More Sovereign Defaults Loom?.. George Soros - Secret Austrian Economist?

More Sovereign Defaults Loom?

Tuesday, March 09, 2010 - by Staff Report


Inter-dealer broker Tullett Prebon expects worries of a second crisis caused by sovereign debt defaults to boost volumes in its industry this year, although revenue from trading is down 5% so far. Terry Smith, the company's chief executive, said the company would benefit from greater volatility causing more trades, after profits rose slightly and revenue remained flat in 2009. "I would be shocked if there was not another crisis at some point during the course of this year," Mr Smith said. "Banks have de-leveraged, but governments have leveraged up." The company's revenue was flat at £948m and pre-tax profits grew 14% to £156.5m on cost reductions. – UK Telegraph

Dominant Social Theme: If it's not one thing, it's another.

Free-Market Analysis: In keeping with the Bell's analysis of dominant social themes for investment purposes, we draw the reader's attention to perhaps the most important point of the above article: "Banks have de-leveraged, but governments have leveraged up." This is an innocent sentence, perhaps, but to us its eight words manage to purvey radical confusion. They are in fact symptomatic of an economic confusion that has expanded drastically over the past century.

You, dear reader of the Bell, are a super-sophisticated economic maven and not apt to be confused. But many people reading this sentence might be quite upset by it and for the wrong reasons. They would think, perhaps, that the private sector was starting to behave responsibly –finally – but that government still hadn't caught on to the necessary cost cutting. Government, these observers might believe, still doesn't understand that moderation and fiscal probity are key.

They would be wrong, of course, for reasons we are about to explain – ones having to do with economic inter-connectedness. What we are getting at of course is that in the central banking/fiat money era, there is no real private sector left. The public sector, thanks to mercantilist money printing, is everywhere and in a sense controls everything.

How does it work? First governments print too much money, causing a mania, and then the private sector implodes into ruin. Again, the government and those standing behind government print more money. Gradually the private sector, especially big banks and big corporations, are stabilized. But in doing so, government has turned the danger of a deflationary depression into a potential hyper-inflationary crisis.

Today, we would argue, we are in the center of the eye of the hurricane. On the other side lie the raging, gale-force winds of massive inflation, government (sovereign) defaults and repudiations. Yes, global "private sector" bankruptcy has been averted for the time being by direct and indirect applications of massive public funds. But there is no science here. No delicate calibration of what is necessary. Literally trillions have been printed and given away without care, without thought, in a blind panic to ensure that the system does not collapse. These give-aways are not free. They are not without consequence.

Now, as a result, government is "leveraged." Private deleveraging and public leveraging are part of the same dysfunctional mechanism. That's how the mercantilist fiat-based business cycle works. But in this case, because the ruin was so evident and the system was so desperately close to falling apart, we can only assume that what lies on the other side is going to be equally deadly. Why shouldn't it be? For every action there is a reaction.

On the other side, to be sure, lie more defaults – "public" rather than "private." But there is another issue, too, that we want to raise, and which the article excerpted above does not examine. It is the larger issue of Western (and global) economic viability. Governments must cut costs, pay down debts and raise revenue to survive. But from a larger economic standpoint, there is likely only one way to deal with tomorrow's challenges. And that is to do what Federal Reserve chairman Paul Volcker did in the late 1970s in the United States – drain the swamp of excess money by printing less of it and raising interest rates to double digits.

The trouble with this solution is that the business cycle this time around has been so excessive and so obviously destructive that it might take much HIGHER interest rates to do the trick. Rates of thirty or forty percent, anyone? A truly drastic reduction in the money supply driving the US and the larger Western world into depression? This is a most grave scenario. People may not stand for an economic environment that is two or three times more punitive than it was the in the late 1970s and early 1980s.

The other problem is that Paul Volcker worked his magic in a pre-Internet era. People didn't really understand what was going on and Volcker was presented as a hero in America for "saving" the system. He didn't save it, of course, he merely SALVAGED it for the same crowd of power elite players that have driven it into the ground once more.

And so we find ourselves (as is the Bell's unique investment mission) once again trying to ascertain the potential success or failure of the elite's dominant social themes – their ability to sustain their promotions. In this case, as in many others, we must confess that we are not in a position to make a definitive prediction, not yet anyway. Even so, we would urge readers to grapple with these issues as best they can, for they are most important. You see, if you believe that the elite is going to be able to navigate the second leg of this financial hurricane and come out with an intact financial system, then you will make certain financial decisions and live and work a certain way.

But If you believe the next leg of the economic crisis presents the harder test – draining money rather than printing it – and if you believe that people simply won't stand for what may be an ongoing jobless depression or severe inflation verging on hyperinflation, then you will conduct your affairs in a much different manner. And to make it even more complex, your analysis, if you choose to approach the world this way, will be complicated by the advent of the Internet.

It is the Bell's contention that the success or failure of elite promotional themes (global warming, peak oil, the necessity of green industry, the efficacy of central banking, etc.) constitute the most important elements of investing in the 21st century – but that the prospects for continued success (and acceptance) of these memes has been complicated immeasurably by the Internet, which has exposed many of them and continues to do so today. One must certainly analyze the prospects of elite memes, but in today's world that analysis must take the Internet truth-telling and ongoing reporting into consideration.

Conclusion: As more begin to understand the reality of power-elite promotions – that they are a kind of fear-based propaganda aimed at gathering additional wealth and power for only a few (at the expense of the many) – the task of those supporting such promotions grows increasingly more difficult. To be a successful investor in the 21st century, one will continually have to monitor the success or failure of the power elite as they grapple with the other side of the global economic hurricane. Upcoming sovereign defaults may be grave indeed, but there are other difficulties that lie ahead – and savvy investors will have to calibrate each and every one.


George Soros - Secret Austrian Economist?

Tuesday, March 09, 2010 - by Staff Report


George Soros Billionaire investor and Soros Fund manager George Soros (left) says President Obama mishandled the financial crisis big time. Soros would have preferred that the government take over U.S. banks instead of bailing them out, a move he believes would have been more popular with Americans, The Wall Street Journal reports. "The solution that he found to the financial crisis, which was to effectively bail out the banks and allow them to earn their way out of the hole, was, in my opinion, not the right solution," Soros said in an interview with CNN. "He should have compulsorily replaced the capital that was lost." Soros says China did a better job of managing its banks by forcing them to increase their minimum capital requirements. Soros also noted that the "market fundamentalist" belief prevalent in the U.S. during the Fed tenure of Alan Greenspan is wrong, citing his own investment decisions as evidence. "When I see a bubble, I buy that bubble, because that's how I make money," Soros says. – MoneyNews

Dominant Social Theme: Stop fooling around! Take real action – nationalize something.

Free-Market Analysis: We found the article, excerpted above, fascinating. We did not find it so because Soros advocates US bank nationalization (of a sort), however, but because in it Soros reveals - inadvertently or not – what we have always known (but could not always convince others of), that he is at heart a free-market, Austrian-based economist. At least he is from an investment/strategy standpoint.

Some background first. We have known this all along because when he was a student, Soros studied in London under some of the greatest laissez faire professors of all time. And we knew from his incomprehensible books which seem to present Austrian economic theory in his own language, with so much elaboration and confusion that only a few could ever tell the initial inspiration.

Finally, we have known this about Soros because he so evidently and obviously utilizes Austrian economic analysis in order to pursue his investment strategies.
Here, finally, Soros all but comes out and admits it. "When I see a bubble, I buy that bubble, because that's how I make money," Soros blurts out. One takes Soros literally at one's peril. He may "sell" the bubble as well - short it. But the point of this is that Soros recognizes bubbles and expects to take advantage of them and he is one of the best at doing so, or so his track record would seem to illustrate. He is also, from our point of view, somewhat cynical about it in that his public rhetoric is all about the value of government interference in the markets while his private investment actions are definitively market oriented.

Bubbles are the province of free-market economics. The great socialist economist John Maynard Keynes was not especially fond of bubbles because they would have drawn him into a larger discussion about competition, the validity of the Invisible Hand, etc. Keynes was more interested, of course, in establishing the validity and credibility of government interventions into a flawed private market that constantly needed the correctives of the bureaucracy. He did deal with inflation, because he had to – claiming that "inflation" was the result of "wage push." And he seems to have believed that a depression was merely a lack of consumer demand. But when it came to the larger issues of the business cycle, Keynes had far less to contribute than free-market economists.

It was up to Austrians such as FA Hayek and Ludwig von Mises himself to analyze the business cycle and how central banking and fiat money printing aggravated it and caused booms and busts. This they did brilliantly during their lifetimes. Thus, Soros' admission that he makes his money by "seeing and buying" bubbles builds on Austrian economic analysis. It is Austrians who defined what bubbles are and how they work.

But there is more to Soros' remarkable interview, which was conducted by CNN and further reported in the Wall Street Journal. Here is an excerpt directly from the WSJ article:

Mr. Soros said the U.S. and China needed to work closely to manage the global economy, calling recent signs of bilateral tension worrying. The two countries disagreed over how to tackle global warming during a meeting in Copenhagen recently, and have faced off over trade and currency issues. Mr. Obama met with Tibet's exiled spiritual leader the Dalai Lama of Tibet in the White House this month, despite official protests from China. "Unless we stop it in the next few months, I think that we could yet fall back into a situation that prevailed in the 1930s, where each country is for itself," Mr. Soros said. He said trade protectionism was his top concern, in terms of the global economy's outlook.
Turning to Europe, Mr. Soros said worries about Greece's debt had exposed a flaw in the euro's construction, namely that the 16 euro zone countries, which share a single currency, had a common central bank but not a common Treasury. "Either Europe now takes the institutional measures that are needed to make up for the deficiency or, in fact, it may not survive," said Mr. Soros. Soros Fund Management is one of several heavyweight hedge funds that are betting that the Greek-debt woes will push the euro lower.

One can see in these comments (at last we can) that Soros is addressing power elite dominant social themes and putting them in perspective. For Soros, issues of global warming, global trade, the viability of the European Union are all top-of-mind. He is even betting, according to the article that "Greek-debt woes will push the euro lower." One looks in vain for Soros to discuss the prospects of IBM or the success or failure of GM within a product context. Of course this is not the kind of investing that Soros does, but that's just the point. He plays the game at the highest and largest level and apparently now manages some US$27 billion.

He has accomplished all this with a free-market world view. There is little doubt! His rhetoric is socialist but his analysis is first of all Austrian and then somewhat along the lines that we here at the Daily Bell advocate. In fact, we are proud to claim him as one of our own - not as a political pundit or economic philosopher (Lord help us) but as the amazingly successful investor he is ... so far anyway.
Soros, in our opinion, utilizes techniques we regularly suggest. Yes ... Soros analyzes dominant social themes, determines the likelihood of their success or failure, and then overlays them on top of the business cycle itself to determine where they fit and whether the timing is right. (He also cynically manipulates public opinion, squeezes governments if he can, etc., but that is an article for another day.)

The only thing we advocate that Soros does not do – or has not spoken publicly about – is the necessity of taking the Internet into account in virtually every decision one makes. And that's because we think the 'Net has drastically complicated the task of savvy investors like Soros. Instead of just worrying about dominant social themes these global investors now have to analyze the Internet's impact on them.

Conclusion: We have no idea why Soros is advocating the nationalization of American banks, or why he is talking up the Chinese approach as superior. We don't really care. Most of what Soros says these days has little or nothing to do with the way he actually invests, we would suggest. Occasionally, however, he says something fairly frank and revealing in between all the socialist rhetoric – and his line about investing in bubbles may be just such revelation. Put that statement (and others like it) together with publicly available documents about his investment strategies, the strange but discernibly market-based sentiments of some of his books and his free-market oriented economic education long ago, and you have the makings of one of the most successful Austrian-style investors of all time. Ironic, huh?