With my TV broken for the last several months and a useless repairman backed by a company going out of business, I have had a lot of time to devote to learning and thinking. Recently, I realized I needed to dig into fundamentals and decided George Soros was the best place to start. Thankfully, there are plenty of his speeches and lectures online.
Soros’ “The Way Ahead” lecture series from 2010 is very interesting. It covers his theory of reflexivity and how it applies to financial markets. The lecture contains some interesting ideas that have yet to happen, but seem to apply to the near future. You can watch the lecture below.
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To follow are my quick notes and thoughts on the material presented.
Back in 2010, Soros felt the financial crisis was not the end. He expected another crisis within a year or two. Obviously that did not happen, but he explains he did not see the recovery from 2009. I am not saying a crisis is around the corner, but we should never lose sight that one could be.
The billionaire investor said that eventually, the U.S. will not dominate the world as it has in the past. If Soros is right, a new paradigm will emerge. There will likely be many potential opportunities to profit during the shift. As a 13th generation American, I am saddened by the short-sightedness of our leaders, but a new world order is not the end. Rather, it is an opportunity.
Soros goes on to discuss the concept of central and periphery currency flows.
After talking about global financial regulations needing a force with teeth, Soros mentions how the system is currently constructed to give rise to "financial protectionism" that could disrupt the global markets.
Soros discusses many points in the last few minutes of the lecture. The overriding theme is: what happens after the dollar rises and puts developing countries in a bind? The world does not seem to trust American leadership anymore and that could spell trouble for U.S. debt and dollar dominance. My intention is not to say that the following will absolutely happen, but rather to game scenarios to see where things may land. Ultimately, how do we profit from these events should they happen? I will try to encapsulate as many points as possible:
- If the dollar continues to advance higher, will the other powers (including China) want to operate under the Bretton Woods arrangement? Soros’ suggests the world should move to an SDR basket as a reserve currency. But could this realistically happen? I doubt the current administration would be willing to sit down with the Chinese and allow a new world order where the dollar ceases to be the reserve currency. After all, the dollar's reserve currency status provides certain advantages to the U.S. government (e.g. greater debt spending because foreign governments are willing to buy in).
- Would it be in China’s best interest to join an SDR-like arrangement? With all the poverty still racking their country, I doubt they would want to give up their manufacturing advantage by becoming the reserve currency. Maybe they think they can do better than the Americans and prevent the hollowing of their rust belt. But of course, I should mention America can still produce a lot. I see it everyday. However, I also happen to know by dealing directly with the Chinese that they are skeptical of automation (plant automation is my profession).
- Soros concedes that if Obama fails to prevent a double-dip, the population could become susceptible to populism. We did not have another dip in asset prices, but the folks in the places that voted for Trump did not see it that way. Shortly before the election, I interviewed an engineer who worked for the steel industry in western Pennsylvania. He told me he was looking for a job because a lot of plants had shut down and he knew he was next. This is a common story that illustrates the people who voted for Trump did not care about stock prices.
- At the end of the lecture, Soros mentions China will need a more open society if it wants to be considered a developed country. This point makes me wonder whether a crisis will serve to open China up or make it more isolated. This is something we will have to wait to see.
These are just my own thoughts on the lecture. I would love to hear yours as well. Please feel free to respond in the comment section below.
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About the author:
I eventually left the public sector to work as a consultant for a leading Silicon Valley firm that creates advanced data software for intelligence and finance. I then went on to pursue my passion for markets, working at a global-macro hedge fund.
Recently, I co-founded Macro Ops with two other former hedge fund analysts with the goal of helping friends and family navigate these volatile markets.