Hedge Fund Billionaire George Soros: 'Donald Trump Is Doing The Work Of ISIS'
George Soros, the world’s richest hedge fund billionaire, has no shortage of opinions when it comes to both politics and the global economy. Famed for making a billion dollars by “breaking” the Bank of England in 1992, Soros is in a semi-retirement, but his prognostications still move markets. And he remains a top contributor on the U.S. political scene, where he supports liberal candidates and causes.
On Thursday evening at the World Economic Forum in Davos, Soros used a 45-minute interview with Bloomberg TV’s Francine Lacqua to create an explosion of headlines on both the political and economic front. “Donald Trump is doing the work of ISIS,” Soros said, citing the anti-immigrant vitriol that’s been a hallmark of the Trump campaign as he’s risen in Republican primary polls. He levied a similar critique against candidates such as Ted Cruz, and said Hillary Clinton would win the general election in a landslide.
(Soros ranked #16 on the FORBES 400 with a fortune worth $24.5 billion. Trumpranked #121 with a fortune worth $4.4 billion)
Ideas like closing U.S. borders to Muslims, Soros said, might “convince the Muslim community that there is no alternative but terrorism.” He also said ISIS’s “days are numbered” as both the Iraqi and Syrian governments win back territory the terrorist group gained.
The rise of ISIS and the crumbling of the Middle East has created a crisis for Europe, and Soros said German Chancellor Angela Merkel may have erred in opening the country to refugees. “She risked her political capital and lost,” Soros said. Nonetheless, he expressed optimism that Germany and other European powers could successfully integrate migrants.
With a tinge of biography, Soros recalled his days as a refugee from Nazi-occupied Hungary. “I was a migrant for fifteen years,” Soros said, speaking about his teenage years in England, where he received an education, and his time New York City, where he launched his investing career at F.M. Meyer and Wertheim & Co in the 1950s. ”Migrants in those days were better treated,” Soros said. He added, ”now that I am a bit of a statesman, my loyalty is for the stateless people.”
Often, Soros’s prognostications about the U.S. political process and geopolitics are dismissed as partisan. He is, after all, a kingmaker to the Democratic party and a host of liberal causes. Nonetheless, his read on the global economy, central banks and investing is a must-listen no matter where one’s politics lie.
Thursday, Soros gave a dire perspective on the current market environment. He was unsparing in his critique of Janet Yellen and her peers at the Federal Reserve, who made a “mistake” when raising interest rates in December. “By the time they acted, the window of opportunity closed,” Soros said of the Fed’s hike, which he argued should have happened a year ago. “Quantitative easing works, but it has a diminishing return,” Soros said.
Europe is one part of the world where central bank stimulus remains potent, according to Soros. The threats of deflation and a recession are also giving Mario Draghi, head of the European Central Bank, the support to embark on a new round of easing measures after the ECB resisted such a move in December.
QE may eventually work for Europe and the Fed is unlikely to raise rates for the balance of 2016, but Soros doesn’t believe either development should make investor bullish.
“This is not a time to buy in my opinion, but rather for those who have to sell to sell,” Soros said. He entered the year short the S&P 500 Index, and the currencies of commodity producing countries. He was also long U.S. Treasuries, bracing for weaker-than-expected growth and the threat of deflation.
Eventually, Soros believes Europe can come out of its malaise. China won’t collapse, Soros indicated, but it may face a hard landing, unable to generate strong enough growth to continue driving the global economy. “I see the turnaround. I see the light at the end of the tunnel,” Soros said. “I just don’t know how to get there.”
For now, his recommendation is central bank dovishness.
“Quantitative easing has worked. It has saved the world from deflation and a Great Depression,” Soros said. And regions like Europe need another dose. “What you have to do is just print money.”
Forbes took a deep dive into that trade in the November 9, 1992 issue, illuminating how Soros made $1.5 billion in just a single month by betting the British pound and several other European currencies were priced too richly against the German deutsche mark.
The entire group cashed in big-time. Jones’ funds made $250 million, while Kovner’s Caxton Corp. rang the register to the tune of $300 million, but no one made more than Soros, who cleared $1.5 billion in that fateful month of September. (The score made Soros’ legend and swelled his firm’s coffers; assets under management jumped to $7 billion, from $3.3 billion, by mid-October 1992, and to $11 billion by the end of 1993.)
“They bet that the politicians and central banks could not much longer maintain artificially high exchange rates in the interests of European unity,” wrote authors Thomas Jaffe and Dyan Machan.
The inverse is apt these days, with many traders questioning how European leaders can possibly maintain their tenuous grip on exchange rates and bond yields in the eurozone, where several nations boast 10-year bond yields well below those of the U.S., which at least controls its own currency.
One thing that is clear is the stakes have only gone up since 1992. From Jaffe and Machan’s story (republished in full below):
In former times, powerful central bankers could usually frustrate speculators. They did so by simply buying massive amounts of the weaker currency and flooding the market with the stronger currency. But times are changing. While the central banks can mobilize tens of billions of dollars, trading in foreign currency markets now runs to a trillion dollars a day.
Foreign currency trading has only gotten more massive – pegged at over $5 trillion a dayby the Bank for International Settlements – but so has the financial firepower of central banks. The Federal Reserve’s balance sheet stands at $4.5 trillion after years of quantitative easing, while the European Central Bank laid out a plan for 1.1 trillion euro of bond purchases through September 2016.
That makes the sums Soros was betting against seem almost pedestrian by comparison.
So could a repeat of the Soros score happen today?
Traders can certainly position to profit if the euro currency unravels, but Soros’ bet benefited from the insular nature of the Bank of England in the early 1990s.
“The world is a lot smaller than it was in 1992,” says Dean Popplewell, vice president of currency analysis at foreign exchange currency Oanda. “Central banks today work much more quickly and collectively than in years past, to avoid knock-on effects.”
The last decade offered plenty of lessons in how rapidly a crisis can emerge, from the collapse of 2008 to the European sovereign debt mess that is still roiling financial markets. Central banks have moved to the forefront, far more transparently telegraphing their actions. While there can be isolated instances of breakdowns — the Swiss National Bank’s surprise withdrawal of its euro peg in January was far more reminiscent of 1992 than anything happening in the euro — trading has remained largely fluid and orderly, Popplewell says, pointing to the recent spike in German bund yields that was significant, but quickly absorbed by the market.
Fed policy is also a crucial element in the euro story, since interest rate divergence is what helped make Soros’ trade a winner in 1992. Were it only considering U.S. conditions, the Fed would likely raise rates at least once and probably twice this year, Popplewell suggests, but it’s clear Janet Yellen and her central bank colleagues have a more global perspective that takes into account the stronger dollar, Europe’s struggles and the peril looming if the overheated Chinese stock market collapses. If those concerns keep a leash on Fed rate hikes, the bets on its policy diverging with that of the ECB will take longer to pay off.
Will traders make money if the euro falls to parity with the dollar or below? Of course. A host of macro-focused hedge funds are said to have short euro positions. But are any loading up the truck like Soros did, with a variety of long and short positions designed to make billions on the currency’s collapse? The odds on that bet are probably a bit longer.