Over the holidays, we will be republishing our top posts of 2016 over the next few days. This was our single most-read post of 2016 from way back in January. Many of Soros’ predictions for the year we’re about to leave behind never came to fruition (a “hard landing” in China) while others were spot on (the Federal Reserve left interest rates, mostly, alone this year). Looking back on it now, much of what Soros spoke of has not changed. China is still exporting deflation even though metal prices recovered this year.
You would be a brave investor to bet against George Soros. The billionaire investor has shown a canny knack of making the right calls over the decades. As an article in Bloomberg says he rose to fame as the hedge fund manager who broke the Bank of England in 1992, netting $1 billion with a bet that the UK would be forced to devalue the pound.
He also successfully bet that Germany’s deutsche mark would rise after the collapse of the Berlin Wall in 1989 and that Japanese stocks would start to fall in the same year. Between 1969 and 2011, Soros led his hedge fund to average annual gains of about 20% before returning money back to investors in 2011.
Expecting a Hard Landing?
In an interview with Bloomberg’s Francine Lacqua from the World Economic Forum in Davos, Switzerland, this week, he is predicting another financial crisis like 2008, but rather than being precipitated by the US sub-prime market, this one will be down to China exporting deflation to the rest of the world.
Ironically, Soros believes China has the reserves and centralized control to weather what he sees as an inevitable hard landing. It is the effect that China’s hard landing will have on the rest of the world that worries him.
When asked if he expected a hard landing he responded, “I’m not expecting it, I’m observing it.”
It has already started. Soros says a more accurate measure of China’s current economic growth is 3.5%, rather than the latest official figures of 6.8% expansion in the fourth quarter. He added that the country’s unsustainable debt burden and capital flight are both signals of a hard landing.
China had about $843 billion of capital outflows in the 11 months through November, according to a Bloomberg Intelligence estimate. Meanwhile, China’s slowdown is combining with lower oil prices and competitive currency devaluations to increase the risk of deflation around the world, a situation the world has no experience of handling and few tools left to counter.
Don’t Expect Interest Rates to Rise
Soros says the Fed will not raise rates this year, and, indeed, made a mistake in raising them late last year as deflationary pressures were already rising. He predicts a continuing difficult year for stocks, commodities and Asian currencies, and says the market has not yet hit bottom.
Soros is not alone in his predictions, other hedge fund managers at Davos have made similar warnings and a report in the New York Times this week says deflationary pressures are dissuading consumers from spending the gains made by lower gasoline prices on increased spending elsewhere. The paper quotes JPMorgan Chase & Co. which said lower prices will help expand economic activity by just 0.1%, while economists at Goldman Sachs said they expected an impact “around zero.”
In a deflationary environment, lower prices actually encourage consumers to step back from purchases in the belief that consumption tomorrow will be cheaper than today. The last time we had such conditions was in the 1930’s when major economies went backwards and now, as then, we would find it a challenge to overcome.