Matthew Lynn

Emperor Soros’s new clothes

Matthew Lynn says hedge-fund pioneer and currency speculator George Soros is still a brilliant player of markets — but as a philosopher, frankly, he’s incomprehensible

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Matthew Lynn says hedge-fund pioneer and currency speculator George Soros is still a brilliant player of markets — but as a philosopher, frankly, he’s incomprehensible

If nothing else, three decades as one of the world’s most successful speculators has taught George Soros how to pitch a book. While the main title of his latest work, The New Paradigm for Financial Markets, might not be the kind of thing to get Waterstone’s managers clearing their shelves, its subtitle — The Credit Crisis of 2008 and What It Means — makes it bang up to date. Even better, Soros rushed it out as a digital download within days of the final words being penned. The implication was that the world couldn’t possibly wait until 19 May — when the print version published by PublicAffairs is released — to find out what Soros made of the credit crunch.

The hedge-fund billionaire, still best know for his role in forcing the pound out of the European Exchange Rate Mechanism in 1992, immediately hit the television studios to frighten everyone. The ‘super-boom’ that had lasted since the end of the second world war is now over, he told the BBC. Britain, like the US, is heading for a full-blown recession. The City and Wall Street will have to ‘shrink’ as banks retrench. ‘The whole world is facing a very serious financial crisis... the most serious financial crisis of our lifetime.’ A quarter-century-long ‘super-bubble’ was finally bursting, he told the New York Times.

And yet, download the book itself and it turns out not to be about any of those things at all. Anyone wondering if they should sell their Credit Suisse shares and stash gold bars under the floorboards instead will come away little the wiser. ‘Near panic conditions prevail in the financial markets,’ he writes. ‘People want to know what lies ahead. I cannot tell them because I do not know. What I want to tell them is something different. I want to explain the human condition.’

We look to hedge-fund managers for various different things. Wreaking havoc on small nations by destroying their currencies, for example, as Neil Barnett described here a couple of weeks ago. Or running up £30,000 bills in London restaurants. But explanations of the human condition? That’s not usually what we expect.

But, of course, this is George Soros we’re talking about, and he’s a man who now prefers his speculations to be philosophical rather than financial. He’d like to be known as a thinker of stature. ‘To make a contribution to our understanding of reality would be my greatest accomplishment,’ he said in one recent interview.

But is he actually saying anything worth hearing? In reality, Soros gets away with a lot on account of being very rich. He is, without question, a superbly incisive investor, one of the best of his generation in the world, but as a writer and thinker his work varies from the incomprehensible to the plain weird. Put his views under a microscope and it’s surprising anyone takes them seriously at all. Indeed, although Soros keeps warning us about the crisis of global capitalism, it may well be that what he’s really discussing is the crisis of George Soros.

The Hungarian-born Soros is among the most interesting characters in the financial world. Having fled his native country after the second world war, he settled in Britain and studied at the London School of Economics before making his way into the financial markets, eventually starting his own private investment company, which evolved into the Quantum Fund. With Quantum, Soros virtually invented the hedge-fund industry. Investors gave him money and he took bold gambles with it: in return he and his team took 20 per cent of any profits. It was a fabulously lucrative business model, turning Soros into one of the first billionaires of the industry. In the first ten years of its existence, the Quantum Fund made average annual returns of more than 40 per cent and wealthy New Yorkers flocked to put money into the fund.

But Soros laboured in relative obscurity, known mostly to his own investors and Wall Street insiders. That was until 1992, when he bet big against the pound, convinced that the Conservative government would eventually be forced out of the ERM. That trade made Soros another fortune. More importantly, it made him a financial celebrity, loved by investors and hated by politicians: an official in Thailand once labelled him an ‘economic war criminal’.

Now he had a platform to become a writer and public thinker. From the late 1990s onwards, Soros started predicting the demise of the capitalist economic system with monotonous regularity. In 1998 he published The Crisis of Global Capitalism, which declared that unfettered capitalism is ‘a bigger danger to an open society than socialism’, and that financial markets ‘behave more like wrecking balls than a pendulum’. As it turned out, 1998 marked the beginning of a decade-long boom, but no matter. Since then, a succession of Soros tomes have made roughly the same point. ‘An unleashed and unhinged financial industry is wreaking havoc with the economy,’ he writes in the latest. ‘It needs to be reined in.’

At the heart of his argument is the concept of ‘reflexivity’, which means that ‘our thinking actively influences the events in which we participate and about which we think,’ according to his own definition. He makes very grand claims for the theory, linking it to quantum mechanics (from which the Quantum Fund gets its name), and attempting to establish that it explains not just the markets but, well, pretty much everything. At the core is the notion that what we think about things changes according to the way events unfold. The trouble is, it’s a pretty mundane thought, dressed up in a lot of pseudo-philosophical language. Certainly, no one would pretend that the financial markets weren’t affected by moods and emotions. But Soros piles layer upon layer of meaning on this basically quite commonplace observation. ‘Usually there are several reflexive processes going on at the same time, interfering with each other and producing irregular shapes,’ he argues in the new book.

Well, maybe. More interesting, in fact, is what his books say about Soros. He remains a brilliant investor: indeed this year, Institutional Investor ranked him the second most successful in the world, adding another $2.9 billion to his fortune. But even Soros admits that ‘reflexivity’ doesn’t often help him make financial decisions. In fact, he is more often guided by his back pain, which turns out to be remarkably prescient about financial trouble ahead. ‘To what extent my financial success was due to my philosophy is a moot question because the salient feature of my theory is that it does not yield any firm predictions,’ he concedes. ‘I used to suffer from backaches and other psychosomatic ailments, and I received as many useful signals from my backaches as from my theory.’

So why the constant stream of books? One reason might be an eye for publicity. Great money managers have an ear for the noise of the crowd. They can tell what the markets will think a few seconds before the markets know it themselves, which is enough time to make a big profit.

So it is for his books. He knows what will make a splash and command an audience — which is to invert expectations. A book by a billionaire financier saying the system is dandy and that the poor should pull themselves up by their bootstraps would be unremarkable. But a book in which the billionaire says the whole system is about to smash itself to bits and that nobody should mind because it was all rotten anyway gets lots of attention.

It comes at a price, however, and the price is credibility. Soros’s book and lectures seem to be more about working out his own demons than they are about the financial system. Perhaps he can no longer handle the pressure of being the human face of the financial system. To seek to put some kind of recognisable face to strange impersonal forces is a natural impulse. Most of us can’t quite understand the markets. We merely sense they are, like hurricanes, vicious and powerful things that can rip up communities before blowing elsewhere. Just as primitive peoples had gods of wind and rain, so we have latched on to Soros as the man who personifies forces that would otherwise be incomprehensible.

Being the face of the markets might be profitable, but it isn’t much fun. Outside the City and Wall Street, nobody likes you much. Greedy, callous, brutal and cruel are the kind of adjectives you find stuck in front of your name. And every time homes start getting repossessed and businesses closed because of financial turmoil, you end up taking the rap.

That Soros should be tired of all this is hardly surprising. Turning around and saying the system sucks is just a convoluted way of saying, ‘Don’t blame me.’ But that doesn’t mean we should listen. The convulsions in the global markets this year do need serious analysis, but Soros’s abstruse undergraduate twitterings add little to the debate. ‘I have been fortunate in making a lot of money and spending it well,’ Soros writes. ‘But I have always wanted to be a philosopher, and finally I may have become one.’ In a sense that’s true. Just not a very good one. And, as Soros himself appears to sense, if it weren’t for the money, no one would be very interested in the philosophy.