George Soros on Financial Crisis, Commodities, China

• The financial crisis on Wall Street, particularly, has not come to an end. The real scare of a major financial bank going broke, such as in the case of Bear Stearns, could be coming to an end. Is an end of a chapter, but there's another chapter coming up, which is the effect of the weakening financial system on the real economy. [This is in agreement with a comment I made earlier: the multi-trillion credit derivative market is the next time bomb [1].]
• Almost inevitable to see a recession. We may already be in a recession, but we will certainly be in the coming quarters.
• The Fed was right to have provided liquidity and rescued Bear Stearns. They did it when they had to, in the tradition of central banks.
• The Fed totally failed in recognising that markets can't be left to their own devises.

• Ever since 1980, "market fundamentalism" became the dominant ideology in the US and the UK. That's the beginning of the super bubble, when Ronald Reagan became the US president and Margaret Thatcher the UK prime minister. [The massive credit expansion since 1980 gave the US and UK a very good time. When you injected massive amount of liquidity into the system, everybody felt like they were a superman. Alan Greenspan first described it the "irrational exuberance" [4]. However, as Warren Buffett put it, "only when the tide goes out do you discover who's been swimming naked." [2]]
• 45 trillion USD of CDS outstanding, which is equal to half the US household wealth and 5 times the US national debt, and is totally unregulated. [Let me add to that: the US is THE most indebted nation in human history! US consumers have been spending way beyond their means.]
• The CDS market is the "Damocles Sword" that's overhanging the financial markets, and is not going to drop until you have the defaults. [Warren Buffett’s explosive warning in March 2003 about the dangers posed by derivatives reads just as freshly today [3].]
• Soros suggested CDS contracts to be transacted through a regulated exchange, and is urgently needed.
• The financial system needs to be rescued. [Jim Rogers has consistently and openly said that we should let the banks to go bankrupt. The Fed's action of bailing out the banks is wrong, is going to create more inflation, and is essentially letting the CEO's of these banks, which made bad and irresponsible risky bets, to keep their bonuses so that they can buy a Maserati! Wall Street paid out these banks bonuses in total of approximately 40 billion USD last year, if I am not mistaken -- that's about the size of the Vietnamese economy!]
• But you can't prevent a recession. Markets are still living in the hope that the Fed will do whatever it takes to avoid a recession. Soros believes the Fed is not in a position to do that. Credit expansion in the global financial system has reached the outer limit.
• Holders of US issued I-Owe-U's are increasingly reluctant to hold US treasury, resulting in a flight from the US Dollar.
• SWF's are buying real assets, particularly commodities. That's behind the commodity boom.

• Commodities are an incipient bubble.
• Central banks control money, but they don't control credit.
• The Chinese may have a problem in the years to come. There's a political flaw. Is very much a government controlled economy.
• The UK economy is as vulnerable or conceivably more vulnerable.
• Have we seen the end of the problem in the US housing market? We are not even half way there! [In [5], I commented: "House price depreciation has not yet started in earnest -- all the price depreciation to date has mostly occurred in the absence of rising US unemployment. Now, unemployment is rising and the real housing debacle begins!" And back in October 2007 [6], I predicted that foreclosures will make headline news in early 2008: "The subprime problem has led to a great deal of foreclosures this summer, but the worst is yet to come. In early 2008, ARMs sold to subprime borrowers will begin to reset to an even higher rate, forcing even more homeowners to abandon their homes, pushing house prices even lower, leading to more defaults, foreclosures, and further decline in construction. The total figure of foreclosures in the quarter could be as much as the total figure in 2007."]

• The weak US Dollar does help right now.
• Unemployment will build up, but it hasn't happened.
• Recession = wealth destruction.
• Are there any parts of the world right now that you don't see this kind of bubbles forming? Not really... This is a period of great uncertainty, and very difficult to escape it.
• Obama is more likely to deliver change. The US needs to change.

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References:

1. To von
2. Warren Buffett Quotes
3. Financial time bombs that threaten mass destruction
4. irrational exuberance
5. Think in Gold
6. Dow Down 366.94 Points

Related posts:

• To von
• Think in Gold
• Dow Down 366.94 Points
• Soros: Things will get Worse before They Improve
• Soros: CDS the Next Shoes to Drop
• Soros:'... Probably not... the Final Bottom'
• George Soros: The Worst Market Crisis in 60 Years
• Soros: End of Dollar as World's Reserve Currency
• Soros: The Current Crisis is the 'Worst in 60 Years'
• George Soros & Reflexivity