Sunday, May 11, 2008

George Soros - The New Paradigm for Financial Markets

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.
by George Soros,
Publisher: Perseus Publishing

Pub. Date: May 2008

Over the weekend I had time to read the new book from billionaire hedge fund investor George Soros. The legendary investor was one of the first to respond to the current financial crisis with a razor sharp and comprehensive analysis.

In the first part Soros explains in detail the theory of reflexivity. This is what he calls his "life's work" and deals with the inherent flaw in market fundamentalism. Markets work like social networks and fundamentals are altered through the influence of market participants. This differs from the view of the fundamentalists that markets are always right and revert to the mean. Boom and bust cycles do exist but they eventually take care of itself. This is known as the efficient market hypothesis.

Soros in the book's second part argues that this inherent flaw in market fundamentalism has weakened financial markets to a point where the emergence of a new paradigm for financial markets is inevitable. The trigger was the credit crisis of 2008. His razor sharp analysis of the current crises that commenced in August 2007 and has its origin in the collapse of the subprime mortgage market is one of the most impressive parts of this chapter.

The current crisis marks the end of a "superboom" in financial markets that started after WWII and accelerated during the Reagan/Thatcher governments when market fundamentalism took hold. This superboom was characterized by huge credit and monetary expansions. According to Soros this expansion has nowhere to go and is now ending. The emerging new paradigm has two faces. One, the dollar looses its status as reserve currency and two, interest rates on U.S. government debt are bound to rise.

Once again Soros proves that he is capable of analyzing money flows like nobody else does. It is known that his endowment fund has made several billion dollars profit in 2007. The book is highly recommendable for anyone who wants to get a peek into the investment mind of the best hedge fund manager in the world. He is currently (time of publication) short U.S. and European equities and the US dollar and long Chinese and Indian equities and "other currencies" than the USD.

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