Soros the Bear re-emerges .... will he gorge himself once more?

Monday 13th June 2016

Soros the Bear re-emerges .... will he gorge himself once more?

ref :- "6 Events That Could Make Soros a Winner" , by Mohamed El-Erian, Bloomberg View

The news last week that famed investor George Soros was returning to hands-on trading once more would have prompted mixed emotions. Anyone who can lift  £1 billion or so from the market, especially 24 years ago,  certainly deserves our respect although the surviving members of the UK government of the time might not see it that way. It was back in 1992 that Mr Soros was the most high-profile amongst many who gambled against Britain being able to remain in the Exchange Rate Mechanism, a policy that had looked badly ill-judged when adopted by the British government two years earlier and was now forcing them into increasingly desperate (with hindsight we might say insane) measures in an attempt to defend the currency. They failed of course, at great cost to the country and much to the benefit of savvy speculators like Mr Soros.

Well he's back, and as is his wont is positioning himself to make some money when risk markets collapse from what he believes are seriously overvalued levels. In "normal" circumstances, it would be easy to agree that bond prices for example are too high (and therefore bond yields too low). But then these are not normal times. Not so long ago the idea that Germany's 10yr Bund would within a basis point or two of yielding zero, and the average of the country's total debt would carry negative yields' would have been unthinkable for many. Similarly, a scenario that sees such flattening of the yield-curve (a reduction of the premium of long-term rates over short-term) would normally be seen as presaging recession, yet equity prices are trading close to historical highs.

The truth is that investors have become used to the fact that central banks will be both willing and able to boost asset prices by continuing to ease monetary policy to hitherto unseen levels, and ones that in certain crucial cases are not justified by economic fundamentals. 

Most sensible people would agree that logically there must be limit to how far and for how long asset prices can decouple from economic fundamentals. And beyond that, nobody of sound mind would still argue that central banks on their own can foster strength in both growth and asset prices indefinitely. Fiscal and structural measures must play a part, to a degree that politicians have been reluctant to adopt so far. So the case seems made for a reversal, but then it has done for some time and at lower levels than these.. Back in December with 10yr US Treasuries yielding around 2.25%, a Bloomberg survey of economists saw a median expectation of the yield rising to 2.55% by the end on June. Currently, it's trading around 1.62%. Even now, there is fundamental difference of opinion about which way yields are headed from even these historically low levels between heavyweights Morgan Stanley (lower) and Goldman Sachs (higher). 

So, says Mr El-Erian, making money on the downside of bond and stock markets may need a catalyst to break the safety-net that expectations of central bank support have provided up until now. Timing will be everything, but here are 6 possible events that he believes could be that catalyst, or catalysts :

A vote for Brexit .... and no quick compensatory trade agreements with Europe to put in place

A major ruction in China "as it tries to implement financial policies aimed at balancing liquidity support for the economy with the orderly management of a credit boom ..."

Isolationist tone of US presidential primaries (after decades of US leadership for globalization) becomes a reality (presumably, all the more likely should Mr Trump prevail)

Wildly different economic global conditions leading to equally divergent rate policies leading to large exchange rate moves and capital flows leading to hugely volatile financial markets

Scares over the European banking system after banks in Europe fail to raise capital levels quickly enough

A return of risk-aversion among market participants who up until now have been prepared to ignore dangers in the search for yield as long as central banks ensure stability.

So, there are plenty of scenarios that might help the likes of Mr Soros but as ever no guarantees. Still, his first publicized move was to buy gold (entirely in keeping with his perception of a financial system stretched to breaking point), and that's not going too badly .....