George Soros, the well-known mega-speculator, has reportedly massively shorted the S&P index. In other words, he would be betting against the entire US stock market. Recall that this is the same man who made a billion dollars betting against the pound sterling and winning the bet. Why would he make such a move, assuming it is not just a rebalancing of his funds to hedge large bullish bets elsewhere?
The economic and financial situation of the US is not good, but it is not catastrophic. Growth is stagnant and the entire public and private sectors are over-indebted for all the reasons that we know, but there is also good news. New technologies, such as 3-D manufacturing and advanced robotization may impel large improvements in productivity. New technologies applied to oil and gas exploration and exploitation have also resulted in enormous increases in the production of natural gas and crude oil and thus will further underpin productivity increases. Will the favorable factors outweigh the equally significance negative factors in the medium-term? Only time will tell.
But the reported gigantic S & P put is for the here and now, To understand such a move we must look elsewhere--and we don't have far to look. Europe is in much worse condition than the US. Recession is back in many of the EU countries, and destructive deflation threatens. Besides the negative economic and financial factors, the geo-political situation has deteriorated in a rapid and massive fashion, especially in the Middle East, with the Iraqi disaster and the Islamic State rampage threatening markets for exports as well as energy supply. Even more significant is the standoff between Russia and Ukraine, with ongoing sanctions applied to Russia, and counter-sanctions announced by Russia, affecting European exports.
The actual and potential damage is huge, both in terms of markets and threatened investments. Already, competitors are rushing in to replace European suppliers. Weak economies, such as the French and Italian, not to mention the peripheral countries, are now joined by mighty Germany, threatened with a return to recession, when so recently it was riding high. A great Eurasian geo-economic zone was being forged including Germany, Russia and China. That concept is now in tatters.
The European policy-elites, both national and Europe-wide, are devoid of any significant plans or projects. All that European Central Bank supremo Mario Draghi can think of doing is adding further liquidity to economies already drowning in liquidity--read debt. As explained in previous columns, the 2008/2009 crisis was one of insolvency, not illiquidity, but it was misdiagnosed on both sides of the Atlantic and as a result was addressed in the worst possible way: a combination of increased liquidity; very low interest rates inhibiting savings; and fiscal austerity, making recovery difficult or impossible, with rare exceptions, such as Ireland.
A major crash in the European equity markets is very likely, But these markets are too small and insular for a speculator of the size of the Soros funds. A European crash will be followed by a similar fall in the US market, and that is where the bet is centered.
Any such general market turmoil is bound to negatively affect Israel, especially in terms of the European export markets. So much more reason to continue to emphasize trade and investment relations with India, China, South Korea and Japan. Curiously, this tiny country is at present one of the most dynamic economies in the entire world. Great agility will be required to keep it so.
Norman A. Bailey, Ph.D., is Adjunct Professor of Economic Statecraft at The Institute of World Politics, Washington, DC, and teaches at the Center for National Security Studies and Geostrategy, University of Haifa.
Published by Globes [online], Israel business news - www.globes-online.com - on August 19, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013