George Soros: "The New Paradigm for Financial Markets"
Soros’ opening sentence summarizes his point concerning his new book (10th):
“We are in the midst of the worst financial crisis since the 1930s.”
He gave an interview to Bloomberg yesterday (Read HERE). Some excerpts:
Last summer, worried about market disruptions that started with rising subprime-mortgage defaults, Soros, 77, returned to a more active role in managing the US$17 billion Quantum Endowment Fund, whose profits pay for his philanthropic projects. Quantum returned an average of 30 percent a year before Soros started using outside managers in 2000 for much of his money.
He also decided to write a book, his 10th, The New Paradigm for Financial Markets. Released yesterday online (see HERE), the book explains the causes of the current meltdown, a crisis he says has been in the making since 1980, and the trades he put in place this year to protect his wealth, much of it in Quantum.
Soros has bet on declines in the US dollar, 10-year Treasuries and US and European stocks. He expected foreign currencies to rise, as well as Chinese and Indian equities. The latter bet helped Quantum return 32 percent last year. Quantum’s returns this year have ranged from up 3 percent to down 3 percent.
The euro has climbed 7.5 percent against the US dollar this year and the yen has gained 9.1 percent. These and other currencies may continue to strengthen, he said.
US Federal Reserve officials dropped their benchmark interest rate 2 percentage points this year to 2.25 percent and Soros doesn’t think that they could lower the rate much further, given the weak dollar.
“We are close to the limit,” he said.
The cause of the current troubles dates back to 1980, when US president Ronald Reagan and British prime minister Margaret Thatcher came to power, Soros said. It was during this time that borrowing ballooned and regulation of banks and financial markets became less stringent. These leaders, Soros said, believed that markets are self-correcting, meaning that if prices get out of whack, they will eventually revert to historical norms. Instead, this laissez-faire attitude created the current housing bubble, which in turn led to the seizing up of credit markets and the demise of Bear Stearns, Soros said.
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.
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