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George Soros and his big predictions

George Soros who came back last year to his fund because of the subpar performances took his fund back it’s previous glory by trouncing the market with currency bets against the dollar but he now suggest that the market may correct in the short term but in the long as I concur, we had large systematic problems that are not easily corrected.  The two problems that he sees are in the credit swaps market and the growing foreclosures in the real estate market.  My understanding of the credit swaps market was pretty limited until I read about how he suggested that the market had many loop holes which he suggest was a reason that Bear Stearns had to be rescue to avoid massive chaos which still may happen.  With growth in funds for distressed securities, many people see defaults as the next logical step and with inflation rising that may likely occur.  Here is a snippet of the article:

Instead of reshuffling regulatory agencies, the authorities ought to prepare for the next shoes to drop. I shall mention only two. There is an esoteric financial instrument called credit default swaps. The notional amount of CDS contracts outstanding is roughly $45,000bn. To put it into perspective, that is about equal to half the total US household wealth and about five times the national debt. The market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall, but only after some defaults have occurred. That must have played a role in the Fed’s decision not to allow Bear Stearns to fail. One possible solution is to establish a clearing house or exchange with a sound capital structure and strict margin requirements to which all existing and future contracts would have to be submitted. That would do more good in clearing the air than a grand regulatory reorganisation.

The other issue is rising foreclosures. About 40 per cent of the 6m subprime loans outstanding will default in the next two years. The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude but occur over a longer period. With single family home sales running at an annual rate of 600,000, foreclosures will overwhelm the market and cause prices to overshoot on the downside. This will swell the number of homeowners with negative equity who may be tempted to turn in their keys. The fall in house prices will become practically bottomless until the government intervenes. Cutting foreclosures should be a priority but the measures so far are public relations exercises.

Anyways…good luck and happy trading.  I’m still long VLO, short C and GRMN.  I am looking into longs in MSFT and shorts in COF.