http://www.cnbc.com/id/15840232/?video=1598887347
http://www.cnbc.com/id/15840232/?video=1598913851
Monday, September 27, 2010
Monday, December 14, 2009
Soros Sure Greece Won't Be Allowed to Default
Soros Sure Greece Won't Be Allowed to Default
Reuters| 10 Dec 2009 | 06:18 AM ET
Billionaire investor and philanthropist George Soros said on Thursday he was sure the Greek government would not be allowed to default on its debts despite growing budgetary difficulties and market concerns.
"There has to be pressure on Greece to put its house in order but I'm sure that Greece will not be allowed to default. The same applies to the United Kingdom," Soros told Sky News television.
Soros said there were heightened market concerns about sovereign defaults around the world following the recent debt restructuring proposal for Dubai's leading companies.
But he said the chances of such a default were remote.
"There are concerns about sovereign defaults but it is a rather remote one. Dubai shook the world for a day because it raised the spectre of sovereign defaults," Soros said, adding the Dubai problem was an issue of Abu Dhabi seeking a more independent financial position from the Dubai emirate.
Fitch Ratings cut Greece's debt rating to BBB+ on Tuesday with a negative outlook — the first time in 10 years a major ratings agency has put Greece below an A grade — citing fiscal deterioration in the euro zone's weakest member.
The move hit bank shares, bonds and the euro.
http://www.cnbc.com/id/34359834
Reuters| 10 Dec 2009 | 06:18 AM ET
Billionaire investor and philanthropist George Soros said on Thursday he was sure the Greek government would not be allowed to default on its debts despite growing budgetary difficulties and market concerns.
"There has to be pressure on Greece to put its house in order but I'm sure that Greece will not be allowed to default. The same applies to the United Kingdom," Soros told Sky News television.
Soros said there were heightened market concerns about sovereign defaults around the world following the recent debt restructuring proposal for Dubai's leading companies.
But he said the chances of such a default were remote.
"There are concerns about sovereign defaults but it is a rather remote one. Dubai shook the world for a day because it raised the spectre of sovereign defaults," Soros said, adding the Dubai problem was an issue of Abu Dhabi seeking a more independent financial position from the Dubai emirate.
Fitch Ratings cut Greece's debt rating to BBB+ on Tuesday with a negative outlook — the first time in 10 years a major ratings agency has put Greece below an A grade — citing fiscal deterioration in the euro zone's weakest member.
The move hit bank shares, bonds and the euro.
http://www.cnbc.com/id/34359834
Monday, December 7, 2009
Reality check
Reality check
By John Authers
Published: December 3 2009 19:10 | Last updated: December 3 2009 19:10
Is this recovery real? And if not, would it make any difference?
George SorosThe trade of financial economics has taken a bruising after the many surprises of the past two years, but a more ancient discipline is coming back into focus: philosophy. In the vanguard is George Soros, one of history’s most successful hedge fund managers – and someone who prefers to judge himself as a failed philosopher.
Philosophers have long wrestled with the concept of perception: how the “real” world corresponds to our perceptions of it, or whether it even makes sense to say there is something “real” out there.
Most of us tend to dismiss such questions as sophistry. Soros, on the other hand, has wrestled with the problem since he was a student. And he may have the last laugh, because he appears to have turned the philosophy of reality into a way to make money.
Soros’s guiding principle, as outlined in his book*, concerns “reflexivity”: how our perceptions of the world, as expressed through buying and selling, change the world itself. When markets become “reflexive”, they reflect flawed perceptions rather than a prior “reality” – but the market’s version of “reality” is no less real because of that.
Soros’s key principles are first that “market prices always distort the underlying reality which they are supposed to reflect”; and second, that “instead of playing a purely passive role in reflecting an underlying reality … markets also have an active role: they can affect the so-called fundamen-tals they are supposed to reflect”.
Reflexive markets can turn into bubbles. And bubbles can turn into opportunities to make money for those like Soros, who have the self-discipline to invest in an incipient bubble and get out before it bursts.
Armed with Soros’s insight, the question of whether we should believe in the current market rebound looks different. Last year’s collapse rested on confidence. Oil prices, for instance, grew so high that they put pressure on the economy and forced companies to change their output decisions.
However, this year, numerous market factors have reinforced an impression of a recovery. That, in turn, has made it easier to do business and precipitate an “actual” recovery.
Markets had sold off so much that only a slight change in perception moved them dramatically. To make money this year was to understand the market “reality” that investors’ perceptions would create, rather than focus on an apparently separate “fundamental” reality, which followed macroeconomic rules that still saw evidence of high unemployment and lingering bad debt.
Once oil prices and Chinese shares moved upwards, this was evidence the “real” world was recovering. Once credit markets recovered, it became cheaper for companies to raise finance, and that in turn gave good reason to buy equities – and to buy other credit, as it could now be seen there were buyers out there prepared to buy debt. In this way, perceptions of reality led to a different reality.
If this really is an incipient bubble – and the fact it relies on artificially cheap money from the government certainly reinforces that impression – how will we know when it has become a true bubble and when will it end?
Again, Soros has a theory. “Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend,” he says. A boom and an eventual bust are set off “when a trend and a misconception positively reinforce each other”.
Eventually, “market expectations become so far removed from reality that people are forced to recognise that a misconception is involved”. As doubts set in, “a point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction”.
World stock markets peaked in 2007 after a sudden sell-off in the bond market. Bond investors decided the rosy assumptions in other markets simply could not happen without higher inflation, and reacted accordingly. The trend was reversed. A long bear market turned into a savage sell-off once the commodity market went into reverse, again collapsing under its contradictions, and then the bankruptcy of Lehman Brothers, the US investment bank, administered a nasty dose of reality.
Some geopolitical event, or a corporate incident like Lehmans’, could bring this rally to an end. Otherwise, it is best to look at the bond and foreign exchange (forex) markets. If forex traders revolt against the huge volume of extra bonds being issued to fund the deficit, that could push up interest rates and end the rally. Or, similarly, if the run on the dollar gets to the point where many countries feel their own currencies are overvalued, and therefore take action, this rally could come to an end.
http://www.ft.com/cms/s/0/c6b6e9ce-d965-11de-b2d5-00144feabdc0.html?nclick_check=1
By John Authers
Published: December 3 2009 19:10 | Last updated: December 3 2009 19:10
Is this recovery real? And if not, would it make any difference?
George SorosThe trade of financial economics has taken a bruising after the many surprises of the past two years, but a more ancient discipline is coming back into focus: philosophy. In the vanguard is George Soros, one of history’s most successful hedge fund managers – and someone who prefers to judge himself as a failed philosopher.
Philosophers have long wrestled with the concept of perception: how the “real” world corresponds to our perceptions of it, or whether it even makes sense to say there is something “real” out there.
Most of us tend to dismiss such questions as sophistry. Soros, on the other hand, has wrestled with the problem since he was a student. And he may have the last laugh, because he appears to have turned the philosophy of reality into a way to make money.
Soros’s guiding principle, as outlined in his book*, concerns “reflexivity”: how our perceptions of the world, as expressed through buying and selling, change the world itself. When markets become “reflexive”, they reflect flawed perceptions rather than a prior “reality” – but the market’s version of “reality” is no less real because of that.
Soros’s key principles are first that “market prices always distort the underlying reality which they are supposed to reflect”; and second, that “instead of playing a purely passive role in reflecting an underlying reality … markets also have an active role: they can affect the so-called fundamen-tals they are supposed to reflect”.
Reflexive markets can turn into bubbles. And bubbles can turn into opportunities to make money for those like Soros, who have the self-discipline to invest in an incipient bubble and get out before it bursts.
Armed with Soros’s insight, the question of whether we should believe in the current market rebound looks different. Last year’s collapse rested on confidence. Oil prices, for instance, grew so high that they put pressure on the economy and forced companies to change their output decisions.
However, this year, numerous market factors have reinforced an impression of a recovery. That, in turn, has made it easier to do business and precipitate an “actual” recovery.
Markets had sold off so much that only a slight change in perception moved them dramatically. To make money this year was to understand the market “reality” that investors’ perceptions would create, rather than focus on an apparently separate “fundamental” reality, which followed macroeconomic rules that still saw evidence of high unemployment and lingering bad debt.
Once oil prices and Chinese shares moved upwards, this was evidence the “real” world was recovering. Once credit markets recovered, it became cheaper for companies to raise finance, and that in turn gave good reason to buy equities – and to buy other credit, as it could now be seen there were buyers out there prepared to buy debt. In this way, perceptions of reality led to a different reality.
If this really is an incipient bubble – and the fact it relies on artificially cheap money from the government certainly reinforces that impression – how will we know when it has become a true bubble and when will it end?
Again, Soros has a theory. “Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend,” he says. A boom and an eventual bust are set off “when a trend and a misconception positively reinforce each other”.
Eventually, “market expectations become so far removed from reality that people are forced to recognise that a misconception is involved”. As doubts set in, “a point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction”.
World stock markets peaked in 2007 after a sudden sell-off in the bond market. Bond investors decided the rosy assumptions in other markets simply could not happen without higher inflation, and reacted accordingly. The trend was reversed. A long bear market turned into a savage sell-off once the commodity market went into reverse, again collapsing under its contradictions, and then the bankruptcy of Lehman Brothers, the US investment bank, administered a nasty dose of reality.
Some geopolitical event, or a corporate incident like Lehmans’, could bring this rally to an end. Otherwise, it is best to look at the bond and foreign exchange (forex) markets. If forex traders revolt against the huge volume of extra bonds being issued to fund the deficit, that could push up interest rates and end the rally. Or, similarly, if the run on the dollar gets to the point where many countries feel their own currencies are overvalued, and therefore take action, this rally could come to an end.
http://www.ft.com/cms/s/0/c6b6e9ce-d965-11de-b2d5-00144feabdc0.html?nclick_check=1
Monday, September 14, 2009
Jim Rogers on China's stocks: not the time to buy
Jim Rogers on China's stocks: not the time to buy
September 11, 2009
China's shares nearly doubled this year, and then plummeted 20 percent within a month. Reports asked investment guru Jim Rogers when is a good time to buy China stocks while he was attending the China International Financial Services Conference (CIFSC) held in Guangzhou on September 10.
Rogers says since 1999, he bought shares of China, and has never sold them. He believes that after ten years China stocks will still be rising, but at the same time he has sold all stocks from the other emerging market countries.
Last year in October, he bought shares in China again. But the Chinese stocks he bought were H-shares, B shares, and S shares. He has never bought A shares, since the A shares are too expensive, and perhaps one day, China's H shares, B shares, S shares and A shares will merger as one kind of stocks.
If signs of collapse appear in China's stock market, he would buy more Chinese stocks. He thinks this may occur in the near future, but not now, because although China's stock market is making adjustment, no one is selling Chinese shares in large quantities. Besides, China's stock market rose 80 percent in the past six months, prices have been too high, and I will not buy Chinese stocks at this time. After a year or two, I would consider buying Chinese stocks again.
By People's Daily Online
September 11, 2009
China's shares nearly doubled this year, and then plummeted 20 percent within a month. Reports asked investment guru Jim Rogers when is a good time to buy China stocks while he was attending the China International Financial Services Conference (CIFSC) held in Guangzhou on September 10.
Rogers says since 1999, he bought shares of China, and has never sold them. He believes that after ten years China stocks will still be rising, but at the same time he has sold all stocks from the other emerging market countries.
Last year in October, he bought shares in China again. But the Chinese stocks he bought were H-shares, B shares, and S shares. He has never bought A shares, since the A shares are too expensive, and perhaps one day, China's H shares, B shares, S shares and A shares will merger as one kind of stocks.
If signs of collapse appear in China's stock market, he would buy more Chinese stocks. He thinks this may occur in the near future, but not now, because although China's stock market is making adjustment, no one is selling Chinese shares in large quantities. Besides, China's stock market rose 80 percent in the past six months, prices have been too high, and I will not buy Chinese stocks at this time. After a year or two, I would consider buying Chinese stocks again.
By People's Daily Online
Wait and See Investment in A-shares, Big City Real Estate
Jim Rogers: Wait and See Investment in A-shares, Big City Real Estate
byCSC staff, Shanghai
September-11-2009
Jim Rogers, an American investor and financial commentator based in Singapore who has been paying close attention to the Asian market, sees that in the past 10 months, A-shares values have doubled, but predicts that there will be a negative change in September-November. He adds he would neither buy nor sell shares at present, points out that in the next 20 years agriculture will be a very promising industry in China, and suggests that everybody play the role of "farmer."
In the first half of this year, China's economic stimulus policies to deal with the financial crisis and lending of seven trillion yuan boosted domestic stock and property transactions and prices hit new highs.
But the A-share market has been fluctuating recently between 2600 and 3000 points. At the second China International Financial Services Conference, held at Guangzhou in South China on September 9-10, Rogers noted that although China's economy is improving, market risk is brewing, and he predicted the Hong Kong market could have problems in the next few months, which will affect the domestic market. Rogers believes that the current autumn round is perhaps the shift from bear to bull market, and investors should be patient and wait for opportunities to buy rather than rush into the market.
In addition, conditions in Europe and the US have not fully recovered, and their lack of improvement will influence China's exports and affect its markets. Time is needed to observe the continuing development of the European and US economies.
Rogers believes that, just as the market has worried, huge amounts of money issued by central banks is leading to inflation, and that investing in commodities would be a good choice, especially raw materials, natural resources, energy and bulk commodities. Non-renewable resources will be particularly profitable products in the next round of investment. The prices of silver, sugar and coffee have decreased 70% from their high points. When the global economy picks up, demand for commodities will rise, so will prices. If economies continue to falter, governments will continue to release liquidity, and commodity investors can benefit from the effects of inflation.
Rogers emphasizes that in recent years a food crisis has emerged, and may become serious in the next decade. Investors should pay attention to commodities such as wheat. In the long run, investors should watch growth industries. China's agriculture, for example, has great growth potential due to huge investment from the government in recent years. In addition, water conservancy in Asia has great potential because India and China are often affected by flooding or drought. Tourism is also promising.
Rogers predicts the USD's status may be reduced in the next 5-10 years with the development of Asia and the decline of the US. He reasons that China, Japan and other Asian countries are gradually hold financial claims and European and American countries are turning into debtors, meaning that global capital flows are diverting to Asia. In terms of historical evolution, the economic center was in the UK in the 19th century, then in the US in the 20th century. It may well be China in the 21st century.
Rogers believes that domestic real estate development is good. In the past two months, housing prices have greatly increased in many cities, but he says he would not buy property at present, especially in Shanghai or Hong Kong.
In response to the financial crisis, central banks have released vast liquidity but different orientations have emerged in China and the US. Rogers says that in the first half year China invested in medium and long-term infrastructure, which can enhance future competitiveness, truly investing in the future, while the US invested 70%-80% of the resources into short-term projects.
It is generally believed that huge amounts of capital released, whether invested in short or long-term projects, will bring on inflationary pressures. The difference is that the pulling effect of short-term projects for follow-up competitiveness is not as good as for long-term projects. In evaluating government efforts to relieve the financial crisis, Rogers says that China and Singapore have done better than the US or Britain.
http://www.chinastakes.com/PrintArticle.aspx?articleid=1499
byCSC staff, Shanghai
September-11-2009
Jim Rogers, an American investor and financial commentator based in Singapore who has been paying close attention to the Asian market, sees that in the past 10 months, A-shares values have doubled, but predicts that there will be a negative change in September-November. He adds he would neither buy nor sell shares at present, points out that in the next 20 years agriculture will be a very promising industry in China, and suggests that everybody play the role of "farmer."
In the first half of this year, China's economic stimulus policies to deal with the financial crisis and lending of seven trillion yuan boosted domestic stock and property transactions and prices hit new highs.
But the A-share market has been fluctuating recently between 2600 and 3000 points. At the second China International Financial Services Conference, held at Guangzhou in South China on September 9-10, Rogers noted that although China's economy is improving, market risk is brewing, and he predicted the Hong Kong market could have problems in the next few months, which will affect the domestic market. Rogers believes that the current autumn round is perhaps the shift from bear to bull market, and investors should be patient and wait for opportunities to buy rather than rush into the market.
In addition, conditions in Europe and the US have not fully recovered, and their lack of improvement will influence China's exports and affect its markets. Time is needed to observe the continuing development of the European and US economies.
Rogers believes that, just as the market has worried, huge amounts of money issued by central banks is leading to inflation, and that investing in commodities would be a good choice, especially raw materials, natural resources, energy and bulk commodities. Non-renewable resources will be particularly profitable products in the next round of investment. The prices of silver, sugar and coffee have decreased 70% from their high points. When the global economy picks up, demand for commodities will rise, so will prices. If economies continue to falter, governments will continue to release liquidity, and commodity investors can benefit from the effects of inflation.
Rogers emphasizes that in recent years a food crisis has emerged, and may become serious in the next decade. Investors should pay attention to commodities such as wheat. In the long run, investors should watch growth industries. China's agriculture, for example, has great growth potential due to huge investment from the government in recent years. In addition, water conservancy in Asia has great potential because India and China are often affected by flooding or drought. Tourism is also promising.
Rogers predicts the USD's status may be reduced in the next 5-10 years with the development of Asia and the decline of the US. He reasons that China, Japan and other Asian countries are gradually hold financial claims and European and American countries are turning into debtors, meaning that global capital flows are diverting to Asia. In terms of historical evolution, the economic center was in the UK in the 19th century, then in the US in the 20th century. It may well be China in the 21st century.
Rogers believes that domestic real estate development is good. In the past two months, housing prices have greatly increased in many cities, but he says he would not buy property at present, especially in Shanghai or Hong Kong.
In response to the financial crisis, central banks have released vast liquidity but different orientations have emerged in China and the US. Rogers says that in the first half year China invested in medium and long-term infrastructure, which can enhance future competitiveness, truly investing in the future, while the US invested 70%-80% of the resources into short-term projects.
It is generally believed that huge amounts of capital released, whether invested in short or long-term projects, will bring on inflationary pressures. The difference is that the pulling effect of short-term projects for follow-up competitiveness is not as good as for long-term projects. In evaluating government efforts to relieve the financial crisis, Rogers says that China and Singapore have done better than the US or Britain.
http://www.chinastakes.com/PrintArticle.aspx?articleid=1499
Wednesday, July 15, 2009
Commodities are sizzling, says Jim Rogers
Commodities are sizzling, says Jim Rogers
14 Jul 2009, 0013 hrs IST, Andy Mukherjee, ET Now
In an exclusive interview with ET NOW , Mr Rogers reiterated his view that a currency crisis could happen any time in the
near future. But he’s not sure yet who’s going to pay the price — pound sterling, US dollar or even the rupee. Excerpts: ( Watch )
The commodities rally seems to have paused. The Rogers International Commodity Index has come off 13% since June 12. This pullback, essentially as I can see, is because of tin, energy and silver even as some of those agri commodities like orange juice, sugar and cotton have done well. What are your expectations going forward for commodities?
That's the way I know you know about commodities. You read The Economic Times and your ET TV. So, you know that the markets always have corrections whether they are going up or down. Nothing goes straight up or down forever. So, it's having a normal correction. In my view, the best place to be is in real assetscommodities, because if the world is going to recover, they (commodities) will recover first because of the shortages and if the world economy is not going to recover, they are still the best place to be, because governments around the world are printing huge amounts of money. So, if you got to own something, I don't much to own besides commodities.
In India, we are getting worried about the monsoon. We are looking out of our windows and not finding any clouds, and there is also talk about El Nino weather formation. Is this something you would advise investors to keep an eye on?
Of course, I would. The world's inventories of food are at the lowest they have been in decades. We haven't have had any serious weather problems around the world for several decades as a matter of fact. So, with fairly good weather, we have been having bad harvest or we have been consuming more than we have been producing. Can you imagine what's going to happen to the price of agriculture if we have bad weather around the world?
The last time we met here in Mumbai you had a sachet of sugar in your pocket and you pulled it out to underscore your point of impending shortage about agri commodities. You have been right about sugar as far as we can see from the price charts. What are you hiding today in your pockets? A silver coin, a hip flask full of crude oil, may be?
I do actually have a silver coin in my pocket. I don't know how you knew. I also have a gold coin, but the silver one is probably my better play. If I were a bright young man, I would be buying sugar now and silver, given the state of the world. That's not a recommendation, but I am just saying I do own some silver. Silver is cheaper than many things on a historic basis and I do own some silver. The dollar has fallen almost 10% since the beginning of the stocks rally in March. Commodities have risen 94% of the time that the dollar has fallen. A very strong correlation. Do we expect the dollar decline and the commodity run-up, therefore, to continue? It's not always a strong correlation. You are right; there has been (a correlation) in recent months, recent years even. But no, there are many times when the dollar and commodities go entirely separate ways. So, don't get it into your head, and I know many times that the press do have it in their head that commodities and dollars go opposite ways. I am not terribly bullish on the dollar in long term. US dollars are a terribly flawed currency and down the road I hope I don't own any US dollars. I still own some of them at the moment, but it's not getting better for the US. The dollar any way is getting worse. The fundamental for commodities continue to improve. The fundamentals for the US dollar do not continue to improve. They are deteriorating.
Are you still sticking to your prediction of a currency crisis sometime in a year or two?
Yes. The world is full of currency imbalances and economic trade imbalances would have to be resolved or corrected, one way or the other. Unfortunately, given the state of politicians and it's not just the current state of politicians, but politicians throughout history have usually got things wrong. So, we are going to have some problems in the currency market. I don't know when. May be not. I may be wrong. But having seen that sort of thing before in history somebody would have to pay the price whether it's the pound sterling or the US dollar or the rupee, I have no clue. No idea where it’s going to stop, but we are going to have problems in the currency markets.
What’s your view on global equities now? Do you think emerging markets’ premium over developed country markets has gone a way too high?
I don't pay any attention to things like emerging markets premium. You talk about it on TV, but every market is different. Why can't I just go out and buy emerging markets when it is likely to go broke. Every market is different, every country is different, every economy is different and every sector of the economies is different. Just because you are in an emerging country does not mean you are going to make money if you get the wrong sector. I have not bought any stocks anywhere in the world in the last couple of years except China. I did buy some Chinese shares back in October-November. I have not been buying anything other than that for some time. I have been worried about the world economy, about the world stock markets. If you got to be somewhere and if there is going to be a recovery, it will show up in commodities best of all, and if there is not going to be any recovery, commodities are still a better place to be.
So what are you buying nowadays?
If you want to put in your money somewhere, put it in commodities. That's the only thing I bought recently. I have bought some yen and swiss francs. If you know enough about currencies to figure out who is going to benefit, if I am right about the currency turmoil coming, then you can buy some of the currencies and if you think that the rupee is the place to be, then you can buy some rupees.
Long-term inflation expectations in the US as reflected by the five-year forward breaking rates on treasury inflation protected securities. Those have hardened considerably since the beginning of the year. That's also your view, right? Too much money in the financial systems and monetary authorities the world over don't have a credible plan to withdraw liquidity?
I cannot conceive of lending money to the US government for 30 years in US dollars for 3, 4, 5 or 6% interest. It's just inconceivable to me that I would let them have my money for 30 years and they would pay me back someday in US dollars at such a low rate of interest. I expect problems in the bond market. I don't know when. I am not sure about the bond market. I was short in the bond market, but I got out. I expect to see serious problems in the bond market down the road.
In the near term, markets seem to be more concerned about growth than they are about inflation. The difference between the 10-year and the two-year bond yield in the US has narrowed some 40 basis points since early June. Unlike you Jim, people are actually going out and buying long maturity treasuries because they don't see growth, don't see inflation. So, what do say to these bond buyers? Good luck?
When you see anomalies like this in the market, you are supposed to take advantage . The spread is very low. So, why would anybody buy a 10-year when he can buy a two-year ? Not worth the extra risk to go out 10 years. I would urge people to keep their wits. Now, granted Mr Bernanke and the US are buying a lot of government paper and driving the price up. That's why I am not sure. He has got more buying power than I do, at least for the foreseeable future. So, you are seeing longer bonds going up. That gives you an opportunity to get out if you own them or think about selling them short if you don't own them and know how to sell short.
RAPIDFIRE ROUND
Ben Bernanke: Hero or villian?
He's an idiot. ( Watch )
US stocks: Buy now or stay away?
I'm not buying them.
US banking stocks: Short them or stay away?
I'm doing neither. I am watching. They're down a whole lot.
US bonds: Short them or stay away?
I'm doing neither right now. My next move will probably be to sell them short.
In Asia: Sri Lankan stocks or Indian equities?
I'd rather buy Sri Lanka than India.
Chinese stocks or Indian stocks?
I'm not buying either at the moment. I don't own any Indian stocks. I own Chinese shares which I am not selling. The Indian... I wouldn't buy either.
Gold or silver?
I'd rather buy silver today. I own both and I'm not selling either.
http://economictimes.indiatimes.com/articleshow/4774115.cms
14 Jul 2009, 0013 hrs IST, Andy Mukherjee, ET Now
In an exclusive interview with ET NOW , Mr Rogers reiterated his view that a currency crisis could happen any time in the
near future. But he’s not sure yet who’s going to pay the price — pound sterling, US dollar or even the rupee. Excerpts: ( Watch )
The commodities rally seems to have paused. The Rogers International Commodity Index has come off 13% since June 12. This pullback, essentially as I can see, is because of tin, energy and silver even as some of those agri commodities like orange juice, sugar and cotton have done well. What are your expectations going forward for commodities?
That's the way I know you know about commodities. You read The Economic Times and your ET TV. So, you know that the markets always have corrections whether they are going up or down. Nothing goes straight up or down forever. So, it's having a normal correction. In my view, the best place to be is in real assetscommodities, because if the world is going to recover, they (commodities) will recover first because of the shortages and if the world economy is not going to recover, they are still the best place to be, because governments around the world are printing huge amounts of money. So, if you got to own something, I don't much to own besides commodities.
In India, we are getting worried about the monsoon. We are looking out of our windows and not finding any clouds, and there is also talk about El Nino weather formation. Is this something you would advise investors to keep an eye on?
Of course, I would. The world's inventories of food are at the lowest they have been in decades. We haven't have had any serious weather problems around the world for several decades as a matter of fact. So, with fairly good weather, we have been having bad harvest or we have been consuming more than we have been producing. Can you imagine what's going to happen to the price of agriculture if we have bad weather around the world?
The last time we met here in Mumbai you had a sachet of sugar in your pocket and you pulled it out to underscore your point of impending shortage about agri commodities. You have been right about sugar as far as we can see from the price charts. What are you hiding today in your pockets? A silver coin, a hip flask full of crude oil, may be?
I do actually have a silver coin in my pocket. I don't know how you knew. I also have a gold coin, but the silver one is probably my better play. If I were a bright young man, I would be buying sugar now and silver, given the state of the world. That's not a recommendation, but I am just saying I do own some silver. Silver is cheaper than many things on a historic basis and I do own some silver. The dollar has fallen almost 10% since the beginning of the stocks rally in March. Commodities have risen 94% of the time that the dollar has fallen. A very strong correlation. Do we expect the dollar decline and the commodity run-up, therefore, to continue? It's not always a strong correlation. You are right; there has been (a correlation) in recent months, recent years even. But no, there are many times when the dollar and commodities go entirely separate ways. So, don't get it into your head, and I know many times that the press do have it in their head that commodities and dollars go opposite ways. I am not terribly bullish on the dollar in long term. US dollars are a terribly flawed currency and down the road I hope I don't own any US dollars. I still own some of them at the moment, but it's not getting better for the US. The dollar any way is getting worse. The fundamental for commodities continue to improve. The fundamentals for the US dollar do not continue to improve. They are deteriorating.
Are you still sticking to your prediction of a currency crisis sometime in a year or two?
Yes. The world is full of currency imbalances and economic trade imbalances would have to be resolved or corrected, one way or the other. Unfortunately, given the state of politicians and it's not just the current state of politicians, but politicians throughout history have usually got things wrong. So, we are going to have some problems in the currency market. I don't know when. May be not. I may be wrong. But having seen that sort of thing before in history somebody would have to pay the price whether it's the pound sterling or the US dollar or the rupee, I have no clue. No idea where it’s going to stop, but we are going to have problems in the currency markets.
What’s your view on global equities now? Do you think emerging markets’ premium over developed country markets has gone a way too high?
I don't pay any attention to things like emerging markets premium. You talk about it on TV, but every market is different. Why can't I just go out and buy emerging markets when it is likely to go broke. Every market is different, every country is different, every economy is different and every sector of the economies is different. Just because you are in an emerging country does not mean you are going to make money if you get the wrong sector. I have not bought any stocks anywhere in the world in the last couple of years except China. I did buy some Chinese shares back in October-November. I have not been buying anything other than that for some time. I have been worried about the world economy, about the world stock markets. If you got to be somewhere and if there is going to be a recovery, it will show up in commodities best of all, and if there is not going to be any recovery, commodities are still a better place to be.
So what are you buying nowadays?
If you want to put in your money somewhere, put it in commodities. That's the only thing I bought recently. I have bought some yen and swiss francs. If you know enough about currencies to figure out who is going to benefit, if I am right about the currency turmoil coming, then you can buy some of the currencies and if you think that the rupee is the place to be, then you can buy some rupees.
Long-term inflation expectations in the US as reflected by the five-year forward breaking rates on treasury inflation protected securities. Those have hardened considerably since the beginning of the year. That's also your view, right? Too much money in the financial systems and monetary authorities the world over don't have a credible plan to withdraw liquidity?
I cannot conceive of lending money to the US government for 30 years in US dollars for 3, 4, 5 or 6% interest. It's just inconceivable to me that I would let them have my money for 30 years and they would pay me back someday in US dollars at such a low rate of interest. I expect problems in the bond market. I don't know when. I am not sure about the bond market. I was short in the bond market, but I got out. I expect to see serious problems in the bond market down the road.
In the near term, markets seem to be more concerned about growth than they are about inflation. The difference between the 10-year and the two-year bond yield in the US has narrowed some 40 basis points since early June. Unlike you Jim, people are actually going out and buying long maturity treasuries because they don't see growth, don't see inflation. So, what do say to these bond buyers? Good luck?
When you see anomalies like this in the market, you are supposed to take advantage . The spread is very low. So, why would anybody buy a 10-year when he can buy a two-year ? Not worth the extra risk to go out 10 years. I would urge people to keep their wits. Now, granted Mr Bernanke and the US are buying a lot of government paper and driving the price up. That's why I am not sure. He has got more buying power than I do, at least for the foreseeable future. So, you are seeing longer bonds going up. That gives you an opportunity to get out if you own them or think about selling them short if you don't own them and know how to sell short.
RAPIDFIRE ROUND
Ben Bernanke: Hero or villian?
He's an idiot. ( Watch )
US stocks: Buy now or stay away?
I'm not buying them.
US banking stocks: Short them or stay away?
I'm doing neither. I am watching. They're down a whole lot.
US bonds: Short them or stay away?
I'm doing neither right now. My next move will probably be to sell them short.
In Asia: Sri Lankan stocks or Indian equities?
I'd rather buy Sri Lanka than India.
Chinese stocks or Indian stocks?
I'm not buying either at the moment. I don't own any Indian stocks. I own Chinese shares which I am not selling. The Indian... I wouldn't buy either.
Gold or silver?
I'd rather buy silver today. I own both and I'm not selling either.
http://economictimes.indiatimes.com/articleshow/4774115.cms
Friday, June 26, 2009
Jim Rogers says has no short positions, selling dollars
Jim Rogers says has no short positions, selling dollars
Thu Jun 25, 2009 4:49am EDT
SINGAPORE, June 25 (Reuters) - Investor Jim Rogers said on Thursday that he sees prolonged economic problems and while he did not see much worth buying, he is not shorting any assets either.
He repeated a previous comment that he is selling his U.S. dollars and that commodities were the best investment bet.
"I have no shorts for one of the first times in my life," Rogers, a co-founder with George Soros of the Quantum Fund, told Reuters TV in Singapore. "On the other hand I don't see much to buy."
He said huge borrowing by governments, particularly in the United States and Britain, would hurt their currencies and lead to future problems, though he picked the Canadian dollar CAD as one of the "soundest" currencies. "I've got out of my pounds. I will be getting out of my (U.S.) dollars soon," he said, repeating his view that commodities were the best place to be with metals having gained more than stocks this year and long-term potential for soft commodities.
"I'd rather be a farmer than a stockbroker for the next couple of years," he said. "No-one you went to school with became a farmer... so we have a shortage of farmers."
Rogers, who lives in ethnically Chinese Singapore, co-founded the Quantum Fund in 1970. The fund, since closed, returned 4,200 percent in the next decade, compared with a 50 percent gain in the S&P 500 index.
"If you're in London you're in the wrong place at the wrong time... You gotta move east."
http://www.reuters.com/article/bondsNews/idUSSP50971720090625?sp=true
Thu Jun 25, 2009 4:49am EDT
SINGAPORE, June 25 (Reuters) - Investor Jim Rogers said on Thursday that he sees prolonged economic problems and while he did not see much worth buying, he is not shorting any assets either.
He repeated a previous comment that he is selling his U.S. dollars and that commodities were the best investment bet.
"I have no shorts for one of the first times in my life," Rogers, a co-founder with George Soros of the Quantum Fund, told Reuters TV in Singapore. "On the other hand I don't see much to buy."
He said huge borrowing by governments, particularly in the United States and Britain, would hurt their currencies and lead to future problems, though he picked the Canadian dollar CAD as one of the "soundest" currencies. "I've got out of my pounds. I will be getting out of my (U.S.) dollars soon," he said, repeating his view that commodities were the best place to be with metals having gained more than stocks this year and long-term potential for soft commodities.
"I'd rather be a farmer than a stockbroker for the next couple of years," he said. "No-one you went to school with became a farmer... so we have a shortage of farmers."
Rogers, who lives in ethnically Chinese Singapore, co-founded the Quantum Fund in 1970. The fund, since closed, returned 4,200 percent in the next decade, compared with a 50 percent gain in the S&P 500 index.
"If you're in London you're in the wrong place at the wrong time... You gotta move east."
http://www.reuters.com/article/bondsNews/idUSSP50971720090625?sp=true
Thursday, June 25, 2009
Warren Buffett's Live Lunch Interview on CNBC
Warren Buffett's Live Lunch Interview on CNBC
24 Jun 2009 04:05 PM ET
Warren Buffett appeared live on CNBC with Becky Quick today, Wednesday, June 24, 2009.
Buffett told us the economy is in a "shambles" with no signs of a recovery anytime soon. He also criticized Apple for not disclosing earlier that CEO Steve Jobs had received a liver transplant.
This is a complete transcript of their conversation:
BECKY QUICK: We are here at Smith & Wollensky where Warren Buffett is paying off last year's winner for this auction. This is, right now there's another auction underway. And this is the tenth year in a row he's been doing this. Warren, we want to thank you very much for joining us.
WARREN BUFFETT: It's a pleasure.
BECKY: You've been doing this for 10 years, raising money for the Glide Foundation. Why the Glide Foundation?
BUFFETT: I think it's probably as remarkable a social organization as there is in the country, and it's run by Cecil Williams, who, for 45 years, has taken people that have hit bottom and said, 'You're still a worthwhile individual and we're going to do what we can for you in terms of housing, medicine, vocational training and you're going to become the kind of person that you can become.' He believes in people and he carries it out every day and I've never found a more effective place at lifting people from bottom.
BECKY: This year's winner, last year's winner showing up today, Zhao Danyang, who is someone who paid 2.1 million dollars. That's a remarkable amount of money that's out there. Last year, obviously, the markets were in a very different place than they are this year. The auction is underway. I know the bidding goes through Sunday. (Note: Bidding actually ends this coming Friday at 10p ET). Do you think someone can bid as much as you saw last year?
BUFFETT: (Laughs.) Well it surprised me last year. They have qualified a number of bidders that are good for very big figures. They make sure of that beforehand. So we'll see what happens. (Laughs.) Two-point-one million is a pretty good number to shoot for. I hope I don't have to leave a 10 percent tip at the end of the lunch. (Laughs.)
BECKY: The last time we sat down to talk to you was on May 4, and at that point you told us that you think we're in an economic war right now. How much progress do you think we've made in that war?
BUFFETT: Well, it's been pretty flat. I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the (Berkshire Hathaway) annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true.
BECKY: We hear people on our air all the time who talk about the 'green shoots' that they're seeing. Are you seeing any of those green shoots?
BUFFETT: (Laughs.) I looked. I wasn't seeing anything. I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet.
BECKY: Earlier this year you also told us that you think Washington and the Obama administration should be paying attention to jobs, that's the number one, jobs and the economy is the number one, the number two, and the number three job that they should be doing. Has there been progress made at all on that front?
BUFFETT: Well, they're doing thing but they take awhile to have an effect. They're doing things on a lot of fronts. But you can't produce a baby in one month by getting nine women pregnant, you know. (Laughs.) It just doesn't work that way. So you can be throwing things at the economy and they will have an impact, but they haven't had much impact yet. And unemployment will go high and it will lag the turn up of the economy.
BECKY: But has Washington done enough that you think they can turn their sights to other problems that exist?
BUFFETT: Well, they've turned their sights to other problems, but this problem is not yet solved. And it's the most important problem we have.
BECKY: It continues to be? You don't think any of the urgency has come away?
BUFFETT: No, I don't think the urgency has come away. The urgency has moved away from a total meltdown of the financial sector which we faced last fall. I've never seen anything like that. But I would give enormous credit to the people there. (Federal Reserve Chairman) Bernanke did a fabulous job. We were right at the point where people lost faith in money-market funds, when commercial paper stopped being issued. People would be having a problem meeting their payroll, very big companies, if that hadn't gotten addressed very quickly. And I give credit to people for doing that. So that part, we've moved past that particular period. We haven't got the economy going again.
BECKY: You mentioned that you think Ben Bernanke did a good job. Today is an FOMC meeting day. We're going to be hearing more about that at 2:15 today. Do you think Ben Bernanke should be reappointed to a second term?
BUFFETT: I don't see how you could do better. Yeah. He has taken decisive action at a time when really decisive action was needed, and extraordinary action, things that we hadn't done before. If he hadn't of done -- I give the Bush administration credit on this. (Former Treasury Secretary) Hank Paulson. They don't do everything perfectly. Nobody does. And we were getting balls thrown at your head by the hour. You're going to make some mistakes. But they got us through a period that, if we had different people in those jobs, I'm not so sure we would have gotten through.
BECKY: Well now you do have different people on those jobs. You have (National Economic Council Director) Larry Summers, who is advising the president. You have (Treasury Secretary) Tim Geithner who's there. You have Ben Bernanke. What do you think of the troika today?
BUFFETT: I think you've got three very, the people you named are very, very good. And I think Bernanke is very much the key. The Fed came through for us.
BECKY: You haven't commented since the Obama administration rolled out these new regulatory overhaul plans that they've been looking at. What do you think overall about it? There's a consumer protection agency that's involved with this. There's a lot of other different arenas. But is this the right, is this a step in the right direction?
BUFFETT: We'll see how the statute reads. But basically we got way overleveraged in the financial arena. And the American public got overleveraged too. We do need something to address that. We do need something to address institutions where the wrong incentives are in place so that their personal incentives are at real variance with what our national incentives should be. We need something to make sure we don't get into the situation again that we were in last September. And leverage is a big key to it. Now that's a huge problem to attack and how it's written and how it's administered is not an easy job.
BECKY: Can you lay that down as a rule? Should it be that you can't be levered more than 10-to-1? You can't be leveraged up more than 20-to-1? How do you figure out?
BUFFETT: And it's very difficult. And you can't lay down a rule like that, unfortunately. Because just through derivatives you can have an enormous amount of leverage that doesn't show and you can have an inter-connectedness that causes one domino to hit the next. It is not a simple problem. You don't just write down leverage of 10 or 20 to one or something of the sort. There's all kinds of different leverage. You can leverage against home mortgages with big down payments and that will be relatively safe. You can leverage against somebody else who's leveraged and you've got troubles getting compounded. So it's not a simple problem but it is an important problem.
BECKY: Is it one that can be tackled? Is there a solution, a potential solution?
BUFFETT: It's not easy. It's not easy. You need somebody - you need reasonable rules, and you need a very, very good administrator or group of administrators doing it. It's not an easy problem. People like to go to excesses. And the incentives are, in a market system, to overshoot. And it's happened over the years. America's genius has not been in avoiding problems, it's been in surmounting them once they happen. And fortunately, you know, we've come through again on that.
BECKY: So you're not saying it's an impossible task but it doesn't sound like you're very hopeful we can prevent something like this from happening again?
BUFFETT: I think that what started out with a tulip, maybe four-hundred years ago, and continued through the South Sea Bubble and all of those sorts of things, it's in human nature to go to excess. And it's very hard, in a country of 300-million people and a 14-trillion dollar GDP and all of that, to set up a set of rules that will prevent excesses in a market system. But I think there can be improvements made and I think that's what we're shooting for.
BECKY: When we sat down with you here last year, you said inflation was a very big worry for you. What do you see today? Do you worry about inflation or deflation?
BUFFETT: Well, I don't worry about deflation at all. We won't see deflation in any significant amount in your lifetime, which is more relevant than my lifetime. We've taken action in fighting the economic war that we face that certainly sows the seeds of substantial inflation down the road. Not in the next six months or year or two years, but we have done things that raise the probability of really high rates of inflation at some point. We're flooding the system with dollars. We're monitizing debt. We're doing all the things that lead to that. Now those are appropriate things to do. Our economy was like a fellow going down in quicksand last September and up to his shoulders, and somebody tosses a rope. You can tie it around and yank him out with a truck, you may dislocate a couple of shoulders but it's still pays to get him out. And we may dislocate the economy in certain ways. There's really no choice. But we could see a lot of inflation.
BECKY: You mentioned that the financial system was in tatters just last year. It's turned around quite a bit. In fact, some of the big banks have been paying back TARP money, or have made plans to pay back that TARP money. One of your big investments, though, Wells Fargo , has not. Does that put Wells Fargo at a disadvantage?
BUFFETT: Well, it doesn't put them at a disadvantage with the person on the street that's putting in deposits. And they've got the widest spreads, really, in terms of interest income of anybody. But I'm sure they would like to get out of TARP. There's been unanimity among the people in the TARP plan that they want to get out as fast as possible, so I'm sure they'd like to get out at Wells. But from my standpoint, the earning power of Wells is dramatic with or without the TARP money.
BECKY: So, with or without, it doesn't matter to you as an investor?
BUFFETT: It doesn't really, no, no. I wish they didn't have the warrants outstanding that came with the TARP money because that's a call on the future profits of it, but the government set the terms on it. They just signed a blank piece of paper.
BECKY: Over the last few days, Steve Jobs and Apple's board have gotten a lot of attention because of the disclosure, or lack of disclosure of the liver transplant that he had while he was out. You're someone who has also gotten some criticism about your succession plans. What do you think about how the Apple board went about it and do you think that criticism there has been fair?
BUFFETT: Well, I think it probably has. I think if I have any serious illness, or something coming up of an important nature, an operation or anything like that, I think the thing to do is just tell the American, the Berkshire shareholders about it. I work for 'em. Some people might think I'm important to the company. Certainly Steve Jobs is important to Apple. So it's a material fact. Whether he is facing serious surgery or not is a material fact. Whether I'm facing serious surgery is a material fact. Whether (General Electric CEO) Jeff Immelt is, I mean, so I think that's important to get out. They're going to find out about it anyway so I don't see a big privacy issue or anything of the sort.
BECKY: Just this past week, the Class B shares of Berkshire were able to start trading options on them. What happened? Why did you do that and what's it mean?
BUFFETT: They didn't ask me.
BECKY: What does it mean for the stock though?
BUFFETT: Well, it means people can speculate on it instead of invest in it and I'm basically not for it. We have the lowest turnover of any stock in the New York Stock Exchange by far. We've got more real owners. People buy our stock to own a piece of the business. The people that buy puts or calls, or sell puts or calls, are just betting on what it's going to do in the short term. So it's no plus to us. It is no big minus either. I don't think there will be a lot of trading in it.
BECKY: It doesn't bother you?
BUFFETT: No. If I had my choice it wouldn't happen, but it doesn't bother me.
BECKY: You know, cap and trade is something we talked about when we spoke with you back in May as well. And you raised some of the issues and concerns you have about cap and trade. It does look like it is still on the agenda for right now. So is health care. Does it concern you to see Washington, Congress and the administration, moving on some of these big initiatives while you're still concerned about the economy?
BUFFETT: Well, I think if they're important issues and they get well thought out solutions. It is important that we move on carbon emissions. It's important we move on health care. But I don't think they should be jammed through in a hurry. But those are issues that should be addressed by America. But I do think the economy is number one.
BECKY: You said you didn't like cap and trade especially in this economy though, because it puts a tax on people.
BUFFETT: I think if you get into the way it was written, it's a huge tax and there's no sense calling it anything else. I mean, it is a tax. And it's a fairly regressive tax. If we buy permits, essentially, at our utilities, that goes right into the bills of the utility customers and an awful lot of people in Iowa, in Oregon, and Utah, and places where we are, very poor people are going to pay a lot more money for electricity. So I think that can be improved.
BECKY: And finally, the last question. You've written about the economy and where you see the stock market in the past. You wrote an op-ed for the New York Times. How are your thoughts on where the stock market stands right now compared to where you saw it then?
BUFFETT: Well, I think it's attractive over the next ten years compared to alternatives. If your alternative is buying some fixed-dollar investment, I think inflation will eat away at that. I think it's almost certain over a ten-year period that equities will do better than fixed-dollar investments. So, if people are keeping their money in cash and getting virtually nothing for it they may feel comfortable, but it will be very expensive for them over time.
http://www.cnbc.com/id/31526815
24 Jun 2009 04:05 PM ET
Warren Buffett appeared live on CNBC with Becky Quick today, Wednesday, June 24, 2009.
Buffett told us the economy is in a "shambles" with no signs of a recovery anytime soon. He also criticized Apple for not disclosing earlier that CEO Steve Jobs had received a liver transplant.
This is a complete transcript of their conversation:
BECKY QUICK: We are here at Smith & Wollensky where Warren Buffett is paying off last year's winner for this auction. This is, right now there's another auction underway. And this is the tenth year in a row he's been doing this. Warren, we want to thank you very much for joining us.
WARREN BUFFETT: It's a pleasure.
BECKY: You've been doing this for 10 years, raising money for the Glide Foundation. Why the Glide Foundation?
BUFFETT: I think it's probably as remarkable a social organization as there is in the country, and it's run by Cecil Williams, who, for 45 years, has taken people that have hit bottom and said, 'You're still a worthwhile individual and we're going to do what we can for you in terms of housing, medicine, vocational training and you're going to become the kind of person that you can become.' He believes in people and he carries it out every day and I've never found a more effective place at lifting people from bottom.
BECKY: This year's winner, last year's winner showing up today, Zhao Danyang, who is someone who paid 2.1 million dollars. That's a remarkable amount of money that's out there. Last year, obviously, the markets were in a very different place than they are this year. The auction is underway. I know the bidding goes through Sunday. (Note: Bidding actually ends this coming Friday at 10p ET). Do you think someone can bid as much as you saw last year?
BUFFETT: (Laughs.) Well it surprised me last year. They have qualified a number of bidders that are good for very big figures. They make sure of that beforehand. So we'll see what happens. (Laughs.) Two-point-one million is a pretty good number to shoot for. I hope I don't have to leave a 10 percent tip at the end of the lunch. (Laughs.)
BECKY: The last time we sat down to talk to you was on May 4, and at that point you told us that you think we're in an economic war right now. How much progress do you think we've made in that war?
BUFFETT: Well, it's been pretty flat. I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the (Berkshire Hathaway) annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true.
BECKY: We hear people on our air all the time who talk about the 'green shoots' that they're seeing. Are you seeing any of those green shoots?
BUFFETT: (Laughs.) I looked. I wasn't seeing anything. I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet.
BECKY: Earlier this year you also told us that you think Washington and the Obama administration should be paying attention to jobs, that's the number one, jobs and the economy is the number one, the number two, and the number three job that they should be doing. Has there been progress made at all on that front?
BUFFETT: Well, they're doing thing but they take awhile to have an effect. They're doing things on a lot of fronts. But you can't produce a baby in one month by getting nine women pregnant, you know. (Laughs.) It just doesn't work that way. So you can be throwing things at the economy and they will have an impact, but they haven't had much impact yet. And unemployment will go high and it will lag the turn up of the economy.
BECKY: But has Washington done enough that you think they can turn their sights to other problems that exist?
BUFFETT: Well, they've turned their sights to other problems, but this problem is not yet solved. And it's the most important problem we have.
BECKY: It continues to be? You don't think any of the urgency has come away?
BUFFETT: No, I don't think the urgency has come away. The urgency has moved away from a total meltdown of the financial sector which we faced last fall. I've never seen anything like that. But I would give enormous credit to the people there. (Federal Reserve Chairman) Bernanke did a fabulous job. We were right at the point where people lost faith in money-market funds, when commercial paper stopped being issued. People would be having a problem meeting their payroll, very big companies, if that hadn't gotten addressed very quickly. And I give credit to people for doing that. So that part, we've moved past that particular period. We haven't got the economy going again.
BECKY: You mentioned that you think Ben Bernanke did a good job. Today is an FOMC meeting day. We're going to be hearing more about that at 2:15 today. Do you think Ben Bernanke should be reappointed to a second term?
BUFFETT: I don't see how you could do better. Yeah. He has taken decisive action at a time when really decisive action was needed, and extraordinary action, things that we hadn't done before. If he hadn't of done -- I give the Bush administration credit on this. (Former Treasury Secretary) Hank Paulson. They don't do everything perfectly. Nobody does. And we were getting balls thrown at your head by the hour. You're going to make some mistakes. But they got us through a period that, if we had different people in those jobs, I'm not so sure we would have gotten through.
BECKY: Well now you do have different people on those jobs. You have (National Economic Council Director) Larry Summers, who is advising the president. You have (Treasury Secretary) Tim Geithner who's there. You have Ben Bernanke. What do you think of the troika today?
BUFFETT: I think you've got three very, the people you named are very, very good. And I think Bernanke is very much the key. The Fed came through for us.
BECKY: You haven't commented since the Obama administration rolled out these new regulatory overhaul plans that they've been looking at. What do you think overall about it? There's a consumer protection agency that's involved with this. There's a lot of other different arenas. But is this the right, is this a step in the right direction?
BUFFETT: We'll see how the statute reads. But basically we got way overleveraged in the financial arena. And the American public got overleveraged too. We do need something to address that. We do need something to address institutions where the wrong incentives are in place so that their personal incentives are at real variance with what our national incentives should be. We need something to make sure we don't get into the situation again that we were in last September. And leverage is a big key to it. Now that's a huge problem to attack and how it's written and how it's administered is not an easy job.
BECKY: Can you lay that down as a rule? Should it be that you can't be levered more than 10-to-1? You can't be leveraged up more than 20-to-1? How do you figure out?
BUFFETT: And it's very difficult. And you can't lay down a rule like that, unfortunately. Because just through derivatives you can have an enormous amount of leverage that doesn't show and you can have an inter-connectedness that causes one domino to hit the next. It is not a simple problem. You don't just write down leverage of 10 or 20 to one or something of the sort. There's all kinds of different leverage. You can leverage against home mortgages with big down payments and that will be relatively safe. You can leverage against somebody else who's leveraged and you've got troubles getting compounded. So it's not a simple problem but it is an important problem.
BECKY: Is it one that can be tackled? Is there a solution, a potential solution?
BUFFETT: It's not easy. It's not easy. You need somebody - you need reasonable rules, and you need a very, very good administrator or group of administrators doing it. It's not an easy problem. People like to go to excesses. And the incentives are, in a market system, to overshoot. And it's happened over the years. America's genius has not been in avoiding problems, it's been in surmounting them once they happen. And fortunately, you know, we've come through again on that.
BECKY: So you're not saying it's an impossible task but it doesn't sound like you're very hopeful we can prevent something like this from happening again?
BUFFETT: I think that what started out with a tulip, maybe four-hundred years ago, and continued through the South Sea Bubble and all of those sorts of things, it's in human nature to go to excess. And it's very hard, in a country of 300-million people and a 14-trillion dollar GDP and all of that, to set up a set of rules that will prevent excesses in a market system. But I think there can be improvements made and I think that's what we're shooting for.
BECKY: When we sat down with you here last year, you said inflation was a very big worry for you. What do you see today? Do you worry about inflation or deflation?
BUFFETT: Well, I don't worry about deflation at all. We won't see deflation in any significant amount in your lifetime, which is more relevant than my lifetime. We've taken action in fighting the economic war that we face that certainly sows the seeds of substantial inflation down the road. Not in the next six months or year or two years, but we have done things that raise the probability of really high rates of inflation at some point. We're flooding the system with dollars. We're monitizing debt. We're doing all the things that lead to that. Now those are appropriate things to do. Our economy was like a fellow going down in quicksand last September and up to his shoulders, and somebody tosses a rope. You can tie it around and yank him out with a truck, you may dislocate a couple of shoulders but it's still pays to get him out. And we may dislocate the economy in certain ways. There's really no choice. But we could see a lot of inflation.
BECKY: You mentioned that the financial system was in tatters just last year. It's turned around quite a bit. In fact, some of the big banks have been paying back TARP money, or have made plans to pay back that TARP money. One of your big investments, though, Wells Fargo , has not. Does that put Wells Fargo at a disadvantage?
BUFFETT: Well, it doesn't put them at a disadvantage with the person on the street that's putting in deposits. And they've got the widest spreads, really, in terms of interest income of anybody. But I'm sure they would like to get out of TARP. There's been unanimity among the people in the TARP plan that they want to get out as fast as possible, so I'm sure they'd like to get out at Wells. But from my standpoint, the earning power of Wells is dramatic with or without the TARP money.
BECKY: So, with or without, it doesn't matter to you as an investor?
BUFFETT: It doesn't really, no, no. I wish they didn't have the warrants outstanding that came with the TARP money because that's a call on the future profits of it, but the government set the terms on it. They just signed a blank piece of paper.
BECKY: Over the last few days, Steve Jobs and Apple's board have gotten a lot of attention because of the disclosure, or lack of disclosure of the liver transplant that he had while he was out. You're someone who has also gotten some criticism about your succession plans. What do you think about how the Apple board went about it and do you think that criticism there has been fair?
BUFFETT: Well, I think it probably has. I think if I have any serious illness, or something coming up of an important nature, an operation or anything like that, I think the thing to do is just tell the American, the Berkshire shareholders about it. I work for 'em. Some people might think I'm important to the company. Certainly Steve Jobs is important to Apple. So it's a material fact. Whether he is facing serious surgery or not is a material fact. Whether I'm facing serious surgery is a material fact. Whether (General Electric CEO) Jeff Immelt is, I mean, so I think that's important to get out. They're going to find out about it anyway so I don't see a big privacy issue or anything of the sort.
BECKY: Just this past week, the Class B shares of Berkshire were able to start trading options on them. What happened? Why did you do that and what's it mean?
BUFFETT: They didn't ask me.
BECKY: What does it mean for the stock though?
BUFFETT: Well, it means people can speculate on it instead of invest in it and I'm basically not for it. We have the lowest turnover of any stock in the New York Stock Exchange by far. We've got more real owners. People buy our stock to own a piece of the business. The people that buy puts or calls, or sell puts or calls, are just betting on what it's going to do in the short term. So it's no plus to us. It is no big minus either. I don't think there will be a lot of trading in it.
BECKY: It doesn't bother you?
BUFFETT: No. If I had my choice it wouldn't happen, but it doesn't bother me.
BECKY: You know, cap and trade is something we talked about when we spoke with you back in May as well. And you raised some of the issues and concerns you have about cap and trade. It does look like it is still on the agenda for right now. So is health care. Does it concern you to see Washington, Congress and the administration, moving on some of these big initiatives while you're still concerned about the economy?
BUFFETT: Well, I think if they're important issues and they get well thought out solutions. It is important that we move on carbon emissions. It's important we move on health care. But I don't think they should be jammed through in a hurry. But those are issues that should be addressed by America. But I do think the economy is number one.
BECKY: You said you didn't like cap and trade especially in this economy though, because it puts a tax on people.
BUFFETT: I think if you get into the way it was written, it's a huge tax and there's no sense calling it anything else. I mean, it is a tax. And it's a fairly regressive tax. If we buy permits, essentially, at our utilities, that goes right into the bills of the utility customers and an awful lot of people in Iowa, in Oregon, and Utah, and places where we are, very poor people are going to pay a lot more money for electricity. So I think that can be improved.
BECKY: And finally, the last question. You've written about the economy and where you see the stock market in the past. You wrote an op-ed for the New York Times. How are your thoughts on where the stock market stands right now compared to where you saw it then?
BUFFETT: Well, I think it's attractive over the next ten years compared to alternatives. If your alternative is buying some fixed-dollar investment, I think inflation will eat away at that. I think it's almost certain over a ten-year period that equities will do better than fixed-dollar investments. So, if people are keeping their money in cash and getting virtually nothing for it they may feel comfortable, but it will be very expensive for them over time.
http://www.cnbc.com/id/31526815
Thursday, June 4, 2009
Fund Managers can become farmers: Jim Rogers
Fund Managers can become farmers: Jim Rogers
4 Jun 2009, 0005 hrs IST, ET Bureau
Even if you are outright bearish, don't short the market. Stocks could touch crazy levels, but they may be in currencies which are worthless.
Indeed, a sovereign default and currency turmoil could rattle world markets in a year or two. In a chat with ET, global investor Jim Rogers says cotton, silver and sugar can be hot picks. Read on.
At one stage we were inundated with gloomy forecasts, which were further reinforced by the IMF and World Bank. And then suddenly stocks surged — something most were not prepared for. How risky is the market today?
Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed... so, it's going into stocks and real assets such as commodities. It's a mistake what they are doing. It's giving short-term pleasure, but there's long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.
The American bond market is already beginning to go down dramatically as people realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.
Stocks are rising even as fiscal deficit is widening. Somewhere it has to snap...
It's going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don't know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what's happening out there in the world.
In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end.
They are doing many of the same mistakes now. What's different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.
What do you do? No politically-elected government can afford so much pain, unemployment and hardships...
America could have. America just had an election. The guy was elected in November and he could have come in the beginning of a four-year term and said the guys before me were hopeless idiots. They ruined things. We have to solve this problem. We have to take some pains now. But don't worry, we will get through this pain, and in two to three years or four years, things would be fine. And he could have been re-elected.
If the pain comes in 2010, 2011 or 2012, there will be nobody he can blame. Especially, if things go bad later, the opposition will say, wait a minute, 2009 looked good. The next guy is going to say you did it... But you are right. It's very difficult for an elected government. You have a newly-elected government in India. Whenever you have a new government they can take some of the pain.
You recently said that you would invest in China and Sri Lanka but not in India. Aren’t you betting on the new government in India?
I was trying to make a point that if anyone wants to invest in this particular part of the world, the best place would be Sri Lanka. Because it looks like the 30-year war is coming to an end.
Throughout history, if you go to a place after the war ends you usually find everything as very cheap, everyone is demoralised, people are just depressed and there are enormous opportunities if you have energy.
In my view, investing in Sri Lanka in May 2009 is probably a better bet than Pakistan, Bangladesh, India or some of the other countries nearby. Let's hope the new Indian government does something. I have heard wonderful things from Indian politicians for 40 years.
And rarely do they produce. It's not the first time that the Congress party has been in the power. If they mean it, India's going to be one of the greatest development stories in the next 20 years. But I don’t know if they mean it.
What kind of reforms?
Why isn't the currency convertible, why isn't foreign capital encouraged, why isn't foreign expertise encouraged, why is it so protectionist? Why are farmers only allowed to own five hectares? India should be the greatest farming nation in the world. You have the soil, the weather, you have everything and yet an Indian farmer can own only five hectares.
How can an Indian farmer compete with a guy in Ireland who can own 1,000 hectares or a guy in Brazil who can own 5,000 hectares? Smart people don't become farmers. Because what's the future? Whenever prices start going up, Indian politicians ban futures trading, as if futures trading makes prices go up. It's the craziest and the most absurd thing in the whole world. Prices go up because there is a reason for prices to go up.
Last year you were buying only Chinese stocks. Why?
The market collapsed in October-November. That's when I bought more Chinese shares. I have not bought any Chinese shares since then. I have not bought shares anywhere in the world since then. My way of participating in what's going on now is to buy commodities.
In my view, commodities are the only place where fundamentals are improving. Farmers can't get loans for fertilisers now, even though inventories of food are the lowest in decades. Nobody can get a loan to open a mine. So, you will have supplies of everything continuing to decline.
What else are you looking at while investing?
There are some industries in India that would do exceedingly well in the next few years, one of which is water. You have a horrible water problem. China also has a horrible water problem. So, I bought water companies in China. There are some great opportunities if America falls off the face of the earth. China is spending hundreds of billions of dollars to solve the agricultural problem.
So, I am buying agricultural stocks and water stocks in China. There are other industries in India which have a great future. I am very bullish on Indian tourism. Wherever I go for speeches around the world I tell people, if you have to go to one country in your lifetime, you should go to India.
Your government is going to re-build the military, they say. So, there's going to be great opportunities here. Also, they may build the infrastructure. So, I see many opportunities in India.
The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?
In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.
Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again.
Are you worried about any particular market or region?
I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.
But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.
If US unemployment touches the 10%-mark, it would further impact retail sales. How bad could this be for Asia?
Let's pick on China for a minute. If you sell to Wal-Mart in the US and if you are a Chinese supplier you know there is a problem. And you are going to be suffering. Any company that deals with the West is going to have problems. On the other hand, companies that are in the water-treatment business in Asia will care less if the West disappears. They are too busy making money, too busy going to work everyday.
What kind of commodities will smart money chase? Can money be made in crude?
I own gold but think silver is better right now. Natural gas is cheaper than oil right now, but I own them all. If you want to buy crude, you should probably buy cotton. Because all farmers in the US are planting corn to turn into energy. That means they are not going to plant any cotton. The best way to play crude oil is to buy cotton.
Right now, there are huge subsidies around the world for farmers to plant corn, maize, for instance, so that they can be converted into energy. If energy prices go higher, there will be even more of that.
If everybody plants his fields with soya, corn or palm oil to turn it into oil or energy then no one is going to plant cotton.
And you can make a lot more money in cotton than oil. Between oil and gold, buy cotton. Between oil and gold buy silver. The other way to invest in oil is to buy sugar as everybody is converting a lot of sugar into energy.
Silver is so much cheaper on a historic basis. And gold is near its all-time high. Silver is 75% below its all-time high. So, I would suspect that silver and cotton are going to do better than gold and oil.
Global population is close to its peak and genetically-modified crops will increase productivity. What makes you so bullish on agriculture?
It doesn't matter. The world has been consuming more than it produced. Food inventories are at a multi-decade low. And we haven't had any bad weather. We had isolated cases of droughts and things. That may never happen again. But if it does, the prices of food would go through the roof.
If there is climate change taking place, the best way to participate is through agriculture or through agriculture products. There are many positive things happening. Right now, there is a shortage of everything in agriculture — seeds, fertilisers, tractors, tractor tyres. We have a shortage of farmers because farming has been a horrible business for the past 30 years.
What kind of a market are you witnessing now?
It's a bear market rally. I was going to say I don't think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.
Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency.
That naturally brings us to the debate on a new international reserve currency
Several countries have raised the issue once again. The US dollar is terribly flawed right now. Something has to be done to the US dollar and something will be done just as something was done about the pound sterling. After World War II, people stopped using the pound sterling and converted to the dollar for many reasons. Something's going to be done about the dollar.
We are much closer to be doing something about it or will be forced to do something about it. India was forced to change in 1991 and the world will be forced to change the currency situation in the foreseeable future.
There is already an underlying fear that this mountain of cash will chase assets and eventually force central banks to mop up liquidity. How do you think this would play out?
I know they all say, 'Don't worry, we will reverse gears and take the excess liquidity out in time.' I don't believe them for a minute. No one has ever done it that way. When central bankers started trying to, it caused so much pain that they quickly reversed or have got rid of that central banker and put somebody else in.
I just don't think they could do it. That's why I am worried about the bond market and the inflation. If all central banks do it together, that's going to lead to higher unemployment, riots in the streets, civil unrests.
Your track record as an investor has been more than impressive. But in todays market can you replicate your performance of the past 20 years?
One can. I probably cannot as I am not spending enough time at it. But it can be done. There are going to be people who we will read about in 20 years having made legendary fortunes starting now. In the 1930s, there were people who built huge fortunes and laid the foundations like Templeton.
He started in the 1930s. He saw opportunities and took advantage. These are people who saw great advantages and opportunities in the 1930s, acted and became fantastic successes. There may be somebody out there now. I don’t know who she is. Maybe she is in Brazil, China or India.
What will you tell a confused fund manager who seeks your advice?
Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial community is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc.
The world, in my view, is changing and is shifting away from the financial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way. Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best.
http://economictimes.indiatimes.com/articleshow/4610704.cms?prtpage=1
4 Jun 2009, 0005 hrs IST, ET Bureau
Even if you are outright bearish, don't short the market. Stocks could touch crazy levels, but they may be in currencies which are worthless.
Indeed, a sovereign default and currency turmoil could rattle world markets in a year or two. In a chat with ET, global investor Jim Rogers says cotton, silver and sugar can be hot picks. Read on.
At one stage we were inundated with gloomy forecasts, which were further reinforced by the IMF and World Bank. And then suddenly stocks surged — something most were not prepared for. How risky is the market today?
Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed... so, it's going into stocks and real assets such as commodities. It's a mistake what they are doing. It's giving short-term pleasure, but there's long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.
The American bond market is already beginning to go down dramatically as people realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.
Stocks are rising even as fiscal deficit is widening. Somewhere it has to snap...
It's going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don't know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what's happening out there in the world.
In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end.
They are doing many of the same mistakes now. What's different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.
What do you do? No politically-elected government can afford so much pain, unemployment and hardships...
America could have. America just had an election. The guy was elected in November and he could have come in the beginning of a four-year term and said the guys before me were hopeless idiots. They ruined things. We have to solve this problem. We have to take some pains now. But don't worry, we will get through this pain, and in two to three years or four years, things would be fine. And he could have been re-elected.
If the pain comes in 2010, 2011 or 2012, there will be nobody he can blame. Especially, if things go bad later, the opposition will say, wait a minute, 2009 looked good. The next guy is going to say you did it... But you are right. It's very difficult for an elected government. You have a newly-elected government in India. Whenever you have a new government they can take some of the pain.
You recently said that you would invest in China and Sri Lanka but not in India. Aren’t you betting on the new government in India?
I was trying to make a point that if anyone wants to invest in this particular part of the world, the best place would be Sri Lanka. Because it looks like the 30-year war is coming to an end.
Throughout history, if you go to a place after the war ends you usually find everything as very cheap, everyone is demoralised, people are just depressed and there are enormous opportunities if you have energy.
In my view, investing in Sri Lanka in May 2009 is probably a better bet than Pakistan, Bangladesh, India or some of the other countries nearby. Let's hope the new Indian government does something. I have heard wonderful things from Indian politicians for 40 years.
And rarely do they produce. It's not the first time that the Congress party has been in the power. If they mean it, India's going to be one of the greatest development stories in the next 20 years. But I don’t know if they mean it.
What kind of reforms?
Why isn't the currency convertible, why isn't foreign capital encouraged, why isn't foreign expertise encouraged, why is it so protectionist? Why are farmers only allowed to own five hectares? India should be the greatest farming nation in the world. You have the soil, the weather, you have everything and yet an Indian farmer can own only five hectares.
How can an Indian farmer compete with a guy in Ireland who can own 1,000 hectares or a guy in Brazil who can own 5,000 hectares? Smart people don't become farmers. Because what's the future? Whenever prices start going up, Indian politicians ban futures trading, as if futures trading makes prices go up. It's the craziest and the most absurd thing in the whole world. Prices go up because there is a reason for prices to go up.
Last year you were buying only Chinese stocks. Why?
The market collapsed in October-November. That's when I bought more Chinese shares. I have not bought any Chinese shares since then. I have not bought shares anywhere in the world since then. My way of participating in what's going on now is to buy commodities.
In my view, commodities are the only place where fundamentals are improving. Farmers can't get loans for fertilisers now, even though inventories of food are the lowest in decades. Nobody can get a loan to open a mine. So, you will have supplies of everything continuing to decline.
What else are you looking at while investing?
There are some industries in India that would do exceedingly well in the next few years, one of which is water. You have a horrible water problem. China also has a horrible water problem. So, I bought water companies in China. There are some great opportunities if America falls off the face of the earth. China is spending hundreds of billions of dollars to solve the agricultural problem.
So, I am buying agricultural stocks and water stocks in China. There are other industries in India which have a great future. I am very bullish on Indian tourism. Wherever I go for speeches around the world I tell people, if you have to go to one country in your lifetime, you should go to India.
Your government is going to re-build the military, they say. So, there's going to be great opportunities here. Also, they may build the infrastructure. So, I see many opportunities in India.
The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?
In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.
Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again.
Are you worried about any particular market or region?
I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.
But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.
If US unemployment touches the 10%-mark, it would further impact retail sales. How bad could this be for Asia?
Let's pick on China for a minute. If you sell to Wal-Mart in the US and if you are a Chinese supplier you know there is a problem. And you are going to be suffering. Any company that deals with the West is going to have problems. On the other hand, companies that are in the water-treatment business in Asia will care less if the West disappears. They are too busy making money, too busy going to work everyday.
What kind of commodities will smart money chase? Can money be made in crude?
I own gold but think silver is better right now. Natural gas is cheaper than oil right now, but I own them all. If you want to buy crude, you should probably buy cotton. Because all farmers in the US are planting corn to turn into energy. That means they are not going to plant any cotton. The best way to play crude oil is to buy cotton.
Right now, there are huge subsidies around the world for farmers to plant corn, maize, for instance, so that they can be converted into energy. If energy prices go higher, there will be even more of that.
If everybody plants his fields with soya, corn or palm oil to turn it into oil or energy then no one is going to plant cotton.
And you can make a lot more money in cotton than oil. Between oil and gold, buy cotton. Between oil and gold buy silver. The other way to invest in oil is to buy sugar as everybody is converting a lot of sugar into energy.
Silver is so much cheaper on a historic basis. And gold is near its all-time high. Silver is 75% below its all-time high. So, I would suspect that silver and cotton are going to do better than gold and oil.
Global population is close to its peak and genetically-modified crops will increase productivity. What makes you so bullish on agriculture?
It doesn't matter. The world has been consuming more than it produced. Food inventories are at a multi-decade low. And we haven't had any bad weather. We had isolated cases of droughts and things. That may never happen again. But if it does, the prices of food would go through the roof.
If there is climate change taking place, the best way to participate is through agriculture or through agriculture products. There are many positive things happening. Right now, there is a shortage of everything in agriculture — seeds, fertilisers, tractors, tractor tyres. We have a shortage of farmers because farming has been a horrible business for the past 30 years.
What kind of a market are you witnessing now?
It's a bear market rally. I was going to say I don't think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.
Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency.
That naturally brings us to the debate on a new international reserve currency
Several countries have raised the issue once again. The US dollar is terribly flawed right now. Something has to be done to the US dollar and something will be done just as something was done about the pound sterling. After World War II, people stopped using the pound sterling and converted to the dollar for many reasons. Something's going to be done about the dollar.
We are much closer to be doing something about it or will be forced to do something about it. India was forced to change in 1991 and the world will be forced to change the currency situation in the foreseeable future.
There is already an underlying fear that this mountain of cash will chase assets and eventually force central banks to mop up liquidity. How do you think this would play out?
I know they all say, 'Don't worry, we will reverse gears and take the excess liquidity out in time.' I don't believe them for a minute. No one has ever done it that way. When central bankers started trying to, it caused so much pain that they quickly reversed or have got rid of that central banker and put somebody else in.
I just don't think they could do it. That's why I am worried about the bond market and the inflation. If all central banks do it together, that's going to lead to higher unemployment, riots in the streets, civil unrests.
Your track record as an investor has been more than impressive. But in todays market can you replicate your performance of the past 20 years?
One can. I probably cannot as I am not spending enough time at it. But it can be done. There are going to be people who we will read about in 20 years having made legendary fortunes starting now. In the 1930s, there were people who built huge fortunes and laid the foundations like Templeton.
He started in the 1930s. He saw opportunities and took advantage. These are people who saw great advantages and opportunities in the 1930s, acted and became fantastic successes. There may be somebody out there now. I don’t know who she is. Maybe she is in Brazil, China or India.
What will you tell a confused fund manager who seeks your advice?
Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial community is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc.
The world, in my view, is changing and is shifting away from the financial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way. Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best.
http://economictimes.indiatimes.com/articleshow/4610704.cms?prtpage=1
Wednesday, May 13, 2009
Soros says economic downward trend easing
Soros says economic downward trend easing
Mon May 11, 2009 3:10am EDT
BERLIN, May 11 (Reuters) - The downward trend in the financial crisis is easing and national economic stimulus packages are starting to work, billionaire investor George Soros was quoted as saying by a German newspaper on Monday.
Soros also told the Frankfurter Allgemeine Zeitung daily that Asia would be the first region to pull out of the crisis and China was set to overtake the United States as the engine of world growth.
"The economic freefall has been stopped, the collapse of the financial system averted. National economic stimulus programmes are starting to take effect. The downward dynamic is easing," Soros told the newspaper.
"I expect the recovery to make up for around half of the downturn we have had and then to move into stagnation," Soros said. "Asia will be first to find out of the crisis, but America is also currently doing that."
Soros said the U.S. dollar was already weak, adding: "I don't expect the dollar to lose much value against the euro, on the contrary."
Soros said the financial crisis had shown that it was a big advantage for weak countries to be part of the euro system.
"But the crisis should motivate Germany as the strongest country to make proposals for a more efficient euro system. I am missing leadership from the German government on this," Soros said.
http://www.reuters.com/article/marketsNews/idUSLB65783520090511
Mon May 11, 2009 3:10am EDT
BERLIN, May 11 (Reuters) - The downward trend in the financial crisis is easing and national economic stimulus packages are starting to work, billionaire investor George Soros was quoted as saying by a German newspaper on Monday.
Soros also told the Frankfurter Allgemeine Zeitung daily that Asia would be the first region to pull out of the crisis and China was set to overtake the United States as the engine of world growth.
"The economic freefall has been stopped, the collapse of the financial system averted. National economic stimulus programmes are starting to take effect. The downward dynamic is easing," Soros told the newspaper.
"I expect the recovery to make up for around half of the downturn we have had and then to move into stagnation," Soros said. "Asia will be first to find out of the crisis, but America is also currently doing that."
Soros said the U.S. dollar was already weak, adding: "I don't expect the dollar to lose much value against the euro, on the contrary."
Soros said the financial crisis had shown that it was a big advantage for weak countries to be part of the euro system.
"But the crisis should motivate Germany as the strongest country to make proposals for a more efficient euro system. I am missing leadership from the German government on this," Soros said.
http://www.reuters.com/article/marketsNews/idUSLB65783520090511
Thursday, April 16, 2009
Soros says U.S. faces "lasting slowdown"
Soros says U.S. faces "lasting slowdown"
Mon Apr 6, 2009 6:31pm EDT
By Jennifer Ablan and Daniel Burns
NEW YORK (Reuters) - The U.S. economy is in for a "lasting slowdown" and could face a Japanese-style period of relatively low growth with the added problem of high inflation, billionaire investor George Soros said on Monday.
Soros told Reuters Financial Television that rescuing U.S. banks could turn them into "zombies" that suck the lifeblood of the economy, prolonging the economic slowdown.
"I don't expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown," Soros said, adding that in 2010 there might be "something" in terms of U.S. growth.
Most economists expect the U.S. economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to a latest monthly poll of forecasts by Reuters.
The recovery will look like "an inverted square root sign," Soros said: "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down -- step down."
In the fourth quarter, the U.S. economy contracted at a 6.3 percent annualized rate, and economists think the first quarter's slide will be at least as severe, if not worse.
Healing the banking system, which is "basically insolvent," and housing markets is crucial to recovery, Soros said.
The public-private investment funds -- unveiled by the Treasury last month to get bad debts off bank balance sheets -- are going to work but won't be enough to recapitalize the banks so they are able to or willing to provide credit, he said.
Even a steep yield curve won't generate enough profits to keep the banks out of their vulnerable situation.
"What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.
"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."
Soros, whose latest book, "The Crash of 2008 and What it Means," has made prescient calls during the credit crisis.
A year ago, he told Reuters that global losses were likely to top $1 trillion. U.S. and European banks have recorded more than $700 billion in losses and write-downs, as of February 5, 2009, according to Reuters data.
DOLLAR IS VULNERABLE
Soros said the "stress tests" of banks being conducted by Treasury, to determine their financial resilience, could be a precursor to a more successful recapitalization of the banks.
He also said the U.S. dollar is under selling pressure and one day could be replaced as a world reserve currency, possibly by the International Monetary Fund's Special Drawing Rights, a currency basket comprising dollars, euros, yen and sterling.
"I think the dollar is now under question and I think the system will need to be reformed, so that the United States will be subject to the same discipline as is imposed on other countries," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.
"Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end."
Soros said there was a risk of a "tipping point" for the dollar which would see it slump, triggering higher interest rates and choking growth.
"This leads you to what used to be stagflation -- stop, go. And I think that is what's probably in store, rather than... hyperinflation."
China recently proposed greater use of SDRs, possibly as an eventual global reserve currency.
"In the long run, having an international accounting unit rather than the dollar may, in fact, be to our advantage so we can't splurge -- you know, it felt very good for 25 years but now we are paying a very heavy price," Soros said.
U.S. consumer spending has to fall to 60 percent of gross domestic product, compared two-thirds now, he continued.
China will emerge first from recession, probably this year, and will lead global growth in 2010, Soros added.
World policymakers are "actually beginning to catch up" with the crisis and efforts to fix structural problems in the financial system, he said referring to last week's meeting of leaders of G20 countries.
Turning to Europe, the euro has been "a tremendous advantage" to countries that use it, adding there's "no question of a weaker country dropping out," Soros said.
More funds for the IMF will help it stabilize struggling Eastern Europe but the Baltic states still face "serious problems" and Ukraine is not far from default, he warned.
Widespread use of credit default swaps has worsened the risks for Europe, he said, though he added that Germany, the euro zone's biggest economy, is becoming more open to offering help. "Germany, which has been the most reserved about being the deep pocket of the rest of Europe, has recognized that it too has a responsibility toward the new member states."
Germany has been one of the most reluctant major economies to meet U.S. calls for more fiscal stimulus spending to boost the global economy and fight the financial crisis.
http://www.reuters.com/article/newsOne/idUSTRE53537D20090406
Mon Apr 6, 2009 6:31pm EDT
By Jennifer Ablan and Daniel Burns
NEW YORK (Reuters) - The U.S. economy is in for a "lasting slowdown" and could face a Japanese-style period of relatively low growth with the added problem of high inflation, billionaire investor George Soros said on Monday.
Soros told Reuters Financial Television that rescuing U.S. banks could turn them into "zombies" that suck the lifeblood of the economy, prolonging the economic slowdown.
"I don't expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown," Soros said, adding that in 2010 there might be "something" in terms of U.S. growth.
Most economists expect the U.S. economy to stop contracting in the third quarter and resume growing in the fourth quarter, according to a latest monthly poll of forecasts by Reuters.
The recovery will look like "an inverted square root sign," Soros said: "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down -- step down."
In the fourth quarter, the U.S. economy contracted at a 6.3 percent annualized rate, and economists think the first quarter's slide will be at least as severe, if not worse.
Healing the banking system, which is "basically insolvent," and housing markets is crucial to recovery, Soros said.
The public-private investment funds -- unveiled by the Treasury last month to get bad debts off bank balance sheets -- are going to work but won't be enough to recapitalize the banks so they are able to or willing to provide credit, he said.
Even a steep yield curve won't generate enough profits to keep the banks out of their vulnerable situation.
"What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.
"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."
Soros, whose latest book, "The Crash of 2008 and What it Means," has made prescient calls during the credit crisis.
A year ago, he told Reuters that global losses were likely to top $1 trillion. U.S. and European banks have recorded more than $700 billion in losses and write-downs, as of February 5, 2009, according to Reuters data.
DOLLAR IS VULNERABLE
Soros said the "stress tests" of banks being conducted by Treasury, to determine their financial resilience, could be a precursor to a more successful recapitalization of the banks.
He also said the U.S. dollar is under selling pressure and one day could be replaced as a world reserve currency, possibly by the International Monetary Fund's Special Drawing Rights, a currency basket comprising dollars, euros, yen and sterling.
"I think the dollar is now under question and I think the system will need to be reformed, so that the United States will be subject to the same discipline as is imposed on other countries," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.
"Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end."
Soros said there was a risk of a "tipping point" for the dollar which would see it slump, triggering higher interest rates and choking growth.
"This leads you to what used to be stagflation -- stop, go. And I think that is what's probably in store, rather than... hyperinflation."
China recently proposed greater use of SDRs, possibly as an eventual global reserve currency.
"In the long run, having an international accounting unit rather than the dollar may, in fact, be to our advantage so we can't splurge -- you know, it felt very good for 25 years but now we are paying a very heavy price," Soros said.
U.S. consumer spending has to fall to 60 percent of gross domestic product, compared two-thirds now, he continued.
China will emerge first from recession, probably this year, and will lead global growth in 2010, Soros added.
World policymakers are "actually beginning to catch up" with the crisis and efforts to fix structural problems in the financial system, he said referring to last week's meeting of leaders of G20 countries.
Turning to Europe, the euro has been "a tremendous advantage" to countries that use it, adding there's "no question of a weaker country dropping out," Soros said.
More funds for the IMF will help it stabilize struggling Eastern Europe but the Baltic states still face "serious problems" and Ukraine is not far from default, he warned.
Widespread use of credit default swaps has worsened the risks for Europe, he said, though he added that Germany, the euro zone's biggest economy, is becoming more open to offering help. "Germany, which has been the most reserved about being the deep pocket of the rest of Europe, has recognized that it too has a responsibility toward the new member states."
Germany has been one of the most reluctant major economies to meet U.S. calls for more fiscal stimulus spending to boost the global economy and fight the financial crisis.
http://www.reuters.com/article/newsOne/idUSTRE53537D20090406
Wednesday, April 8, 2009
Soros Says Gain in U.S. Stocks Is ‘Bear-Market Rally
Soros Says Gain in U.S. Stocks Is ‘Bear-Market Rally
By Saijel Kishan and Kathleen Hays
April 7 (Bloomberg) -- George Soros, the billionaire hedge- fund manager who made money last year while most peers suffered losses, said the four-week rally in U.S. stocks isn’t the start of a bull market because the economy is still shrinking.
“It’s a bear-market rally because we have not yet turned the economy around,” Soros, 78, said in an interview yesterday with Bloomberg Television, referring to the recent rebound in stock prices. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”
The Standard & Poor’s 500 Index of largest U.S. companies has climbed 21 percent since March 9 on optimism the worst of the 16-month U.S. recession is over. The economy continues to contract, and there’s a risk the U.S. falls into a depression, Soros said.
“As long as we deal with this in a multilateral and more or less coordinated way, I think we’ll get through,” said Soros, whose Quantum Endowment Fund rose 8 percent last year, compared with the average 19 percent decline of hedge funds tracked by Chicago-based Hedge Fund Research Inc.
Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom and Doom Report, said in a separate Bloomberg TV interview today that the S&P 500 may drop as much as 10 percent before resuming gains.
Views on Obama
Soros gave a mostly positive review of the President Barack Obama’s administration.
“He’s done very well in every area, except in dealing with the recapitalization of the banks and the restructuring of the mortgage market,” said Soros, who has published an updated paperback version of his book “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means” (Scribe Publications, 2009). “Unfortunately, there’s just a little bit too much continuity with the previous administration.”
Soros said the U.S. housing market hasn’t bottomed, even as transactions in states such as California have increased.
“There are some signs of hitting bottom, but we are not there yet,” he said. “A lot has been done to forestall foreclosures.”
U.S. stocks declined for the first time in five days yesterday on concern that government measures to shore up banks may not help as much as estimated by analysts and loan losses will exceed levels from the Great Depression. The S&P 500 today fell 2.4 percent to 815.55, adding to yesterday’s 0.83 percent drop.
‘Zombie’ Banks
Soros said the banking system is “seriously under water” with banks on “life support.”
“They are weighed down by a lot of bad assets, which are still declining in value,” he said in the interview in his New York office. “The amount is difficult to estimate, but I think it’s in the region of maybe a trillion-and-a-half dollars.”
Soros said the change to fair-value accounting rules will keep troubled banks in business, stalling a U.S. recovery.
“This is part of the muddling-through scenario where we are going to keep zombie banks alive,” Soros said. “It’s going to sap the energies of the economy.”
The Financial Accounting Standards Board relaxed so-called mark-to-market rules last week, allowing banks to use “significant” judgment in gauging prices of some investments on their books. While analysts said the measure may reduce writedowns and boost net income, investor advocates and accounting-industry groups said it will help financial institutions hide their true health.
Bank Nationalization
The “bugaboo of nationalizing banks,” which the Obama administration wants to avoid, means “we are nationalizing only one side of the balance sheet,” Soros said. “We gradually take over the deficits on the balance sheet. But we aren’t actually going to benefit from the banks recovering.”
Money being injected into banks under government rescue programs should be used to finance new lending, according to Soros. He said he participated in HSBC Holdings Plc’s rights offer, which raised about $19.1 billion.
Soros’s firm oversees $21 billion. Its Quantum Endowment Fund rose 5.2 percent this year through February, data compiled by Bloomberg show. Soros ranked last year as the industry’s fourth-highest paid hedge fund manager, earning about $1.1 billion, according to Institutional Investor’s Alpha magazine.
Hedge funds should be regulated like other financial firms, Soros said. It would be appropriate for authorities to monitor positions to see whether managers have “excessive exposure,” he said.
Hedge-Fund Regulation
The Group of 20 leaders said last week they would extend oversight to all financial institutions deemed vital to global financial stability, including “systemically important” hedge funds. U.S. Treasury Secretary Timothy Geithner said last month he wants to bring hedge funds, private-equity firms and derivatives markets under federal supervision for the first time.
“The hedge funds that have used excessive leverage have actually failed or are on the way out, so I don’t think this is going to do any damage or hurt the hedge funds except for the fact that they have to fill out more forms,” Soros said.
“Recognizing that markets are inherently unstable does require a different kind of regulation than we had in the past,” he said.
Soros Fund Management LLC was fined 489 million forint ($2.2 million) last month for attempting to manipulate the share price of OTP Bank Nyrt., Hungary’s largest bank, the country’s financial regulator said.
Hungarian Ruling
The Soros fund attempted on Oct. 9 to “send out false or misleading signals about a security’s supply and demand or its share price” and short sold OTP shares, the regulator, known as PSZAF, said in a statement late yesterday. The short selling caused the shares to drop 14 percent in the final 30 minutes of trade, the regulator said. Soros apologized for the trade and said the fund had started an internal investigation.
Hungarian-born Soros gained fame in the 1990s when he broke the Bank of England’s defense of the pound and drove the currency from Europe’s system of linked exchange rates. He also successfully bet that Germany’s mark would appreciate after the collapse of the Berlin Wall in 1989 and Japanese stocks would start to fall in the same year.
Soros said China’s economic growth will accelerate before the end of the year.
“They have a pretty big stimulus package,” he said. “They are going to use more, because not being a democracy, the leadership knows that their very survival, the avoidance of social unrest, requires them to generate growth.”
Brazil to China
China’s economy grew 6.8 percent in the fourth quarter from the same period a year earlier, lagging the 9 percent expansion in all of 2008 and 13 percent in 2007. Industrial output growth slowed, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.
Brazil’s economy will resume growth “relatively soon,” helped by Chinese demand for iron ore and soybeans, Soros said.
“I think Brazil actually, together with China, will be among the recovering countries,” he said. “The outlook for Brazil is better than for most other countries.”
To contact the reporter on this story: Kathleen Hays in New York at khays4@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNR3f9WE2L9s
mms://media2.bloomberg.com/cache/vrNyQYkxiMmg.asf
08/04/2009 tjhinkh
China will come out of recession at the end of the year.
Instead of giving credit to America, China will now give credit to Africa and Latin America.
Already China signed a credit swap agreement with Argentina.
America will have less deficit and save more as China is not funding US deficit anymore.
When world economy recover, oil will rise to USD70. Cost to develop oil is around USD70.
Brazil will develop deep sea oil drilling and oil in the Artic will be developed.
Brazil will come out of recession relatively soon.
By Saijel Kishan and Kathleen Hays
April 7 (Bloomberg) -- George Soros, the billionaire hedge- fund manager who made money last year while most peers suffered losses, said the four-week rally in U.S. stocks isn’t the start of a bull market because the economy is still shrinking.
“It’s a bear-market rally because we have not yet turned the economy around,” Soros, 78, said in an interview yesterday with Bloomberg Television, referring to the recent rebound in stock prices. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”
The Standard & Poor’s 500 Index of largest U.S. companies has climbed 21 percent since March 9 on optimism the worst of the 16-month U.S. recession is over. The economy continues to contract, and there’s a risk the U.S. falls into a depression, Soros said.
“As long as we deal with this in a multilateral and more or less coordinated way, I think we’ll get through,” said Soros, whose Quantum Endowment Fund rose 8 percent last year, compared with the average 19 percent decline of hedge funds tracked by Chicago-based Hedge Fund Research Inc.
Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom and Doom Report, said in a separate Bloomberg TV interview today that the S&P 500 may drop as much as 10 percent before resuming gains.
Views on Obama
Soros gave a mostly positive review of the President Barack Obama’s administration.
“He’s done very well in every area, except in dealing with the recapitalization of the banks and the restructuring of the mortgage market,” said Soros, who has published an updated paperback version of his book “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means” (Scribe Publications, 2009). “Unfortunately, there’s just a little bit too much continuity with the previous administration.”
Soros said the U.S. housing market hasn’t bottomed, even as transactions in states such as California have increased.
“There are some signs of hitting bottom, but we are not there yet,” he said. “A lot has been done to forestall foreclosures.”
U.S. stocks declined for the first time in five days yesterday on concern that government measures to shore up banks may not help as much as estimated by analysts and loan losses will exceed levels from the Great Depression. The S&P 500 today fell 2.4 percent to 815.55, adding to yesterday’s 0.83 percent drop.
‘Zombie’ Banks
Soros said the banking system is “seriously under water” with banks on “life support.”
“They are weighed down by a lot of bad assets, which are still declining in value,” he said in the interview in his New York office. “The amount is difficult to estimate, but I think it’s in the region of maybe a trillion-and-a-half dollars.”
Soros said the change to fair-value accounting rules will keep troubled banks in business, stalling a U.S. recovery.
“This is part of the muddling-through scenario where we are going to keep zombie banks alive,” Soros said. “It’s going to sap the energies of the economy.”
The Financial Accounting Standards Board relaxed so-called mark-to-market rules last week, allowing banks to use “significant” judgment in gauging prices of some investments on their books. While analysts said the measure may reduce writedowns and boost net income, investor advocates and accounting-industry groups said it will help financial institutions hide their true health.
Bank Nationalization
The “bugaboo of nationalizing banks,” which the Obama administration wants to avoid, means “we are nationalizing only one side of the balance sheet,” Soros said. “We gradually take over the deficits on the balance sheet. But we aren’t actually going to benefit from the banks recovering.”
Money being injected into banks under government rescue programs should be used to finance new lending, according to Soros. He said he participated in HSBC Holdings Plc’s rights offer, which raised about $19.1 billion.
Soros’s firm oversees $21 billion. Its Quantum Endowment Fund rose 5.2 percent this year through February, data compiled by Bloomberg show. Soros ranked last year as the industry’s fourth-highest paid hedge fund manager, earning about $1.1 billion, according to Institutional Investor’s Alpha magazine.
Hedge funds should be regulated like other financial firms, Soros said. It would be appropriate for authorities to monitor positions to see whether managers have “excessive exposure,” he said.
Hedge-Fund Regulation
The Group of 20 leaders said last week they would extend oversight to all financial institutions deemed vital to global financial stability, including “systemically important” hedge funds. U.S. Treasury Secretary Timothy Geithner said last month he wants to bring hedge funds, private-equity firms and derivatives markets under federal supervision for the first time.
“The hedge funds that have used excessive leverage have actually failed or are on the way out, so I don’t think this is going to do any damage or hurt the hedge funds except for the fact that they have to fill out more forms,” Soros said.
“Recognizing that markets are inherently unstable does require a different kind of regulation than we had in the past,” he said.
Soros Fund Management LLC was fined 489 million forint ($2.2 million) last month for attempting to manipulate the share price of OTP Bank Nyrt., Hungary’s largest bank, the country’s financial regulator said.
Hungarian Ruling
The Soros fund attempted on Oct. 9 to “send out false or misleading signals about a security’s supply and demand or its share price” and short sold OTP shares, the regulator, known as PSZAF, said in a statement late yesterday. The short selling caused the shares to drop 14 percent in the final 30 minutes of trade, the regulator said. Soros apologized for the trade and said the fund had started an internal investigation.
Hungarian-born Soros gained fame in the 1990s when he broke the Bank of England’s defense of the pound and drove the currency from Europe’s system of linked exchange rates. He also successfully bet that Germany’s mark would appreciate after the collapse of the Berlin Wall in 1989 and Japanese stocks would start to fall in the same year.
Soros said China’s economic growth will accelerate before the end of the year.
“They have a pretty big stimulus package,” he said. “They are going to use more, because not being a democracy, the leadership knows that their very survival, the avoidance of social unrest, requires them to generate growth.”
Brazil to China
China’s economy grew 6.8 percent in the fourth quarter from the same period a year earlier, lagging the 9 percent expansion in all of 2008 and 13 percent in 2007. Industrial output growth slowed, forcing thousands of factories to close and leaving about 20 million migrant workers jobless.
Brazil’s economy will resume growth “relatively soon,” helped by Chinese demand for iron ore and soybeans, Soros said.
“I think Brazil actually, together with China, will be among the recovering countries,” he said. “The outlook for Brazil is better than for most other countries.”
To contact the reporter on this story: Kathleen Hays in New York at khays4@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNR3f9WE2L9s
mms://media2.bloomberg.com/cache/vrNyQYkxiMmg.asf
08/04/2009 tjhinkh
China will come out of recession at the end of the year.
Instead of giving credit to America, China will now give credit to Africa and Latin America.
Already China signed a credit swap agreement with Argentina.
America will have less deficit and save more as China is not funding US deficit anymore.
When world economy recover, oil will rise to USD70. Cost to develop oil is around USD70.
Brazil will develop deep sea oil drilling and oil in the Artic will be developed.
Brazil will come out of recession relatively soon.
Monday, April 6, 2009
Soros calls G20 deal "a turning point"
Soros calls G20 deal "a turning point"
Fri Apr 3, 2009 12:11am BST
LONDON (Reuters) - Billionaire investor George Soros on Thursday said G20 leaders had taken decisive action to combat the worst economic crisis since the Great Depression of the 1930s was a success.
"This could well be a turning point because the authorities got together and they have taken the steps," Soros said in an interview on BBC television.
The investor, who said last week that the G20 meeting in London would be a "make or break event" for global markets, added: "I think it has definitely made it."
World leaders clinched a $1.1 trillion (747 billion pound) deal to boost the global economy and said financial rules would be tightened to prevent a repeat of the crisis.
Hungarian-born Soros said the leaders had "anticipated there is a very serious problem facing the developing world."
"If it hadn't been addressed today, we would have another very serious deterioration in what I call the periphery countries, including Eastern Europe. They have definitely prevented it by the measures they have taken," he said.
http://uk.reuters.com/article/UKNews1/idUKTRE53188N20090402
http://news.bbc.co.uk/1/hi/programmes/newsnight/7981506.stm
http://www.youtube.com/watch?v=h2zLNZyqFAc
http://www.cnbc.com/id/30024970
Fri Apr 3, 2009 12:11am BST
LONDON (Reuters) - Billionaire investor George Soros on Thursday said G20 leaders had taken decisive action to combat the worst economic crisis since the Great Depression of the 1930s was a success.
"This could well be a turning point because the authorities got together and they have taken the steps," Soros said in an interview on BBC television.
The investor, who said last week that the G20 meeting in London would be a "make or break event" for global markets, added: "I think it has definitely made it."
World leaders clinched a $1.1 trillion (747 billion pound) deal to boost the global economy and said financial rules would be tightened to prevent a repeat of the crisis.
Hungarian-born Soros said the leaders had "anticipated there is a very serious problem facing the developing world."
"If it hadn't been addressed today, we would have another very serious deterioration in what I call the periphery countries, including Eastern Europe. They have definitely prevented it by the measures they have taken," he said.
http://uk.reuters.com/article/UKNews1/idUKTRE53188N20090402
http://news.bbc.co.uk/1/hi/programmes/newsnight/7981506.stm
http://www.youtube.com/watch?v=h2zLNZyqFAc
http://www.cnbc.com/id/30024970
Wednesday, April 1, 2009
George Soros: Britain may have to seek IMF rescue
George Soros: Britain may have to seek IMF rescue
March 28, 2009
Alice Thomson, Rachel Sylvester and Philip Webster
Britain may have to go to the IMF for a huge financial bailout, the influential investor George Soros warns today.
The man who made $1 billion on Black Wednesday in 1992 told The Times that Britain was particularly vulnerable to the economic crisis.
Mr Soros – speaking days after an auction of government bonds failed for the first time in 14 years, ringing alarm bells about Britain’s ability to fund its growing debts – said that Gordon Brown might have to go begging for billions of pounds in international aid. He also warned that next week’s G20 summit in London was the last chance to avert a full-scale depression that could prove worse than that in the 1930s.
“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,” he said. Asked about the chances of Britain having to seek help from the International Monetary Fund, he said that if the banking system continued to collapse, it was “a possibility”. At this stage, he added, it was “not a likelihood”.
He was not optimistic about the G20 meeting, saying the odds were that it would fail because there were so many differences of opinion. The price could be years of economic devastation worse than the Great Depression. “It is really a make-or-break occasion.”
It would be a disaster if the meeting were allowed to turn into a talking shop, he said. “It’s not enough to state general principles. You’ve got to come up with practical measures that are going to provide protection to the developing world, periphery countries, against a storm that originated from the centre, against a calamity that is not of their own making.”
He spoke amid more gloom over the British economy after official figures showed that output shrank by a worse-than-expected 1.6 per cent in the final three months of 2008. It was the biggest fall since April-June 1980.
Mr Soros refused to blame Mr Brown for failing to prevent the crisis. “He underestimated the severity of the problem but so did most people. Part of the perceived role of a leader is to cheerlead so you can’t really blame him for that.”
Britain has not sought IMF help since 1976 when, with inflation approaching 27 per cent, Denis Healey, then the Chancellor, applied for a loan, shredding confidence in the Labour Government
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5989746.ece
March 28, 2009
Alice Thomson, Rachel Sylvester and Philip Webster
Britain may have to go to the IMF for a huge financial bailout, the influential investor George Soros warns today.
The man who made $1 billion on Black Wednesday in 1992 told The Times that Britain was particularly vulnerable to the economic crisis.
Mr Soros – speaking days after an auction of government bonds failed for the first time in 14 years, ringing alarm bells about Britain’s ability to fund its growing debts – said that Gordon Brown might have to go begging for billions of pounds in international aid. He also warned that next week’s G20 summit in London was the last chance to avert a full-scale depression that could prove worse than that in the 1930s.
“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,” he said. Asked about the chances of Britain having to seek help from the International Monetary Fund, he said that if the banking system continued to collapse, it was “a possibility”. At this stage, he added, it was “not a likelihood”.
He was not optimistic about the G20 meeting, saying the odds were that it would fail because there were so many differences of opinion. The price could be years of economic devastation worse than the Great Depression. “It is really a make-or-break occasion.”
It would be a disaster if the meeting were allowed to turn into a talking shop, he said. “It’s not enough to state general principles. You’ve got to come up with practical measures that are going to provide protection to the developing world, periphery countries, against a storm that originated from the centre, against a calamity that is not of their own making.”
He spoke amid more gloom over the British economy after official figures showed that output shrank by a worse-than-expected 1.6 per cent in the final three months of 2008. It was the biggest fall since April-June 1980.
Mr Soros refused to blame Mr Brown for failing to prevent the crisis. “He underestimated the severity of the problem but so did most people. Part of the perceived role of a leader is to cheerlead so you can’t really blame him for that.”
Britain has not sought IMF help since 1976 when, with inflation approaching 27 per cent, Denis Healey, then the Chancellor, applied for a loan, shredding confidence in the Labour Government
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5989746.ece
One Way to Stop Bear Raids
One Way to Stop Bear Raids
Credit default swaps need much stricter regulation.
By GEORGE SOROS
In all the uproar over AIG, the most important lesson has been ignored. AIG failed because it sold large amounts of credit default swaps (CDS) without properly offsetting or covering their positions. What we must take away from this is that CDS are toxic instruments whose use ought to be strictly regulated: Only those who own the underlying bonds ought to be allowed to buy them. Instituting this rule would tame a destructive force and cut the price of the swaps. It would also save the U.S. Treasury a lot of money by reducing the loss on AIG's outstanding positions without abrogating any contracts.
CDS came into existence as a way of providing insurance on bonds against default. Since they are tradable instruments, they became bear-market warrants for speculating on deteriorating conditions in a company or country. What makes them toxic is that such speculation can be self-validating.
Up until the crash of 2008, the prevailing view -- called the efficient market hypothesis -- was that the prices of financial instruments accurately reflect all the available information (i.e. the underlying reality). But this is not true. Financial markets don't deal with the current reality, but with the future -- a matter of anticipation, not knowledge. Thus, we must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect. (I call this feedback mechanism "reflexivity.")
With the help of this new paradigm, the poisonous nature of CDS can be demonstrated in a three-step argument. The first step is to acknowledge that being long and selling short in the stock market has an asymmetric risk/reward profile. Losing on a long position reduces one's risk exposure, while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. This asymmetry discourages short-selling.
The second step is to recognize that the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. Going short on bonds by buying a CDS contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in. People buy them not because they expect an eventual default, but because they expect the CDS to appreciate in response to adverse developments.
AIG thought it was selling insurance on bonds, and as such, they considered CDS outrageously overpriced. In fact, it was selling bear-market warrants and it severely underestimated the risk.
The third step is to recognize reflexivity, which means that the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is so dependent on trust. A decline in their share and bond prices can increase their financing costs. That means that bear raids on financial institutions can be self-validating.
Taking these three considerations together, it's clear that AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS mutually amplified and reinforced each other. The unlimited shorting of stocks was made possible by the abolition of the uptick rule, which would have hindered bear raids by allowing short selling only when prices were rising. The unlimited shorting of bonds was facilitated by the CDS market. The two made a lethal combination. And AIG failed to understand this.
Many argue now that CDS ought to be traded on regulated exchanges. I believe that they are toxic and should only be allowed to be used by those who own the bonds, not by others who want to speculate against countries or companies. Under this rule -- which would require international agreement and federal legislation -- the buying pressure on CDS would greatly diminish, and all outstanding CDS would drop in price. As a collateral benefit, the U.S. Treasury would save a great deal of money on its exposure to AIG.
http://online.wsj.com/article/SB123785310594719693.html
Credit default swaps need much stricter regulation.
By GEORGE SOROS
In all the uproar over AIG, the most important lesson has been ignored. AIG failed because it sold large amounts of credit default swaps (CDS) without properly offsetting or covering their positions. What we must take away from this is that CDS are toxic instruments whose use ought to be strictly regulated: Only those who own the underlying bonds ought to be allowed to buy them. Instituting this rule would tame a destructive force and cut the price of the swaps. It would also save the U.S. Treasury a lot of money by reducing the loss on AIG's outstanding positions without abrogating any contracts.
CDS came into existence as a way of providing insurance on bonds against default. Since they are tradable instruments, they became bear-market warrants for speculating on deteriorating conditions in a company or country. What makes them toxic is that such speculation can be self-validating.
Up until the crash of 2008, the prevailing view -- called the efficient market hypothesis -- was that the prices of financial instruments accurately reflect all the available information (i.e. the underlying reality). But this is not true. Financial markets don't deal with the current reality, but with the future -- a matter of anticipation, not knowledge. Thus, we must understand financial markets through a new paradigm which recognizes that they always provide a biased view of the future, and that the distortion of prices in financial markets may affect the underlying reality that those prices are supposed to reflect. (I call this feedback mechanism "reflexivity.")
With the help of this new paradigm, the poisonous nature of CDS can be demonstrated in a three-step argument. The first step is to acknowledge that being long and selling short in the stock market has an asymmetric risk/reward profile. Losing on a long position reduces one's risk exposure, while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. This asymmetry discourages short-selling.
The second step is to recognize that the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way. Going short on bonds by buying a CDS contract carries limited risk but almost unlimited profit potential. By contrast, selling CDS offers limited profits but practically unlimited risks. This asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds. The negative effect is reinforced by the fact that CDS are tradable and therefore tend to be priced as warrants, which can be sold at anytime, not as options, which would require an actual default to be cashed in. People buy them not because they expect an eventual default, but because they expect the CDS to appreciate in response to adverse developments.
AIG thought it was selling insurance on bonds, and as such, they considered CDS outrageously overpriced. In fact, it was selling bear-market warrants and it severely underestimated the risk.
The third step is to recognize reflexivity, which means that the mispricing of financial instruments can affect the fundamentals that market prices are supposed to reflect. Nowhere is this phenomenon more pronounced than in the case of financial institutions, whose ability to do business is so dependent on trust. A decline in their share and bond prices can increase their financing costs. That means that bear raids on financial institutions can be self-validating.
Taking these three considerations together, it's clear that AIG, Bear Stearns, Lehman Brothers and others were destroyed by bear raids in which the shorting of stocks and buying CDS mutually amplified and reinforced each other. The unlimited shorting of stocks was made possible by the abolition of the uptick rule, which would have hindered bear raids by allowing short selling only when prices were rising. The unlimited shorting of bonds was facilitated by the CDS market. The two made a lethal combination. And AIG failed to understand this.
Many argue now that CDS ought to be traded on regulated exchanges. I believe that they are toxic and should only be allowed to be used by those who own the bonds, not by others who want to speculate against countries or companies. Under this rule -- which would require international agreement and federal legislation -- the buying pressure on CDS would greatly diminish, and all outstanding CDS would drop in price. As a collateral benefit, the U.S. Treasury would save a great deal of money on its exposure to AIG.
http://online.wsj.com/article/SB123785310594719693.html
Eastern Europe 'prime candidate' for IMF help-Soros
Eastern Europe 'prime candidate' for IMF help-Soros
Tue Mar 31, 2009 9:47am EDT
LONDON, March 31 (Reuters) - Billionaire investor George Soros said on Tuesday Eastern Europe was a "prime candidate" for International Monetary Fund (IMF) support.
Speaking at the London School of Economic ahead of the G20 summit, Soros said: "G20 should not just provide pious words but should take steps to stabilise periphery countries."
Last week Soros told the Times that it was "conceivable" for Britain to seek help from the IMF
http://www.reuters.com/article/rbssInvestmentServices/idUSWLA113020090331
Tue Mar 31, 2009 9:47am EDT
LONDON, March 31 (Reuters) - Billionaire investor George Soros said on Tuesday Eastern Europe was a "prime candidate" for International Monetary Fund (IMF) support.
Speaking at the London School of Economic ahead of the G20 summit, Soros said: "G20 should not just provide pious words but should take steps to stabilise periphery countries."
Last week Soros told the Times that it was "conceivable" for Britain to seek help from the IMF
http://www.reuters.com/article/rbssInvestmentServices/idUSWLA113020090331
Monday, March 23, 2009
U.S. hedge fund takes HSBC short, repeats HBOS ploy
U.S. hedge fund takes HSBC short, repeats HBOS ploy
Tue Mar 10, 2009 5:41am EDT
LONDON, March 10 (Reuters) - U.S. hedge fund Harbinger Capital is the first company to declare a short position in HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) following the bank's record rights issue, after making millions from a similar tactic with UK bank HBOS last year.
Harbinger said in a regulatory filing it has taken a 0.26 percent short position in HSBC's London shares, worth about 110 million pounds ($157 million). By 0910 GMT the shares were up 2.5 percent at 356 pence.
Harbinger has also unveiled a series of short positions in Spanish banks in recent weeks, including a short position of 1 percent in BBVA (BBVA.MC: Quote, Profile, Research, Stock Buzz) and 0.4 percent in Santander (SAN.MC: Quote, Profile, Research, Stock Buzz).
It has also been declaring almost on a daily basis short positions in other Spanish lenders, particularly in Banco Popular (POP.MC: Quote, Profile, Research, Stock Buzz) and Sabadell (SABE.MC: Quote, Profile, Research, Stock Buzz).
The hedge fund -- run by Philip Falcone, who was one of five hedge fund managers quizzed by U.S. lawmakers last November -- took a 3.3 percent short position in HBOS during last summers's rights issue.
It bet 345 million pounds ($490.7 million) on the stake, and HBOS shares fell sharply in the subsequent months as the rights issue flopped. A takeover by Lloyds offered only brief respite, and the stake is now worth about 35 million pounds in Lloyds (LLOY.L: Quote, Profile, Research, Stock Buzz) shares.
Harbinger never disclosed if or when it bought the shares back. It could not immediately be reached for comment.
Former Harvard hockey star Falcone's shrewd housing market bets at Harbinger netted him a $1.7 billion payout in 2007, according to Alpha Magazine. [ID:nN16372761]
Harbinger's parent group Harbert Management Corp, based in Alabama, manages about $9 billion in assets, according to its website.
One fund focuses on distressed, undervalued or special situation assets, and the other focuses on longer-term investments including special equity situations.
It sells short securities when a company's deterioration or industry fundamentals are not reflected in its current price, the website said. ($1=.7030 pounds) (Reporting by Steve Slater in London and Judith MacInnes in Madrid; Editing by Greg Mahlich)
http://www.reuters.com/articlePrint?articleId=USLA16109520090310
23/03/2009
tjhinkh: Falcone short HSBC on 10th March 2009
01/04/2009
tjhinkh: He has reduced his HSBC short.
Tue Mar 10, 2009 5:41am EDT
LONDON, March 10 (Reuters) - U.S. hedge fund Harbinger Capital is the first company to declare a short position in HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) following the bank's record rights issue, after making millions from a similar tactic with UK bank HBOS last year.
Harbinger said in a regulatory filing it has taken a 0.26 percent short position in HSBC's London shares, worth about 110 million pounds ($157 million). By 0910 GMT the shares were up 2.5 percent at 356 pence.
Harbinger has also unveiled a series of short positions in Spanish banks in recent weeks, including a short position of 1 percent in BBVA (BBVA.MC: Quote, Profile, Research, Stock Buzz) and 0.4 percent in Santander (SAN.MC: Quote, Profile, Research, Stock Buzz).
It has also been declaring almost on a daily basis short positions in other Spanish lenders, particularly in Banco Popular (POP.MC: Quote, Profile, Research, Stock Buzz) and Sabadell (SABE.MC: Quote, Profile, Research, Stock Buzz).
The hedge fund -- run by Philip Falcone, who was one of five hedge fund managers quizzed by U.S. lawmakers last November -- took a 3.3 percent short position in HBOS during last summers's rights issue.
It bet 345 million pounds ($490.7 million) on the stake, and HBOS shares fell sharply in the subsequent months as the rights issue flopped. A takeover by Lloyds offered only brief respite, and the stake is now worth about 35 million pounds in Lloyds (LLOY.L: Quote, Profile, Research, Stock Buzz) shares.
Harbinger never disclosed if or when it bought the shares back. It could not immediately be reached for comment.
Former Harvard hockey star Falcone's shrewd housing market bets at Harbinger netted him a $1.7 billion payout in 2007, according to Alpha Magazine. [ID:nN16372761]
Harbinger's parent group Harbert Management Corp, based in Alabama, manages about $9 billion in assets, according to its website.
One fund focuses on distressed, undervalued or special situation assets, and the other focuses on longer-term investments including special equity situations.
It sells short securities when a company's deterioration or industry fundamentals are not reflected in its current price, the website said. ($1=.7030 pounds) (Reporting by Steve Slater in London and Judith MacInnes in Madrid; Editing by Greg Mahlich)
http://www.reuters.com/articlePrint?articleId=USLA16109520090310
23/03/2009
tjhinkh: Falcone short HSBC on 10th March 2009
01/04/2009
tjhinkh: He has reduced his HSBC short.
The long and the short
The long and the short
Mar 12th 2009
From The Economist print edition
John Paulson made a fortune betting against mortgages. Now he spies opportunities in the wreckage
IN TODAY’S gut-wrenching markets, winners are as rare as a house that sells for the asking price. Even Warren Buffett is looking less than sagacious after his holding company posted its worst year ever. But one investor who continues to win plaudits is John Paulson. His hedge funds have had a superb crisis. They clocked up triple-digit returns in 2007 betting against subprime mortgages, netting him $3.7 billion personally—a sum that made George Soros’s winnings from currency bets in the early 1990s look modest. Mr Paulson’s funds continued to do well last year, rising by 7.9-37.6% even as those run by other hedge-fund titans, such as SAC’s Steve Cohen and Citadel’s Ken Griffin, suffered miserably. His funds were all up again in the first two months of 2009, and they now hold $30 billion—a war chest that Mr Paulson is now starting to use to gobble up the very securities that made him rich when they collapsed in value.
He cut his teeth in risk arbitrage, which involves punting on actual or potential merger targets. This remains an important strategy for him, and he had reason to celebrate this week when Dow Chemical agreed (under legal pressure) to complete its $15.3 billion acquisition of Rohm & Haas, another chemicals firm, in which Mr Paulson’s funds own a big stake. But he is best known for his canny bets against mortgage-backed bonds and financial shares. The firms in which he was “short” (ie, betting on a fall) last year lost, on average, 90% of their value.
Success has not bred arrogance. On the contrary, Mr Paulson is a fitting icon for the post-boom age: mild-mannered, bordering on weedy and so soft-spoken that when testifying before Congress in November he had to be asked to speak up. His first taste of business was to buy sweets in bulk and sell them to classmates at a hefty mark-up, but it is hard to imagine him having had the guts for such a scheme. He has never charged more than 1½% of assets and 20% of profits, a reasonably modest fee for a hedge-fund superstar. His job is, he says, more about preserving clients’ principal than gambling for outsized returns.
Accordingly, his funds generally eschew leverage, or making bets with borrowed money. He insists that his fruitful subprime trade, far from being stunningly clever, was a no-brainer for anyone who bothered to analyse the complex securities’ underlying collateral. “It was obvious that a lot of the stuff…was practically worthless at the time of issuance,” he says. He finds it “perplexing” that the banks holding the higher-rated tranches could not see this danger, and that so few others were prepared to believe that Wall Street’s finest could have miscalculated so badly.
Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust. Though the CDS market has been good to him, he believes it “blew out of control” and needs to be regulated and moved onto exchanges, with margin requirements to limit excessive speculation. He also advocates tighter oversight of hedge funds.
He is, however, robust in his defence of short-selling, which has been vilified for its perceived role in driving down banks’ share prices. He sees it as a “valuable” tool, used not least by banks themselves to hedge their various exposures. More importantly, he argues, it is too small a part of stockmarket activity to move prices. His shorting “made absolutely no difference to the performance of any mortgages, securities or banks.” The blame lies with reckless lending, not with those who capitalise on the resulting mispricing of securities. There is, therefore, no “moral dimension”—though he allows that some of the “more vocal” shorts may have hurt banks’ prospects of raising fresh capital.
Still, his vast profits make him a target in a world where high finance is held in low esteem. Portfolio, a business magazine, dubbed him “The man who made too much”. He retorts that the bulk of the profits went to his investors, which include foundations, endowments and pension funds. They are not the only ones with reason to thank him: a $15m donation is helping families facing foreclosure to keep their homes, by paying for lawyers to exploit the sloppy documentation that accompanied the often-hurried pooling of subprime mortgages into securities. Mr Paulson says he has many other philanthropic arrows in his quiver, but to publicise them would “take away the altruism”.
Distress call
Just as markets used to hang on Mr Soros’s every move, they are now keen followers of Mr Paulson. He does not see the economy reaching bottom this year and is still a net short-seller of financial firms. More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain. He talks of distressed debt—mortgages, leveraged loans and the debt of bankrupt firms—as a $10 trillion opportunity.
At some point, his “number-one focus” will be to provide equity to recapitalise sick but viable banks. He is already dipping his toe in: his latest vehicle, the Recovery Fund, recently took a 25% stake in IndyMac, a Californian bank that the government seized last July. But the timing of any bigger push is uncertain. Mr Paulson is acutely aware of the costs of moving too early: those who have bought into financial firms since the start of the crisis have lost, on average, 80% of their investment. Still, in these dire times it is comforting to know that such a smart investor believes there will be something worth saving.
http://www.economist.com/people/displaystory.cfm?story_id=13277415
Mar 12th 2009
From The Economist print edition
John Paulson made a fortune betting against mortgages. Now he spies opportunities in the wreckage
IN TODAY’S gut-wrenching markets, winners are as rare as a house that sells for the asking price. Even Warren Buffett is looking less than sagacious after his holding company posted its worst year ever. But one investor who continues to win plaudits is John Paulson. His hedge funds have had a superb crisis. They clocked up triple-digit returns in 2007 betting against subprime mortgages, netting him $3.7 billion personally—a sum that made George Soros’s winnings from currency bets in the early 1990s look modest. Mr Paulson’s funds continued to do well last year, rising by 7.9-37.6% even as those run by other hedge-fund titans, such as SAC’s Steve Cohen and Citadel’s Ken Griffin, suffered miserably. His funds were all up again in the first two months of 2009, and they now hold $30 billion—a war chest that Mr Paulson is now starting to use to gobble up the very securities that made him rich when they collapsed in value.
He cut his teeth in risk arbitrage, which involves punting on actual or potential merger targets. This remains an important strategy for him, and he had reason to celebrate this week when Dow Chemical agreed (under legal pressure) to complete its $15.3 billion acquisition of Rohm & Haas, another chemicals firm, in which Mr Paulson’s funds own a big stake. But he is best known for his canny bets against mortgage-backed bonds and financial shares. The firms in which he was “short” (ie, betting on a fall) last year lost, on average, 90% of their value.
Success has not bred arrogance. On the contrary, Mr Paulson is a fitting icon for the post-boom age: mild-mannered, bordering on weedy and so soft-spoken that when testifying before Congress in November he had to be asked to speak up. His first taste of business was to buy sweets in bulk and sell them to classmates at a hefty mark-up, but it is hard to imagine him having had the guts for such a scheme. He has never charged more than 1½% of assets and 20% of profits, a reasonably modest fee for a hedge-fund superstar. His job is, he says, more about preserving clients’ principal than gambling for outsized returns.
Accordingly, his funds generally eschew leverage, or making bets with borrowed money. He insists that his fruitful subprime trade, far from being stunningly clever, was a no-brainer for anyone who bothered to analyse the complex securities’ underlying collateral. “It was obvious that a lot of the stuff…was practically worthless at the time of issuance,” he says. He finds it “perplexing” that the banks holding the higher-rated tranches could not see this danger, and that so few others were prepared to believe that Wall Street’s finest could have miscalculated so badly.
Another motivating factor for Mr Paulson was the alluring asymmetry of shorting credit. The most you can lose is the spread over some benchmark rate. Yet if the bond defaults, the gains can be mouth-watering. He targeted BBB-rated tranches, the lowest in subprime securities. With credit spreads so low because of a liquidity glut, his possible upside as a buyer of protection using credit-default swaps (CDSs) was as much as hundred times the potential downside. One $22m trade is said to have netted him $1 billion when Lehman Brothers went bust. Though the CDS market has been good to him, he believes it “blew out of control” and needs to be regulated and moved onto exchanges, with margin requirements to limit excessive speculation. He also advocates tighter oversight of hedge funds.
He is, however, robust in his defence of short-selling, which has been vilified for its perceived role in driving down banks’ share prices. He sees it as a “valuable” tool, used not least by banks themselves to hedge their various exposures. More importantly, he argues, it is too small a part of stockmarket activity to move prices. His shorting “made absolutely no difference to the performance of any mortgages, securities or banks.” The blame lies with reckless lending, not with those who capitalise on the resulting mispricing of securities. There is, therefore, no “moral dimension”—though he allows that some of the “more vocal” shorts may have hurt banks’ prospects of raising fresh capital.
Still, his vast profits make him a target in a world where high finance is held in low esteem. Portfolio, a business magazine, dubbed him “The man who made too much”. He retorts that the bulk of the profits went to his investors, which include foundations, endowments and pension funds. They are not the only ones with reason to thank him: a $15m donation is helping families facing foreclosure to keep their homes, by paying for lawyers to exploit the sloppy documentation that accompanied the often-hurried pooling of subprime mortgages into securities. Mr Paulson says he has many other philanthropic arrows in his quiver, but to publicise them would “take away the altruism”.
Distress call
Just as markets used to hang on Mr Soros’s every move, they are now keen followers of Mr Paulson. He does not see the economy reaching bottom this year and is still a net short-seller of financial firms. More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain. He talks of distressed debt—mortgages, leveraged loans and the debt of bankrupt firms—as a $10 trillion opportunity.
At some point, his “number-one focus” will be to provide equity to recapitalise sick but viable banks. He is already dipping his toe in: his latest vehicle, the Recovery Fund, recently took a 25% stake in IndyMac, a Californian bank that the government seized last July. But the timing of any bigger push is uncertain. Mr Paulson is acutely aware of the costs of moving too early: those who have bought into financial firms since the start of the crisis have lost, on average, 80% of their investment. Still, in these dire times it is comforting to know that such a smart investor believes there will be something worth saving.
http://www.economist.com/people/displaystory.cfm?story_id=13277415
George Soros interview: A very good crisis
George Soros interview: A very good crisis
EXCLUSIVE: Peter Wilson | March 19, 2009
George Soros is having a very good crisis. Other investors are wilting, political power structures are being upended and market economists are scrambling to fashion new theories, but the world's most famous speculator is having a belated heyday.
George Soros: A very good crisis
George Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
"It is, in a way, the culminating point of my life’s work," the 78-year-old says in his heavy Hungarian accent during an interview at his London mansion.
If Soros had retired from the money markets at 48 to become a philosopher – which was his life plan when he set up his own Wall Street hedge fund at the age of 43 – the world is unlikely to have heard of him, as either an ideas man or a money man. Even if he had ended his career 20 years later, he would have been remembered as little more than the big-stakes gambler who "broke the Bank of England" with his 1992 bet against the pound that earned him $US1.1 billion.
At 68 Soros had just predicted a global financial collapse which did not happen, just as he had done a decade earlier; his pet theory of market behaviour, which he calls "reflexivity", had been largely ignored; and his political donations had bought him little sway in Washington. Yet today, he says, all those strands seem to have come together – "the American election, the financial crisis, the theory of reflexivity, so it is actually a very stimulating period".
For one thing Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
Having twice cried wolf, he finally got it right by being one of the very few people to anticipate the 2007 credit crunch and current economic collapse. In the process he has gained enough respect for his ideas on market behaviour to help his ninth book, The New Paradigm for Financial Markets, win the sales and positive reviews that had eluded him.
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent. He now believes he can step back from a hands-on role at Quantum.
"I think that I have done what I can to preserve capital," he says with some understatement, "and going forward I need to be less engaged. Also, I now have a chief financial officer who can take over. I am sort of handing over to him again and I am more engaged in policy issues than ever before."
INTERVIEW TRANSCRIPT, PART ONE: how Soros stays informed, why the crisis is stimulating, and how he helped Henry Paulson change his mind.
That new engagement on the policy front coincides with a remarkable improvement in the political environment for Soros, who spent $US25 million in a failed effort to help Democrat John Kerry defeat George W. Bush in 2004.
Some Wall Street donors jumped onto Barack Obama’s bandwagon just before last November’s election, when he was comfortably leading John McCain in the opinion polls. Others can boast that they backed Obama before he stitched up the Democratic nomination in May and there are a few who can even say that they were on board before he won the Iowa Democratic caucuses in January.
Soros held a fundraiser for Obama at his New York home and donated the maximum legal amount in June – June 2004, that is, before Obama had even been elected to the US Senate. Two years later he urged Obama to run for president, and when he did become a candidate Soros organised a meeting with other financiers in Soros’s own Wall Street office.
The result is that after being a political outcast under the Bush administration and having little infl uence under Bill Clinton, Soros is confi dent that “at least I will get a hearing” in Washington. And he will use it to advocate radical regulatory and financial reform to rein in financiers like himself.
After decades exploiting any weakness he could find in the regulatory system, Soros certainly knows where the flaws are, and he warns that past US policies have been based on the “ideological excess (of) market fundamentalism” – the assumption that markets can correct themselves with little need for government intervention in financial affairs.
If regulators and major governments stick to that approach in the current fi nancial crisis, rather than making radical changes, then “all hell will break loose”, Soros says. “For instance, having put the fi nancial system on artificial life support after the Lehman breakdown, that artificial life
support then created problems for the periphery countries that were not able to give the same kind of credible guarantees” as the US and other wealthy nations, he says.
“You now face the situation where a lot of loans are going to come due that cannot be rolled over, so unless the authorities get their act together and do something to prevent it, there will be tremendous problems ... in all the emerging markets. I am talking 2009, I am talking about right now.”
Self-interest would lead many financiers to oppose tighter government regulations but Soros says that speculators and investors like himself need to be pulled tightly into line, along with banks and other financial players.
He concedes that many of his proposals – such as loosening Washington’s grip on the International Monetary Fund; co-ordinating macroeconomic policies between national governments; and bringing in new international regulatory regimes for banking and markets to oversee some of the wilder financial instruments and derivative products – will be extremely difficult to sell politically. But he claims there is reason for at least some hope because of the growing awareness of the depth of the crisis.
“I am actually fairly optimistic because the problems are recognised and certainly the new team in America understands things pretty well the same way as I do. And I think Gordon Brown does and he is providing leadership. He is working on the G20 meeting in April as the sort of culminating point of some actions, so I think action will be taken. But there will always be slippage, so they may continue to lag behind events.
“It is in the nature of this situation that (things continue) to deteriorate, and if you only respond to problems and don’t foresee them and take preventive action, then the problem always gets larger, and measures that would have worked are inadequate by that time. So actually the problem I see is that some of the policymakers understand what needs to be done but ... what they are afraid of
actually has to happen before action can be taken. And that is why we are liable to have still a number of crises.”
Several governments are considering the creation of so-called “bad banks” to hold the toxic assets of crippled commercial banks. But Soros says more dramatic steps are needed, because even banks relieved of their worst assets will spend years restoring their balance sheets before they offer the sort of lending needed to stimulate economic recovery. For that reason Soros advocates a partial nationalisation scheme, through the creation of a “good bank” as well as a “bad bank”, even though diverting solid assets from existing commercial banks into such a “good bank” would erode shareholder wealth.
Too much has already been done for the banks and their shareholders rather than for the ordinary households and businesses that would benefit from new lending, he says. Governments should keep existing capital with bad assets and move good assets into a new bank, which would then be recapitalised so it could provide new lending.
“I think the Obama administration is moving towards a good bank/bad bank solution, but it is not the right kind of good bank/bad bank solution. What they propose currently is creating this aggregator bank which will take the toxic assets out of the banking system, out of the banks, so it really injects government money into the bad banks, and I am saying that they ought to be injecting money into the good banks. I think it is difficult to generate the political will (for that) ... and this is my main worry right now, that they may get it wrong.
“They (are) in a difficult situation because they have two obstacles. One is that the hole has become too big – you need something like a trillion and a half of new money in addition to the (initial) $US700 billion because the hole has grown.”
The second obstacle to be overcome is that the clumsy way in which the Bush Administration handled the Troubled Asset Relief Program has “poisoned the well”, making it more difficult to get future funding packages through Congress.
Soros advocates much greater restrictions on the sort of short-selling of stocks that has been a mainstay of the hedge fund industry and says the creation of new credit instruments will have to be regulated in the future.
While many are now calling for regulation of credit default swaps, Soros takes a harder line, saying they are toxic and should be used only by prescription. They could be used to insure actual bonds, he says, but not to speculate against nations or businesses. Derivatives and synthetic
instruments, such as the slicing and dicing of collateralised debt obligations, should also be tightly
regulated and monitored.
The limits on credit and leverage will have to be set substantially lower than those tolerated in the past, he says, a move which would make the financial industry less profi table than in recent years and make some highly leveraged business models untenable.
Alongside recapitalisation of the banks, there should be an overhaul of the US mortgage system to cut the cost of mortgages and foreclosures. Governments should also create money, both domestically and globally, through a massive expansion of the IMF’s Special Drawing Rights scheme, running into trillions of dollars. The only way to avoid global deflation and depression, according to Soros, is to first induce its opposite, inflation, and then carefully reduce it.
One potential engine for new growth is the development of alternative energies and a greener economy, Soros says, but he worries that the fall in the price of oil has eliminated a grand
opportunity by reducing the incentive to invest in better options.
“It would have been a perfect fit. You could have introduced effectively a carbon tax and put a floor under (the price of) oil, and stopped it from falling, but now that it has fallen you would have to impose an import duty to raise it.”
That is politically untenable, but at current prices “you have to use less simple instruments to foster alternative energy development, like subsidies and so on – it will be messier”.
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth.
One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus
is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
Soros sees Australia’s medium-term economic prospects as largely a function of China’s growth and the state of commodity markets. In 2008 he sold a large stake in the Brazilian iron ore producer CVRD before the crash in commodity prices and then profi tably shorted BHP’s stock.
However, he says he did not act decisively enough to take advantage of the fall in other commodities such as oil.
Soros’s enthusiasm for sharing his views on the crisis and its possible solutions is driven by a fierce desire to be seen as more than the archetypal money market man. When the economic historian Niall Ferguson described the early hedge fund managers in The Ascent of Money, he
called Soros “the acknowledged capo dei capi of the new economic hitmen”. But Soros yearns to be respected for his ideas rather than his market clout.
He arrived in Britain as a teenager in 1947 after his Jewish family survived the Nazi occupation of Hungary. He studied philosophy at the London School of Economics under Karl Popper before going into finance and moving to New York in 1956. He was deeply influenced by Popper’s
views on fallibilism – the need to question the information underpinning one’s own assumptions and to be open to the possibility that those assumptions may be wrong.
One of his great strengths as an investor, Soros says, has been his willingness to change positions as soon as he realises that he has made a mistake, rather than clinging on in the
hope that his initial judgements will be vindicated. There is pleasure, he says, “in recognising that you are wrong – because actually the pleasure (comes) from not losing money”.
His view of the markets was also shaped by the sociological concept of reflexivity, the awareness that the simple act of observing a subject can affect that subject and distort the observations.
Soros applied the idea to the markets, rejecting the notion that prices are the efficient outcome of “perfect” knowledge, instead insisting that they are shaped by the biases and ignorance of market players, and that those biases can be self-fulfilling.
During the American housing bubble, for instance, the relentless series of double-digit rises in house prices changed the behaviour and perceptions of market players, who loosened lending practices and allowed the market to move further and further from equilibrium.
Soros says his 1992 attack on the British pound, which forced then Chancellor of the Exchequer Norman Lamont to accelerate Britain’s withdrawal from the European Exchange Rate Mechanism, is an example of his constant search for the opportunities created by imperfect markets overshooting and under-shooting in that way.
“The authorities lagged, you see. There is this reflexive cat-and-mouse game going on between markets and the authorities all the time and I am more aware of it than perhaps most others, therefore I acted more decisively.
“So just like traditional economists predicted seven of the last three recessions, in the same way I anticipated seven of the last three bubbles,” he says with a throaty chuckle.
“What has happened now is that the efficient market hypothesis has been discredited, the evidence is just too overwhelming ... but instead of accepting reflexivity, the
(economics) profession is veering towards behavioural economics and what is called the adaptive systems hypothesis (or) adaptive markets hypothesis.
“And I am worried about that because I think that this will perpetuate the mistake. Because basically the adaptive markets hypothesis says that anything goes that helps the survival of the fittest in terms of systems. And therefore this validates any system that prevails. My contention is that actually systems can be maladaptive, as witnessed by the fact that they can collapse the way they have collapsed.”
Jon Danielsson, a reader in international finance at the LSE, argues that Soros overstates the originality of his theories. “A lot of market participants have focused on finding inefficiencies in the market,” he says. “Soros is just very good at putting that into practice.”
Larry Summers, the director of Obama’s National Economic Council, has a kinder view, telling the Financial Times recently that Soros’s theories deserve attention and have been incorporated not only into the financier’s money-making strategies but also into his philanthropic efforts to promote what Soros describes as “open societies”.
“No philanthropist in the second half of the 20th century has done better in deploying resources strategically to change the world,” Summers said.
Soros is “very proud” of his large donations against Bush in 2004, even though Bush was re-elected. “When you invest, you do it in order to make a profit. When you take a political stance, you do it for the principle and not for the outcome. One of the people I admire is a Russian human rights activist named Sergei. He said to me: ‘All my life I fought losing battles.’ And I think if you keep on fighting losing battles, you actually win the war.”
http://www.theaustralian.news.com.au/business/story/0,28124,25211027-5018057,00.html
EXCLUSIVE: Peter Wilson | March 19, 2009
George Soros is having a very good crisis. Other investors are wilting, political power structures are being upended and market economists are scrambling to fashion new theories, but the world's most famous speculator is having a belated heyday.
George Soros: A very good crisis
George Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
"It is, in a way, the culminating point of my life’s work," the 78-year-old says in his heavy Hungarian accent during an interview at his London mansion.
If Soros had retired from the money markets at 48 to become a philosopher – which was his life plan when he set up his own Wall Street hedge fund at the age of 43 – the world is unlikely to have heard of him, as either an ideas man or a money man. Even if he had ended his career 20 years later, he would have been remembered as little more than the big-stakes gambler who "broke the Bank of England" with his 1992 bet against the pound that earned him $US1.1 billion.
At 68 Soros had just predicted a global financial collapse which did not happen, just as he had done a decade earlier; his pet theory of market behaviour, which he calls "reflexivity", had been largely ignored; and his political donations had bought him little sway in Washington. Yet today, he says, all those strands seem to have come together – "the American election, the financial crisis, the theory of reflexivity, so it is actually a very stimulating period".
For one thing Soros is now recognised as one of the most effective philanthropists, finding a new sense of purpose by spending billions to promote civil society in new democracies.
Having twice cried wolf, he finally got it right by being one of the very few people to anticipate the 2007 credit crunch and current economic collapse. In the process he has gained enough respect for his ideas on market behaviour to help his ninth book, The New Paradigm for Financial Markets, win the sales and positive reviews that had eluded him.
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent. He now believes he can step back from a hands-on role at Quantum.
"I think that I have done what I can to preserve capital," he says with some understatement, "and going forward I need to be less engaged. Also, I now have a chief financial officer who can take over. I am sort of handing over to him again and I am more engaged in policy issues than ever before."
INTERVIEW TRANSCRIPT, PART ONE: how Soros stays informed, why the crisis is stimulating, and how he helped Henry Paulson change his mind.
That new engagement on the policy front coincides with a remarkable improvement in the political environment for Soros, who spent $US25 million in a failed effort to help Democrat John Kerry defeat George W. Bush in 2004.
Some Wall Street donors jumped onto Barack Obama’s bandwagon just before last November’s election, when he was comfortably leading John McCain in the opinion polls. Others can boast that they backed Obama before he stitched up the Democratic nomination in May and there are a few who can even say that they were on board before he won the Iowa Democratic caucuses in January.
Soros held a fundraiser for Obama at his New York home and donated the maximum legal amount in June – June 2004, that is, before Obama had even been elected to the US Senate. Two years later he urged Obama to run for president, and when he did become a candidate Soros organised a meeting with other financiers in Soros’s own Wall Street office.
The result is that after being a political outcast under the Bush administration and having little infl uence under Bill Clinton, Soros is confi dent that “at least I will get a hearing” in Washington. And he will use it to advocate radical regulatory and financial reform to rein in financiers like himself.
After decades exploiting any weakness he could find in the regulatory system, Soros certainly knows where the flaws are, and he warns that past US policies have been based on the “ideological excess (of) market fundamentalism” – the assumption that markets can correct themselves with little need for government intervention in financial affairs.
If regulators and major governments stick to that approach in the current fi nancial crisis, rather than making radical changes, then “all hell will break loose”, Soros says. “For instance, having put the fi nancial system on artificial life support after the Lehman breakdown, that artificial life
support then created problems for the periphery countries that were not able to give the same kind of credible guarantees” as the US and other wealthy nations, he says.
“You now face the situation where a lot of loans are going to come due that cannot be rolled over, so unless the authorities get their act together and do something to prevent it, there will be tremendous problems ... in all the emerging markets. I am talking 2009, I am talking about right now.”
Self-interest would lead many financiers to oppose tighter government regulations but Soros says that speculators and investors like himself need to be pulled tightly into line, along with banks and other financial players.
He concedes that many of his proposals – such as loosening Washington’s grip on the International Monetary Fund; co-ordinating macroeconomic policies between national governments; and bringing in new international regulatory regimes for banking and markets to oversee some of the wilder financial instruments and derivative products – will be extremely difficult to sell politically. But he claims there is reason for at least some hope because of the growing awareness of the depth of the crisis.
“I am actually fairly optimistic because the problems are recognised and certainly the new team in America understands things pretty well the same way as I do. And I think Gordon Brown does and he is providing leadership. He is working on the G20 meeting in April as the sort of culminating point of some actions, so I think action will be taken. But there will always be slippage, so they may continue to lag behind events.
“It is in the nature of this situation that (things continue) to deteriorate, and if you only respond to problems and don’t foresee them and take preventive action, then the problem always gets larger, and measures that would have worked are inadequate by that time. So actually the problem I see is that some of the policymakers understand what needs to be done but ... what they are afraid of
actually has to happen before action can be taken. And that is why we are liable to have still a number of crises.”
Several governments are considering the creation of so-called “bad banks” to hold the toxic assets of crippled commercial banks. But Soros says more dramatic steps are needed, because even banks relieved of their worst assets will spend years restoring their balance sheets before they offer the sort of lending needed to stimulate economic recovery. For that reason Soros advocates a partial nationalisation scheme, through the creation of a “good bank” as well as a “bad bank”, even though diverting solid assets from existing commercial banks into such a “good bank” would erode shareholder wealth.
Too much has already been done for the banks and their shareholders rather than for the ordinary households and businesses that would benefit from new lending, he says. Governments should keep existing capital with bad assets and move good assets into a new bank, which would then be recapitalised so it could provide new lending.
“I think the Obama administration is moving towards a good bank/bad bank solution, but it is not the right kind of good bank/bad bank solution. What they propose currently is creating this aggregator bank which will take the toxic assets out of the banking system, out of the banks, so it really injects government money into the bad banks, and I am saying that they ought to be injecting money into the good banks. I think it is difficult to generate the political will (for that) ... and this is my main worry right now, that they may get it wrong.
“They (are) in a difficult situation because they have two obstacles. One is that the hole has become too big – you need something like a trillion and a half of new money in addition to the (initial) $US700 billion because the hole has grown.”
The second obstacle to be overcome is that the clumsy way in which the Bush Administration handled the Troubled Asset Relief Program has “poisoned the well”, making it more difficult to get future funding packages through Congress.
Soros advocates much greater restrictions on the sort of short-selling of stocks that has been a mainstay of the hedge fund industry and says the creation of new credit instruments will have to be regulated in the future.
While many are now calling for regulation of credit default swaps, Soros takes a harder line, saying they are toxic and should be used only by prescription. They could be used to insure actual bonds, he says, but not to speculate against nations or businesses. Derivatives and synthetic
instruments, such as the slicing and dicing of collateralised debt obligations, should also be tightly
regulated and monitored.
The limits on credit and leverage will have to be set substantially lower than those tolerated in the past, he says, a move which would make the financial industry less profi table than in recent years and make some highly leveraged business models untenable.
Alongside recapitalisation of the banks, there should be an overhaul of the US mortgage system to cut the cost of mortgages and foreclosures. Governments should also create money, both domestically and globally, through a massive expansion of the IMF’s Special Drawing Rights scheme, running into trillions of dollars. The only way to avoid global deflation and depression, according to Soros, is to first induce its opposite, inflation, and then carefully reduce it.
One potential engine for new growth is the development of alternative energies and a greener economy, Soros says, but he worries that the fall in the price of oil has eliminated a grand
opportunity by reducing the incentive to invest in better options.
“It would have been a perfect fit. You could have introduced effectively a carbon tax and put a floor under (the price of) oil, and stopped it from falling, but now that it has fallen you would have to impose an import duty to raise it.”
That is politically untenable, but at current prices “you have to use less simple instruments to foster alternative energy development, like subsidies and so on – it will be messier”.
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth.
One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus
is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
Soros sees Australia’s medium-term economic prospects as largely a function of China’s growth and the state of commodity markets. In 2008 he sold a large stake in the Brazilian iron ore producer CVRD before the crash in commodity prices and then profi tably shorted BHP’s stock.
However, he says he did not act decisively enough to take advantage of the fall in other commodities such as oil.
Soros’s enthusiasm for sharing his views on the crisis and its possible solutions is driven by a fierce desire to be seen as more than the archetypal money market man. When the economic historian Niall Ferguson described the early hedge fund managers in The Ascent of Money, he
called Soros “the acknowledged capo dei capi of the new economic hitmen”. But Soros yearns to be respected for his ideas rather than his market clout.
He arrived in Britain as a teenager in 1947 after his Jewish family survived the Nazi occupation of Hungary. He studied philosophy at the London School of Economics under Karl Popper before going into finance and moving to New York in 1956. He was deeply influenced by Popper’s
views on fallibilism – the need to question the information underpinning one’s own assumptions and to be open to the possibility that those assumptions may be wrong.
One of his great strengths as an investor, Soros says, has been his willingness to change positions as soon as he realises that he has made a mistake, rather than clinging on in the
hope that his initial judgements will be vindicated. There is pleasure, he says, “in recognising that you are wrong – because actually the pleasure (comes) from not losing money”.
His view of the markets was also shaped by the sociological concept of reflexivity, the awareness that the simple act of observing a subject can affect that subject and distort the observations.
Soros applied the idea to the markets, rejecting the notion that prices are the efficient outcome of “perfect” knowledge, instead insisting that they are shaped by the biases and ignorance of market players, and that those biases can be self-fulfilling.
During the American housing bubble, for instance, the relentless series of double-digit rises in house prices changed the behaviour and perceptions of market players, who loosened lending practices and allowed the market to move further and further from equilibrium.
Soros says his 1992 attack on the British pound, which forced then Chancellor of the Exchequer Norman Lamont to accelerate Britain’s withdrawal from the European Exchange Rate Mechanism, is an example of his constant search for the opportunities created by imperfect markets overshooting and under-shooting in that way.
“The authorities lagged, you see. There is this reflexive cat-and-mouse game going on between markets and the authorities all the time and I am more aware of it than perhaps most others, therefore I acted more decisively.
“So just like traditional economists predicted seven of the last three recessions, in the same way I anticipated seven of the last three bubbles,” he says with a throaty chuckle.
“What has happened now is that the efficient market hypothesis has been discredited, the evidence is just too overwhelming ... but instead of accepting reflexivity, the
(economics) profession is veering towards behavioural economics and what is called the adaptive systems hypothesis (or) adaptive markets hypothesis.
“And I am worried about that because I think that this will perpetuate the mistake. Because basically the adaptive markets hypothesis says that anything goes that helps the survival of the fittest in terms of systems. And therefore this validates any system that prevails. My contention is that actually systems can be maladaptive, as witnessed by the fact that they can collapse the way they have collapsed.”
Jon Danielsson, a reader in international finance at the LSE, argues that Soros overstates the originality of his theories. “A lot of market participants have focused on finding inefficiencies in the market,” he says. “Soros is just very good at putting that into practice.”
Larry Summers, the director of Obama’s National Economic Council, has a kinder view, telling the Financial Times recently that Soros’s theories deserve attention and have been incorporated not only into the financier’s money-making strategies but also into his philanthropic efforts to promote what Soros describes as “open societies”.
“No philanthropist in the second half of the 20th century has done better in deploying resources strategically to change the world,” Summers said.
Soros is “very proud” of his large donations against Bush in 2004, even though Bush was re-elected. “When you invest, you do it in order to make a profit. When you take a political stance, you do it for the principle and not for the outcome. One of the people I admire is a Russian human rights activist named Sergei. He said to me: ‘All my life I fought losing battles.’ And I think if you keep on fighting losing battles, you actually win the war.”
http://www.theaustralian.news.com.au/business/story/0,28124,25211027-5018057,00.html
Subscribe to:
Posts (Atom)