Sunday, January 27, 2008

George Soros – Financially Right, Reflexively Wrong in Davos
…and everywhere else for that matter

George Soros is an interesting man. He has made billions of dollars for himself in the capital markets of the United States and around the world. He himself credits much of this success to an investment philosophy called Reflexivity. Long story short—his Reflexivity approach dictates that the value or worth of any market is determined by the person or group that is doing the looking and, in fact, the market has no value at all until it is determined by the “looker.” Basically, it means that we bring biases to the table and that those biases amplify market fluctuations. This approach is based upon a European philosopher named Popper and shares several theoretical principles in common with Quantum Physics. Heady stuff indeed—but not a bad approach for a man who cut his teeth in the arbitrage cellars where exploiting perceived value discrepancies is the order of the day.

His biography includes some other notable entries including his support for the Polish Solidarity Movement (a good thing) and advocacy for the Revolution of the Roses in the country of Georgia (also pretty good) along with his successful and eponymously-named Soros Funds.

More recently, Mr. Soros has become notable for his unabashed financial support for Liberal causes, the Democrat party in general, and for various “we are the world” and “America is not very special” type causes. He is quite the celebrity in the halls of Davos.*

Last week Mr. Soros took the opportunity to pontificate in the Financial Times regarding the credit, stock market, and housing corrections taking now full shape. Fair enough. But in the mind of George Soros we are suffering not from a traditional series of market corrections. Rather, we are in the middle of “the worst market crisis in 60 years” and the “…relative decline of the US…” as an economic power. Hmmmm….

Certainly I do not wear rose-colored glasses—it is my firm opinion that the United States is to spend a little market-cycle time in the economic woodshed receiving our just due. And I have no doubt that China—with its 1.2 billion souls and pseudo-capitalist structure—will become an economic powerhouse. But the “end of the American era” was predicted to happen in the 60’s, all throughout the 70’s (stagflation), during the market crash of the late 80’s, during the pop of the Tech Bubble in 2000 and the ensuing post-911 recession, and at every point of currency fluctuation over the last century.

America left a decades-long period of raising interest rates and entered a decades-long period of declining interest rates in the early 1980’s (secular trend). By all accounts we are entering a long-term raising trend once again. This requires adjustment. Such transitions always do and always will. America’s dominance may one day end—but a few years of more difficult times will not be a factor when it does.

I think that Mr. Soros misses another key point. It is a reasonable suggestion that the rest of the world has not improved economically in spite of America, but because of it. China would likely be a nation of one billion starving peasants had it not adapted some of the capitalist structures we designed and then built products that we want to buy. Europe would likely be a fascist serfdom of economic repression without our military intervention, Truman-doctrine economic aid, the continuing blanket of our protection during the cold war, and current (mostly friendly) competition in the marketplace. The rest of the world is mostly in ascendency, yes; but America had a part in that and we will continue to do so. John F. Kennedy once famously said that “A rising tide lifts all boats.” The other ships of state would be wise not to curse that tide.

George Soros is no doubt a very bright man who has made his mark in the world. These days, however, his Liberal One-World’er bent is distorting the way he is looking at America. To put this in his own terms, Mr. Soros’ valuation of the US is deeply affected by his incumbent biases which feed on themselves and cause him to short-sell America’s place in the world. He will understand if the rest of us look beyond his biases and invest in the underlying strength.

Be well,

* Davos is the traditional location of the World Economic Forum:

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