Markets likely to fall more this year after brief rebound

Dark skies ahead: Soros

Markets likely to fall more this year after brief rebound

Friday • April 4, 2008

— Bloomberg

NEW YORK — Billionaire George Soros (picture) has called the current financial crisis the worst since the Great Depression and said markets would fall more this year after a brief rebound.

"We had a good bottom," Mr Soros said in New York, referring to the rally in stocks and the US dollar after JPMorgan Chase agreed to buy Bear Stearns on March 17. "This will probably not prove to be the final bottom," he said, adding the rebound might last six weeks to three months as the US moves closer to a recession.

Last summer, worried about market disruptions that started with rising sub-prime mortgage defaults, Mr Soros, 77, returned to a more active role in managing the US$17 billion ($24 billion) Quantum Endowment Fund.

He also decided to write his 10th book, "The New Paradigm for Financial Markets" in which he explains the causes of the current meltdown, a crisis he says has been in the making since 1980.

Mr Soros has bet on declines in the US dollar, 10-year Treasuries and US and European stocks. He expected foreign currencies to rise, as well as Chinese and Indian equities.

The latter bet helped Quantum with returns of 32 per cent last year.

The euro has climbed 7.5 per cent against the US dollar this year and the Japanese yen has gained 9.1 per cent. These and other currencies may continue to strengthen, he said.

"There is an increasing unwillingness to hold dollars, though there's a lack of suitable alternatives," he said.

Federal Reserve officials dropped their benchmark interest rate 2 percentage points this year to 2.25 per cent, and Mr Soros doesn't see that they can lower the rate much further, given the weak dollar.

"We are close to the limit," he said.

Credit default swaps may be the next crisis area because the market is unregulated, and it's impossible to know whether counterparties can meet their obligations in the event of a bond default.

The market has a notional value of about US$45 trillion, or about half the total wealth of US households.

Mr Soros recommends the creation of an exchange with a sound capital structure and strict margin requirements, where current and future contracts could be traded.

He believes the cause of the current troubles dates back to 1980. It was during this time that borrowing ballooned and regulation of banks and financial markets became less stringent.

The leaders then, Mr Soros said, believed that markets are self-correcting — if prices get out of control, they will eventually revert to historical norms. But this attitude created the current housing bubble, which in turn led to the seizing up of credit markets, Mr Soros said.

To avoid a super-bubble in the future, Mr Soros said banks must control their own borrowing. They must also curtail lending to clients, such as hedge funds, by demanding greater collateral and margin requirements on loans.


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