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Soros abandons the markets

S. Venkitaramanan

The rise and rise of Mr. George Soros is over. He has quit the stock market. Mr. Soros has long been known as the most powerful investor in the world. From a modest beginning, the Hungarian refugee to the UK rose through sheer effort and brilliance. Over the years, he acquired a tremendous reputation as an investor. In the words of Mr. Barton Biggs of Morgan Stanley, himself an eminent investor, Mr. Soros gave a higher return than anyone else in his time. He was naturally known as probably the finest in vestment analyst of our time. Mr. Soros has now decided to quit -- renounce participation in the stock market.

Announcing this, in a brief message recently, he said, ``I am very happy to pull my money out of the market.'' Mr. Soros further explained that he no longer had any faith in the way the stock market behaved. Together with Mr. Soros, disciples, such as Mr . Julian Robertson, also quit. Mr. Robertson, almost as famous as Mr. Soros, successfully copied Mr. Soros with his fund rightly known as `Tiger'. Mr. Robertson has also closed down his funds.

Mr. Soros had two funds -- Quantum and Quota -- both of which have closed down. The two men, who ran the funds on Mr. Soros' behalf, Mr. Stanley Druckenmiller and Mr. Nicholas Roditi, also retired. What does all this mean? Does it just mean that two o r three rich men, who were making lots of money by investing their funds, suddenly found themselves on a losing streak and quit punting in the market? Is there more to this mass exit of the gurus? Has the stock market lost its charm?

The Economist commented that Mr. Soros' exit only meant that a few rich men had acquired vulgarly large fortunes by exploiting variations in the stock market through the device of hedge funds, and had suddenly abandoned punting. They had now tired and de clared that the market itself had become irrational.

The discovery that today's stock market is irrational is not unique to them. It had been made by many others before, but when large pots of money go out with such a discovery, it becomes significant. Mr. Druckenmiller says, ``The stock market today is cr azy... insane, unbelievably dangerous.'' Mr. Soros had himself lost nearly $2.5 billions in dealing in hi-tech shares. Let Mr. Soros speak for himself on this matter: ``It (investment in hi-tech shares) is too dangerous. It is crazy to short them. You co uld have shorted the market in March of 1929 and lost everything. If you cannot go long and cannot go short, the only other place to go is, away.''

While the fact that Mr. Soros and his colleagues are leaving the stock market is significant, even more significant is the fact that even that model of a sane investor, Mr. Warren Buffett, also shares the feeling of irrationality of market behaviour. He compares today's investing in Internet stock to a chain letter, in which early participants get rich at the expense of later ones.

Now that a few of the most famous and respected gurus of the stock market investment have declared that they have got a new religion and abandoned the old, let us see what happens to those who still believe that the market is always rational. In fact, th e dominant philosophy among India's economic policy-makers is that India should develop its economy through the market. Mr. Soros and his band have now discovered what our investors had also found out much earlier, over the last few years, that investmen t in what is known as the new economy shares has been a mug's game. The Fed Chairman, Mr. Alan Greenspan, had been warning American investors that one of these days the ``tech'' bubble would burst, but nobody would listen to him.

Mr. Soros' exit from the scene does mean that those who believed him will no longer leave funds for investments in the market with him. There are, of course, many more like Mr. Soros in the field who will hope to make profits from the indices and other v ariations. Even with Mr. Soros out, there will be new Soroses and the US will continue to be a punter's paradise. It must have been a humbling experience for Mr. Soros that his exit did not create any ripples on the Nasdaq market, although it is true tha t investor groups, who depended exclusively on funds flow from Mr. Soros naturally, dipped a bit.

Mr. Soros did not have a distinguished career in the London School of Economics (LSE). After a brief career in a British securities firm, Mr. Soros moved to the US, where he was able to use his skills through the device of the hedge fund, a device which he exploited to the full. His successful bet against the sterling is a part of history. While Mr. Soros' Quantum Fund played the sterling market skillfully, the Bank of England and the then Prime Minister, Mr. John Major, were slow and fidgety. Mr. Soros won notoriety for successfully betting that the UK would have to devalue. In fighting his speculative efforts, the Bank of England lost nearly two billion pounds sterling.

Mr. Soros explained that what he was doing in the matter of the sterling was exactly what he had been doing in the case of the equity market. He and his aides had studied the balance-sheet of the UK economy thoroughly. They knew the pound had to fall. Mr . Soros also explained how he interpreted the body language of Mr. Major as he explained the UK's determination not to devalue. He knew this was unrealistic. Mr. Soros also interpreted rightly the attitude of the Bundesbank, another important player in t he scene, which was against weakening the Exchange Rate Mechanism (ERM), by allowing the pound to stay. A study of all these led to the conviction in Mr. Soros' mind that the sterling had to fall and the UK had willy-nilly to get out of the ERM.

As Mr. Soros' power grew, many South-East Asian nations began blaming him for interfering with their currencies -- not always with full justification. But, in the late-1990s, one of the biggest of hedge funds, the LTCM (Long-Term Capital Market), not managed by Mr. Soros, ran up heavy losses, bringing down many bankers in the US and Europe. Leaders of the financial community the worldover began discussing how to regulate hedge funds. Mr. Soros was even called by the SEC for a dialogue on ho w to regulate these funds. There was also a proposal to bring hedge funds under a new supervisory structure, which was to be set up similar to the International Monetary Fund (IMF).But, now that Mr. Soros has left the market scene, the reformers may ha ve to make a new beginning. It is significant that Mr. Soros himself had thought it necessary to separately regulate such funds as well as all forex transactions. He prided himself on his revolutionary and constructive ideas, such as the setting up of a Global Central Bank. In this he followed very much the ideas of his exemplar, Lord Keynes.

Mr. Soros wanted to be known not only as a rich investor, but also as an intellectual. He is known definitely as a successful investor. There was also his desire to be a great philanthropist. At one time, he became the biggest philanthropist, especially in Eastern Europe. He set up many foundations, some of which have helped many a young East European to move to an open society.

Mr. Soros wanted to be known as an intellectual. In this, his model was obviously Lord Keynes, who was a successful economist and investor and also an intellectual. But, Lord Keynes had the advantage of belonging to Britain's elite, which Mr. Soros was n ot. The economist was already an academician based in Cambridge. Besides, he was the editor of the prestigious Economic Journal. There was no way Mr. Soros could compete in academics with Lord Keynes, even if academically he had been equally outstanding, which he was not. His writings are, no doubt, brilliant, but they do not have the quality of Lord Keynes'.

Mr. Soros was attempting the impossible, when he tried to become a Lord Keynes of the 20th century. He did publish articles in Financial Times, one of them at the height of the Asian and Russian crises. He suggested perceptively that there should be an i nternational central bank of the kind Lord Keynes had himself suggested in 1945. The financial superpower of the world did not give credence to such an idea as it came from a parvenu, like Mr. Soros. But still, there is a great deal of merit in Mr. Sor os' idea -- an idea which will be pursued, if not by the current generation, then by the next. There is no other solution possible to the chaos that is inherent in today's unregulated forex markets and free capital movements across borders.