Legendary investor George Soros recently released a new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means.
The underlying thesis of the book is that the current financial system has been built on a false paradigm, namely that financial markets tend towards equilibrium. This misleading paradigm has directly resulted in the financial woe that we’re experiencing.
Soros’ paradigm, which he started developing when he was a student at LSE, is the concept of reflexivity - the idea that prices influence the underlying fundamentals and that newly-influenced set of fundamentals proceed to change expectations, thus influencing prices - a self-reinforcing pattern. Because outcomes after each cycle are different from the previous outcome, this theory is often termed the discordant with equilibrium theory.
The first part of the book is all about the theory of reflexivity. The second part of the book talks about the current financial crisis and where we are headed beyond 2008.
Soros explained a lot of interesting concepts in the book. The main takeaways I got from the book are:
- We need a new paradigm, whether its reflexivity or something else; the previous equilibrium paradigm simply does not hold
- Although the US in a recession, there’s no reason to expect a global recession due to significant expansionary forces among countries like China, India, Russia and other emerging economies
- New bubbles are forming – raw materials, energy, agriculture
- A period of political and financial instability is around the corner as the rest of the world Challenge’s United States’ dominant economic power and the USD as the global reserve currency
- China’s rising renminbi will create further problems for the United States
- Policy changes are a means to achieving a more stable system
- Short US and European stocks, US ten-year government bonds, and the US dollar
- Long Chinese, Indian and Gulf State stocks and non-US currencies
Click here to purchase the book.