Tuesday, March 31, 2009

UK Times: George Soros Sees Global Meltdown

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It is interesting how the farther we go along the more negative George Soros gets, which is the opposite of many others. While he admits he was behind the curve at first, he retooled during 2008, and his bearishness is now growing by leaps and bounds each story I read about him. He must be talking a lot with his buddy Jim Rogers ;) (I'll have an extended Rogers video out tomorrow) Actually there are some themes below that were discussed in The Atlantic piece we posted this weekend; mostly denial by the powers that be of what exactly is going on.

One could dismiss Soros as an outlier at this time, but I guess we'll find out in a few years. I have been and remain in the camp *this* is a secular change, and the "new normal" will be a different animal ... just as those who first dismissed (a) a recession was even happening and then morphed into (b) believing it was the old school type of corporate led recession ala early 90s and early 00s - were eventually proven wrong.... I do believe those who believe this will be a typical rebound, will also be proven wrong. But just as I posed theories (a) and (b) were incorrect while the herd was running in the opposite direction, I'm in the same situation now with my ideas of what the recovery will be shaped like. [Dec 15, 2008: The Economic "Recovery"] Time will show if I am 3 for 3.

But in the interim, we'll trade some near term problems for even more epic long term problems - and get our sugar high from money (which we don't have) thrown from every direction by government...

Via UK Times
  • George Soros was 13 when the Nazis invaded his homeland of Hungary. As a Jew, he was forced to adopt a false identity and live separately from his parents in Budapest. Instead of being traumatised by the experience, though, he found the danger exhilarating. “It was high adventure,” he says, “like living through Raiders of the Lost Ark.”
  • Sixty-five years later, he still thrives on danger. He famously made $1 billion on Black Wednesday by shorting the pound, earning him the label of “the man who broke the Bank of England”. Last year, as the world tipped into financial chaos, Mr Soros pocketed another $1.1 billion by correctly predicting the downturn. “I’m an expert in crises,” he says.
  • Since 1944 he has believed in what he calls “reflexivity” – the idea that people base their decisions on their own perception of a situation rather than on the reality. (I would have to agree with that) He has applied this both to investment and to politics: his skill has been to predict moments of seismic change by identifying a disjunction between perception and reality.
  • When everyone else was convinced that the markets would automatically correct themselves, the 78-year-old “old fogey”, as he calls himself, was one of the few warning of recession. He put all his chips on “the Barack guy” early on when all around him were still gunning for Hillary Clinton.
  • This recession, he explains, is a “once-in-a-lifetime event”, particularly in Britain. “This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life. On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed.”
  • The financial oracle does not know how long it will last. “That depends on how it’s handled. Allowing Lehman Brothers to fail was the game-changing event. That’s when the financial crisis went over the brink.” We could end up with a depression. “Unless we handle it well then I think we would. The size of the problem is actually bigger than in the 1930s.”
  • The problem in Britain, he believes, is in many ways worse than in America or Germany. “American memory is seared by the Depression, the German memory is seared by hyperinfla-tion but Britain has a pretty serious problem in many ways worse than America because the financial sector looms bigger and the overvaluation of real estate is bigger than in America.”
  • He is not worried that an auction of government bonds failed this week – “that was a blip”, he says. He would still buy British bonds – “it depends on the price” – but he agrees with Mervyn King, the Governor of the Bank of England, that debt is a real problem. It will, he says, put people off investing in Britain. “I think it will have an effect, yes. It is a matter of worry because effectively the hole in the banking system is replaced by increasing the national debt.” There has been some talk that Britain might have to go cap in hand to the International Monetary Fund. “It’s conceivable,” Mr Soros says. “You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt . . . if the banking system continued to collapse, it’s a possibility but it’s not a likelihood.”
  • Is the euro under threat? “There is stress in the euro because of the differential in the interest rate that the different countries have to pay,” he replies.
  • He does not, however, blame Gordon Brown. “He underestimated the severity of the problem, but then so did most people. Part of the perceived role of a leader is to cheerlead, so you can’t really blame him for that.”
  • He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. “I have always understood how normal rules may not apply at all times,” he says.
  • In recent years he has been arguing against “market fundamentalism” – “the accepted theory was that markets tend to equilibrium”. He believes that the credit crunch has proved him right. “It reminds me of the collapse of the Sovi-et system, events are always exceeding people’s understanding. The situation is out of control. There’s a shortage of time to adjust to the change. Change is accelerating.”
  • Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. “Everybody who realised that this was unsustainable expected it to collapse much sooner,” he says. “It is so devastating exactly because it took so long.”
  • The urgent task now, he says, is to realise that the system that collapsed was flawed. “Therefore you can’t restore it. You have to reform it.He worries that politicians have not yet accepted the need for fundamental change and that “a lot of bankers have their head in the sand”.
  • The G20 summit in London next week is, he says, the last chance to avert disaster. “The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”
  • If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”
Allrighty then.

[Feb 23, 2009: George Soros - This is the End of the Free Market Era; Situation Similar to Disintegration of Soviet Union]
[Jan 28, 2009: Roubini & Soros on Bad Bank]
[Apr 9, 2008: Soros Believes Global Subprime Costs to Reach $1 Trillion]
[Jan 22, 2008: Soros Says World Faces Worst Financial Crisis Since World War II]

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