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The world’s most famous hedge fund manager, George Soros, says the four week rally in U.S .stocks is just a bear market rally, and warns that the financial crisis is like nothing seen before in our lifetimes. You have to wonder, then, what will be the trigger for another market down leg.

Step forward the bankruptcy of General Motors, the largest company in the world on some measures, now looming as the clock ticks on a 60-day time limit on a new business plan imposed by President Obama, who essentially fired CEO Rick Wagoner last week.

GM bankruptcy

The bankruptcy of GM, however it is arranged, has the necessary scale to precipitate a major stock market crash, and it comes against the background of a 16-month recession with key indicators like house prices still falling.

Might this be a repeat of the now generally disparaged bankruptcy of Lehman Brothers last autumn which set off a 50 per cent crash in the Dow?

GM is a giant, ultimately responsible for the employment of more than a million people, and the collateral damage of insolvency will be huge, quite apart from its $62 billion in debt. It will be a huge blow to the economy and the domino effect on its suppliers and bankers could equal anything seen in the Lehman debacle.

Mr Soros told Bloomberg yesterday: ‘This is not a financial crisis like all the other financial crises that we have experienced in our lifetime’. If the US economy continues to contract there is ‘a risk it falls into depression’, he added.

‘Banks are weighed down by a lot of bad assets, which are still declining in value,’ he said. ‘There are some signs of hitting bottom but we are not there yet’.

The S&P index presently trades at 12 times average earnings for the past decade, while in previous market bottoms it has reached as low as seven, which implies a near 50 per cent drop in stock prices is possible from current levels.

The pattern of 1929-30 included an almost identical 50 per cent stock market rally in March, followed by a drift sideways in April and a huge plunge in June. Given the timetable for GM it looks as if history might repeat itself in 2009.

That said, even Mr Soros can see an eventual light at the end of the tunnel. He said: ‘As long as we deal with this in a multilateral and more or less coordinated way, I think we will get through.’

Source: George Soros, GM and the next Lehman Brothers