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Billionaire businessman George Soros, one of the most wealthiest people in the world and one of the best shoppers, when it comes to investing globally, spoke to CNBC about emerging markets, fund flows and hedge funds.
Soros is a very influential voice and has been in this whole emerging markets space for decades now. George Soros' new book 'The Age of Fallibility', consequences of the war on terror is out this week.
Excerpts from CNBC - TV18's exclusive interview with George Soros, founder and chairman of Soros Fund Management:
You have made so much money anticipating sizeable changes in the financial markets. How do you see things and what is happening?
I think we are in a situation where almost all the asset classes will be under pressure or are under pressure and the main reason for that is the reduction in liquidity. What people do not realise is that the Japanese Central Bank has withdrawn something over $200 billion worth of excess liquidity from Japanese banks. Now that money was not put to work in Japan because there was no room for it, a lot of that went abroad, went into emerging markets, there was a so-called carry trade and it is not that suddenly people are risk averse. It is really that liquidity has been drawn out of the market and that is affecting emerging markets. So the markets went down because Latin America was hit.
We are seeing that over the last month I guess, that this expectation that the strain in liquidity will continue. How do you invest in the light of interest rates going up around the world and this idea that you just do not have the liquidity that you had a year or two years ago?
Hedge funds are in a fortunate position, they can go both ways but it is a very difficult period here because there is a certain sequence and one does not quite know what the sequence is. Clearly there is a making of a slow down due to the softness of the housing market, but it has not yet had its effect. In the meantime, we have cost inflation pressures so you are caught in a double whammy, that the economy is slowing down or expected to slow down but you still have to fight inflation.
The last time Bernanke spoke, he said that the consumer is slowing down noticeably. I know you have been all around the world, you are going to Turkey. Tell me why Turkey and what do you think of opportunities around the world, we look at 10 per cent growth in China or the 8 per cent growth in India and people want to know how do you participate in this tremendous growth around the world?
There is a tremendous amount of money pouring into those markets and that is where the liquidity squeeze is most felt, so Turkey has been a particularly vulnerable market in this correction. There are also some political problems, although economically Turkey is very dynamic and the longer term is very attractive. But there are a lot of problems with accession to the European Union, in addition to the liquidity problem.
When you look at Turkey and some of the other emerging markets, are you looking at the political stability as being the most important or are you looking at economic growth. What is it that you look to lead you in terms of finding new opportunities?
I am not doing it now. So I would say that it is really is more of finding good situations and economies that are in good shape. Emerging markets have been very good investments and will be again but they are more subject to volatility and swings and they were overdone.
Let me ask you about what has been happening in commodities and currencies. Commodities has been such an incredible bull market.
It really has been sort of a parabolic rise and you know that it is something that cannot last very long and one also does not know how far it goes and the last bit is always the best bit. But they have broken now and I think commodities are in for a period of correction.
Even though a lot of people say that China has an enormous demand for oil. You are seeing India and you are seeing this need for infrastructure and with that comes a whole new demand.
It is somewhat overdone on the speculative side, otherwise people would have bought a little too much. People have got into hedge funds that do not normally engage in commodities. Commodities have become an asset class and people have invested in them. As an asset class it is now vulnerable and of course the biggest asset class that is vulnerable is real estate. We know that there is a slowdown in the residential houses in the US and it also is a worldwide phenomenon.
What does that do to the currency of any particular country? Would you expect that as we see this slowdown happening whether it is America or these emerging markets that the currency gets hit or does the currency gets propped up because of the interest rates moving higher?
The moment we reach the peak of interest rates, the dollar is liable to come under pressure, which is in some ways a good thing because you have a fundamental imbalance that needs to be corrected. However, exchange rate movements will have to be quite extreme to correct those things by themselves.
The question that a lot of people ask is are there just too many hedge funds? Is there a bubble in hedge funds right now?
It is not a bubble; it is probably a self-correcting thing. There are a lot of them and when they become the market then it is much harder to outperform the market, so it will correct itself.
Whether it is hedge funds or whether it is war in Iraq, all of these issues do impact the financial markets. Let me get to your book, why did you write this book?
I really wanted to lay out my philosophy, my approach to the world and apply to the present moment in history because we are in a very difficult period and our difficulties are very largely our own making because of my view of reflexivity and so on. Misconceptions play a very important role in shaping history.
Misconceptions about the war on Iraq or misconceptions about what you are trying to do on terrorism?
I think the war on terror actually is a forced metaphor that people have accepted as the only way or the natural way to deal with terrorism. And yet it is the wrong way to deal with terrorism because a war by its very nature creates innocent victims and when you wage war on terrorists who keep themselves hidden, it is more likely that you hit the wrong people and if you wage war on abstraction like the war on terror, there is no limit to what you can do.
Having innocent victims, that is exactly what we abhor in terrorism, that terrorists kill innocent people for political goals and waging war on terror we are actually going the same way. And we are perceived the same way by those who are on the receiving end of the war on terror and that is how we have had sympathy of the world on 9/11 and now we really have the whole world against us. You have people in Iraq who were never happy with Saddam actually finding the American troops and the Iraqi troops a greater danger to them, than the insurrection itself.
Were you surprised that we didn't get a reaction due to the fact that Zarqawi was caught and killed? Last week I was expecting that we would even see a market reaction since Zarqawi is one of their most well known terrorists?
Zarqawi has done an untold amount of damage but the damage will continue because the insurrection will continue. Our reaction to him has touched of a situation of effective civil war and we now have the insurrection that we have to fight. There are death squads that have developed in the Iraqi police and army, we have to fight that too. So we are sitting on a civil war and by sitting on it, we are keep it at low frequency so to speak. 40 people die if we got off and our, the whole thing would blow up and we would have a real humanitarian disaster. So we cannot stay and we cannot leave. That's a quagmire and that's where we are.
I like the idea that you put in the book this letter from the White House talking about America being at war. You of course have been a real critic of the Bush administration. Have you spoken to President Bush?
No, neither has he spoken to me.
So no reaction to your criticism of the way this country is going. Do you think this is one of the foundations of sort of these ideas that we are seeing some protectionism? When you look around the world I wonder how you feel about the Dubai ports deal was stopped, you had CNOOK trying to acquire an American oil company, tell me the ramifications of this, the consequences of war on business?
That is an unfortunate side effect because Dubai really is our ally and it would not have changed anything in the port security. Now there was a lot of criticism that we do not have enough security. So it was a wonderful opportunity for people to oppose the administration.
But I think it was actually an unfortunate thing and the Unocal deal was particularly unfortunate because it pushes China into supporting countries Sudan, Angola, Uzbekistani where they had the massacre, all the outlaws. They say that if we cannot do it legitimately, we have to look. So it is very disruptive the world over.
In the book you said everybody says we should not have gone into Iraq, what should we have done?
I think we need a different approach. We must not make war and terror the centerpiece of our policy. As the leading nation in the world, the dominant power, we have a unique responsibility to be concerned with the common needs of humanity, in addition to our narrow self-interest. You have got issues like global warming, climate change or the proliferation of nuclear arms, which is now the problem of Iraq. It is more pressing, and a bigger threat than Iraq ever was. Now it is not something that we can possibly solve on our own, so we need to strengthen our international institutions.
United Nations is on the verge of shutting down because we are not willing to pay our share of fees at the end of this month. So we are not behaving as responsible citizens of the world and particularly being the strongest and since there is greater need for co-operation, we ought to be leading that instead of being an obstacle.
Give me your thoughts on emerging economies like China and India? Should these countries be worried?
We should be worried about our over consumption. Basically the rise of China and India is a very positive force for the world economy. That is why the world economy is so strong, because those are large new markets that are opening up. It ought to be a positive development provided we weren't consuming a lot more and saving a lot less than we ought to.
Last couple of months the market have been so focused on what is going on around the world and with Bernanke's comments - how would you characterise Ben Bernanke so far?
He has got a difficult job because he is the new man on the block. I actually think that the Federal Reserve is trying to be far sighted. Look around the curve and anticipate the decline in consumption that will eventually come from the slowdown in housing and not raise interest rates.
However, he needs to establish the ability therefore he is liable to be pushed into having to raise interest rates further. There will be an overshoot on the interest rates and that is one of the factors that is affecting the market.
It sounds like you are more worried about the slowdown as opposed to the inflation.
Yes, it is coming in six months time. In the mean time if one does not raise interest rate then maybe it will not come. Maybe housing re-ignites.
You are talking about the consequences, if not America then where. Give me one country?
I think right now, cash preferably and not dollars, is king.
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