George Soros and the Difficulties of Macro-investing
By Alberto Mingardi
I receive this from my friend Antonio Foglia. It seemed brilliant and worth sharing (with his permission).
Last night I saw the documentary on George Soros directed by Bob Dylan’s son. To explain how Macro investing works, George explains in an old interview that he was once skiing in St. Moritz and had picked up the FT before going skiing. Reading it on the chairlift he learned that the UK government was bailing out Rolls Royce. Looking at the company’s history that should have happened in February, 1971.
Informational advantages were often part of Macro trades at least since Rothschild’s pigeons were carrying messages from the Waterloo battlefield. But George’s case his edge has always rather been his ability in processing information and foreseeing developments faster and further than anyone else I ever met.
George says in that interview that by the time he got to the top of the mountain he had decided to instruct his broker to sell short Gilts, the UK government’s bonds. The interviewer looks at him perplexed an George explains that such a huge corporate bailout would have caused the UK government deficit to rise, would have required the issue of more Gilts to finance it, and hence Gilt yields would have to rise to attract buyers and their price would fall. This would have allowed him to buy them back cheaper than at the price he had originally sold them short.
Now that was back in 1971. At the time there were controls on capital movement in the UK, the Gold standard and fixed exchange rates prevailed and no futures markets where to easily sell Gilts short existed. Today we think of that period as an era of barbaric financial repression that allowed socialist governments to do all sorts of turpitudes to capital to the detriment of economic efficiency and growth.
You don’t need a rich fantasy to imagine the same scene Today. First, Rolls Royce is in trouble again. Imagine the UK government bails Rolls Royce out once more after fudging with EU rules that in theory would forbid corporate bailouts. Other EU governments have already bailed firms out and Brexit is happening shortly anyway. If a Macro manager had been smart enough to anticipate the collapse of Rolls Royce, and had already sold short the stock, the fudge is likely to cause him losses as the stock would now rise because of the governmental help to the company.
Say that Today’s macro manager reasons like George and decides to short Gilts. Tough luck, since the Bank of England is buying tons of them in the secondary market sustaining their prices in order to keep interest rates low. But no, the Bank of England assures you, this is Quantitative Easing, nothing to do with monetisation of government debt which only happens when they buy on the primary market.
This may satisfy the layman, but not a sophisticated Macro manager who knows that part of a Central Bankers’ job is to say whatever lie policy requires with a straight face. So, the Macro manager thinks, if we have monetisation in the UK and rates are kept at artificially low levels surely the Pound Sterling must weaken against currencies with a stronger economic backdrop.
Hence our Macro manager sells Pounds and buys Swiss Francs. After all Switzerland has a modest amount of government debt, its Covid induced deficit is easily financiable and its current account surplus has been extremely high for well over a decade. If the Macro manager is really sophisticated, he might even have noticed that Swiss pension funds have hedged for a decade their substantial purchases of foreign securities, implying that the local professionals also expect an appreciation of the Swiss Franc.
Tough luck again, though. The Swiss National Bank is selling all the Swiss Francs anyone may want to buy to keep it from appreciating. And this is happening in an extraordinary rich country considered a bastion of free market economy and with a vast surplus in its international trade balance.
Deprived of any opportunity to help the markets price events rationally, and to profit in the process, our contemporary Macro manager drops on his sofa and switches on his TV. Just in time to hear the end of a very recent interview with George Soros who laments that Today’s economic policies set by “free markets fundamentalists” are ruining the world.