Why is George Soros Short the Euro? MUST READ!
By Larry Doyle on March 3, 2009 at 4:45 PM in Banking Institutions, Commerce, Credit Card Companies, Credit Risk, Current Affairs, Economy, Employment, Equity Markets, European Union, Global Finance, Sense on Cents (Larry Doyle blog), Wall Street
In very short order, I have gained a deep respect and regard for our Economic All-Star, John Mauldin. I have come to appreciate that Mauldin and I view the market through the same lens focused on the global economy. While many media outlets focus on the day to day, if not hour to hour trading activity, I believe they are truly missing the forest for the trees.
While I have written twice over the last week about eastern Europe being the weakest link in the world of global finance, Mauldin and his colleague Niels Jensen of Absolute Return Partners provided insights and analysis that is numbing.
Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.” This piece is somewhat lengthy, but a MUST READ!! A link is provided at the end of my review.
Jensen initially provides a backdrop of the collective guilt across all market participants in this global economic meltdown. The U.K. government is targeted by Jensen for their total lack of fiscal discipline in the process. He further adds that the outlandish banking compensation was a direct correlation of the leverage employed. Jensen focuses on the preponderance of supposed AAA rated CLOs (Collateralized Loan Obligations) backed by corporate loans and credit cards. The leverage employed by the European banks dwarfed the leverage employed by U.S. banks.
To this point Jensen’s analysis is enlightening but not earth shattering. He then enters into the rate of expected defaults on the European banks’ balance sheets, the exposures to eastern Europe, and the specifics of mortgage borrowing by eastern European citizens from European banks. I started to get a little queasy.
Jensen’s comparisons of the details in this crisis relative to the Asian crisis experienced in the late 90’s is scary. His focus specifically on Austria and the level of their debt exposure is also daunting. My queasiness increased.
Please read the Mauldin/Jensen report in its entirety so you can gain a further appreciation of the pressure in that part of the world and the implications for these economies, countries, and their political stability. Last Sunday evening on NQR’s Dollars & Sense, I spoke at length about the global government funding needs. On that very topic, Jensen writes:
Public debt to rise and rise
. . . the banking sector cannot, in the current environment at least, raise sufficient capital to stay afloat, so more, possibly a lot more, tax payers’ money will have to be put forward. This can only mean one thing. Public debt will rise and rise. The official estimate for the UK for next year is already approaching 10% of GDP, an estimate which will almost certainly rise further. We probably have to get used to running 10-15% deficits for a few years, a fact which seriously undermines the notion of government bonds being next to risk-free.BCA Research has calculated the effect on public debt in a number of countries, as a result of further bank losses being underwritten by tax payers. Obviously, those countries with the largest banking industries (as a % of GDP) will be hit the hardest.
Mauldin and Jensen are clearly on the cutting edge of the weakest link in the global economy today. In light of this color, there is no surprise why George Soros is short the Euro.
I would never raise undue anxiety, but this situation is very fluid and needs to be watched daily. I will be doing that as I try to help you navigate the economic landscape!!
LD
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Not knowing what “short the euro” means, I tagged trusty old Google again and came up with this:
“Shorting is the process of borrowing a security, then selling it in the hopes it will fall in value so you can buy it back at a lower price before returning the security to its rightful owner.”
Okay and this is legal? and people wonder why we are having problems.
I like suggestions from various directions to restructure the entire global financial system. Maybe that was some Dr Strangelove’s idea all along. Undoubtedly, there are bad ways and worse ways to do that, but pouring more taxpayer money into a corrupt, rotten, STUPID system is the worst way.
Mercedes…Shorting is actually a very healthy and necessary part of a vibrant capitalist system. Without the ability to express one’s opinion to “short” a security/asset, markets would be much more susceptible to manipulation and fraud.
It is difficult for a financial ignoramus like me to see how markets could be much more susceptible to manipulation and fraud than is evidenced by the many publically known, recent cases like Enron, Bernie Madoff, etc. I am sure the more knowledgeable NQ readers could name many more. I personally think that honest enforcement of reasonable regulations is a better way to prevent manipulation and fraud. Also, people like Bernie Madoff should be sitting in jail, not a Park Avenue penthouse.
And his crooked wife should go right along with him for complicity and attempting to hide multi- millions in assets. While we’re at it, throw all the relatives in jail who received the jewelry he mailed to them. Aiding and abetting…hiding over 1 million in assets.
yep; it’s privatize the profits, socialize the losses. screw that.
Larrym I am feeling really stupid. What does “short the Euro” mean exactly?
Tricia…”short the euro” means he sold this currency not having owned it in the expectation that it will fall in value..
It sounds like check kiting. Illegal for us ordinary people.
“Short” is the opposite of “long.” When you long a security, you expect the value to rise, as well as your investment value. When you short a security, you expect the value to fall to turn in a profit. Shorting a stock or currency is usually dangerous, because you will have limited profit (you can only short to zero), but unlimited risk. And for savvy investors, short side usually is used as a hedge for the long. A mature market has both mechanisms to maintain liquidity, etc.
Chinese stock markets don’t allow for short selling, and the markets are notoriously choppy as compared those mature markets. Of course, the stock markets in the US are behaving like the markets in third world country lately, so it is hard to say.
Ok, sorry to be a bone-head. What exactly did George Soros do in layman’s terms…He bought what with what and sold it to whom and got what?
MBC, He is selling Euros short. Think of it this way — He is selling Euros that he hasn’t bought yet. He’s betting he can buy them cheaper in the future to fulfill the sale.
Uh-oh, LD. When YOU get queasy it really makes me worried!
He bought money, power and celebrity status. The cost to him: pledging his conscience/soul to the financially elite pushers of “free markets.”
“If I wasn’t doing it, somebody else would,” is his rationalization.
“Firewall–In Defense of Nation State” video:
http://newsbrowser.org/firewall/index.html
Search “Soros Dossier” on Google.
Isn’t this Soros’ usual MO? Isn’t he known for shorting currency?
Maybe that’s why the POTUS was his guy — the more our president says and does, the worse the markets get.
He did it in England he broke The Bank of England
Black Wednesday it is known as
http://en.wikipedia.org/wiki/Black_Wednesday
Currency speculation
On Black Wednesday (September 16, 1992), Soros became immediately famous when he sold short more than $10 billion worth of pounds, profiting from the Bank of England’s reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.
Finally, the Bank of England was forced to withdraw the currency from the European Exchange Rate Mechanism and to devalue the pound sterling, and Soros earned an estimated US$ 1.1 billion in the process. He was dubbed “the man who broke the Bank of England.”
The Times of Monday, October 26, 1992, quoted Soros as saying: “Our total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when Norman Lamont said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was about how much we wanted to sell.”
According to Steven Drobny,[15] Stanley Druckenmiller, who traded under Soros, originally saw the weakness in the pound. “Soros’ contribution was pushing him to take a gigantic position,” in accord with Druckenmiller’s own research and instincts.
In 1997, during the Asian financial crisis, then Malaysian Prime Minister Mahathir bin Mohamad accused Soros of using the wealth under his control to punish ASEAN for welcoming Myanmar as a member.
Larry, thank you for this post and the link to the amazing Mauldin-Jensen article.
LD, If I get you, the hyper-debt is coming to a grocery store near me?
What is the “ripple” that concerns you the most as it relates to the US markets and the Euro’s malady? Are all those people who fled the dollar to Euro’s in the 4th quarter of last year toast?
If one looks at the global transfer of wealth as arteries and assigns some part of the human anatomy to represent economic organs…which is to be starved of oxygen first?
The weakest link becomes a strongest force for social unrest. This, to me, is why “hope” as marketed by BO, is a mythical creature similar to unicorns. Looks cool hanging on the walls of the Cloisters, but is not real.
I was very disconcerted by BO’s remarks today about “day to day” market swings…yet he can’t even acknowledge a simple fact that the market has TANKED out of the gate with him and he does not mention it. Yes, he gave lip service to long term investments but neglets to understand that increasing M1 thru z is not a cure for what ails us.
Makes me think the only reason BO was smiling as he walked with the British Prime Minister was ’cause he knows that they are in a much worse position.
I’m not really so much confused by the term “short the Euro” as I am by the bizarre grammar at play here. If “short the Euro” is a verbal clause, how IS Soros “short the Euro”?
LD explained by using the participle gerund form (”shorting”) in his explanation upthread, and John D’s explanation involved the present tense (”when you short a security”). Even Patience used the gerund (”shorting currency”).
So how does the title of this thread make any sense? “Why is George Soros Short the Euro?” I still don’t know. Perhaps “Why DOES George Soros Short the Euro?” or “Why is George Soros SHORTING the Euro?”
Sorry for the nitpicking, but why should I waste my time reading an article when the author can’t be bothered to proof the freakin’ title?
Very good video about the relation of money and debt. 45 minlong. take s a few sec to begin.
http://tinyurl.com/27jppm