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George Soros -- Predicts Financial Crisis Worst Yet to Come


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Soros was speaking last Friday at Columbia University. 

He said that the world financial system has effectively disintegrated , and there's no near-term bottom to this financial crisis in sight.

Soros actually compared the current situation to the breakup of the Soviet Union and that there's no sign that we are anywhere near a bottom.






other article of the same event:




The real estate bubble was created as much by “relaxed” lending standards and the valuation of collateral as the availability of credit, he said. The bubble began in the early 1980s, and the subprime-mortgage debacle acted as the “detonator,” Soros said. The crisis was made possible by the globalization of financial markets and securitization of debt, he said.


Risk management has become so “refined and sophisticated” regulators can no longer follow what is happening, he said.




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We have had the greatest bubble in equities ever with the peak in 2000.  It started coming down in 2000-2002 and did deflate a bit, but it was not permitted to burst as interest rates were cut and the velocity of money increased with structured finance and the mortgage boom and this created a fragile, finance-based economy with bubbles in real-estate, credit and other asset classes. 


Then in 2008, the equity bubble (as well as other asset classes) does burst and it goes very briefly to 15% below fair-value in October/November to 750 on the S&P (fair value being around 900 plus or minus).  So after a high of 1500 on the S&P and it plunging 40% to 900 (fair-value more or less), why would there be a higher than average probability that the bubble just stops gingerly at around 15% below 900 or the lows of 750 reached in November briefly for a day or two?  Why would the odds not favor it going 30-40% below fair-value.  This seems like the better bet.  The only question is how does it get there and the answer is 1) either it goes sideways for quite a few years, or 2) it does it in the next year or so.  To bet on the latter, one would need a good "trigger" for 2009.  Maybe the worst global economy since the depression would do the trick combined with the market's misconception that the governments will be able to stimulate the economies out of this very deep recession in short order would qualify as a trigger.  Add on the odds of some blow ups along the way or a misstep or two by a sovereign creating a currency crisis.  That's the way I see 2009 - hopefully I am wrong but I remain fully hedge despite the increased costs.

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I think assuming fair of the SP500 is 900 is iffy.  It isn't like you have one company that you are trying to value.  The IV of one company is a range and the IV of that index is the weight sum of 500 ranges.  Using the SP500 for the whole stock market is iffier still as there are lot more than 500 stocks out there.  Some are way overvalued still and some are undervalued.


I am not trying to call a bottom or anything like that, but I think everyone might be getting excited about the 50% off sale.  Just because it is 50% off doesn't mean it is a good buy.  It is a better buy that it was, but that might not mean to much in the long term.


Just remember this quote:  Most stocks trade above IV for most of there life. 


Take a collection of sold, liquidated and bankrupcty companies, so you know the total cash outflow to investors over their life,  and discounted it back in a chart to compare to the stock quote over the total life cycle to see a true IV to price relationship.  You will see most companies traded over IV for a large part of that cycle.  Those that did trade under IV likely gave investors unreal returns.



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I'm not entirely sure that anybody knows anything about the S&P500's value or where it is going...In the near term, the economy has fallen off a cliff. As a result of that, people have dumped stocks. If the economy didn't go off a cliff, I'm sure we wouldn't be having this conversation and the index would be 50% higher and all the value justifications for it based on THAT economic state would be in order.


Yet, IV is far more complex. Given enough time, a few years, even of a Depression has a very small effect on the value of a business many years out (assuming it survives).


My opinion is that the world is not discounting properly because of emotion. People are projecting the current economic state for as long as the eye can see and that cannot be the case.

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Keep in mind Soros’s comments on capital injection, & where that leads:

- If key global zombies were nationalized by their home governments, global lending between these banks would effectively become inter-governmental, & those banks own loan sale infrastructures could be used to immediately push government backed credit into the global Main Street. Competitors would be forced to either follow the lead, or risk nationalization themselves. A regulatory & market solution.

- If you nationalize, you write the rules. Take it or leave it maximum 500K salary, anti-trust break up into smaller non-toxic entities, reset regulation. No shareholder input. Political capital for removing the corruption. New & healthy financial entities going back to the market.

- $ on the sideline can safely move into the new non-toxic entities. Unregulated off BS securitization starts getting refinanced as regulated on BS banker acceptances/commercial paper. If 10% of US GDP is on the sidelines (low estimate) & these entities are capped at 12.5:1 (very conservative) leverage – 1.25x US GDP suddenly becomes available.           

- Controlled write offs/bankruptcies. Write off particular toxic assets & everyone else holding those particular assets will be forced to follow – bankrupting some. Let the planned fallout pass, & then repeat with another type of toxic asset.


Of course if you’re one of the bankers/hedge funds potentially affected you’d collectively do everything that you could to ensure that this didn’t happen.  Inaction & stagflation suddenly becomes the only way to go!


Soros has been ridiculed by many, but consider that for most of his life he’s called the various emperors out on their lack of clothes, & repeatedly been right. In many ways, he is the ultimate truly independent black sheep.


Do you feel lucky enough to ignore him?




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IMHO, it is possible to come up with a rough idea of fair value for a broad stock market.


Starting with the assumption that economy is going to survive and would continue to grow at more or less as in the 20th century, we can get a rough idea of the IV of the stock market. Earnings are cyclical, they go up and down quite a bit year to year but in the long term it tends to go up at roughly the nominal growth rate of the economy. In an open free market capitalist economy, various economic, social and political forces would ensure this. Total earnings of all the companies fluctuate within a narrow range as a percentage of the economy. Smoothing out the earnings, by whatever mechanism (Shiller 10 yr avg, etc), you can find the normal sustainable earnings power.


The way I define "fair value" for the stock market as a whole or a proxy like S&P 500 is the value at which the expected return over the very long term approximates the historial stock market real return of 6.5%. My calculated normal earnings power for S&P 500 is $65 in 2008. An earnings yield of 7% has historically delivered a return of 6.5% due to leakage - transaction costs, etc. This gives a fair value of somewhere in the 900-950 region for S&P 500. This tells nothing of what is going to happen in the near term but it gives a pretty good idea of your expected returns over the long term.



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George Soros is brilliantly smart, probably too smart for his own good.


However, he is a media whore. 


If he was soooo right about all this gloom and doom, why did he lose somewhere in the 200M range with Lehman???


The more gloomy you are these days, the more media time you are getting. 


If you took a poll of CNBC watchers on who they would trust more with their money Roubini or Buffett, I wouldn't be surprised to see Buffett lose. 




You've got to accentuate the positive

Eliminate the negative

Latch on to the affirmative

Don't mess with Mister In-Between


You've got to spread joy up to the maximum

Bring gloom down to the minimum

Have faith or pandemonium

Liable to walk upon the scene


"Accentuate the Positive" Bing Cosby

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George Soros made a hell of a lot of money in 2007 and made 8% in 2008.  He also has a good longer term record.


Scorpion - I've been having this discussion since 1998/9, its not because the market dropped 50% that I am making remarks.  This was a long time coming.  What I find interesting is all the people coming out of the woods now stating that the S&P will go lower - which I agree they would not be talking about if it was double its current market quote.


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Guest ericopoly

"That's the way I see 2009 - hopefully I am wrong but I remain fully hedge despite the increased costs. "




I think you just have index puts, right?  This gives you some costs.


I have another idea for hedging.


Take the FFH 2011 $260 strike put.  The ask on that put is $54, which is roughly 20% of the share price.

Okay, that's one way to hedge, but it's expensive.

However, if you dig around you can find ways of earning that put premium with huge downside protection.  The DELL $5 strike 2011 put for example can be written for nearly $1.  In other words, DELL needs to decline another 40% from here before the hedge stops working.  At $5 I believe it would be trading for the cash on it's balance sheet.  Or there is the LUK  $7.50 strike 2011 put trading for about $1.60 (you get more than 20%), but you have better than 50% downside protection from today's share price.



Bottom line -- relative to the universe out there, FFH calls are very very cheap.  You can hedge, hoping underlying equity prices on the puts you write don't fall another 50%.  Then, if they do fall that far, you end up being invested in some decent companies at 1/2 the price of today.


Very cheap way to hedge, yet you get the full upside of a market recovery (FFH upside potential).  Well, I suppose you miss out on the FFH dividend.



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Soros runs Soros Fund Management with $4.5 billion invested in stocks, 30% in Petrobras and Potash. I do believe the fund is 12-20 billion so that is still about 25%, but if he thought the world was coming to an end, why own a single share? In fact, why not short everything?


In fact, he, like everyone else, doesn't know what the future holds.

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Guest Broxburnboy

scorpioncapital says:


"but if he thought the world was coming to an end, why own a single share? In fact, why not short everything?"


Soros does not think the world is coming to end, but he does think the delevering will continue and financial stocks (and every asset class that is levered) will continue to implode. Investors like Soros and his once partner Rogers believe that the place for growth will be commodities, since the supply and demand fundamentals there are intact. Rogers points out that commodities did very well during previous depressions and recessions. Soros has big bets in agriculture commodities and Brazilian oil. Rogers likes base and precious metals as well.


Both seem to favour emerging markets and have distanced themselves from currency risks and financial instruments.


Not a bad response to the economic realities.

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I think Jim Rogers is much better long-term understanding of markets than Soros who has a short-term focus and will change is strategy on a dime.  Of what I have read he is great trader with a short-term focus.  It sounds like at their hedge fund Rogers set the long-term strategy and Soros was the trader. 


It appears that the strategy that the US administration is following is just the opposite of what Rogers is stating.  They are ignoring the market signals that their strategy of bailout and spend does not work.  The real danger with the addition of spending to the Bush bailouts is that of a currency/debt crisis.  I think the admin is taking lower interest rates as a signal that they can spend $ for a cheap price without considering the reason that interest rates are low for t-bills is fear.  China and other creditor nations appear at this point willing to continue to lend us money, again due to fear.  However, you have to ask yourself why would these countries finance US debt with such a low interest rate?  I think there are two reasons.  First, these foreign countries will gain political influence far more than any OPEC countries selling us crude.  So we are spending money to become energy independent (I don't know why other than some folks say so or the green energy groups have alot of lobbyists) with borrowed money from people we know want political influence.  Second, a short-term reason is fear.  I think where the current policy is driving us towards the post-WWII UK model.  The gov't is not letting some politically connected institutions fail and spending like a drunken soldier.  I fear that the people getting hurt the most now and those who continue to have the most to lose with the bailout and spend philosophy are the investor class.  And to add injury to insult the spending is going to be financed by the same group of savers/investors.  I think you really need to ask yourself is the bailout and spend philosophy of the current administration really investor friendly or is it hostile to those who follow the rules and save?  Do you want the gov't to be decision making of what is fair with no debate, distorting the words/intentions of those who disagree with you and with an approach of my way or the highway all the while talking about compromise.  The danger here is the approach is that of a dictator or at least of a group of people who dislike/disagree with workings of the democratic system and have been able to circumvent the checks and balances in the system.  When has so much money been spent and the seeds for so much more to be spent without debate?   



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