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George Soros: Markets
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George Soros: Stock market bubbles don't grow out of thin air. They have a solid basis in reality -- but reality as distorted by a misconception. Under normal conditions misconceptions are self-correcting, and the markets tend toward some kind of equilibrium. Occasionally, a misconception is reinforced by a trend prevailing in reality, and that is when a boom-bust process gets under way. Eventually the gap between reality and its false interpretation becomes unsustainable, and the bubble bursts.
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Soros has just written a new book: The Crisis of Global Capitalism. Here he bites the corrupt hand that has so enriched him. Without regulation and morality, he warns, global markets will self-destruct. He is now publicly worried about global depression and the great US bear market. His volte face came after he himself suffered heavy losses in a market he had himself rigged in Russia last year.
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When Central bankers talk about a benign economic outlook, and George Soros stands up and says he sees a US recession in 2007, who do you believe? The implications for the oil and gas markets of the Middle East are clearly very important.
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When reflexivity comes into play, markets go into what Soros calls "dynamic disequilibrium." That means virtuous upside cycles that lead to bubbles and booms, and vicious downside cycles that lead to crises and crashes.
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Only one other individual -- the famed Warren Buffett -- rivaled Soros as an investing wizard for the long stretch from the '60s through the '90s. Buffett's approach was dreadfully prosaic -- he lived in Omaha, Neb., of all places, bought stocks in a few supersolid companies (among them Coca-Cola, Disney, ABC and the Washington Post) and held onto them forever. Soros, in contrast, was the epitome of guts and glory. He was a short-term speculator who made terrifyingly huge bets on the directions of financial markets.
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Soros slammed the government for "not taking the right steps in dealing with" what he called upset financial markets. "[T]he authorities ought to move into the market makers, look at the books and make sure that the bad risks are recognized and reassure the markets that the main actors, the banks that are too big to fail, will not fail, that they will in fact be bailed out the same way as Northern Rock was bailed out even if that means wiping out the shareholders or greatly reducing their benefits."
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