(All the transcripts from the FCIC will be easily accessible in the future a link to my scribd account on the timeless reading page.)
The markets are always on the side of exuberance or fear. It’s fear and greed. Right now greed has the better of it, which is rather nice (for investors) as long as it doesn’t get out of hand
In his book, The Alchemy of Finance: Reading the Mind of the Market, George Soros writes.
Reflexivity is discordant with equilibrium theory, which stipulates that markets move towards equilibrium and that non-equilibrium fluctuations are merely random noise that will soon be corrected. In equilibrium theory, prices in the long run at equilibrium reflect the underlying fundamentals, which are unaffected by prices. Reflexivity asserts that prices do in fact influence the fundamentals and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining the familiar pattern of boom and bust cycles.
While George Soros is not a value investor persay, he does try to take advantage of discrepencies in the market sometimes using contrarian investing. I have searched for this quote for days but have not found it, but I believe Soros said he has made most of his money on value plays and not macro plays. 1969 Soros established the Quantum Fund,which over the next 30 years produced annual returns of 32%!
In Soros’ book,The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means(May 2008), described a “superbubble” that had built up over the past 25 years and was ready to collapse. In an FT article written in early 2009, Soros stated ” I positioned myself reasonably well for what was coming last year”.
Soros was asked to testify before the Financial Crisis Inquiry Commission. Which wass a ten-member commission appointed by the United States government with the goal of investigating the causes of the financial crisis of 2007–2010
The full transcript of the audio tape of George soros is available below in both scribd and text format.
2010-10-04 FCIC Staff Audiotape of Interview With George Soros Soros Fund Management LLC
10/04/2010 FCIC staff audiotape of interview with George Soros, Soros Fund Management, LLC
Gary Cohen: And we’re here from the Financial Crisis Inquiry Commission. I’m Gary Cohen. I’m the general counsel. My colleague Kim Shafer and Donna Norman. We are charged with investigating the causes of the financial crisis in 2008 and 2007 and perhaps in 2009 and ’10. And this is a on the record recording that we’re doing with George Soros. We’re in New York and it is 4:55. We’re a little bit early. And Mr. Soros, are you – you are okay with us taping you on this?
George Soros: Absolutely.
Gary Cohen: Very good. And would you like to introduce yourself [0:00:38] [Indiscernible]?
Michael Vachon: My name is Michael Vachon. I am an employee of Soros Fund Management and I advice Mr. Soros on a number of topics.
Robert Johnson: I’m Robert Johnson. I’m the executive director of the Institute for New Economic Thinking, formally a partner with Soros Fund Management many years ago and work frequently with Mr. Soros on questions of financial regulation.
Gary Cohen: Pardon me. Well, we’re going to ask you questions about, you know, why was there a financial crisis, what it was actually and what part of the crisis. We’re going to ask you questions about regulation system issues and things of that nature. And at any time there are things that you want to add to me, you can be as candid as you wish. We’ve had some remarkably candid conversations today with a couple of other people we’ve spoken to.
What do you think was the financial crisis itself? Where do you think it stopped being the beginning of a recession say and became what it turned out to be the great recession or the great almost depression?
George Soros: Sometime, I would say, early in 2007. Maybe on March or so and when the first bankruptcies occurred. But it was something that could be anticipated much earlier than that. And those of us who did actually did not expect that it will take that long for it to develop.
Gary Cohen: What do you think – when you say it started in 2007 and you anticipated it, what did you see that made you think it was happening and then – and that delayed it from actually popping, I guess, if you can recall what happened in ’08.
George Soros: Well, I have a conceptual framework in terms of which I interpret financial markets and that conceptual framework actually led me to anticipate it. And maybe – I think that the process started in – it goes back as far as the early 1980s. It went through a number of phases. There have been a number of [0:03:48] [Inaudible] and each time the – they were [Inaudible] and prevented a financial crisis from affecting the economy. And the measures they took then reinforced across the process making the bubble bigger until it became so big that in fact the authorities are unable to contain it and that’s how we had the financial and the crash of the – in – following the bankruptcy of Lehman Brothers in 2008.
Gary Cohen: What do you think started in 1980, in the ‘80s? I mean, what was going on?
George Soros: The [0:05:00] – a [Indiscernible] an interpretation of the financial markets and an ideology connected with it came to them and dominated public policy. I call it market fundamentalism for short.
Gary Cohen: You mean that deregulation philosophy …
George Soros: That had basically globalization of financial markets and deregulation of financial markets and a spirit of financial innovations which were based on this false ideology.
Gary Cohen: Do you think the innovations were – had value or were they valueless or were they …
George Soros: They had some value but they also had some negative effects. And you have to look at them case by case.
Gary Cohen: How did the financial system change over that 30-year period or so that you thought accelerated it and did you think that [0:06:34] [Inaudible]?
George Soros: Well, the – one of the remarkable features is still the growth of credit and leverage. Generally speaking, credit has been growing significantly faster than GDP ever since the end of the Second World War but it’s really only in – around 1980 that the situation got out of hand. But the growth in credit then