Summary Notes: Conversation with George Soros

A Conversation with George Soros at HKU from JMSC HKU on Vimeo.

George Soros spoke at HK University, and fielded a number of questions from students and professionals. Soros was last covered on this blog last October.

If you want to spend even a moment this year on finance and economics, this is the one video (89 minutes) to watch. Soros provide his opinion on the current financial crisis, regulatory reform, the economy in developed countries versus developing countries, and on China.

Here are the summary notes:

About the Proposed Solutions to Current Crisis:

• Will result in protection of system plus extra protection with Regulators part of that solution
• Regulators are imperfect because bureaucratic and worse, they are subject to political influence
• Imposing capital requirement justified (Volker proposal is valid)

At 49 minutes in the video, a young student told the audience and Soros he did not understand Soros' writings at age 13, at college, and now, at age 30, he still cannot understand it.

He asks Soros: "If you cannot influence the market, how do you spot turning points?"

Soros replies:

Markets move far away from equilibrium as well as towards equilibrium. When a positive feedback occurs, it is a bubble. When a negative feedback occurs, it is moving towards equilibrium.

Will market move as a bubble or to equilibrium? Greenspan saw bubble in 1996, but Soros said you cannot predict how far the bubble will go. Further, bubbles are not irrational. It is rational to participate in bubble. When bubble is mature, he sells or goes short.

Other important points:

• An investor could have been short in 1996 but not alive (insolvent) in 2000. This follows the old adage that markets can remain irrational longer than an investor can stay solvent 
• Soros shorted internet stocks after they fell, but had to cover because the stocks rose again
• Conclusion: there is no recipe for getting the market right!

On China:

• The China / Taiwan relationship is a negative sum gain right now
• For world to be prosperous, a positive sum gain is required

Soros not a favorite for China. When he is asked his opinion on China opening up of society (culturally) to the world, his response is the following:

• Open society through a critical process would raise prosperity
• China developed an efficient critical process, but it is confined to the leadership
• This leadership requires constant consultation to see what is being done wrong
• One of the strengths of China today is leadership
• China's leadership is self-critical and is anxious about doing the right thing
• China needs to allow outside criticism as well
• On the plus side, its internal critical process is efficient

Soros notes that China has emerged as a leading power in the world: it is rising while the U.S. is sinking; rest of the world turns towards positive influences.

China is the motor.

Finally,

• the American consumer was the motor before financial crisis
• Rest of world turning towards China
• China must pay attention to how the world views it: it can only rise in a way where it is accepted by the world

   In response to a question on Soros causing the color revolution, his response is that it is easy to blame someone else than to look at one’s own shortcomings.

Soros is not in favor at all of revolutions, as revolutions destroy without creating a world order. He believes in critical thinking and gradually improving the order rather than revolutions.

His viewpoint on the current crises is that:

• the Greek crisis will pass and (EU) solvency requirements will be met
• China/India/Brazil will grow faster than the developed world

Notes on George Soros, Rosenberg on CNBC

The Mighty U.S. Dollar No Longer?
In the U.S., the S&P 500 is now trading over 60% higher from the bottom reached in March. For we Canadians, this return looks more impressive than it really is: the U.S. dollar fell 20% against the Canadian dollar in that time. Similarly, the U.S. currency is weak against the Yen- and the Euro. A massive U.S. dollar "carry trade" may be in the works, or maybe not.

It remains to be seen.

Rosenberg vs. CNBC

On George Soros - Taleb's Perspective

There are two ideas in Nassim Nicholas Taleb's Fooled by Randomness worth addressing. They are highly pertenant states of the mind that is necessary in navigating through the markets.

The first is on the idea of changing one's mind:

An old trading partner of Taleb's, a man named Jean-Manuel Rozan, once spent an entire afternoon arguing about the stock market with Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed. Two years later, Rozan ran into Soros at a tennis tournament. "Do you remember our conversation?" Rozan asked. "I recall it very well," Soros replied. "I changed my mind, and made an absolute fortune."

Speculating how or why Soros could change is mind would be a fruitless exercise. Taleb's interpretation was that George Soros knew how to handle randomness by keeping a critical open mind and changing his opinions with minimal shame. (Which carries the side effect of making him treat people like napkins.)

The second ideas is on the idea of knowing...nothing:

My lesson from Soros is to start every meeting at my boutique by convincing everyone that we are a bunch of idiots who know nothing and are mistake-prone, but happen to be endowed with the rare privilege of knowing it.

When managing money, especially one's own, the first rule above everything else is, as Warren Buffett said it best:

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"

Soros, for whatever reason, knew when to change his mind, but he did not do so on a whim or a guess (as it sounded in the book). There was detailed work done when an investment strategy was developed. However, when an strategy and investment thesis is carried out but is not working, even more work is needed to make up for losses.

The second idea is about being in a state that frees our mind from trying to control or model the unknown. Not everything may be forecast or predicted, and that which is unexpected to take place can take place. Knowing this (without actually knowing the unexpected) is something investors need to account in the analysis of stocks and the stock market.

Questions that Need Answering:

Here are a few things happening in the market that need resolution:

1. The U.S. 30-year Treasury prices are rising (yields are falling), and yet the stock market is rising. Is U.S. debt not the "safest haven" for investing? How are the debt auctions doing well if China is said to be buying metals instead of U.S. debt?

2. The S&P 500 rally since March was on declining volume, was without conviction, and sentiment was that of complacency (as indicated by the volatility index). Is there a risk of big players stepping in (or out) of the market in the next few weeks?

3. Will there be more government stimulus packages? Once the current programs run out, will markets ask for more?

4. If insiders are heading to the exits (insider selling is 95:1) why would ordinary investors be buying?



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Soros, Kaynes and ...Beauty Contestants

Soros on Market Instability



I found this video originally posted by Ritholz here:
http://www.ritholtz.com/blog/2009/07/video-o-rama-roller-coaster-ride-into-the-long-weekend/

Soros is a brilliant macro investor. In the video, he describes China as being the main beneficiary of the aftermath of the market crash in 2008.

He also expresses his view that markets do not tend towards equilibrium (i.e. efficient market hypothesis is incorrect). This is contributing to market instability. Market instability runs contrary to the Graham/Dodd's approach of valuing a security using discounted earnings power. It is for this reason that Hedge funds do not use this, because stock prices don't work solely on earnings growth.

I liked this line (from Keynes) describing the above point: beauty in a beauty contest is judged not on how beautiful a person actually is, but on what others all perceive on who is the most beautiful.

By that logic, must hedge fund managers be, metaphorically speaking, beauty contestant judges? In the environment of market instability, I would say so.