With Cyprus dominating the financial markets news this week, the "risk on/risk off" switching process has governed stock market action this week. On the back of Thursday's losses, stocks mirrored Wednesday's gains, with the S&P 500 (SNPINDEX:^GSPC) gaining 0.7%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) rose 0.6%. On the week, the S&P 500 lost 0.2% -- only its second weekly loss this year.
Reflecting the day's gains, the VIX Index (VOLATILITYINDICES:^VIX), Wall Street’s fear gauge, fell 3% today, to close at 13.57. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)
Gold: not anti-fragile
Philosopher-trader Nassim Taleb, the author of The Black Swan and, most recently, Antifragile, has been a harsh critic of the Federal Reserve, both under Ben Bernanke and his predecessor, Alan Greenspan. According to the argument he develops in Antifragile, the national economy is like a living organism in that it requires an environment that changes -- sometimes in an adverse or hostile manner -- in order to become stronger. Or, as he puts it, "Anything organic requires ‘variability stressors.'"
In this model, which I think is a powerful example of consilience, any efforts to artificially suppress that variability -- such as quantitative easing -- are doomed to weaken the organism and sow the seeds of larger, more damaging crises.
Consistent with this reasoning, you might think Mr. Taleb is very bullish on gold -- a store of immutable value, according to its supporters. Not so. As reported by Barron's Michael Santoli, at an investment conference in New York yesterday, Taleb told investors: “It’s too neat a narrative, gold. Central banks own gold,” before adding, “something that doubles [in value] in no time can’t be a real store of value.”
I'm not sure that the fact that central banks own gold is, in itself, relevant to the investment case -- after all, Ben Bernanke himself said this is a matter of long-term tradition, rather than economics. However, I think Taleb is dead on with his two other remarks, particularly the third. Something that doubles in value is highly unlikely to be a real store of value. Why? Because if it behaves that way, it's probably equally likely to halve in value in the same amount of time (or faster). By definition, a store value cannot exhibit that sort of volatility. Shareholders of the SPDR Gold Shares and the iShares Silver Trust may want to ponder Mr. Taleb's words.