Melt Up or Melt Down?

Please consider some snips from Fat Tails.

Everyone on Wall Street is freaking out over the 2/10-year yield curve inversion, with recession being the most feared outcome. I am fully aware of the fact that the expression of "consensus view" is often biased and very influenced by a subjective assessment of the outlook. But it seems clear that the risk perception of the investment world has migrated to the darker side.

With more investors believing that a recession could be just around the corner, there could be only two extreme cases — things turn out to be either a lot better than feared or much worse than what is currently discounted. Which is it?

I had a conversation recently with a very shrewd and smart investor whom I have known for nearly 30 years. Let's call him Joe. Joe is seriously concerned that things could turn out to be much worse than most anticipate. His bearish case starts with Trump being highly unpredictable, and no one seems to know his game plan for his trade war with China. This is very bad for the economy in general and harmful for business investment in particular.