Showing posts with label Soros. Show all posts
Showing posts with label Soros. Show all posts

Wednesday, September 17, 2008

Soros: Crisis wll only get worse

“Financial bubble” of the last 25 years coming to an end
17 Sept, 2008
Billionaire investor George Soros has given his gloomiest assessment of the state of the US and world economies. Speaking with BBC business editor Robert Peston Soros said that the "acute phase" of the credit crunch may be over but effects on the real economy are yet to be felt.
He warned the "financial bubble" of the last 25 years could be drawing to an end and the post World War II "super-boom" era could also be over.

He predicted a "more severe and longer" US slowdown than most people expect.

And he said that the UK was worse-placed than America to weather the coming economic storm, because it had such a large financial sector and has had the biggest increase in house prices.

Mr Soros said that the current mandate of most of the world's leading central banks - where their main focus was fighting inflation - meant there was limited scope for cutting interest rates to help economies recover.

As for the Bank of the England, he said, "it was like a Greek tragedy", because they "couldn't do a U-turn" until there was a full-blown recession, which would finally take away the price pressures.

It was "inevitable" that they would keep rates too high for the good of the economy, he added. In part, Mr Soros is echoing the gloomy forecast of the world's central bankers in recent weeks.

The head of the European Central Bank, Jean-Claude Trichet, recently told the BBC that the "market correction was still on-going".

Mervyn King, the governor of the Bank of England, warned in the Bank's inflation report that UK inflation would rise above its target while the economy would slow sharply.

Mr Soros believes that central bankers are partly to blame for the credit crunch because of their past behavior in bailing out the financial sector whenever it got into trouble for over-lending, the so-called moral hazard problem.

He said that the central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far.

And he said that tougher but smarter regulation would be needed in the future in order to reduce the excess supply of credit in the economy.

These could include measures to force banks to put aside more reserves in good times to help cushion them in bad times.

Mr Soros believes that oil and other commodities are over-priced, but he sees little chance of the price of oil coming down until there is a big slowdown in the richer economies. He sees the price of oil as being driven by higher demand in developing countries such as China, where subsidized energy costs mean there is less price-sensitivity.

He also said that stock markets are still underestimating the severity and length of the economic downturn, especially in the US, and are now having a "bear market rally".

Mr Soros has credibility partly because he is prepared to invest his own money to back up his convictions.

The private investment fund he has resumed managing made a return of 34% last year betting that the credit crunch was more severe than many people expected.

Mr Soros was the man reported to have made a billion pounds in September 1992, betting correctly that the British currency would have to be devalued and leave the European Exchange Rate Mechanism.

Mr Soros has devoted much of time since then to philanthropy, especially in Eastern Europe.

'We are heading into a storm and it's reminiscent of the 1930s', warns investment guru George Soros

By Sophie Borland
Last updated at 1:56 AM on 17th September 2008

Last night George Soros, one of the world's most powerful financiers, warned that the world was 'heading into a storm'.

Mr Soros, the financial speculator best known for cashing-in on the pound's withdrawal from the European Rate Mechanism on Black Wednesday in the 1990s said that the worst was far from over.

Mr Soros even claimed that we are only at the beginning of a major financial crisis.

soros

George Soros: Is worried the world could collapse in a 1930s style depression

He compared the current situation with the Great Depression of 1930s which followed the Wall Street Crash of 1929.

Speaking on BBC's Newsnight, he said: 'We are not through it at all.

'We are heading into the storm rather than coming out of it. We are at a very precarious moment.'

When asked whether the US Government was wrong not to bail out the Lehman Brothers, he replied: 'Whether they should have been rescued depends on whether the financial system survives.

'If it survives then it was right to let them go bust. If there is a meltdown then it obviously wasn't.

'One thing is clear - We mustn't allow the financial system to collapse as it did in the 1930s.'

Referring to Hank Paulson, the US Treasury Secretary, he said: 'The way Paulson is handling the situation is reminiscent of the way the bankers handled it in the 1930s.'

He added: 'The financial system has gone overboard and the financial engineering has grown to big, it takes up too big a share in the world's resources.

'Now it is shrinking. When it becomes regulated it will be less profitable than the last 25 years.'

Speaking of the impact on Britain, he said: 'The financial industry is a major segment of the British economy. That's why Britain is more heavily hit by the financial crisis than most other economies.'


Financier Soros warns crisis will only get worse

LONDON (AFP) — US financier George Soros warned in a television interview Tuesday that the turmoil in the financial markets was far from over, with Britain likely to be the economy most badly hit by the crisis.

As Wall Street braced for the potential collapse of insurance giant AIG, the hedge fund pioneer told the BBC that the wisdom of letting Lehman Brothers go to the wall at the weekend would only be revealed with hindsight.

"I'm afraid we are not through it at all -- in some ways we are still heading into the storm rather than heading out of it," he said.

Asked whether the US government should have rescued Lehman investment bank, he said: "If the financial system survives then it was the right thing to do to let them go bust. If there is a meltdown then obviously it wasn't."

"Saving the system trumps moral hazard. In the end you do whatever it takes to save the system," he added.

However, he said the way US Treasury Secretary Henry Paulson was handling the situation was "very reminiscent of the way the central bankers talked in the 1930s", the time of the Great Depression.

Soros said Britain's reliance on the financial industry make it especially vulnerable.

"The financial industry is a major segment of the British economy and that's why I think Britain is more heavily hit by this financial crisis than most other economies," he said.

More generally, he warned finance had "grown too big, it has taken up too big a share of the world's resources. Now it is shaking and I think when it becomes once again regulated it will be less profitable".


Hedge funds suffer further pain

By Laurence Fletcher and Bill McIntosh

LONDON (Reuters) - The bankruptcy filing of Lehman Brothers is another blow for the hedge fund industry, but at least the damage is limited from here for funds exposed the U.S. investment bank.

Even legendary fund manager George Soros, who runs around $18 billion (10 billion pounds) in assets, is likely to have been affected after raising his stake in the investment bank to 9.5 million shares in the second quarter.

A spokesman for Soros Fund Management declined to comment on the composition of their portfolio.

British activist hedge fund Algebris is also likely to have been hit by the fall in the share price of Lehman, once the fourth-largest U.S. investment bank.

The hedge fund firm owned just over 4.45 million shares at end-June, Thomson Reuters data show. Algebris sold its stake this year, a spokesman said, declining to give further details.

The industry also saw its dealings through Lehman's prime brokerage business suspended, just as hedge funds seek to increase the number of banks they deal with to spread risk.

The slump in Lehman's share price is unlikely to have benefitted many hedge funds, even though they have the ability to short -- bet on a lower price for a security in the future.

Many had taken their bets off the table in recent weeks following the spike in bank shares in July, while shorting becomes more costly as the share price falls because fewer people are willing to be on the other side of the trade.

"At the end of the day, how many hedge fund managers will be shorting Lehman at $3.75, when it's come from $70?" said one fund of hedge funds manager

"Many have been reducing or taking off their short positions over the last few weeks or so."

Meanwhile, the slump in markets -- the FTSE 100 closed 3.9 percent lower at 5,204.2 -- will prove painful for long-short equity funds, most of which are positioned for rising markets.

"If you're not a pure financials-focused manager you'll be long something else. You might make money on the shorts but you'll lose money on something else," the manager said.

Lehman's collapse comes during a tough period for the hedge fund industry. HedgeFund Research's HFRI index is down 4.83 percent in the first eight months of the year, having fallen in each of the past three months.

PRIME BROKERAGE

Administrators said on Monday they had suspended all market trading activity at Lehman Europe, while hedge funds said they were unable to trade, despite being offered prices.

"Officially they are still open for business," an executive at one of London's biggest hedge fund firms said.

"In fact they are not trading anything. They might be unravelling trades but they are not taking any new trades. They are in limbo pending what is going to happen next."

Sources in the hedge fund industry on both sides of the Atlantic said Lehman was in stasis.

Lehman's private banking unit was not accepting orders and its foreign exchanging execution operation was not allowing trades even though it was offering prices, they said.

One hedge fund manager said that the investment bank's broker dealers had been instructed not to trade.

Lehman declined to comment on these issues.

Winton Capital, one of London's biggest commodity trading advisor CTA.L hedge funds, said on Monday that Lehman had been one of its eight counterparties for foreign exchange trading, but was no longer.

"We stopped trading with them last week and we have no counterparty exposure," a spokesman said.

The effect on the hedge fund industry is likely to be limited given that funds have had months to move their business away to safer rivals.

"A lot of people have seen this coming and I'm sure ... have reduced exposure," said a fund of hedge fund manager who requested anonymity to avoid drawing attention to his firm.

Hedge funds have slowly been increasing the number of prime brokers they trade with over the past year to limit exposure to a single counterparty, and this is likely to continue.

"This is something we (the hedge fund industry) will all have to look at," David Stewart, chief executive of hedge fund firm Odey Asset Management, told Reuters.

Tuesday, August 19, 2008

A Danish fix for the US mortgage crisis

A Danish fix for the US mortgage crisis

By George Soros --- Published: August 11 2008

The recent compromise struck between the Treasury and Democrats in Congress on the fate of Fannie Mae and Freddie Mac, the government-sponsored mortgage guarantors, constitutes the worst of all possible worlds. The Treasury offered a blank cheque to come to the rescue, if necessary, but the managements of both companies were kept in place. They know that their survival depends on not drawing on that blank cheque. They will therefore do everything in their power to reduce the need for any new equity capital that would be dilutive. In short, as privately owned but undercapitalised financial institutions, the GSEs cannot fulfil their stated mission of providing stability, liquidity and affordability to the nation's housing finance system.

In presentations to investors, which followed big quarterly losses, the GSEs said they would curtail purchases of mortgages and might shrink their holdings to preserve capital. They highlighted that fees from their insurance guarantee business had nearly doubled. They also improved the quality of new loans by focusing on borrowers with higher-quality credit, who put down greater down payments. This means that the GSEs have significantly increased the cost of mortgages and tightened lending standards.

The problems in the banking system have left the two GSEs as the only game in town in the mortgage market. Their market share of new mortgages has doubled over the past year and is now close to 80 per cent. Much of the balance is accounted for by the Federal Housing Administration, a fully guaranteed government agency. As the two companies fight for survival and try to reduce their need for new capital, the availability and cost of mortgages in the US suffer. Coming at a time when the supply of houses is swollen by a rising tide of foreclosures, this is a recipe for disaster. House prices have already fallen sharply and will continue to fall unless mortgages are made available on more favourable terms to a broader group of people.

This compromise, or stalemate, practically ensures that house prices will overshoot on the downside. That, in turn, renders the policies of the GSEs self-defeating as lower house prices increase their losses and push them further into insolvency. The GSE crisis has merely been postponed, at a cost of making the housing crisis more severe.

Confidence in GSE-backed bonds has been shaken. The stocks remain under pressure. Markets are forcing officials to come up with a better solution. We need to recognise that the business model of the GSEs is fatally flawed. They are public/private partnerships in which the risks are borne by the public sector while profits accrue to the private sector: management and shareholders. The companies have been plagued by accounting problems and other irregularities; their managements have spent enormous sums lobbying Capitol Hill. This is not a business model that deserves to be perpetuated.

Fortunately, alternatives are available. Hank Paulson, the Treasury secretary, has suggested the use of covered bonds, a mortgage-financing vehicle popular in Europe. I would recommend the system of mortgage credit used in Denmark, where loan-to-value ratios and underwriting standards are strictly enforced by a single, strong regulator. These mortgages are transformed into instantly tradable bonds. Cover for the bonds is provided by both the mortgages and the credit of the financial institutions issuing them. The mortgages remain on the balance sheets of the issuers, eliminating the moral hazard inherent in the US system, which is based on earning fees from selling them on to the market.

The standardisation of mortgages in the Danish system promotes transparency and liquidity. Householders can prepay their mortgages at any time by buying the bonds. Since house values and bond prices tend to move in unison this arrangement reduces the danger of householders' equity falling into negative territory. For the issuing banks, owning these bonds carries lower capital requirements so the bonds sell at a premium to ordinary covered bonds. This system has survived and provided affordable home mortgages since its creation shortly after the great Copenhagen fire of 1795.

I pioneered the introduction of the Danish system in Mexico with the support of Paul O'Neill, when he was Treasury secretary. With modification, it offers a long-term solution to providing affordable mortgages in the US.

The writer, author of The New Paradigm for Financial Markets, is chairman of Soros Fund Management, which has held and continues to hold short positions in GSEs

Friday, June 27, 2008

The Macleans.ca Interview: George Soros

The Macleans.ca Interview: George Soros

The legendary financier on the U.S. housing crisis, the overall state of the economy, and reluctantly becoming a "prophet of doom"

Philippe Gohier | Jun 13, 2008

As a speculator, George Soros is perhaps most famous for bringing the Bank of England to the brink of collapse in 1997, raking in over $1 billion in a single day. As a philanthropist, he's indelibly associated with any number of political causes. But in his new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, Soros confesses he's always "desperately wanted" to be taken seriously, not as an investment guru or as a political agitator, but as a philosopher. Soros recently spoke with Macleans.ca.

Q: You’ve come to some grim conclusions about the market in the book. For example, you write that the bottom of the housing market is still “further than people think.”

A: Behind the housing bubble, there’s a super bubble which has been growing for the last 25 years. Every bubble has an element of reality and an element of fantasy, of misinterpretation. The reality has been a trend of ever-increasing use of credit, of credit expansion. The misconception is that markets tend toward equilibrium and can be left to their own devices, to take care of their excesses. In the boom phase, it’s very pleasant because you enjoy credit creation and, with that, comes wealth creation. In the bust phase, it’s very unpleasant because you have credit contraction, a reduction of leverage, a decline in the value of collateral, etc. and that involves wealth destruction. I’m afraid that I am a prophet of doom. I don’t like it and I don’t think I’m predicting anything unconditional because I think that how the situation will evolve depends on how the authorities respond to it. But, unfortunately, we are in that phase of the super bubble.

Q: You raise an interesting paradox in the book's introduction: When interest rates were really low, banks were eager to lend people money. But at the same time, they were repeatedly repackaging those loans to avoid the risks that come with lending people money.

A: They thought they were reducing the risk by packaging it and slicing it. In actual fact, by transferring it from people who were familiar with the risks to people who were not familiar with them, they were actually increasing the risks.

Q: Were the financial institutions playing a shell game?

A: Well, I think a lot of it was self-deception. There was a certain amount of deliberate exploitation, but most of it was self-deception, a false interpretation of reality, a misconception. But it’s a convenient misconception, because leaving markets to take care of their own excesses is very convenient for people in control of the financial institutions.

Q: Can you give me a sense of what those misconceptions were?

A: The main misconception was what I call market fundamentalism, [the idea] that markets are perfect. Or, at least, that they are better than regulators and therefore we should leave it to markets and we should deregulate.

Q: You argue that freedom of thought doesn’t mitigate the misconception problem—that is, that an open society can’t produce a perfect market. Does it actually do the opposite?

A: It’s a somewhat different issue. I discovered a misconception in my own ideal of open society, which I kind of took over from Karl Popper. We all took it for granted that the purpose of critical thinking is to improve our understanding of reality. That’s the cognitive function. Then there’s this manipulative function, which is to change reality to meet your own desires, to influence people in a way that they’ll follow you. Politics is dominated by the manipulative function. You can’t take it for granted that critical thinking will give you a better understanding of reality. What you took for granted, you have to introduce as a requirement. I’m not abandoning open society at all; I’m just taking another step in what is necessary to bring about a well-functioning open society.

America, because of the adversarial, competitive nature of the political and economic system has really lost sight of the importance of understanding reality. The proof of it is Karl Rove and the Bush machine, which was fabulously successful in manipulating people, spinning the events, as manifested by the fact that Bush got 90 per cent popularity when he declared war on terror and could take the country to invade Iraq under false pretenses. It achieved the exact opposite of what he hoped to achieve. He wanted to demonstrate American supremacy and America’s influence in the world has suffered a terrible blow. He thought that he would make his brand politically dominant and his name is dirt. It shows how important it is to recognize reality and not distort it.

Q: According to your book, “We are in the midst of a financial crisis the likes of which we haven’t seen since the Great Depression” and that “the entire financial system is on the brink of a breakdown.” Can you give me an idea of what that’s going to feel like?

A: I actually think the acute phase is behind us. We had a pretty serious breakdown. The very core of the system was malfunctioning, and it’s still sputtering pretty badly. But the full effect of the damage is yet to be felt, both for the financial institutions and for the real economy.As far as the financial institutions are concerned, they’ve recognized a lot of losses. But they perhaps haven’t fully recognized all the losses they may incur from holding mortgages if the decline in housing prices hasn’t run its course, which I believe is the case. We are probably halfway in the decline and that decline is going to be quite steep—steeper than currently anticipated because housing prices are going to overshoot on the downside as they overshot on the upside. How far they overshoot depends on how the authorities react to the problem, because what causes the overshoot is foreclosures. It unbalances the supply. In my estimation, there could be something like two million foreclosures in the foreseeable future, half of it from subprime sector and half of it from option adjustable rate mortgages. So you need to take steps to try to reduce the number of defaults and the number of foreclosures. It’s possible to do something about it.

Q: There’s very little discussion about widespread reform of the credit sector. Instead, the authorities seem more inclined to argue about whether or not there’s a recession looming. Is the recession argument a red herring? Is it diverting attention from a more fundamental crisis?

A: No, it’s not a red herring. For the moment, the economy is actually showing considerable resilience and people think the worst is over. I’m afraid that that is not the case; we are heading for a recession, but we are not there yet.

Q: Credit expansion seems to have been an outgrowth of the American dream: it was supposed to mean everyone would be able to afford a big house, a gas-guzzling car, a luxurious vacation. Does the end of credit expansion mean the end of the American dream?

A: Well, hopefully not. I think America has been a country of great opportunity and a great ability to learn. I’m very hopeful that Barack Obama will be able to provide that leadership.

Q: Did income inequality play any role in credit expansion?

A: It was a side effect of allowing markets a free-hand. I suppose I should say it was a side effect of market fundamentalism.

Q: What I mean is whether credit expansion was intended as a mechanism to offset the disparity in income?

A: The idea was that subprime mortgages, etc. would increase house ownership and so on. It’s the people who bought into it who are the worst affected by the bubble. Prince George’s County in Maryland—it’s sort of the yuppie black community—is the worst affected. They bought into the ownership idea and the first object was a house. They don’t have other assets, so they don’t have anything to fall back on.

Q: How can Obama guide the U.S. through the crisis?

A: He can provide leadership, I hope.
Q: Is this a partisan issue?

A: No, no, I don’t think so. I mean, it is in a way, because market fundamentalism is associated with the Republican party. It has deeper roots than Bush. The super bubble was really launched by Reagan.

Q: That’s an interesting point about how the super bubble is about 25 years old. A little over a quarter of the U.S. population is under 20, meaning they’ve never known anything else than the super bubble as an economic system. What does the future hold for them?

A: Well, I think it’s still the land of opportunity. I wouldn’t mind being a young man today.

Sunday, June 15, 2008

The Malaysian Solution (Israel Shamir)

The Malaysian Solution

By Israel Shamir

Take a country populated by diverse communities, the indigenous and immigrant, of roughly equal size. These communities profess different religions and ply different trades. The immigrants are better at business; the natives prefer to till their soil. It could be a description of Palestine with its native Palestinians and the immigrant Jewish communities. But here the comparison ends. In Malaysia, the communities live in peace without UN peacekeepers, they pursue their cultural and religious interests without submitting to bleaching multiculturalism, their country prospers while rejecting the IMF recipes, and it is a native son of soil who stands at the helm of good ship Malaysia.

On a less formal note, Malaysia is warm, wet and exotic. On the monsoon-swayed shore of Andaman Sea, a long-tailed, lithe monkey throws coconuts from the heights of a palm tree, flying fishes jump out of the warm blue sea and splash back, a white triangular sail rises on the horizon. Indians serve their sweet and punchy tea, teh tarik, pouring it with gusto in pulling motion, and neatly place curry on ecologically-sound banana leaves. Malay fishermen unload their haul on the shore and sort it under a broad banyan tree. At night, hundreds of stalls open at the Night Bazaar, feeding, dressing and entertaining locals and tourists.

In Malacca, the oldest-in-East-Asia Catholic church stands next to the Great Mosque next to a Vishnu temple next to a Taoist pagoda. The Dutch-built austere Town Hall is surrounded by spacious British colonial mansions. Narrow streets preserve the charm of the Seventeenth Century, when the Malaccan sultanate was the hub of commerce. Many of its denizens bear proud Portuguese names, but in appearance they do not differ from other residents.

In Penang, old Hakka smugglers warm their bones on the wooden jetties that form a floating island off Georgetown. Tamils sell junk on Armenian street, next to the most advanced chip plant, home to Athlon microprocessor. Yuppies have not taken over all of the Old City, and it reminds of Jaffa as it was before 1948: a modest, humane Eastern city. The glorious Oriental Hotel preserves the days of Somerset Maugham and the Straits' Settlements. Delightful and modish Chinese girls flock out of the convent school. Native Malays carry on their unruffled life in peaceful villages, happily serve in the army and provide the backbone of the administration.

Islam is the state religion, as it had been in the Fourteenth and Fifteenth Centuries, when it peacefully seeped in and eventually became preferred to the older Hindu beliefs. Brought by the traders, Malay Islam is exceedingly tolerant, local, thoroughly adjusted to the place, as it is practically everywhere but on the pages of the New York Times. The girls do not cover their faces, but often wear a scarf, like religious Jewish women. On Fridays, men like to go to a mosque for prayer, the great social unifier and integrator. As Communism was always frowned-upon in Malaya, Islam is the preferred style of social movement.

Prosperity is ubiquitous: perfect roads, new cars, brushed-up and restored relics of the past. There are no beggars, no striking poverty. Malaysians live well: they have given up home cooking and eat out in countless restaurants and at the stalls, where one dollar buys a square meal. Neighbouring Thais and Indonesians flock in and to cook their national dishes. The Twin Towers in the centre of futuristic Kuala Lumpur are the tallest in the world. 9/11 did not happen here, and the hotel security's main worry is Durian, strong-smelling fruit the tourists are prone to smuggle in, disregarding the "No Durian beyond this point" signs.

It is a peaceful land: one rarely sees a policeman or a soldier. There are no security guards in the shopping centres, no visible tension, no American troops or bases, no prostitution, gambling and narcotics. Evening open-air parties, much swimming in the warm sea, friendly chat, unrushed small trade: in short, a relaxing spot. How come ... why do they not fight, these people of different backgrounds?

The secret of the Malaysian success was given away by their Prime Minister, Dr Mahathir bin Muhammad, whom local newspapers affectionately call 'Dr M': "It is better to share a pie than to have all of no pie". In the 1960s, Malaysia was torn by strife, for the native rural Malays felt threatened by the economic success of the Chinese and Indian immigrants, city dwellers with a long tradition of market economy. Numerically, the natives were hardly a majority, rather a plurality, of citizens. Economically, they were nowhere. Riots were frequent, and destruction appeared imminent. A pie was there to share: mineral resources, oil deposits, tin and rubber, an educated work force, a relatively small population; but the same is true for many countries that nevertheless came to grief.

Where others failed, the Malaysians succeeded: they pursued a New Economic Policy (later called a New Development Policy), aimed to correct imbalances in agreement between the communities. That the pie of national economy should grow and the respective shares of the communities should be increasingly equalised was the idea of NEP and NDP. The prospering immigrant communities understood that disparity can ruin their good life, and agreed to affirmative action in the interest of the indigenous people. The indigenous Malays acquiesced to this relatively slow process.

The affirmative action is not too radical: a Malay student has priority if he wants to study medicine or business management, as before the NEP there were just a few Malay doctors, businessmen, administrators. The native Malay gets a five percent discount when he buys an apartment. Malay businesses have some small tax breaks. In new developments, the developers have to secure 10 percent of flats and houses for the Malays, in order to avoid ghetto formation. Malay is the national language, but there are street signs in Chinese and English; Islam is the state religion, but there is full freedom to practise other religions as well.

A guest from distant Palestine, I cried: Eureka! If we, Israelis and Palestinians, would learn from the Malaysian success, establish equality and take affirmative action to ensure a fair share for each community, Palestine would be at least as prosperous and happy as Malaysia. Even the notorious Jewish settlements would cause little irritation if their founders would ensure a fair share of Palestinian residents. (Nowadays, a Palestinian is not allowed even to tread on their fenced grounds.) Malaysia is an example to emulate. Let us follow the Malaysian way, erase partition, restore broken unity, return refugees home and live together happily ever after. Wealthy and privileged minorities can impose their will for a while, but in the long run, only agreement and fair sharing a la Malaysia will work.

Not only in Palestine: This is a general panacea against the malady of inequality and national strife. In the Twentieth Century, the Masters of Discourse promoted their own patent medicine: partition and transfer. Liberally applied in Greece and Turkey, on the Indian subcontinent, in the Middle East, in the Balkans and Eastern Europe, in the former Soviet Union, and this has already ruined half a planet. Nowhere had it improved things. Subcontinent Muslims I meet regret the day Pakistan was torn off India. From Tajikistan to Belarus people dream of returning of the Soviet Union. Hungarians and Czechs feel nostalgia for Oesterreich. Ravaged Smyrna, devastated Sudetenland and bleeding Palestine confirm that partition wounds do not heal for centuries, and that population transfer ensures future massacres. It should be undone.

The Malaysian way of integration had an alternative, the way of partition, and it was pursued by Singapore, a splinter Overseas-Chinese city-state at the tip of the Malay Peninsula. It has some similarities to the Jewish state: authoritarian rule, vast employment of foreign guest workers, aggressive stance towards their integrated neighbours. A great friend of Israel and the Far East base of Mossad, the Israeli intelligence service, Singapore is an important link in the global system of currency trading, an integral part of the New World Order, a supporter of the US and Australia. Singapore is better than Israel: it did not expel its native Malays, did not conquer the Peninsula, did not launch aggressive wars. It could be a free and peaceful city-state, but the dynamics of partition made it a potential source of trouble. By taking a leaf from Israel's book, Singapore declared its 'right' to wage war on Malaysia if the country hikes the price of the water it sells to the island.

Singapore poisons the minds of the Malaysian Chinese and encourages their immigration to the island. It is a very unnecessary thing, for the Malaysian Chinese community is well integrated in their country. In Penang, there is a Chinese Prime Minister, and, despite affirmative action, the Chinese retain commanding heights in the economy. What is worse, Singapore politicians try to influence decision-making of in the People's Republic, the economic giant with little political will of its own. It is proof that the evils caused by choosing the partition model do not stop at partition but have lasting, damaging effect on the world.

How the Malaysians did it

The ruling block of moderate nationalist Malays and its Chinese and Indian counterparts have managed the country since the 1960s, and Dr M, actually a medical doctor by profession, has served as the Prime Minister for over twenty years. Next year he will retire at the ripe age of 78. He came to power as a young radical and Malay nationalist, expressing the natives' disappointment over the too-slow progress in levelling economic misbalance between the communities. His victory scared the immigrant communities and made them more amenable to Malay demands. But Dr M carried out reforms gradually and gently. Under his rule, Malaysia became a prosperous industrial nation, a leader in computers as well as in traditional pursuits. Even more important, it is a rather happy land of contented people.

Malaysia rejected the Western idea of nation-state, as it accepted the many-coloured mosaic of its communities. They are not three, but rather thirty-three. The Chinese form many communities of various languages, cultures and religions. There are Cantonese, Swatow, Hakka, Hokkien, as distinct as Sicilians and Swedes. Indians are equally diverse: Muslim and Hindu, Punjabis, Tamils, Bengalis. The native Malays also form various tribes and ethnic units. The oldest inhabitants of the Peninsula, the orang asli or 'original men', Negroid tribes akin to Australian aborigines and Indian Dravidic people, still roam the jungles. Europeans and their descendents (of mostly mixed marriages) live in Malacca, Penang and Kuala Lumpur.

Malaysia rejected the idea of the 'melting pot' as well. Communities are not asked to integrate and assimilate; they are encouraged to keep their identity and may attend schools in their native tongues while keeping the same curriculum. They do not fall for the trap of multiculturalism, either. The uncomfortable part of multiculturalism as preached by New York is the removal of the backbone of the nation: the rejection of the original religion and culture of the majority. As I watched CNN on pre-Christmas days, I noticed their fear of actually referring to the Christian holiday without balancing it by an example of Hanukkah or Kwanza. Not so in Malaysia: there is a state religion and a state language, and tolerance of minorities.

Most importantly, Malaysia rejected the faith of Neo-Liberalism. Together with Castro and the Pope, Dr M is an outspoken critic of the Chicago School. He does not want to sell assets to the highest bidder, nor thereby to impoverish people and create a new class of super-rich. Food and housing are inexpensive and often subsidised. Dr M is not a socialist. He prefers a strong middle class, but he was taught enough Mencius (Mengzi), the Second Sage of Confucianism, to know of the obligation of rulers to provide for the common people.

The Neo-Liberalists tried to devour Malaysia. The Scourge of Nations, the Imperial Wizard[1] George Soros, a mysterious man with unlimited resources and strong ties to the Israeli intelligence service Mossad, who broke the Bank of England, ruined Taiwan, South Korea and Thailand, attacked Malaysia, too. His financial offensive wiped out ten years of Malaysian development and ten years of 20 million men's labour: a cool $30 billion of damage. The country would have been devastated but for Dr M, who slammed currency controls into place.

After the Soros plague, Malaysia asked for help from the IMF and the World Bank, and was told that aid is conditional upon acceptance of IMF rules, including lifting of currency controls. Ostensibly, that was the purpose of Soros's raid: to break the country, to send it running to the IMF and to turn it into a vassal of the New World Order. All nations that accepted IMF rules were ruined: from Argentina to Bulgaria, from South Africa to Russia.

Eduardo Galeano, the noted Uruguayan writer, in a recent interview, said: "Argentina did everything it was ordered to do by the International Monetary Fund and it's destroyed. The lesson is not to buy into IMF discourse, which leads not only to the extermination of national economies, but to horrific consequences that are not only economic. A discourse that not only translates into mass impoverishment and an offensive concentration of wealth, but into slaps in the face, the daily insults that are the ostentation of the power of the few, in the face of the helplessness of the many... It discredits democracy. Nowadays, it is identified with corruption, inefficiency, injustice, which is the worst thing that could happen to democracy. Another tremendous injury is the great damage that the culture of solidarity has suffered all these years. Right now the predominant culture is that of "every man for himself", and if you fall, you're screwed.

The new name for the financial dictatorship is the "international community"; anything that you do to defend the little that remains of your sovereignty is "an attack against the international community", rather than an act of legitimate defence against the usury practiced by the banking system that rules the world, in which the more you pay, the more you owe. That is why in a country like Argentina everything has been dismantled: the economy, the state, the collective identity of a people who no longer know "who they are, from where they came or where they are going.".

The stubborn old man, Dr M refused to accept the IMF diktat, and Malaysia retained its prosperous independence. It did not go under as Russia and Argentina, because its ruler was a determined man who deeply felt his solidarity with his people. But it was not an easy feat: Dr M had to fight a to-the-last-man-standing battle with his Deputy Prime Minister, Anwar Ibrahim, the IMF supporter in Kuala Lumpur. Anwar Ibrahim used the Soros-inflicted depression and stirred unrest. A weaker man, a Gorbachev, would have collapsed and vacated his seat, plunging the country into chaos. Dr M is made of sterner stuff: he deftly dealt with the Neo-Liberal by using some old and not-too-liberal laws against homosexuality. That was a correct if difficult decision: In similar vein, the Americans had sent Al Capone to jail on a trumped-up charge of small tax evasion, as they could not make other charges stick. An IMF supporter is no better than a gangster.

However, for many Malaysian intellectuals this was a traumatic experience: they would have preferred correct results to be obtained by correct means. "Dearie, don't we all! But we can't put 'IMF support' into the penal code", I said to them. "The ruler has a duty to his people to protect them from neo-liberal wolves, and this obligation precedes his personal ethics".

Soros retained a menacing presence in Malaysia. He paid for a Web magazine and repeatedly tried to buy a newspaper to brainwash Malaysians, as he does elsewhere, notably in Russia. In a Kuala Lumpur hotel, I met Malaysian fellow journalists who expectedly complained about another very non-Western Malaysian precept, that of government-controlled media. This would have been an embarrassing moment for me if I had not heard this complaint twelve years ago, in the offices of Russian newspapers. The Russians had no Dr M of their own; they privatised their media. It was snatched up by a bunch of moguls and turned into subversion tools against Russia. Now, almost all Russian media belongs to a galore of Israeli citizens.

That is why I told my Malaysian colleagues: "Sorry, guys. If you had had it your way and made your newspapers and TV independent of government, you would have had a lot of fun for a whole week. One week later, your media would have been bought by George Soros, the man who preaches of the advantages of open society to oysters. As long as a wolf roams outside, a clever sheep sticks to its shepherd".

This week, Dr M had an unexpected reason for joy: a French court found Soros guilty of insider trading. Its small fine of $2 million means little for a man who makes $1 billion a day, but it is satisfying to see him branded a thief. I would not be amazed to learn that the terrible excesses of the Zionists in Palestine were arranged as a diversion of attention away from their Globalist brethren. While Zionists ruin a village, Soros and the IMF ruin a country.

Together with Castro, Dr M understood that the source of their power lies in the overvalued US dollar. Since 1972, the US freely issued green bucks no longer tied to gold. This financial swindle, the biggest in the history of mankind, brought enormous wealth to some people, and ruined a lot more. That is why Malaysia is the brain and the engine of an ambitious plan to create a stable currency, the golden Dinar. It is also called the 'Islamic Dinar', as Islamic Law forbids usury and interest, and the Dinar will bear zero interest. (A similar step was taken by Solon the Wise in Sixth Century BC Athens: he cancelled debts, zeroed interest and made people free. A hundred years later, Athens ushered in its Golden Age.) This year, the Dinar will become the currency to settle deals between Malaysia and some Arab countries.

Currency trading, the pet tool of Soros, should be banned, thinks Dr M:

The traders sell huge sums of currency they do not have to buyers who are members of the same circle. The buyers in turn sell this fictitious currency to others, force down the value and buy at the depressed prices. Short selling has been taken to the ultimate level. The currency trading is many times bigger than total world trade.

The New World Order has in Dr M a most outspoken enemy. He views it as a continuation of old colonialism by new methods:

Free trade had always been the war cry of the Europeans. In the 19th century they used gunboats to open East Asia for trade. They went to war when they were not allowed to supply opium to China. Now, the gunboats have disappeared, but the pressures are no less effective. An occupation army cannot colonise more effectively than the economic arm-twisting used by the West. Now international institutions are used to open up the countries for 'free trade'. Once the countries are opened up, the big corporations and banks would move in, and the locals will be swallowed up.

Dr M has not mellowed with years. His thinking has become even more striking and extraordinary. While visiting Japan, he called upon the Japanese to reject the Western model as it is sure to ruin their achievements:

Japanese system worked very well for the Japanese. It made Japan the second most powerful economy in the world. It may not be the Western way, but it can't be all wrong if it can achieve so much.

In Dr M's view, Japan should return to strong government involvement in economy, and take up its leading role in Asia, for "East Asia and the world need Japan, its dynamism and its single-minded dedication". For Dr M, as for many important politicians in Asia, WWII was not a war between ultimate good and ultimate evil. "The success of the Japanese army in the early days of the war finally broke the spell cast by the Europeans. East Asians learned that their European overlords could be defeated". Similar sentiments are voiced in Iran and in Arab countries, where anti-British resentment brought nationalist leaders to seek help of the Axis Powers.

Malaysia is an 'alternative' country where many Western ideas were found wanting and were rejected. We are used to frequent changes of prime ministers and presidents and see it as a success of democracy. But Dr M, this benevolent king-philosopher in Plato's mould, disagrees. It takes many years for policies to produce fruits, he says. First year in power, the ruler learns to be addressed and to address others properly. Next year, he forms his opinions. Then he makes decisions, and only in a few years can we judge his decisions properly. He succeeded because he had enough time, he says.

This idea is unusual for us, but as the matter of fact, three of the most charismatic and extraordinary statesmen of our days, Dr M, Dr Fidel Castro and the Pope, persist in power for tens of years with great success. Commercial companies, nowadays as powerful as any state, also do not change their helmsmen without urgent need.

Surely, if a statesman like Dr M were to lead Japan, (or China, or Russia, or, indeed, the EU) the world would be different. Many things have changed since WWII, and Europeans, together with ordinary Americans, are now experiencing the brunt of the same policies Asia suffered in its colonial past. 'The Open Society' has become the tool for robbery brought home, as the New World Order is the colonisation of Europeans and Americans by their new financial elite.

Dr M is a strict opponent of the American War on Terror. For him, "terrorism never dies until the causes for terrorism are eliminated". He speaks against the impending Anglo-American aggression in Iraq, he refuses to accept the rant of 'Islamic terror'. Dr M supports the much-suffering people of Palestine without the caveats usually produced by his meek-hearted colleagues in Europe. His voice is heard, for Malaysia has not surrendered its discourse to its enemies.

Malaysia reminded me of Cuba, the Island of Freedom in the Caribbean Sea. It is also an alternative society where highly educated men map a different future for mankind, for "today's world is in shambles. The abuses of the free trade system, the unlimited greed of speculators, have resulted in the world losing its way", in the words of Dr M. Similar ideas are expressed in Castro's speeches. The two politicians met a few times and expressed mutual admiration, despite their huge ideological differences: Castro the Communist and Dr M the Nationalist. In Cuba and in Malaysia, one can read a newspaper or watch TV without nausea. These two small countries have much for us to learn from.

* * *

Penang, Malaysia, is home to some of the best NGOs, notably the Third World Network, Consumers' Society, Citizens International and Taiping Peace Initiative. Their brilliant gurus, Dr Idris Mohammed, Dr Rajamurti and Anwar Fazal amazed me with their knowledge and devotion to mankind, and shared with me their insights. I am most grateful for their guidance and assistance. I would also like to thank Dr Alijah Gordon, the American writer who made Malaysia her home, and Dr Hishamuddin Ubaidullah, the chairman of Deir Yassin Remembered in Malaysia. For the local Chinese opinion I am indebted to Mr To, a Minister of the Penang Government. I am grateful to the hospitable people of Malaysia and their Prime Minister, Dr Mahathir Mohammad, for showing a possible solution to the problems of Palestine.

Source:
http://www.israelshamir.net/English/malaysiansolution.htm

Tuesday, June 3, 2008

Soros: Euro Cannot Become Main Reserve Currency

Soros: Euro Cannot Become Main Reserve Currency
By Reuters | 17 Apr 2008
The euro cannot replace the dollar as the world's main reserve currency, and a system of two reserve currencies would be unstable, billionaire investor George Soros said on Thursday.

"I don't think the euro can replace the dollar, and a system with two major reserve currencies is not a stable system," Soros said.

The euro has surged to record highs against the U.S. currency as the U.S. economy is seen going into recession.

"What we have now is a period of instability and heightened uncertainty," Soros said.

He was in Brussels to promote his latest book, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means."

It was still a time of wealth destruction, Soros said, and he advised investors to find ways to preserve capital until it was clear how the authorities and markets would respond.

He said the main lesson from the current financial market turmoil was the need to control credit and not just money supply, and added that markets were not yet out of trouble.

"There is a commodities bubble still in the growth phase while other bubbles are being deflated," Soros said.

Soros said a key remedy to the current crisis of confidence among banks would be to move trading in complex securitised products such as collateralised debt obligations and swaps onto exchanges to boost transparency in counterparty risk.

"It would be desirable to regulate it. You need to have transparency on excessive use of leverage by participants. The root of the trouble is excessive leverage based on failure to recognise the uncertainty inherent in the system," he said.

Soros said hedge funds needed to be regulated like other market participants, with banks having better information about the amount of leverage hedge funds used.

"Banks need to have more reserves when lending to hedge funds," Soros said.

Soros Likens Oil Bubble to 1987 Crash

Soros Likens Oil Bubble to 1987 Crash
FT
By CNBC.com | 03 Jun 2008

Billionaire investor George Soros will warn U.S. lawmakers Tuesday that a crash similar to the one in 1987 was not to be excluded, as "a bubble in the making" is under way in oil and other commodities, the Financial Times reported on its Web site.

Rising oil prices are due to a number of fundamental changes and factors in the market, but the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises, Soros is expected to say when he speaks in front of the Senate's Commerce Committee at 10 am New York time.

George Soros
George Soros

"I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987," Soros will say, according to a draft text seen by the FT.

"In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash," the draft remarks said.

The comments by Soros, chairman of Soros Fund Management, a $17bn hedge fund, are likely to fuel a debate about the role of speculators -- including hedge funds, pension funds and other institutional investors -- in the rising costs of energy and food, the FT said. The fund declined to comment on its specific market positions.

Commodity indexes are not a legitimate asset class for institutional investors, and commodity index investing should be discouraged, Soros is expected to say, but that a crash in the oil market is "not imminent".

"When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared," his prepared remarks say, according to the FT.

Thursday, May 29, 2008

A successful prophet of the markets

By John Authers

Published: May 19 2008

This was a book that George Soros badly wanted to write. It is probably
not what many of its readers expect to read. But it shows that in his
deeper thinking about the way markets operate, Soros was several decades
ahead of his time.

The New Paradigm for Financial Markets includes Soros' verdict on the
credit crisis. He thinks, as has been widely reported, that it is the
most severe since the 1930s, and that it marks the end of a 25-year "era
of credit expansion based on the dollar as the international reserve
currency".

He also offers some solutions, which centre on new regulation for
markets, and how to avoid forced sales for US homeowners. A highly
entertaining diary recounts his investment moves in the first three
months of this year, culminating with the confusion surrounding the fire
sale of Bear Stearns.

His insights are clear and concisely expressed. They are worth reading
for anyone interested in the topic. But what is most interesting, and
obviously engages Soros at an emotional level, is the idiosyncratic
philosophy he has developed to explain the metaphysics of how markets
work. Even before the emergence of the efficient markets hypothesis,
which has dominated academic thinking on markets for at least three
decades, Soros had devised his own theory to prove markets were not
efficient. He acted on this philosophy as an investor with spectacularly
successful results.

That philosophy derived from his undergraduate studies at the London
School of Economics under Karl Popper. The "relationship between
thinking and reality", Soros calls "reflexivity." It fills the book's
centre in chapters which he admits many will find "heavy going". In
markets, Soros says, participants' thinking plays a dual function: they
try to understand the situation (the "cognitive function"), and to
change it (the "manipulative function"). The two functions can interfere
with each other; when they doso the market displays "reflexivity".

So an investor's misperception of reality can help to change that
reality, begetting further misperceptions. When market actors' decisions
affect outcomes, patterns emerge. If a lot of people are bullish about
internet stockstheir price goes up. Soros used the theory to predict,
and profit from, a series of "initially self-reinforcing but eventually
self-defeating boom-bust processes, or bubbles". Each bubble "consists
of a trend and a misconception that interact in a reflexive manner".

A key implication of this is that markets do not tend towards
"equilibrium", as predicted by modern portfolio theory. And they will
not move in the "random walk" promulgated by efficient markets theory,
which holds that prices always incorporate all known information and so
move randomly in response to new information.

This is important, as the architecture of modern capital markets depends
on these theories.And it begins to look as though the credit crisis was
the tipping point at which academics and practitioners decided a new
paradigm was needed to replace the efficient markets hypothesis.
Alternative theories borrow from experimental psychology, advanced
mathematics and evolutionary biology and have been built in response to
experience in the markets.

The theory of "adaptive markets" - that markets follow trends until they
become overblown and then start building up other trends - seems to be
gaining ground as an alternative paradigm. Soros' title is a bid for his
own theory of reflexivity to become the new paradigm. What is
fascinating is how much modern thinking is in line with the theory he
developed decades ago.

How does it help explain the credit crisis? Soros believes that a "super
bubble" has been formed as the result of a "long-term reflexive process"
over the last 25 years. Its hallmarks include credit expansion (boosted
by the belief that inflation has been vanquished), and a prevailing
misconception, which Soros unsurprisingly blames on Ronald Reagan and
Margaret Thatcher, that markets should be given free rein.

There have been numerous financial crises in this period. According to
Soros, these "served as successful tests which reinforced the prevailing
trend and the prevailing misconception". Thus the current crisis grows
in severity because it marks "the turning point when both the trend and
the misconception have become unsustainable".

Many will dislike Soros' politics. Others will find the book
self-indulgent. He calls himself a "failed philosopher" and badly wants
his theory to reach a broader public. It is hard to imagine it would
have been published were he not so famous and successful. But his
restless intellectual curiosity commands respect. So does his ability to
foresee the debate in theoretical finance. He may have been a failed
philosopher, but he was a successful prophet.

The writer is the FT's investment editor

Thursday, May 22, 2008

Soros says rebound a bear-market rally

Soros says rebound a bear-market rally

Thu May 22, 2008
By Laurence Fletcher

LONDON (Reuters) - Billionaire hedge fund manager George Soros said on Wednesday the current rebound in stock markets is only a bear market rally because monetary authorities are unlikely to be able to handle the credit crisis.

Soros told a seminar at the London School of Economics, "The prevailing market opinion is that this crisis is like previous ones. ... Markets have been rallying on that. But I think it's actually just a bear market rally based on a false conception the authorities can handle all these crises.

"This time the ability of the authorities to handle the crisis is constrained -- they'll not be able to avoid a recession," he said.

His comments come after a rebound in global stock markets, helped by the takeover of U.S. investment bank Bear Stearns (BSC.N: Quote, Profile, Research) in March by JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), which averted a feared Bear bankruptcy. The FTSE 100 .FTSE, for example has risen from less than 5,500 in March to around 6,200 currently.

Hungarian-born Soros, famous for a speculative attack on the Bank of England that made him more than $1 billion, said that while it was unlikely the global economy would head into a Japan-style downturn, a pick-up in growth at the end of this year was similarly unlikely.

"Certainly the idea that the economy is going to recover (at the end of this year) is totally unrealistic," he said.

According to Alpha Magazine, Soros earned $2.9 billion (1.5 billion pounds) last year after his Quantum Endowment fund returned 32 percent.

Friday, April 25, 2008

The Soros Solution

As any reader of this space may be able to tell by now, I’m a big fan of bailouts. Some believe that the markets should go through the pain of what they have wrought on themselves in order to come out the other side cleaner, stronger, faster. Not me. If there’s an easy way out, I’m for it.

I liked it years ago, when they bailed out Chrysler. And when the S&Ls needed help? That was a terrific one, wasn’t it? Countrywide (CFC)? Same deal! Why not? And when BenCo moved to… I’m not sure “help” is the right word… whatever they did to Bear Stearns (BSC), I was all for it, too.

Coming up, if and when Fannie Mae (FNM) and Freddie Mac (FRE) sink to their pretty knees under the weight of all those loan guarantees, I’ll be right there to support the first trillion dollar bailout ever! A new record — until the next one.

The tsunami of assistance being offered to institutions large and small is always explicated in the same terms: This is the way that the larger eco-system can make sure that smaller fry aren’t destroyed when the big fish get caught in the net of destruction. By helping the large, we are protecting the small. Right. I get that.

Destruction is never the best option, even if comfortable and sometimes nasty people prescribe it for the good of the system. If stuff can be saved with money, well, that’s what money is for, I think. This is possibly why, when I’m personally depressed, I always help my emotional infrastructure with the expenditure of disposable income. This in turn improves the economy and creates the need for new mercantile establishments, like the Container Store, to contain my effluvia. Money may not be able to buy happiness permanently, but as a short term solution to all kinds of problems it really can’t be beat.

This emphasis on top-down help, however, does have its limits if you look at it hard enough. Why are the big always propped up when the small are allowed to get flushed into the drink? Those who raise such questions are often accused of naivete, which is to be distinguished from the outright stupidity that smart people seem to have suffered while creating our current debacle. The risk managers, hedge fund moguls, debt-mongers and analysts may have been the idiots who got us into this. But they don’t stop giving advice, and they’re not naive enough to think that helping little folks can do anything to protect their packages.

This is why it’s refreshing to see someone who has some success in the financial arena articulate what to many might seem a simple, naive and hopelessly humanistic idea. Enter George Soros, cited in the May 15 edition of the New York Review of Books. Here’s what the always opinionated and controversial Mr. Soros had to say when Ms. Woodruff asked him how long the housing crisis was going to last:

“Well, it depends on when the authorities wake up, because you need to reduce the number of foreclosures. You need to keep as many people as possible in their houses so that they don’t come onto the market. You need to arrest the decline in house prices, but you also need to prevent human suffering and social disruption because it’s going to be very, very severe. Certain communities are already hurting and it’s going to get a lot worse. So action will have to be taken, but I don’t think it’s going to happen during this administration.”

Wow. Preventing suffering. Keeping people in their homes. Trying to work from the bottom up to save the system from the mistakes of its proprietors?

Nah. Not this gang.

Let’s just bail out another big loser, shall we?

Wednesday, April 9, 2008

George Soros warns against optimism about US recovery

George Soros warns against optimism about US recovery

10 April, 2008
Some investors are treating the fire-sale of fifth largest US investment bank Bear Stearns as though this marks the end of the financial crisis, rather than a further step downwards. Last week legendary investor George Soros published a new book warning that US stocks may not bottom out for another year.

George Soros is warning that US stocks have a way to fall yet

His book is an elaboration of an ongoing thesis about the decline of the US economy, and the recession predicted as long ago as January 2006 by Soros.

'We are in the midst of the worst financial crisis since the 1930s,' he writes in 'The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means'. 'The United States is facing both a recession and a flight from the dollar. The decline in housing prices, the weight of accumulated household debt, and the losses and uncertainties in the banking system threaten to push the economy into a self-reinforcing decline'.

Soros is shorting US and European stocks, the dollar and 10-year Treasuries, preferring non-US currencies and equities in China, India and the Gulf States. That should be a comfort to Gulf investors tired of waiting for local currency revaluations or dollar de-pegging, and concerned about the poor performance of Gulf stock markets so far this year.

US relief rally

But Soros thinks that any US stock market relief rally that now follows the Bear Stearns fire sale is going to be just that. It could be another year before capital markets really hit rock bottom.

The next shoe to drop could be credit default swaps, or CDSs, a synthetic financial instrument or derivative used as an insurance policy against debt defaults.

'This is a totally unregulated market hanging like a Damocles sword over the financial system,' Soros told reporters last week 'You don't know whether your counterparty is good for its payment or not.'

Soros pointed to an unregulated $45 trillion CDS market that has become separated from actual hedging against defaults. 'People who have these contracts need to know whether or not the counterparties are good or not, and you will only know that when you know who the counterparties are,' he said, adding that the amount invested in this derivatives market is around half the entire US household wealth.

Derivatives crisis

CDSs sound obscure but then who had heard of sub-prime mortgage securities before they blew up last August? Few outside the industry, and then only an even smaller number appreciated what the downside might be.

Perhaps the man who broke the bank of England in late 1992 with his bet against sterling, and who spotted the US housing problem two years ago is right again. The derivatives problem in the financial system threatens a structural crisis of immense proportions.

In the meantime, any US equity rally should be used to sell stocks and reallocate capital to safe havens like Gulf currencies and stocks and precious metals. Whether Soros is right about Chinese and Indian equities after the huge falls seen in recent months remains a more controversial call.