C.M.O. 3.2.2010
Credit Market Overview
March 2, 2010
On the evening of September 16th 1992 the British government announced its exit from the ERM (European Exchange Rate Mechanism) and reverted back to the pegged pound. In the two weeks leading up to what is known in that country as “Black Wednesday” George Soros, leading a band of speculators, sold billions of Pounds short forcing the Bank of England to raise rates to 12% and buy as many of those Pounds as the Exchequer could afford which in the end was not enough to prevent the eventuality.
In July of the next year, Mr. Soros focused on the French Franc and published a statement in La Figaro which said, “It is futile to attempt to protect the EMS by abstaining from trading in currencies when the anchor of the system, the Bundesbank, acts without regard to the interests of other members”.
A few days later he said, “I continue to believe that the European Community needs some kind of currency system and I hope that the ERM will be reconstituted along the lines outlined in my article in Le Figaro. I feel free to resume trading in the French franc after making this announcement.” To which he added, “After the decision of the Bundesbank not to lower the discount rate, I feel no longer bound by the declaration I made in Le Figaro on 26 July”.
A crusader against ill informed global monetary policy? Maybe, but also a ferocious speculator that thought nothing of taking on central banks.
In 2003 George teamed up with none other than Warren Buffett in a bet against the USD. A fund manager at the time was quoted as saying, “I have heard that both Soros and Buffett are shorting the dollar. There’s a growing belief on Wall Street that the dollar is looking like a one-way bet downwards.”
Given his proclivity to speculate, albeit profitably, it was interesting to hear George declare during the early 2008 run up in oil prices that, “Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles”.
This was made all the more curious by another proclamation in June of 2009 when Mr. Soros said, “Some derivatives ought not to be allowed to be traded at all. I have in mind credit default swaps. The more I’ve heard about them, the more I’ve realized they’re truly toxic”, while appearing at a banking conference. Later he emphasized, “CDS are instruments of destruction which ought to be outlawed.”
This all reads like a Hollywood script. The young Lion speculating against central banks and winning and then, in later life; possibly seeing the error of his earlier ways, calling for kinder and gentler markets, possibly an end to speculation as we know it.
If it is a movie in the making then get ready for the surprise ending as it was recently reported in the WSJ that Monness, Crespi, Hardt & Co., a boutique investment bank, hosted a dinner in Manhattan on February 8th which was attended by an elite group of hedge fund managers. The topic of the evening was the future of the Euro. Having fallen from $1.5134 on November 25th of last year to around $1.35 recently, the views reportedly expressed at dinner were that parity with the Dollar was not outside the realm of possibility and may be well within it.
That a hedge fund manager or more than one has a rather polarized view of the world is nothing new. Betting against the banks in 2007 and 2008 took crystal clear vision and nerves of steel. Betting with them in March of 2009 took these same qualities only a magnitude or two more so. Paulson and Tepper stand as examples.
What I found most interesting about that early February dinner was that one of the attendees was none other than George Soros. A lion in winter he might be but one more round of currency speculation, it seems, is just too much of a good opportunity to ignore.
Now what was that about those nasty speculators?
There is no Credit Default Swap traded on the Euro as it is not a sovereign government and as such cannot issue debt. The largest economy within the Eurozone is Germany and as such is used as a proxy when examining the financial health of the common currency, due respect given to France and the other members.
Germany’s CDS traded around 20bps last fall, moved as high as 47bps during the height of the Hellenic hullabaloo and closed last night at 39bps.
The problems in southern Europe are far from over as is the case in most other parts of the world. It would appear, though, that the efforts of the stronger countries to protect the weaker members of the EU and keep the Euro intact have staved off a collapse for now.
If nothing else, the EU’s show of unity should make things that much more interesting for George and the boys.
Enjoy the week.
Jim Delaney
