best book – that's Fooled by Randomness – but it's his most accessible. I highly recommend it.