George Soros’ Speech: “The EU Itself is a Bubble”

Tuesday, June 12th, 2012

by George Soros

Ever since the Crash of 2008 there has been a widespread recognition, both among economists and the general public, that economic theory has failed. But there is no consensus on the causes and the extent of that failure.

I believe that the failure is more profound than generally recognized. It goes back to the foundations of economic theory. Economics tried to model itself on Newtonian physics. It sought to establish universally and timelessly valid laws governing reality. But economics is a social science and there is a fundamental difference between the natural and social sciences. Social phenomena have thinking participants who base their decisions on imperfect knowledge. That is what economic theory has tried to ignore.

Scientific method needs an independent criterion, by which the truth or validity of its theories can be judged. Natural phenomena constitute such a criterion; social phenomena do not. That is because natural phenomena consist of facts that unfold independently of any statements that relate to them. The facts then serve as objective evidence by which the validity of scientific theories can be judged. That has enabled natural science to produce amazing results.

Social events, by contrast, have thinking participants who have a will of their own. They are not detached observers but engaged decision makers whose decisions greatly influence the course of events. Therefore the events do not constitute an independent criterion by which participants can decide whether their views are valid. In the absence of an independent criterion people have to base their decisions not on knowledge but on an inherently biased and to greater or lesser extent distorted interpretation of reality. Their lack of perfect knowledge or fallibility introduces an element of indeterminacy into the course of events that is absent when the events relate to the behavior of inanimate objects. The resulting uncertainty hinders the social sciences in producing laws similar to Newton’s physics.

Economics, which became the most influential of the social sciences, sought to remove this handicap by taking an axiomatic approach similar to Euclid’s geometry. But Euclid’s axioms closely resembled reality while the theory of rational expectations and the efficient market hypothesis became far removed from it. Up to a point the axiomatic approach worked. For instance, the theory of perfect competition postulated perfect knowledge. But the postulate worked only as long as it was applied to the exchange of physical goods. When it came to production, as distinct from exchange, or to the use of money and credit, the postulate became untenable because the participants’ decisions involved the future and the future cannot be known until it has actually occurred.

I am not well qualified to criticize the theory of rational expectations and the efficient market hypothesis because as a market participant I considered them so unrealistic that I never bothered to study them. That is an indictment in itself but I shall leave a detailed critique of these theories to others.

Instead, I should like to put before you a radically different approach to financial markets. It was inspired by Karl Popper who taught me that people’s interpretation of reality never quite corresponds to reality itself. This led me to study the relationship between the two. I found a two-way connection between the participants’ thinking and the situations in which they participate. On the one hand people seek to understand the situation; that is the cognitive function. On the other, they seek to make an impact on the situation; I call that the causative or manipulative function. The two functions connect the thinking agents and the situations in which they participate in opposite directions. In the cognitive function the situation is supposed to determine the participants’ views; in the causative function the participants’ views are supposed to determine the outcome. When both functions are at work at the same time they interfere with each other. The two functions form a circular relationship or feedback loop. I call that feedback loop reflexivity. In a reflexive situation the participants’ views cannot correspond to reality because reality is not something independently given; it is contingent on the participants’ views and decisions. The decisions, in turn, cannot be based on knowledge alone; they must contain some bias or guess work about the future because the future is contingent on the participants’ decisions.

Fallibility and reflexivity are tied together like Siamese twins. Without fallibility there would be no reflexivity – although the opposite is not the case: people’s understanding would be imperfect even in the absence of reflexivity. Of the two twins, fallibility is the first born. Together, they ensure both a divergence between the participants’ view of reality and the actual state of affairs and a divergence between the participants’ expectations and the actual outcome.

Obviously, I did not discover reflexivity. Others had recognized it before me, often under a different name. Robert Merton wrote about self-fulfilling prophecies and the bandwagon effect, Keynes compared financial markets to a beauty contest where the participants had to guess who would be the most popular choice. But starting from fallibility and reflexivity I focused on a problem area, namely the role of misconceptions and misunderstandings in shaping the course of events that mainstream economics tried to ignore. This has made my interpretation of reality more realistic than the prevailing paradigm.

Among other things, I developed a model of a boom-bust process or bubble which is endogenous to financial markets, not the result of external shocks. According to my theory, financial bubbles are not a purely psychological phenomenon. They have two components: a trend that prevails in reality and a misinterpretation of that trend. A bubble can develop when the feedback is initially positive in the sense that both the trend and its biased interpretation are mutually reinforced. Eventually the gap between the trend and its biased interpretation grows so wide that it becomes unsustainable. After a twilight period both the bias and the trend are reversed and reinforce each other in the opposite direction. Bubbles are usually asymmetric in shape: booms develop slowly but the bust tends to be sudden and devastating. That is due to the use of leverage: price declines precipitate the forced liquidation of leveraged positions.

Well-formed financial bubbles always follow this pattern but the magnitude and duration of each phase is unpredictable. Moreover the process can be aborted at any stage so that well-formed financial bubbles occur rather infrequently.

At any moment of time there are myriads of feedback loops at work, some of which are positive, others negative. They interact with each other, producing the irregular price patterns that prevail most of the time; but on the rare occasions that bubbles develop to their full potential they tend to overshadow all other influences.

According to my theory financial markets may just as soon produce bubbles as tend toward equilibrium. Since bubbles disrupt financial markets, history has been punctuated by financial crises. Each crisis provoked a regulatory response. That is how central banking and financial regulations have evolved, in step with the markets themselves. Bubbles occur only intermittently but the interplay between markets and regulators is ongoing. Since both market participants and regulators act on the basis of imperfect knowledge the interplay between them is reflexive. Moreover reflexivity and fallibility are not confined to the financial markets; they also characterize other spheres of social life, particularly politics. Indeed, in light of the ongoing interaction between markets and regulators it is quite misleading to study financial markets in isolation. Behind the invisible hand of the market lies the visible hand of politics. Instead of pursuing timeless laws and models we ought to study events in their time bound context.

My interpretation of financial markets differs from the prevailing paradigm in many ways. I emphasize the role of misunderstandings and misconceptions in shaping the course of history. And I treat bubbles as largely unpredictable. The direction and its eventual reversal are predictable; the magnitude and duration of the various phases is not. I contend that taking fallibility as the starting point makes my conceptual framework more realistic. But at a price: the idea that laws or models of universal validity can predict the future must be abandoned.

Until recently, my interpretation of financial markets was either ignored or dismissed by academic economists. All this has changed since the crash of 2008. Reflexivity became recognized but, with the exception of Imperfect Knowledge Economics, the foundations of economic theory have not been subjected to the profound rethinking that I consider necessary. Reflexivity has been accommodated by speaking of multiple equilibria instead of a single one. But that is not enough. The fallibility of market participants, regulators, and economists must also be recognized. A truly dynamic situation cannot be understood by studying multiple equilibria. We need to study the process of change.

The euro crisis is particularly instructive in this regard. It demonstrates the role of misconceptions and a lack of understanding in shaping the course of history. The authorities didn’t understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it. The crisis is still growing because of a failure to understand the dynamics of social change; policy measures that could have worked at one point in time were no longer sufficient by the time they were applied.

Since the euro crisis is currently exerting an overwhelming influence on the global economy I shall devote the rest of my talk to it. I must start with a warning: the discussion will take us beyond the confines of economic theory into politics and the dynamics of social change. But my conceptual framework based on the twin pillars of fallibility and reflexivity still applies. Reflexivity doesn’t always manifest itself in the form of bubbles. The reflexive interplay between imperfect markets and imperfect authorities goes on all the time while bubbles occur only infrequently. This is a rare occasion when the interaction exerts such a large influence that it casts its shadow on the global economy. How could this happen? My answer is that there is a bubble involved, after all, but it is not a financial but a political one. It relates to the political evolution of the European Union and it has led me to the conclusion that the euro crisis threatens to destroy the European Union. Let me explain.

I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.

The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.

Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.

The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

Tags: Criterion, Decision Makers, Economic Theory, Economists, Fallibility, Fundamental Difference, George Soros, Imperfect Knowledge, Inanimate Objects, Indeterminacy, Natural Phenomena, Natural Science, Newtonian Physics, Objective Evidence, Observers, Scientific Method, Social Phenomena, Social Science, Social Sciences, Validity
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Gold Market Radar (June 11, 2012)

Sunday, June 10th, 2012

Gold Market Radar (June 11, 2012)

For the week, spot gold closed at $1,593.45 down $30.65 per ounce, or 1.89 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, beat bullion with a slight loss of 0.59 percent. The U.S. Trade-Weighted Dollar Index fell 0.54 percent for the week.

Strengths

• The U.S. Mint reported that sales of American Eagle gold bullion coins in May rose 158 percent over the total number purchased in April. Sales of American Eagle silver bullion coins rose 89 percent in the same period. However, sales in May 2012 were down from levels attained in May 2011 for both gold and silver bullion coins. On a positive note, recent SEC filings showed George Soros has been buying gold again.
• While the gold stocks were the star performers in the prior week, silver stocks on average turned in positive gains despite a flat silver price. Lately mining stocks have been outperforming the bullion prices.
• Gold maintained its recent gains most of the week until Fed Chairman Ben Bernanke spoke before Congress on Thursday and did not affirm that the Fed was compelled to immediately start QE3, particularly in response to recent weak job numbers. Short-term traders immediately started shorting gold. Speculative interests have declined significantly over the past year with the Comex speculative open interest recently at 13.6 million ounces net long, down from 28 million ounces, so there is plenty of room for this number to grow, once the Fed or Congress is forced to scream “Uncle!”

Weaknesses

• From recent Fed statements, some of the Federal Open Market Committee (FOMC) members appear to have warmed up to another round of QE, as some economic data has been downright disturbing as of late. When Bernanke refrained from outlining steps that the central bank may take to bolster the economy amid risk from Europe’s debt crisis, gold futures tumbled the most in two months. Instead the Fed indicated it is going to assess more data before acting.
• Barrick Gold’s Board of Directors announced this week that it had replaced Aaron Regent, President and Chief Executive Officer, with Chief Financial Officer Jamie Sokalky. Barrick’s vision is to be the world’s best gold company by finding, acquiring, developing and producing quality reserves in a safe, profitable, and socially responsible manner. Analysts worry that the company may lower guidance.
• A Court of Appeals ruling orders the U.S. Forest Service to consult with wildlife agencies prior to granting Notices of Intent to weekend hobbyists using suction dredges to mine for gold in the Coho Salmon critical habitat in northern California. This could be bad news for all U.S. small miners and explorations working on Forest Service lands with critical wildlife habitat. This decision sets a major precedent across the western states and may render the Forest Service impotent to meaningfully address low impact mining without deferring to other agencies such as the EPA.

Opportunities

• Morgan Stanley conducted a survey of 2,019 urban and rural gold buyers across 16 Indian cities and eight Indian states. The survey report notes that Indians own 20,000 tons of gold worth $1 trillion. Respondents from several households said they expect gold prices to rise by 8 percent in 2012. The survey notes that gold is not the first asset that Indian households liquidate during bad times; it is equities. Gold remains an important asset class for investment, having outperformed most other asset classes over the past five years.
• In a recent address to the Committee for Monetary Research and Education, Bob Hoye noted policymakers are now getting margin calls on their massive experiment in government intrusion and it is likely coming to an end. In studying history, Bob sees a pattern in which the state spends, borrows, inflates and raises taxes until all of the wealth is consumed. Consequent hardship becomes widespread and forces folks to tighten their belts, who in turn, force local and federal governments to tighten theirs. Policymakers have an economic interest in maintaining the bubble but ultimately running the money printing presses cannot keep a mania going.
• Bob points out that typically in the year a bubble maxed out, gold’s real price set a significant low and then increased for some twenty years thereafter. If Congress does not reach agreement on several important tax and budget policy issues before the end of this year, the impending fiscal cliff could be a big hit to GDP growth and could be sufficient enough to push the economy into recession in 2013.

Threats

• Bernanke’s remarks pointed that action is required by Congress to set the right policies to lead the country forward. Congress cannot wait to see if a third quantitative easing sets the ship right. It seems the major central bankers have agreed to a common script, pointing to the failings of fiscal policymakers (i.e., politicians). Mario Draghi of the ECB commented, “Some of these problems in the Euro area have nothing to do with monetary policy. That is what we have to be aware of and I do not think it would be right for monetary policy to compensate for other institutions’ lack of action.” Central bankers are trying to put pressure on their political leaders to address the root causes of the crisis which are beyond the scope of monetary policy.
• With this being an election year, we may be at an impasse with little room to compromise where brinkmanship and stand your ground may be more important than doing the right thing. Gold prices have been highly sensitive to what monetary policymakers have done for much of the past year and with low visibility towards a resolution, it could be a trader’s market for the next couple of quarters with the potential for some large price moves if the stresses become acute.
• If the Fed wants to do something, it really has to be June 19-20 because the window will start to close once the election campaign moves into high gear.

Tags: American Eagle Gold, American Eagle Gold Bullion Coins, April Sales, Ben Bernanke, Bullion Prices, Federal Open Market Committee, George Soros, Gold Bullion Coins, Gold Futures, Gold Market, Gold Miners, gold stocks, India, Market Radar, Nyse Arca, Open Market Committee, Silver Bullion Coins, Silver Price, Silver Stocks, Spot Gold, U S Mint
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15 Quotes from Great Investors

Monday, May 28th, 2012

Via Addicted2Success, here are a few awesome investment quotes by a few of the worlds greatest investors:
Insightful Investment Quotes
Warren Buffett (Net Worth $39 Billion) – “‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

George Soros (Net Worth $22 Billion) – ”I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”

David Rubenstein (Net Worth $2.8 Billion) – “Persist – don’t take no for an answer. If you’re happy to sit at your desk and not take any risk, you’ll be sitting at your desk for the next 20 years.”

Ray Dalio (Net Worth $6.5 Billion) – “More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.”

Eddie Lampert (Net Worth $3 Billion) – “This idea of anticipation is key to investing and to business generally. You can’t wait for an opportunity to become obvious. You have to think, “Here’s what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?”

T. Boone Pickens (Net Worth $1.4 Billion) – “The older I get, the more I see a straight path where I want to go. If you’re going to hunt elephants, don’t get off the trail for a rabbit.”

Charlie Munger (Net Worth $1 Billion) – “If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.”

David Tepper (Net Worth $5 Billion) – “This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing.”

Benjamin Graham – “The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”

Louis Bacon (Net Worth $1.4 Billion) – “As a speculator you must embrace disorder and chaos.”

Paul Tudor Jones (Net Worth $3.2 Billion) - “Were you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt. After a while size means nothing. It gets back to whether you’re making 100% rate of return on $10,000 or $100 million dollars. It doesn’t make any difference.”

Bruce Kovner (Net Worth $4.3 Billion) - ” My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks. The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.”

Rene Rivkin (Net Worth $346 Million) – “When buying shares, ask yourself, would you buy the whole company?”

Peter Lynch (Net Worth $352 Million) – “I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.”

John Templeton (Net Worth $20 Billion)- “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”

John (Jack) Bogle (Net Worth $4 Billion) - “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”

Tags: Anticipation, Charlie Munger, David Rubenstein, David Tepper, Eddie Lampert, Elephants, George Soros, Harde, Hyperactivity, Patience, Quality Merchandise, Rabbit, Ray Dalio, Socks, Straight Path, T Boone Pickens, Vigor, Warren Buffett, Willingness
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Gold Market Radar (May 21, 2012)

Saturday, May 19th, 2012

Gold Market Radar (May 21, 2012)

For the week, spot gold closed at $1,592.40 up $13.59 per ounce, or 0.86 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.87 percent. The U.S. Trade-Weighted Dollar Index gained 1.28 percent for the week.

Strengths

• Gold ETF holdings in India have reached close to the $2 billion mark for the first time as of April 30. According to data released by the Association of Mutual Funds in India, assets under managements for gold ETFs have more than doubled from a year ago.
• Billionaire investor George Soros raised his stake in the SPDR gold trust, the biggest exchange-traded product backed by bullion, according to a filing this week. Against a backdrop of record low interest rates and expectations for further central bank gold buying, which is running at its fastest pace in five decades, there apparently are still buyers adding to gold at current levels. Using a 60-day rate of change, gold prices have fallen 2.2 standard deviations now. Over the last 10 years, gold fell to 2.4 standard deviations in October 2006 and to an extreme of 3.4 in October 2008. One year after those falls, the gold price was up 29 percent and 46 percent, respectively.
• The U.S. House Natural Resources Committee Wednesday passed the National Strategic and Critical Minerals Act, aimed at streamlining the permitting process for U.S. mining. The U.S. Department of Energy identified the 7-10 year period to obtain mining permits in the U.S. as compared to the average 1-2 years in Australia as one of the principle barriers to new U.S. mining ventures. Behre Dolbear, an international consulting firm, has identified the U.S. as having one of the longest permitting processes in the world for mining projects. The bill now goes to a floor vote by the full House, but the bill is not without detractors. Rep. Ed Market, D-Massachusetts, unsuccessfully tried to amend the bill to require a royalty payment for 12.5 percent of the value of the minerals produced as a result of a federal permit for mineral exploration or mining on federal lands.

Weaknesses

• Commodities guru Jim Rogers said he is not buying gold as he expects gold prices to fall further and believes they could tumble 40-50 percent off their top if India were to stop its gold imports or if Europeans were to sell their gold. Rogers notes those probabilities are pretty low but there has been some effort in India to curtail the purchase of gold, such as the introduction of new or higher tax rates on gold purchases. This proposed tax, which was announced in March, was later abandoned after widespread protest.
• Two mining CEOs called it quits this week. John Greenslade left Baja Mining after a drawn-out proxy fight with the company’s largest shareholder. International Tower Hill Mines announced that the Board of Directors has decided to undertake a review of the Livengood Project in order to optimize available development alternatives and that it accepted the resignation of James Komadina as President and Chief Executive of the company.
• In an interview on Mineweb.net, Gold Fields CEO Nick Holland said that the gold industry needs a price above $1,500 per ounce otherwise curtailment of projects, rationalization and possibly more consolidation was in the cards. Nick pointed out that the all-in cost of the industry to produce an ounce of gold is probably around $1,400 per ounce and that doesn’t leave a lot of margin at $1,500. CIBC recently pegged $1,700 per ounce as the replacement cost for an ounce of gold and highlighted that tax increases have been one of the fastest growing components of the cost creep.

Opportunities

• Low gold prices have been a weight on gold equities. Gold mining analyst Tanya Jakusconek of Scotia Bank highlighted that its group of North American senior gold miners is currently trading at 0.90 times the NAV compared to the lows of 0.79 achieved in 2008.

• Before gold rallied in the last two days of the week, all the price gains made this year were erased as the dollar had gone a record 13 days of consecutive gains. What may have snapped gold back was the realization that the run on the banks in Greece by its citizens withdrawing their money could be a wildcard that forces the European Central Bank to act sooner than expected and/or lead to a policy mistake on how to address the country’s solvency crises. Goldman expects gold prices to rise 25 percent to $1,940 an ounce in 12 months and Morgan Stanley forecast prices to rebound to an average of $1,825 this year and $2,175 in 2013.
• As for gold equities they are down but not out. However, investors are adamant about one thing…SHOW ME THE MONEY! In his seminal research report “Stop ‘Growth At Any Price’ (GAAP) Building,” George Topping of Stifel Nicolaus noted that rampant mining inflation has benefited those involved in mine-building to the detriment of shareholders. George pointed out that if mining companies deferred lower internal rate of return (IRR) deposits this would allow management to better focus on cost control, send a message to consultants/contractors that fees have gone too far, and free up labor for the remaining projects. Projects should pass stress test levels of using a $1,200/oz long-term gold price and deliver a minimum 10 percent IRR. The current dynamic in the sector of escalating cash cost and capital expenditure creep has made the high grade/high margin deposits more accretive and with less downside exposure on the gold price. These are the types of companies our gold funds focus on for delivering the best value creation over time. Gold company shareholders are likely to be supportive if the capex savings are paid out as dividends which could be raised to levels that approach 5 percent. George points out that a change of strategy by the gold mining companies is required to reverse the flow of funds out of the gold sector.

Threats

• HSBC Global Research lamented that at some point, the focus will come back to America versus Euroland and the U.S. dollar will come back under pressure. HSBC documents the pending fiscal cliffhanger the U.S. faces with nine tax expirations or spending cuts that investors should worry about seeing in the near future: 1. Expiration of 2001/2003 Bush-era income tax cuts, 2. Budget Control Act Sequester, 3. Alternative Minimum Tax (AMT) increase, 4. Interaction of AMT and income tax changes, 5. Payroll Tax Cut expiration, 6. Expiration of extended unemployment benefits, 7. Reduction in payments for Medicare physician services, 8. New Medicare Tax, and 9. Tax extenders.
• HSBC compiled a worst-case scenario for these potential policy changes and a reality-check scenario that tries to estimate what may actually happen. In the worst-case scenario, the tax increases and spending cuts could amount to $665 billion or about 4.1 percent of GDP in 2013; in a reality-check scenario HSBC forecast 2013 GDP to come in at 1.8 percent.
• David Rosenberg, of Gluskin Sheff Research, also reminded us this week the current luster surrounding the U.S. economy may be in for some headwinds as the fall approaches. With arguably the most important presidential election since 1980, in terms of setting the economic and fiscal path for the next decade, the U.S. government is on track to again hit the debt ceiling by October, just weeks ahead of the election, with Republicans planning a new standoff on debt limits to be front and center. Dave notes that “at that point in the fall, a lot of folks may have wished they were buying the dip in gold during the winter and spring.”

Tags: 2 Standard Deviations, Bank Gold, Critical Minerals, Floor Vote, George Soros, Gold Etf, Gold Etfs, Gold Market, Gold Miners, Gold Price, Gold Prices, gold stocks, International Consulting Firm, Low Interest Rates, Market Radar, Mining Permits, Natural Resources Committee, Nyse Arca, Royalty Payment, Spot Gold
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Eurozone Remains In Jeopardy – Rogers, Soros, Altman, Lagarde, Weinberg

Tuesday, January 31st, 2012

Perspectives from the Euro Crisis, Week 4, January 2012

For the complete interviews, visit the following sources:

Jim Rogers:
Jim Rogers – January 30, 2012 – CNBC.com – No country will exit the euro zone this year but a solution to the debt crisis remains elusive, Jim Rogers, CEO and Chairman at Rogers Holdings, told CNBC Monday. Rogers elaborated that because there are around 40 prominent elections happening around the world this year, that nothing is going to be allowed to happen this year, however, he is not so confident about 2013, or 2014.

George Soros:
George Soros – January 25, 2012 – CNBC.com – Despite some improvement in the euro zone crisis after the European Central Bank’s recent actions, billionaire investor George Soros told CNBC on Wednesday that more is needed to safeguard the region in the face of a possible Greek default and rising national debts.

Roger Altman:
Roger Altman – January 27, 2012 – CNBC.com – The turning point in the Europe crisis was when the ECB made a very American-like step by lending 450-billion euros and providing liquidity to the banking system, says Roger Altman, Evercore Partners.

IMF’s Christine Lagarde:
Christine Lagarde – Jan. 27 (Bloomberg) — International Monetary Fund Managing Director Christine Lagarde discusses Greece’s progress on structural overhauls and the role of the IMF in avoiding a default. She speaks with Maryam Nemazee and John Fraher on Bloomberg Television’s “The Pulse” from the World Economic Forum’s annual meeting in Davos, Switzerland, telling them that her critical objective at this moment is to get Greece debt under control, down to a level that is equal to 120% of GDP. (Source: Bloomberg)

Carl Weinberg:
Carl Weinberg – Jan. 30 (Bloomberg) — Carl Weinberg, founder and chief economist at High Frequency Economics, talks about a European Union leaders’ summit in Brussels, that starts today and the euro zone debt crisis. Weinberg told Betty Liu on Bloomberg Television’s “In the Loop,” that the EU needs to step up and fund the EFSF (European Financial Stability Fund) to the tune of an additional 300-billion euros to match the funding agreement reached by the ECB, because even the big-name banks like Unicredit, are struggling, and this is the only way to safeguard the European banking system. In addition, he added they are spending too much time addressing the wrong issues. (Source: Bloomberg)

Tags: Banking System, Bloomberg Television, Chief Economist, Christine Lagarde, Cnbc, Critical Objective, Davos Switzerland, Debt Crisis, Euro Zone, European Union Leaders, Evercore Partners, George Soros, High Frequency Economics, International Monetary Fund, Jim Rogers, Maryam, National Debts, Nemazee, Roger Altman, Soros George, Stability Fund, Weinberg, World Economic Forum, Youtube
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George Soros: New Year, Same Crisis

Friday, January 27th, 2012

New Year, Same Crisis

by George Soros, Soros Fund Management, via Project Syndicate

DAVOS – The measures introduced by the European Central Bank last December, especially the Long Term Refinancing Operation (LTRO), have relieved the liquidity problems of European banks, but have not cured the financing disadvantage of the highly indebted member states. Since high-risk premiums on government bonds endanger the capital adequacy of banks, half a solution is not enough. Indeed, that supposed solution leaves half the eurozone relegated to the status of Third World countries that have become highly indebted in a foreign currency. Instead of the International Monetary Fund, it is Germany that is acting as the taskmaster imposing tough fiscal discipline on them. This will generate both economic and political tensions that could destroy the European Union.

I have proposed a plan that would allow Italy and Spain to refinance their debt by issuing treasury bills at around 1%. I named it in memory of my friend Tomasso Padoa-Schioppa, who, as Italy’s central banker in the 1990’s, helped to stabilize that country’s finances. The plan is rather complicated, but it is legally and technically sound. I describe it in detail in my new book Financial Turmoil in Europe and the United States. European authorities rejected my plan in favor of the LTRO. The difference between the two schemes is that mine would provide instant relief to Italy and Spain. By contrast, the LTRO allows Italian and Spanish banks to engage in a very profitable and practically riskless arbitrage, but has kept government bonds hovering on the edge of a precipice – although the last few days brought some relief.

My proposal is to use the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) to insure the European Central Bank against the solvency risk on any newly issued Italian or Spanish treasury bills that it may buy from commercial banks. This would allow the European Banking Authority to treat these various T-bills as the equivalent of cash, because they could be sold to the ECB at any time. Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB. Italy and Spain would then be able to refinance their debt at close to the ECB’s deposit rate, which is currently 1% on mandatory reserves and 25 basis points on excess-reserve accounts.

Read the complete article here

Tags: Capital Adequacy, Commercial Banks, Efsf, European Authorities, European Banks, European Stability, Financial Turmoil, Fiscal Discipline, Foreign Currency, George Soros, Government Bonds, International Monetary Fund, Liquidity Problems, Political Tensions, Project Syndicate, Risk Premiums, Soros Fund Management, Spanish Banks, Third World Countries, Treasury Bills
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Frontrunning: January 26, 2012

Thursday, January 26th, 2012

• BOJ Should Be Allowed $643 Billion Fund to Buy Foreign Bonds, Iwata Says (Bloomberg)
• Banks Hoarding ECB Cash May Double Company Defaults (Bloomberg)
• China Police Open Fire on Tibetans as Protests Spread (Bloomberg)
• Sarkozy Presidential Rival Hollande Would Lower Retirement Age, Lift Taxes (Bloomberg)
• IMF takes tougher stance over Greek debt (FT)
• Iran threatens to act first on EU embargo (FT)
• PM says ‘no complacency’ on economy (FT)
• George Soros: How to pull Italy and Spain back from the edge (FT)
• Japan’s NEC to slash 10,000 jobs (Reuters)
• Obama Planning Corporate Tax Overhaul (Bloomberg)
• French police arrest PIP implant boss Mas (Reuters)

Press Digest

WSJ

* With its $6 billion hostile offer for Illumina Inc , Swiss drug-giant Roche Holding AG is making an expensive and risky bet that genetic mapping will soon be common practice in doctors offices and hospitals.

* U.K. regulators fined Greenlight Capital and owner David Einhorn a total of $11.2 million for alleged insider trading in shares of Punch Taverns.

* Bank of America Corp plans to give investment bankers more of their year-end bonuses in stock, in Wall Street’s latest wallet-squeezing response to a wrenching year.

* Former HealthSouth Corp chairman Richard Scrushy could be released from prison and enter a halfway house within the next month after an Alabama judge on Wednesday reduced his sentence for a 2006 bribery conviction by one year, said Mr. Scrushy’s lawyer.

* Federal Reserve officials said they expect to keep short-term interest rates near zero for almost three more years and signaled they could restart a controversial bond-buying program in yet another campaign to rev up the disappointing economic recovery.

* Hasso Plattner, who 20 years ago designed a computer program that supercharged SAP AG’s growth, has been pursuing another breakthrough that could determine the software giant’s fate.

Now SAP’s chairman, the 68-year-old engineer is trying to take advantage of cheaper memory chips in servers to speed up complex business calculations and allow companies to do in seconds what currently can take hours or days. The aim is to allow executives to quickly access and analyze business data even on hand-held devices.

* Large public pension plans are pouring more money into private-equity funds, deepening ties between government workers and an industry currently under the harsh glare of U.S. presidential politics.

* The sharp drop in natural-gas prices has thrown a wrench into the plans of Chesapeake Energy Corp, the country’s second-largest gas producer. But that might not be the biggest challenge it faces. Chesapeake must also complete a slew of asset sales to continue with its business plans

FT

EINHORN AND GREENLIGHT FINED BY UK FINANCIAL REGULATOR

David Einhorn, one of the world’s highest profile hedge fund managers, and his firm, Greenlight Capital, have been fined 7.2 million pounds ($11.22 million) by UK regulators for trading before a 2009 equity fundraising by Punch Taverns. http://link.reuters.com/pyd36s

EX-LLOYDS CHIEF JOINS UK ADVISORY FIRM

Eric Daniels, former chief executive of Lloyds Banking Group and one of the most high-profile figures in the financial crisis, is joining a little-known advisory firm. http://link.reuters.com/faf36s

IRAN THREATENS TO ACT FIRST ON EU EMBARGO

Iran has threatened to pre-empt a European embargo on its oil by halting its exports to the region immediately, a move that could hit economically weak southern European countries. http://link.reuters.com/def36s

NORWEGIAN CARRIER PLACES HUGE ORDER IN RECOVERY BET

Norwegian Air Shuttle plans to buy 222 new aircraft worth $21.1 billion from Boeing and Airbus in a move that heralds its ambition to become one of Europe’s leading low-cost airlines. http://link.reuters.com/mef36s

PEACOCKS STORES INTEREST DISCOUNTERS AND SUPERMARKETS

Discount retailers and supermarkets are eyeing Peacocks’ 563-store portfolio in case administrators fail to find a buyer for all or part of the distressed value fashion chain. http://link.reuters.com/nef36s

CONOCO TO CUT U.S. GAS OUTPUT

ConocoPhillips, the third-largest U.S. oil and gas group by market capitalisation, has said it plans to cut its North American gas production this year as it shifts to more profitable oil reserves, becoming the latest group to announce output reductions after gas prices fell to a 10-year low. http://link.reuters.com/pef36s

SAP BULLISH AS IT BRUSHES OFF SLOWDOWN

SAP has shrugged off Europe’s economic slowdown as the world’s biggest business software maker by sales indicated it may raise its 2015 sales goal after achieving record annual profits and setting double-digit growth targets for this year. http://link.reuters.com/qef36s

UK’S CAMERON BACKED ON EU COURT OVERHAUL

David Cameron’s calls for an overhaul of the European Court of Human Rights to reduce its judges’ interference with the decisions of national governments have received firm backing from the head of the Council of Europe. http://link.reuters.com/ref36s

NYT

* The prominent money manager David Einhorn and his hedge fund, Greenlight Capital, were fined about $11 million by Britain’s financial regulator on Wednesday for using confidential information to trade in the stock of a British pub chain.

* The Federal Reserve said it was not likely to raise interest rates until the end of 2014, adding 18 months to the expected duration of its response to the slump.

* After a haltingly poor performance in the middle of last year, Netflix reported fourth-quarter earnings on Wednesday that exceeded analysts’ expectations and a subscriber uptick that surpassed its own outlook.

The company posted total revenue of $875.6 million, up 47 percent from the quarter last year. As the company invested in content rights and spent more to gain new subscribers, its profit, $40.7 million, or 73 cents a share, was down nearly 14 percent from the quarter last year, when its profit was $47.1 million, or 87 cents a share.

* A new federal task force looking into fraud related to the housing crisis will begin by looking at big banks and investment firms on Wall Street.

* Ron Johnson, J.C. Penney’s chief executive, said the company would adopt a three-tiered pricing structure and cut down on promotions.

* European banks have been busy. Financial institutions on the Continent have raised at least 40.7 billion euros, or $52.8 billion, in new capital as of the fourth quarter of last year, according to estimates by Citigroup.

The effort is part of policy makers’ push to increase banks’ core Tier 1 ratios, a measure of a firm’s ability to weather financial shocks, to 9 percent by June.

* Hedge funds that loaded up on Greek bonds in the last month – betting on a quick gain – are now scrambling to sell those holdings, fearful that European policy makers will force them to take a deep and binding haircut on the debt.

But walking away from the trade may not be that easy. While the money managers had little problem snapping up the bonds from European banks eager to sell, the pool of potential buyers is drying up.

European Economic Highlights:

• UK CBI Reported Sales -22 – lower than expected. Consensus -6. Previous 9.
• Sweden Consumer Confidence -1.3 – higher than expected. Consensus -7.0. Previous -7.4.
• Sweden Manufacturing Confidence s.a. -14 – lower than expected. Consensus -11. Previous -11.
• Sweden Economic Tendency Survey 91.4 – lower than expected. Consensus 93.0. Previous 92.8. Revised 92.9.
• Sweden PPI -0.2% m/m -2.1% y/y – higher than expected. Consensus -0.4% m/m -2.3% y/y. Previous 0.8% m/m 0.3% y/y.
• Sweden Trade Balance 2.8B – lower than expected. Consensus 6.5B. Previous 3.5B. Revised 3.8B.
• Sweden Unemployment Rate 7.1% – higher than expected. Consensus 7.0%. Previous 6.7%.
• Italy Consumer Confidence Ind. Sa  91.6 – lower than expected. Consensus 92.0. Previous 91.6.
• Italy Hourly Wages 0.0%  m/m 1.4% y/y. Previous 0.0% m/m 1.5% y/y.
• Ireland PPI 0.5% m/m 2.4% y/y. Previous 0.9% m/m 1.9% y/y.
• Germany GFK Consumer Confidence Survey 5.9 – higher than expected. Consensus 5.6. Previous 5.6. Revised 5.7.
• France Consumer Confidence Indicator 81 – higher than expected. Consensus 80. Previous 80.
• France Business Survey Overall Demand -12 – lower than expected. Previous 2. Revised 1.
• Denmark Unemployment Rate s.a. 4.0% – lower than expected. Consensus 4.3%.  Previous 4.2%. Revised 4.1%.
• Denmark Unemployment Rate Gross Rate 6.1% – lower than expected. Consensus 6.3%. Previous 6.2%. Revised 6.1%.
• Russia Gold & Forex Reserve USD 499.7B. Previous 497.1B.

Tags: Alabama Judge, Bank Of America, Bank Of America Corp, Chairman Richard, David Einhorn, Drug Giant, Federal Reserve Officials, French Police, Genetic Mapping, George Soros, Halfway House, Healthsouth Corp, Illumina Inc, Insider Trading, Punch Taverns, Retirement Age, Richard Scrushy, Roche Holding Ag, Software Giant, Tax Overhaul
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Soros: Euro Crisis Woes More Serious Than 2008 Crisis

Tuesday, January 10th, 2012

Investor George Soros talks about the 2008 financial crisis and Europe’s sovereign-debt woes. He speaks with Anurag Behar, vice chancellor of Azim Premji University, in Bangalore, India.

Source: Bloomberg, January 9, 2012.

Tags: Bangalore India, Debt Woes, Euro, Europe, Financial Crisis, George Soros, India Source, Investor, Sovereign Debt, Vice Chancellor
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George Soros Sees Gold as the “Ultimate Asset Bubble”

Friday, December 30th, 2011

Gold is set to finish its 11th consecutive year of gains, the longest winning streak in at ninety years, and is on the brink of a bear market, says George Soros. The billionaire who called it the “ultimate asset bubble” two years ago, reduced his gold and gold related by 99 percent in the first quarter of 2011, according to the Securities and Exchange Commission data.

Betty Liu reports on Bloomberg Television’s “In the Loop.”

Gold Bubble Seen by Soros on Brink of Bear Market

Source: Dec. 29 (Bloomberg)~~~

See also

George Soros Says Markets Are `Always Fallible’

Billionaire investor George Soros talks about global financial markets and his philanthropy. He speaks with Francine Lacqua on Bloomberg Television’s “Eye To Eye.” (Source: Bloomberg)Oct. 10 (Bloomberg)

Tags: Bear Market, Billionaire, Bloomberg Television, Brink, Eye To Eye, First Quarter, George Soros, Global Financial Markets, Gold, Investor, Liu, Longest Winning Streak, Market Source, Philanthropy, Securities And Exchange, Securities And Exchange Commission, Securities Exchange
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Investing in Gold has Been Solid in 2011; Gold Miners? Not So Much

Thursday, December 29th, 2011

It has been a head scratching year for the gold miners – despite a very good year for gold itself (until recently) and stable production costs, their stocks have simply not reacted as expected.  Some of the largest investors in the world have expected a different behavior – the WSJ takes a closer look at this divergence in 2011.

• Gold has been among the best investments in 2011.  Shares of gold miners? Among the worst.  Gold is up 12% this year but shares of gold miners have fallen almost 16%. Smaller gold miners are down almost 40%, based on the returns of leading exchange-traded funds tracking those stocks.
• The surprising gulf has caused pain for some of the biggest names on Wall Street—including John Paulson, George Soros, David Einhorn, Seth Klarman and Thomas Kaplan—many of whom piled into gold shares over the past year, sometimes by shifting away from gold itself.
• Bulls figured that gold miners had more upside than gold, partly because mining stocks outperformed during past bull markets for the metal.  But this year, gold miners have been hit by concerns that haven’t tarnished gold prices. Investors have worried that mining costs are rising, and that governments around the world are becoming more aggressive in taxing resources companies. They’re also concerned that gold miners might squander any windfall with ill-conceived acquisitions or other moves.

Disclosure Notice

Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog

Tags: Bull Markets, Closer Look, David Einhorn, Disclosure Notice, Divergence, Exchange Traded Funds, George Soros, Gold Miners, Gold Prices, Gold Shares, Good Year, Investing In Gold, John Paulson, Personal Portfolio, Portfolio Securities, Seth Klarman, Stable Production, Thomas Kaplan, Windfall, Wsj
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