 |
|
hardback £12.99
The Perseus Books Group
Paddyfield.com
More reviews by Wayne E. Yang
Readers may purchase reviewed books from Paddyfield.com, Asia's online bookseller.North American readers may prefer to buy US editions from Powells.com.
|
|
|
The New Paradigm for Financial Markets by George Soros
The world's growing reluctance to hold U.S. dollars has thrown a huge wrench into the central bank machinery, says GEORGE SOROS in his most recent book THE NEW PARADIGM FOR FINANCIAL MARKETS. The U.S. Federal Reserve cut interest rates severely from 5.25% in September to 2.00% in April in an effort to prop up the U.S. financial system. Equity bulls celebrated victory early in the year, but they chose to ignore that the flood of new money would likely have consequences for the market. Those knock-on effects are now being felt. The U.S. dollar continues to fall. Commodities continue to rise. The demand for oil that is being destroyed in the United States is being more than compensated by rising demand in countries such as China. Soros argues that the renminbi will be under pressure to catch up with the rise of the euro. Investors should expect prices to rise at U.S. retailers who depend on Chinese manufacturers.
Confusion over market direction has thrown a number of investors. They could do worse than to turn to George Soros, one of the best traders of our generation and a man with more than 50 years in the markets. In these uncertain markets, his latest book is welcome, but the section in which he analyzes the current markets is more cursory than most of us would like. The "real-time" trading experiment covers the period from early January to late March. A publishing deadline ends this trading journal, which is one of the most interesting parts of the book.
For those who have been wondering why Soros was so guarded about his thoughts in early-year pieces that appeared in the Financial Times and at the World Economic Forum, the more detailed commentary is welcome. The book is likely to fall short with those who have high expectations, however. It is initially burdened by Soros' desire to renew push his thoughts on reflexivity, a theory that he uses to explain political and economic change. Admirers of the Alchemy of Finance will be familiar with the general discussion, though Soros here seeks to win greater acceptance from an academic community (and fawning regulatory community) more beholden to the "Washington Consensus", the free-market fundamentalists who believe that the markets are always able to self-correct. Could the current credit crisis be a more emphatic rebuttal to that idea?
"Soros [...] doesn't want to be remembered as a great speculator who beat the Bank of England but as a philanthropist and the philosopher who discovered the theory of reflexivity," explains hedge fund manager Barton Biggs in his recent book Hedgehogging.
Today's regulators have shown a complete abdication of authority, Soros says. The banks have been allowed to rely on their own risk management systems, but regulators should not allow practices they do not understand. Regulators and investors need to know that the markets make their own reality, that they are dependent on market psychology and where we are in the credit cycle. "Instead of always being right, financial markets are always wrong," he says.
Soros argues that the current market situation cannot be understood without taking into account the economic strength of China, India and the Gulf States. China is seeing an amazing transformation, though it remains an open debate what kind of financial crises it might see as it becomes an economic power. "Either way, China is likely to challenge the supremacy of the United States much sooner than could have been expected when George W. Bush was elected president." During a U.S. recession, we might ultimately be surprised at the resilience of markets like Asia, as those countries convert monetary reserves, currently largely held in U.S. government bonds, into real assets such as commodities. Soros recently caused a stir when he said that the markets were seeing a bubble in oil prices. Going beyond the headlines, however, careful investors saw that Soros noted the so-called commodities bubble will not be popped until we see a long, protracted recession in the United States and other major economies. Such a recession will impact Chinese exports, but demand in China's domestic economy and other markets could ultimately take up the slack.
According to Wall Street, the rest of the world is conjoined to the U.S. market. If the United States sneezes, the rest of the world catches a cold, goes the common wisdom. High flyers like China and India are supposedly not immune to the contagion. American commentators who refuse to see the cracks in the so-called goldilocks economy argue that the emerging market will remain firmly attached to the U.S. economic engine. As usual, they are shortsighted. The world is seeing the popping of a super bubble, one built on cheap credit, says Soros. Critics will note that Soros has prematurely trotted out similar arguments in years past. In the aftermath of recent headlines about the probable insolvency of the U.S. Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"), however, he seems to have been prescient when he warned us that the U.S. government eventually would have to use taxpayer money to arrest the fall in home prices. It is uncertain whether we will ultimately see a global recession, Soros says, but we can count on the developing world outperforming the developed world.
Wayne E. Yang
17/08/2008
|
Wayne E. Yang is based in New York, where he lives with his wife and two children. His web site is www.wayneyang.com. |
| |
|
