Market fundamentalists (otherwise known as financial authorities and institutions) believe in a tendency toward equilibrium. However, says Soros’ column in Thursday’s FT, this belief in the market’s supposedly random deviations from equilibrium and it’s ability to self correct is basically false.
It is the boom-bust sequence that characterises the market. Soros notes that regulation is not the key, as it can only ever respond after the fact. Authorities need to point their gaze toward the next issue that will arise, CDS and mortgage defaults. Soros suggests that credit default swap contracts could be submitted through a clearing house or exchange with a sound capital structure. For mortgages the bankruptcy laws could be adjusted to allow for mortgage terms to be modified. Another suggestion “would provide Federal Housing Administration guarantees that would enable mortgage holders to be paid off at 85 per cent of the current appraised value”.
Making the media rounds, Soros commented to Bloomberg that this is the worst financial crisis since the great depression. In a moodily lit interview with Robert Peston, Soros suggests that current market turmoil is in fact the result of the demise of one of the biggest bubbles - the WW2 bubble that resulted in the long term increase in the use of leverage. There are asymmetric incentives, leveraging is encouraged, but when a crisis occurs, authorities intervene.
In his Bloomberg interview Soros says that he expects the markets to fall more this year, with the current rebound lasting no more than three months.
Soros has bet on declines in the dollar, 10-year Treasuries and U.S. and European stocks. He expected foreign currencies to rise, as well as Chinese and Indian equities. The latter bet helped Quantum return 32 percent in 2007.
