Soros Takes On The Central Banks Again - Guess Who Wins

by: Andrew Hecht

The legend of the Hungarian Trader.

The paradox of Soros.

Soros and Icahn betting lower - Chimps and Chumps.

Soros loves gold too.

The three reasons Soros will make money.

George Soros is a Hungarian-born American trader who has amassed a fortune of almost $25 billion over the course of his legendary career. My favorite Soros quote is "All of economic history is one lie and deceit after another. Your job as a speculator is to get on when the lie is being propagated and then get off before it is discovered." George Soros' view of economic history contains a lot of truth, but it is terribly pessimistic. The quote gives insight into Soros' favorite two pursuits, markets, and politics.

At 85 years young, Soros recently announced that he is back in the game, he sees a trend that he believes will add to his fortunes and as an extraordinary speculator, the game is in his blood. The personality type of a Soros is the same as the gambler who thrives on the action. Soros and others like him love to play the game; it provides the ultimate satisfaction of their hedonistic desires. The excitement of experiencing the ups and downs invigorates the soul of a trader. His assets and presence in markets and politics make him a formidable player and he is back on the scene once again.

The legend of the Hungarian Trader

In 1970, George Soros founded Soros Fund Management, and two other legendary traders worked with him over the years. Stanley Druckenmiller and Jim Rogers both made boatloads of money for Soros and became billionaires.

Perhaps the most notorious trade of his career is a reason he is back in the market these days. Soros loves to take on central banks. In 1992, the speculator took a massive short position in the British pound. He believed that the currency was too high as the nation entered into the European exchange rate mechanism. The British inflation rate was triple the level it was in Germany, and British interest rates weighed heavily on their asset prices. On Black Wednesday in the U.K., September 12, 1992, Soros sold more than $10 billion pounds short as the Bank of England refused to either raise interest rates to a comparable level with the rest of Europe or let its currency float freely. While Stanley Druckenmiller took the position, he credits Soros for pushing him to increase the size of the short. The pound collapsed, and Soros made more than $1 billion and earned the nickname, "The man who broke the Bank of England". The central bank lost more than 3.4 billion pounds defending the currency.

It is interesting that Soros is now making a ceremonious return to the markets on the short side of equities and the long side of gold as the nation he made his legendary bones on is voting on a referendum to exit the European Union on June 23, this Thursday. Soros is an interesting character; he uses his reputation and billions to move markets. At the tender age of 85, George Soros is an enigma.

The paradox of Soros

While the epitome of Wall Street manipulation and influence, Soros is a highly charitable person. However, his charity of choice always involves shaping the issues he embraces. Soros is a notorious left-wing supporter giving hundreds of millions to charities that support his political vision. His philanthropic career began in the 1970s as he funded black students in South Africa before the end of apartheid. At that time, he also supported many dissident movements behind the iron curtain. In the United States, Soros has given tens if not hundreds of millions to organizations like, the Center for American Progress and America Coming Together. He has also been an advocate for the legalization of marijuana and a supporter of Democratic candidates for office. Soros donated to the Super Pac supporting Barrack Obama and is currently a supporter of Hillary Clinton.

When it comes to American billionaires involved in politics, Soros is the polar opposite of the current Republican nominee for president; Soros makes Donald Trump look humble, which is not an easy feat. While Trump has put himself on the front line, Soros remains in the background peppering his favorite causes with his money.

The billionaire has been active in funding movements in the U.S. like the agitation that followed the issues in Ferguson, MI, and the vocal Black Lives Matter movement. He once said, "I admit that I have always harbored an exaggerated view of my self-importance - to put it bluntly, I fancied myself as some kind of god."

Soros has funded many community activist ventures inspired by writer and community organizer Saul Alinsky whose 1971 book Rules for Radicals has become a bible for many left-wing groups. Alinsky wrote, "Life is a corrupting process from the time a child learns to play his mother off against his father in the politics of when to go to bed; he who fears corruption fears life." That statement sums up the thoughts of many of Alinsky's followers who are practicing, "Tactics mean doing what you can with what you have." As a trader, Soros apparently trades with two left hands, and as a master manipulator who has made his riches in the United States, has said, "The main obstacle to a stable world order is the United States." Soros, like Alinsky, believes that change comes from agitation; he has used that tactic in markets, and with his money, supports agitation in the interest of social change.

Soros is a paradox, a speculator who is the embodiment of Wall Street riches using market manipulation and all of the excesses we have heard about since the 2008 financial crisis in the Wall Street versus Main Street debate. At the same time, Soros is a supporter of many left-wing causes that would put him in a camp left of Bernie and the other Sandernistas. Now, he is back with a vengeance, and we believe he will be right once again and add to the mountains of cash that will allow him to fund more of his favorite "stable world order" causes for the rest of his life and after. Soros is a paradox, but others on the opposite end of the political spectrum agree with his opinion about the current state of markets and have been vocal advocates of shorting stocks.

Soros and Icahn betting lower - Chimps and Chumps

George Soros and Carl Icahn come from opposite sides of the political aisle. While Soros will back the political action committees dedicated to Hillary Clinton, Icahn has been vocal in his support of Donald Trump and has even been mentioned as a possible Treasury Secretary in a Trump administration. Meanwhile, both men have one thing in common these days; they think the stock and bond markets are going lower in a big way. The interesting thing is that both legendary fund managers have not been secretive about their views, they have telegraphed their disdain for stocks in loud and clear fashion. Meanwhile, many investors, as well as myriad market pundits, continue to advocate the stock market as the only game in town for investors.

Given the divergence of opinion, two groups emerge when it comes to market opinion. Those following Soros and Icahn are chimps, as the market legends put their money where their mouths are, and some will follow. Those who continue to buy and hold stocks in the hope that the price to earnings ratios move even further away from long-term averages are likely to wind up chumps, stuck in equity positions when the bottom falls out of the market.

The CAPE is just under 26 times earnings while the long-term mean and median are just over 16. The bottom line, stocks are historically too expensive in an environment of tremendous uncertainty. While U.S. equity prices have been on the rise since February, the Carden Smart Hedge Index remains in cash since mid-December.

Soros loves gold too

Soros' cohort, Stan Druckenmiller, who made a mint on shorting the pound, has been publicly bullish on gold since last year's lows at around $1,046. Stan was a few months early, but his bet is paying off handsomely as gold approaches the $1,300 per ounce level. His old boss recently told markets that he too is bullish on the yellow metal and has been putting his money where his mouth is.

As the monthly chart highlights, Stan is still the man, and his timing in gold was impeccable. The yellow metal broke out of the bearish trend that was in place since 2011 and is now momentum, and price action is positive. As of Wednesday, June 15, the price is up almost 24% since the late 2015 lows, and now George Soros is on board for the next leg higher.

The three reasons Soros will make money

Love him or hate him, there are three critical reasons that George Soros will hit another home run in the stock, bond and gold markets in the months to come. If you detest the man, you can always rationalize the market view by following Carl Icahn; between the two all sides of the political spectrum are covered.

Reason one for the coming market turmoil is what Soros believes is one of the greatest mistakes in financial history - seven years of zero interest rates or lower. Soros (and Icahn) thinks that the historically low levels of interest have caused investors to do crazy things pushing the valuations of stocks, bonds and all assets to extreme and unsustainable highs. The CAPE index is a testament to the current rich valuation of equities, and the Fed reiterated its marriage to a dovish rate policy yesterday.

Reason two is the ongoing debasement of currencies. Quantitative easing and artificially low yields have caused the value of paper currencies to fall. We do not see this with the naked eye as we look at currency values against each other via exchange rates. However, the action in the price of gold is the proof that currency values have declined as an asset class. Gold has rallied against all currencies.

Reason three is the current geopolitical state of the world. China is experiencing a dramatic slowdown with rising debt. The Middle East continues to be a hotbed of turmoil with the effects reverberating across all corners of the globe. Terrorist events have been consistent over the past year around the world, and the root of the problem continues to be the most unstable region of the world. Political turmoil in Venezuela, the nation with the world's largest oil reserves, could cause problems for the Americas, and North Africa remains a political basket case. Additionally, Europe continues to suffer under the weight of a wave of immigrants from the Middle East and Africa. The root of the potential for a Brexit from the European Union is partially due to the humanitarian immigration crisis. Finally, the leadership of the U.S. will change in the coming months, and the two bears, Soros and Icahn, each support different candidates. The nominees from each party are so unpopular with many of the voters in the U.S. that they will be throwing up in their mouths as they press the lever for the lesser of the two evils.

For George Soros, the battle is now with the central banks of the world, a group which he is very comfortable opposing. Soros made his fortune taking on the central bankers of the world, and he is about to add to those billions on the back of these monetary authorities once again.

The Carden Smart Wealth Indices provide an emotion-free view of markets and can dampen volatility when market activity flashes warning signs. These indices are validating what Soros and Icahn are publicly screaming.

There are many moving pieces when it comes to the direction of world markets across all asset classes. Now is a good time to take stock of portfolios and plan for the future. Soros is going to win this battle, go with him and make sure your positions do not feed him, even more, money.

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