Category Archives: Crisis in Global Markets

George Soros is Wrong…(sorry George)

Now that we have your attention, let’s start with the recent comments from one of the greatest minds in finance. At the global economic forum in Sri Lanka last week, Mr. Soros warned on Bloomberg (1) that many factors in place today remind him of the 2008 crisis. He points to two factors in particular: the economic transition in China from a manufacturing to a consumption economy, and the devaluing of the Yuan.

Those two factors pose a serious challenge to the world economy, no doubt about that. The recent crashes in the Chinese stock market certainly don’t help either, not to mention various military battles around the globe that could easily escalate into full-scale war. So, with all of these factors clearly pointing to economic doom, it’s hard to see exactly how George is wrong on this one.
This is the same George Soros that bagged 1 billion bucks in a single trade in 1992. This is the same George Soros who managed the Quantum Fund to 30% ROI year after year. And, this is the same George Soros currently holding a net worth of around 25 billion (2) (slightly more than me). So, what was the title of this article again?
There is no denying the accuracy of his recent comments, but, the real reason we should have grave concern is less obvious, and, as argued here, a much more urgent matter.
First, the transition from manufacturing to consumption will take time and will be very slow. But the economic impact will not be immediate and severe, it will just be like trying to swim upstream, for a long time. Also, China has played with the value of its currency for decades, and while devaluing is no doubt a negative, there are also a number of positives with a lower Yuan (increased exports for example).
The real reason we should all be shaking in our boots is because of the massive bank defaults that are just around the corner. Over the last two years there have already been a trickle of stories (3) about one or two Chinese companies defaulting, but that is just the beginning.
What we miss when reading these articles is the backstory to how companies get loans and run daily operations in China. Every major apartment complex in China is surrounded by retail outlets operated by individual citizens: restaurants, hair salons, clothing stores, building supplies, flower shops, etc.
So, when we read about a real estate company defaulting on its loan, because no one is buying, we should really be reading about all the privately owned businesses that depend on people living in that complex. If you were to pick any large city in China and just take a random drive around, you would see brand new building after building with barely a tenant. And those buildings are 20, 30, even 40 floors high. Government data may say one thing, but your eyes will tell you something different.
George may be right after all, but he will be right for the wrong reasons. The real reason we should all be shaking in our boots is because the whole Chinese economy is hinged to bad real estate loans, and the elephant in the room (or china shop as the case may be) is about to go for a jog.

1) http://www.cnbc.com/2016/01/07/soros-its-the-2008-crisis-all-over-again.html

2) http://www.forbes.com/profile/george-soros/

3) http://www.bloomberg.com/news/articles/2015-01-02/kaisa-bonds-plunge-as-non-payment-risk-spreads-post-loan-default

Please note: hyperlinks are embedded and links included. I hope the tone of the article is not too casual….?