Being long commodities and short financials appears to be pretty much in line with Soros's thinking, as well as that of Don Coxe, Jim Rogers, Jim Puplava, and others whom I mostly agree with.
April 04, 2008
Despite Signs of Easing, Credit Stress a Major Risk, Says Soros
In an interview with the Financial Times earlier this week, one of the world’s legendary hedge fund managers warned that the United States is in the midst of the worst financial crisis since the 1930s. And he believes there’s still another huge shoe to drop as credit default swaps – worth in excess of $45 trillion dollars, comes undone.
Soros thinks stocks will enjoy a bear market rally and then head lower before the end of the year. He also chastises Reagan and Thatcher in the 1980s for liberalizing financial services and thereby creating a deregulated environment that is largely responsible for the current credit crisis. In 1999, the United States repealed the 1930s-era Glass-Steagall Act, allowing banks and investment banks to merge.
George Soros founded the Quantum Fund in the late 1960s with another global market guru and one of my mentors, Jim Rogers. The pair split apart in 1969. Both went on to earn huge fortunes trading global markets with Roger’s globe-trotting, publishing several books and forecasting the commodity boom ten years ago. The Rogers Raw Materials Index has outpaced all commodity benchmarks since its introduction in 1998. Rogers himself is a devout Libertarian and a long-term U.S. dollar bear.
Under his tenure, Soros earned more than 30% compounded per annum while gaining universal recognition in late 1992 after scoring a multi-billion dollar bet The Bank of England would devalue the pound and exit the ERM, or the European Exchange Rate Mechanism, the ECU’s currency grid prior to the euro in 1999. Soros retired from fund management in 2000 and currently spends most of his time running the Soros Foundation. Lately, however, the 77-year-old market master has returned to managing money.
Soros is incredibly bright and probably one of the greatest traders in the 20th century. I’d say he’s the Warren Buffet of the hedge fund world, and with strikingly successful performance accolades. When Soros speaks, I listen.
Soros has been adamant, claiming the United States financial system is mired in a toxic deflationary spiral compounded by tens of trillions of dollars clogged in credit SWAPs. A SWAP is typically executed to change the maturities of a bond portfolio or the quality of the issues in a stock or bond portfolio. Credit SWAPs have morphed into a monstrously huge business now worth close to $45 trillion dollars – more than four times the size of America’s GDP.
Soros believes there’s a good chance the entire spectrum of SWAPs will come undone in this crisis because increasingly, counterparties are having difficulty identifying trades. There are hundreds of thousands of outstanding SWAP contracts, and they threaten the financial system.
Soros recommends the creation of an exchange with a sound capital structure and strict margin requirements, where current and future contracts could be traded. To avoid a super-bubble in the future, Soros said banks must control their own borrowing. They must also curtail lending to clients such as hedge funds by demanding greater collateral and margin requirements on loans.
I’ll be heading to Europe this weekend and commenting about the markets specifically in Switzerland, Austria and Italy next week. I’m also writing a three-part report on soft agricultural commodities starting on Monday. Have a good weekend. |
