I have been reading Nassim Taleb’s new book: Antifragile: Things that gain from Disorder. The book basically lays out the case that things can be broken down into three categories: fragile, robust and anti-fragile. Talib states that great effort is made towards keeping things that are fragile stable, which somewhat counterintuitively makes them more susceptible to some unforeseen event. The robust is that which is considered durable enough to withstand some unforseen event, and the Antifragile is that which benefits from some type of 5 sigma event. This book got me thinking about how we approach portfolio construction, amidst the unproven Federal Reserve policies of the last several years.
We have written extensively about the unproven nature of Fed policy and the possible unintended consequences thereof. If one takes as a given, the fact that Fed policy will continue unabated until they see some concrete evidence of significant improvement in economic activity , then one can also assume that these policies will continue even in the event of a severe dislocation in the Treasury Market. We spend a lot of time thinking about this dislocation, particularly given the diametrically opposing views as currently expressed by a 1.5% 10 year treasury note yield on the one hand and the talk of severe fiscal duress on the other. This dichotomy is not lost on the rest of the potential bond buying world, leaving the entire Treasury curve at risk for some type of “buyers strike”. In this scenario, the fragile Treasury Market (as defined by Talib) already manipulated, shaped and coddled by the Federal Reserve will have been rendered more unstable. A severe rise in rates followed by a disorderly decline in the dollar most likely would ensue. The inevitable anti-fragile portfolio in this environment would be comprised of tangible hard assets.