By Andrew Mickey on May 13, 2009
George Soros is one of the most successful investors in the world. His Quantum Fund averaged 30% annual returns for more than two decades. He’s also credited as the man who “broke the bank of England” when he scored an estimated $1 billion payday by betting big against the British pound.As you might expect, Soros has become a closely followed man in the financial markets.Soros’ success has been a bit different than many of the other investing greats. He’s not one of the great value investors who deliver outsized returns over the long run like Warren Buffett, Marty Whitman, and David Dreman. He’s not a great stock picker who catches onto the next big thing very early.His success has been attributed to how he thinks more than anything else.The thing which has made Soros great is his ability to admit when he’s wrong. He’s willing to change his mind. When circumstances change he changes right along with them.
Basically, Soros has not made a habit of arguing with the market. When the market goes against him, he assumes it’s because of something he missed, didn’t consider, or didn’t know about and gets out.As a result, when Soros changes his mind, investors should take note. A previous call he has made is going wrong and he’s flipping around. In this case, his previous call was a bearish one. Now, he’s changing his tune. Investors who take note will likely be in a great position for the next few months.
You Can’t Fight the Market
Last November the markets seemed like they were never going to turn around again. Investors who leveraged up on all sorts of assets were forced to sell. A near panic set in across the country. Big banks were on the verge of collapse and the economy ground to a halt.In response, the U.S. unveiled one the largest economic stimulus packages in history. The government promised a new regime of regulation. And, we’re seeing the impact now, it started pumping massive amounts of cash into banks, bankrupt companies, and “the system.”At the time, Soros was called to testify to the U.S. Congress. His high profile status as manager of one of the world’s top performing hedge funds made him an expert in the field. It also made him a perfect scapegoat for a showy Congress to “get to the bottom of this.”Soros discussed the role of hedge funds in the downturn and future regulations which should be applied to the industry.Soros’ comments on the economy at the time were pretty dire too. He said, “A deep recession is now inevitable and the possibility of a depression cannot be ruled out.”
A Recovery in Sight
Jump ahead five months and, at least, according to the markets, the economic situation has improved drastically. It’s still not great. Realistically, it’s not even good. But it’s not terrible. And that’s what the markets were forecasting back in November (remember, the Dow (^DJI: 8469.11 +50.34 +0.60%) is only up about 10% from November lows).Soros has even changed his mind too. In an interview during the weekend, he said, “The economic freefall has been stopped, the collapse of the financial system averted. National economic stimulus programs are starting to take effect. The downward dynamic is easing.”That’s the key here. Soros had been expecting a steady economic decline. At best, a long, slow decline. At worst, an outright depression.Since then, a lot has changed. The more than $1 trillion in excess government spending and new printed dollar bills has started to have an impact on the economy. Businesses have slowed down making layoffs, consumers have picked up their spending a little bit, and industrial activity is declining at a slower rate.This puts us at a midpoint for the economy. A near-term recovery is certainly possible. A few of the pieces of the puzzle are coming together. Housing sales are starting to recover in the U.S. Consumers are spending again. Companies are raising new capital in the markets to expand and invest.There’s one much bigger indicator which is integral to any recovery starting to turn up.
A Nation of Gamblers Investors
The biggest piece of the economy recovery puzzle is also the most unpredictable - the stock market.As we’ve looked at in the past, the stock market has become an integral part of the U.S. economy. Almost 70% of households own equities - either directly or indirectly through mutual funds. As a result, a portion of their nominal wealth depends on the performance of the overall stock market.Right now, the market is anticipating a big part of the recovery. The steady climb has helped push the account balances on those 401K and brokerage accounts up quite a bit. Granted, most are still much lower than they were a year ago, but after watching them fall 60% and staying there, many people had to get somewhat used the new levels.Now that’s changing. A 30% rise in the market has created a renewed feeling of paper wealth. Although it’s not real wealth, this will have an impact on many economic choices. For instance, a $30K and $100K retirement account will go a long way in helping many people choose whether to go out or stay in for dinner tonight.As a result, we’re witnessing the virtuous part of the cycle here. It’s fueled by hope, greed, and high expectations.Of course, those aren’t sturdy pillars for any economic recovery, but they’ll do the job for now. But don’t get used to it for long.
The Race to Nowhere
Right now, we’re in the relatively good times again. Yes, there will be sharp downswings in the market (like yesterdays). They will test the nerves of all investors. But from this point there is still quite a bit of upside potential here.There’s more stimulus money on the way. Only a small portion of it has been doled out so far and we probably haven’t felt all the effects of this one-time economic jolt in the arm.Also, the Fed is continuing to use every tool it has (and creating new ones) to get dollars circulating again.Of course, it’s all a big race to nowhere.Although I’m excited over the short-term - I believe the window of opportunity is wide open - I’m not going to get too caught up in the recovery when it does come. It will be short-lived for many, many reasons.
From a U.S. perspective, the amount of regulation coming into many different sectors of the economy will be a massive draw on productive resources.Banking and finance will be the hardest hit. For instance, if you’re a bank which can’t repay TARP funds, your future is pretty much set. You will lose a lot of market share to banks which can operate more freely and attract the best people.Another easy scapegoat will be the lenders of most convenience - credit cards and payday loans. We’ve already looked at the bill aimed at de facto shutting down the payday loan industry. Credit card providers are getting their turn next.It’s not just the bankers and lenders who have been vilified though, there have been plenty of others (by the way, if you look at history, vilifying lenders is nothing new and is always wildly popular - but it never, ever ends well). You also have the health insurers, Big Pharma, coal producers, etc.
Then there’s the auto bailout debacle. The short-term tangible impact will be good for the economy. Joe-the-autoworker has a much more secure job for the time being. The long-term consequences, however, will force companies with unionized workforces to pay higher interest rates because they’re riskier borrowers. Also, wait until Joe-the-autoworker asks Joe-the-autoworker for a raise - under the new union ownership structure, Chrysler is a ticking time bomb. In the end, all of that will drive up costs which will be passed onto the consumer.Then there’s the “global warming” (or is it “climate change” today…or “energy security” today) initiatives. The increase in electricity costs related to the green initiatives will prove very, very costly over the years.Oh, and then there are the underfunded pensions, demographic issues, ballooning U.S. budget deficit, tax hikes, and…we could go on and on, but you get the point.I’m not unrealistic in being bullish right now. There is a lot of money on the sidelines and it’s working its way back into the markets. The process of it all coming in will take a long while. Until then though, I recommend riding the virtuous cycle upwards for all it’s worth.
It’s Never Different This Time
There will be a time to turn bearish again. After all, bear markets almost always end the same way. At the real bottom (which is likely a couple years away), you’ll see P/E ratios of 6 to 8, yields of 6% to 10%, and no one caring about stocks anymore.We haven’t seen any of those. We haven’t even seen one of them. But we will see them and we’ll be prepared.Once we see a few things like a few months of GDP growth, a U.S. president patting himself on the back for “saving the economy” and maybe going as far as declaring the recession over (that would make it really easy to know “the top”), the nose-bleed valuations return to different sectors, we’ll be ready to take action.In the end though, I want you to understand that it’s not often Soros changes his mind, but when he does, it’s best to take note.
No comments:
Post a Comment