Bubbles building in financial markets: billionaire Soros
George Soros during interview with the CBC(CBC)U.S. billionaire financier, author and philanthropist George Soros believes there are lots of bubbles building in financial markets, including one in oil.
He believes better regulation is necessary to keep commodity prices at more reasonable levels.
Danielle Bochove, the business host of CBC News: Morning, recently spoke with Soros on his thoughts about the credit crisis, super bubbles, institutional investors and the Canadian dollar.
Danielle Bochove: The very first line of your book reads we are in the midst of the worst financial crisis since the 1930s. Now, since you wrote that, some people have said that the worst of the global credit crisis is over. What do you think?
George Soros: Yes, I think that the acute phase of the crisis is behind us. The authorities have learned how to provide liquidity, and so they will not allow any major institution to fail. But, unfortunately, the fallout, both for the financial system and for the economy, is yet to be felt.
DB: In fact, your book talks about the fact that we’ve moved on to new crises as well — the surge in oil prices, the global food crisis. Are these related?
GS: Yes, they are. It’s all part of the super bubble that I explain in the book but I’m hopeful, actually, the authorities are now aware of bubbles and there is a froth element in the bubble that I think can be blown off by tightening the regulations because there are position limits but they’ve been circumvented through various financial arrangements...I think that authorities are onto that and probably will deal with it before that particular aspect exaggerates the movement in commodity prices.
DB: In layman’s terms, do you believe that institutional investors should be allowed to trade the things that people really need, like food and oil, using borrowed money purely for profit?
GS: I think that this institution index buying is actually a typical textbook example of the misconceptions that come up and affect reality. It’s inappropriate and I think that they exaggerate the move. It's eerily reminiscent to what happened in 1987 when institutions bought what was called portfolio insurance. It was a craze. Everybody piled in and it created that crash. This is very, very similar and I think that the institutions themselves ought to realize and ought not to do it.
DB: If you’re wrong, and you don’t see the increased regulation you believe should happen, what happens when the super bubble collapses? What is the logical reaction to that?
GS:I mean, we are in the super bubble...so we’ve had 25 years of credit expansion, increased use of leverage. Now, you are in a phase of de-leveraging and that is actually taking place and we are in the middle of it.
DB: What does that mean? You’ve touched on this but what does that specifically mean for the global stock market over the next few years?
GS: I think the outcome is not particularly good for stocks. I’m actually bearish on the stock market.
DB: Around the world or just in the United States?
GS: I think that’s pretty global, yes.
DB: Your book also says quite frequently that we are at the end of an era. What is the impact of all of this on the United States and the U.S. dollar?
GS: Well, the dollar has weakened and it has had a twofold affect. On the one hand...it has exported the recessionary forces from the United States to the rest of the world. It actually helped the U.S. economy. It has added one per cent to the U.S. gross national product currently. On the other hand, it is importing inflation; goods cost more at Wal-Mart. I think Fed chairman Bernanke warned about that yesterday.
DB: When you refer to the end of an era, I think of something more general, and I’m wondering is this the end of an era in which the United States is the dominant economic power and the U.S. dollar is the dominant currency?
GS: Yes, I think that it’s no longer the unquestioned reserve currency. There is no real good alternative and so there has been a general flight from currencies, which has contributed to the commodities boom.
George Soros(CBC)
DB: So what will replace the United States and its currency as the dominant force?
GS: I think that the dollar is probably still, will emerge as the most widely used currency but the United State will have to abide by the limitations that are imposed on it by the willingness of the rest of the world to hold dollar reserves. So it constrains the ability of the Fed, for instance, to lower interest rates. That is also what was behind the Fed chairman's remarks yesterday: that if you kept lowering interest rates beyond this, the dollar would suffer further decline, so you can't go anywhere in that direction.
DB: This is a very market specific question, but how do you see Canada and the Canadian dollar faring because you obviously know a thing or two about currencies?
GS: Canada is...on the one hand, it’s a commodity-rich country and that tends to strengthen the currency. On the other hand, Canada is also very much tied to the U.S. economy. So when General Motors...shuts down a plant, one of those plants is in Ontario. So Canada is half in each camp and I think that’s more or less reflected in the way the Canadian dollar is behaving.
DB: That doesn’t answer my question though, I guess, as to your expectations for the Canadian dollar. Do you see it, for example, moving, further above parity with the U.S. dollar?
GS: You know, I cannot make these predictions because I don’t know.
DB: Earlier this week, another billionaire hedge fund manager, Boone Pickens, said that investigating possible price manipulation in the oil market is a waste of time. He said that the rise that we’re seeing in oil prices is justified by supply and demand. What’s your response to that?
GS: I think that there is a bubble in oil prices, and it has two components. There is this foundation in reality, and the interpretation and the bias in the market. Recently, this bias has expressed itself in more of a rise. So there is a froth super-imposed on the fundamental trend. Oil is increasing ... but the recent rise I think has a larger fundamental speculation and really misconception in the way the institutions have piled in on one side of the market buying these commodity indexes.
DB: This is one of the reasons that you’re bearish on the stock market and I know that at the centre of your argument is the idea that some of the most common assumptions investors make about the way the markets work are false. Where does that leave an individual investor?
GS: I think this is a very difficult environment in which to invest, and you either have to be very cautious or very nimble.
DB: Is there hope for sort of regular people? It’s become the norm now to put one’s savings into a 401k plan in the United States or in RRSPs in Canada; people put their savings into mutual funds. Are they in danger of being swamped by the big guys, the speculators? Should they even be in these markets at all in your opinion?
GS: I really don’t know what to say, frankly, because some of these accounts are well managed and others are not. There are some people who have good judgment and can manage their own account, and others need to rely on professionals. So, hopefully, people find good advisers.
DB: But do you believe that the pendulum is going to swing back and the markets will become more tightly regulated?
GS: I am not actually in favour of tight regulation, because markets are imperfect but so are regulators. And what’s worse, they’re also bureaucratic, so they are slow in responding and very bureaucratic in their response. I’m for better regulation and that is not necessarily tight regulation. I think markets have been allowed too much leeway. So there has to be better regulation, but not necessarily more.
DB: You’re also a philanthropist and I wonder how worried you are about the current food crisis and the role that speculators have perhaps played in that?
GS: I’m very worried about it. People feel it in their own pocket book. Food and energy is only a small portion of our spending, but in less developed countries it’s the bulk of what people spend money on. So they’re really desperate and you've got food riots in South Africa, Haiti, Pakistan. It’s a terrible situation.
DB: There’s a certain irony in the fact that you made your fortune as a speculator. Do you have any regrets about that now?
GS: None whatsoever because I play by the rules. And to the extent that I understand the rules are deficient, I am proposing they should be improved. That's the way I try to contribute to make the world a better place.
DB: Thank you so much with your time. It's been a pleasure speaking to you.
GS: Same here.
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