After a long hiatus, George Soros has returned to trading, lured by opportunities to profit from what he sees as coming economic troubles.When George Soros talks or trades, markets listen. Earlier this week I questioned whether US stocks are going to melt up in a deflationary world and followed up with a comment questioning the end of the US dollar bull run. In between, Soros came out with a dire warning and all of a sudden, people are scared again and running for the hills.
Worried about the outlook for the global economy and concerned that large market shifts may be at hand, the billionaire hedge-fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.
Soros Fund Management LLC, which manages $30 billion for Mr. Soros and his family, sold stocks and bought gold and shares of gold miners, anticipating weakness in various markets. Investors often view gold as a haven during times of turmoil.
The moves are a significant shift for Mr. Soros, who earned fame with a bet against the British pound in 1992, a trade that led to $1 billion of profits. In recent years, the 85-year-old billionaire has focused on public policy and philanthropy. He is also a large contributor to the super PAC backing presumptive Democratic nominee Hillary Clinton and has donated to other groups supporting Democrats.
Mr. Soros has always closely monitored his firm’s investments. In the past, some senior executives bristled at how he sometimes inserted himself into the firm’s operations, usually after the fund suffered losses, according to people familiar with the matter. But in recent years, he hasn’t done much investing of his own. That changed earlier this year when Mr. Soros began spending more time in the office directing trades. He has also been in more frequent contact with the executives, the people said.
In some ways, Mr. Soros is stepping into a void at his firm. Last year, Scott Bessent, who served as Soros’s top investor and has a background in macro investing, or anticipating macroeconomic moves around the globe, left the firm to start his own hedge fund. Soros has invested $2 billion with Mr. Bessent’s firm, Key Square Group.
Later in 2015, Mr. Soros tapped Ted Burdick as his chief investment officer. Mr. Burdick has a background in distressed debt, arbitrage and other types of trading, rather than macro investing, Mr. Soros’s lifelong specialty. That is why Mr. Soros felt comfortable stepping back in, the people said.
Mr. Soros’s recent hands-on approach reflects a gloomier outlook than many others on Wall Street. His worldview darkened over the past six months as economic and political issues in China, Europe and elsewhere have become more intractable, in his view. While the U.S. stock market has inched back toward record levels after troubles early this year and Chinese markets have stabilized, Mr. Soros remains skeptical of the Chinese economy, which is slowing.
The fallout from any unwinding of Chinese investments likely will have global implications, Mr. Soros said in an email.
“China continues to suffer from capital flight and has been depleting its foreign currency reserves while other Asian countries have been accumulating foreign currency,” Mr. Soros said. “China is facing internal conflict within its political leadership, and over the coming year this will complicate its ability to deal with financial issues.”
Mr. Soros worries that new troubles will arise in China partly because he said the nation doesn’t seem willing to embrace a transparent political system that he contends is necessary to enact lasting economic overhauls. Beijing has embarked on overhauls in the past year but has backtracked on some efforts amid turbulent markets.
Some investors are beginning to anticipate rising inflation amid recent wage gains in the U.S., but Mr. Soros said he is more concerned that continued weakness in China will exert deflationary pressure—a damaging spiral of falling wages and prices—on the U.S. and global economies.
Mr. Soros also argues that there remains a good chance the European Union will collapse under the weight of the migration crisis, continuing challenges in Greece and a potential exit by the United Kingdom from the EU.
“If Britain leaves, it could unleash a general exodus, and the disintegration of the European Union will become practically unavoidable,” he said. Still, Mr. Soros said recent strength in the British pound is a sign that a vote to exit the EU is less likely.
“I’m confident that as we get closer to the Brexit vote, the ‘remain’ camp is getting stronger,” Mr. Soros said. “Markets are not always right, but in this case I agree with them.”
Other big investors also have become concerned about markets. Last month, billionaire trader Stanley Druckenmiller warned that “the bull market is exhausting itself” and hedge-fund manager Leon Cooperman said “the bubble is in fixed income,” though he was sanguine on stocks.
Mr. Soros’s bearish investments have had mixed success. His firm bought over 19 million shares of Barrick Gold Corp. in the first quarter, according to securities filings, making it the firm’s largest stockholding at the end of the quarter. That position has gained more than $90 million since the end of the first quarter. Soros Fund Management also bought a million shares of miner Silver Wheaton Corp. in the first quarter, a position that has increased 28% so far in the second quarter.
Meanwhile, gold has climbed 19% this year.
But Mr. Soros also adopted bearish derivative positions that serve as wagers against U.S. stocks. It isn’t clear when those positions were placed and at what levels during the first quarter, but the S&P 500 index has climbed 3% since the beginning of the second period, suggesting Mr. Soros could be facing losses on some of those moves.
Overall, the Soros fund is up a bit this year, in line with most macro hedge funds, according to people close to the matter. The investments by the firm were previously disclosed in filings, but it wasn’t clear how involved Mr. Soros was in the decisions spurring the moves.
The last time Mr. Soros became closely involved in his firm’s trading: 2007, when he became worried about housing and placed bearish wagers over two years that netted more than $1 billion of gains.
Nobody has more clout than Soros when it comes to market prognostications. Not Bill Gross, not Jeffrey Gundlach, not Carl Icahn, not Ray Dalio, not even Stan Druckenmiller, his protege. When Soros comes out to trade and warns of market dislocations, he sends a real jolt in these markets.
It reminds me of what Michael Hudson said in a recent interview on financial diversion:
What all the billionaires and the heavy investors do is simply try to preserve their wealth. They’re not trying to make money, they’re not trying to speculate. If you’re an investor, you’re not going to outsmart Wall Street billionaires, because the markets are basically fixed.It’s the George Soros principle. If you have so much money, billions of dollars, you can break the Bank of England. You don’t follow the market, you don’t anticipate it, you actually make the market and push it up, like the Plunge Protection Team is doing with the stock market these days. You have to be able to control the prices. Insiders make money, but small investors are not going to make money.Now, everyone is wondering is George Soros right or wrong on China and did we really escape the Great Crash of 2016 that seemed to be upon us earlier this year?
I agree with Soros, China makes me very nervous and so does the Eurozone, and my biggest fear remains global deflation which I warned about earlier this year in my outlook 2016. I don't buy for a second that deflation is dead and I'm also worried about the surging yen and another Asian financial crisis. For me, these markets feel more like 1997 than 2007.
Still, nothing goes down in a straight line and Soros did come out earlier this year to warn of another 2008 crisis which didn't happen and stocks kept surging higher. So maybe he's trying to influence markets one way to make money off his trading positions.
In fact, it wouldn't surprise me one bit if he and his protege, Stan Druckenmiller, unloaded their gold miners (GDX) on Friday morning when shares popped at the open (and then dropped, click on image):
If I was advising Soros or Druckenmiller I would tell them to dump gold miners (GDX) and short oil (USO), energy (XLE), metals and mining (XME), industrials (XLI), emerging markets (EEM), financials (XLF) and stick to good old US bonds (TLT), the ultimate diversifier in a deflationary world. I would also advise them to short the Canadian dollar which has gained 9 per cent in 2016, making it the second-best performing Group-of-10 currency.
In case you haven't noticed US long bonds (TLT) have rallied sharply lately sending the yield on the 10-year US Treasury note to a yearly low of 1.64%. At this rate, it's going to sink lower than it did in July 16, 2012 when the yield touched 1.44% (click on image):
The rally in bonds is unbelievable but remember, when investors are scared they run to the safety of US bonds and they want to hold US dollars, another reason why I scoff at the suggestion that the endgame for the dollar bull run is near. This is pure rubbish!
In a world where deflation is wreaking havoc everywhere outside the US, it's impossible for the dollar to keep weakening relative to the yen or euro without something blowing up in Asia or even in Europe. My fear is more in Asia but Europe is very fragile and things are far from perfect there.
By the way, Soros is right, China continues to suffer from capital flight and has been depleting its foreign currency reserves but this can go on for a lot longer than he imagines.
Still, what I find fascinating is all these Chinese leaving China where pollution, water problems and political instability are fueling rising uncertainty and the Chinese government has yet to slap much stricter capital controls. When that happens it's going to decimate the residential real estate markets of Vancouver, Toronto, New York, Los Angeles, San Francisco and Seattle (read this comment for more background).
One final note, we might be back in summer doldrums where Risk-Off markets dominate trading. I noticed that biotech shares (IBB and XBI) got whacked hard following Hillary Clinton's nomination for the Democratic party.
People read way too much nonsense in these political events. Trust me, whether it's Hillary or the Donald, nothing is going to change in terms of drug pricing in the United States.
If you don't believe me, then listen to Stelios Papadopoulos, Biogen chairman below where he discusses this and Valeant's prospects. This is one smart and successful Greek American and I would listen to him over any rhetoric coming from presidential candidates.
Also, WSJ's Geoffrey Rogow discusses with Tanya Rivero on why a bearish George Soros is returning to trading. Maybe he's just bored and came back to show all the hedge fund chumps out there how real money is made.
Lastly, CNBC's Dominic Chu reports on bearish comments by George Soros and Carl Icahn and discusses Soros's gold positions. Like I said, Soros probably dumped his gold miners today so don't read too much into this.
Don't worry about George Soros or Carl Icahn. It could be a long, hot summer and while I don't see any melt up in stocks, some sectors offer great opportunities here but you need to tread carefully and stomach insane volatility. If you're scared, stick to US bonds and sleep well at night.
Enjoy your weekend, I'll be back on Tuesday. As always, please remember to show your support via the PayPal options under my picture on right-hand side. Thank you for your support and hope you enjoy my comments.