The Soros Fallacy: Michael Lewis (Correct)
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The Soros Fallacy: Michael Lewis (Correct) (Corrects spelling of baht in second-last paragraph. Eliminates time references in sixth paragraph.) (Michael Lewis, the author of "Liar's Poker," "The Money Culture" and "Trail Fever," is a columnist for Bloomberg News. The opinions expressed are his own, and don't represent the judgment of Bloomberg LP or Bloomberg News.)
New York, Nov. 7 (Bloomberg) -- Sometime in early 1987, I mentioned to a large customer of mine that Japanese government bond futures were trading at a large premium to the cash market. The Japanese financial markets were even less rational then than they are now, and occasionally they presented you with this sort of chance to make riskless profits.
My customer took one look at the numbers, handed me $300 million and told me to buy bonds and sell futures. The next day, as if by magic, Japanese bond futures prices collapsed while the cash market barely moved. There was no way that our $300 million had had that sort of effect, and I phoned my customer to wonder aloud about the miracle of it. "I called George and told him about our trade," said my customer. "And he did $3 billion."
George was George Soros, and back then he actually did make these sort of giant financial decisions. No one said much about his intrusion into the Japanese bond markets, however. The trade certainly never wound up in the newspapers. When Soros' money moved, it moved silently.
Ten years later something like the opposite is true. Soros himself no longer trades for a living. He watches the markets mainly from a distance, as he goes about his admirable business of making the world a freer and more open place to live.
Overruled
The decisions about where to invest money he leaves to his portfolio managers -- to the point where his portfolio managers are quite happy to ignore and even overrule Soros' advice. If they fail to make money they get fired, of course.
Yet even as Soros absents himself from the markets, the world has become perfectly obsessed with his market judgments. Malaysian Prime Minister Mahathir Mohamad accused Soros of staging a run on the ringgit. The chairman of Barrick Gold Corp., Peter Munk, claimed that the price of gold was better controlled by George Soros than by the companies that dug the stuff out of the ground. A Thailand central banker claimed that Soros had caused the collapse of the Thai baht.
But maybe the best example of the Cult of Soros overwhelming financial reason came from Soros' old friend Victor Niederhoffer, who you would think should know better. After losing half the value of his fund by going long Thai markets, Niederhoffer said, by way of an explanation, that Soros had told him the Thai markets were due to rise. As if it mattered!
Off the Cuff
Meanwhile, Soros himself was off writing op-eds and giving speeches to the Council of Foreign Relations. In those speeches he often offered his views on financial affairs. He'd say, for example, that the Italian markets were "too fragile," or that the U.S. stock market was due for a panic attack, or (just yesterday) that a single European currency could "destroy" the European Union.
This is what is known as idle speculation; its effects, however, can be astonishing. Markets sometime move simply because Soros says that they should. "Now I have become an important figure," Soros said a few months ago, to explain why he refused to speculate in the Russian ruble, "and if I started to do some selling the whole market would follow, and it would have a bad effect on Russia."
Viewed in this light, Victor Niederhoffer had a point. The Thai baht may well have stood a better chance if Soros was saying that it should go up. Soros may not have been putting his money where his mouth was, but others almost certainly were.
Soros famously believes that financial markets are irrational. He is never more persuasive than when he explains how markets become prisoners of their own false perceptions. Nothing proves his point more than the way they now treat him. At a time when what George Soros thinks about financial market prices should not matter, the markets are making it matter more than ever before. Go figure.
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