Monday, 12 December 2011

Euro Summit – I wonder what Soros thinks, in private

As these Euro meetings were unfolding I, like most people, started to get quite confused about what was what going on, and it was (is) becoming more and more like watching some kind of bizarre alternative theatre. BUT if markets are perfect, essentially governed by simple rules of supply and demand, equilibrium and most importantly PERFECT KNOWLEDGE, then, with all the collective brain power of Europe, why does it seem so hard to find solution, and why do the meetings themselves seem to affect to markets so profoundly (because it shouldn’t really if they are perfect). Then I thought about a book I read a couple of years ago by George Soros. Soros one of the most admired, respected, feared and hated investors of all time, made it from rags to currently 7th richest person in America, by challenging some of the fundamental principles of our market system; that markets are perfect and self regulating. Love or load him, his results do warrant some attention.

In his book “The new paradigm for financial markets, the Credit Crisis of 2008 and what it means” he is attacking the very idea that markets are perfect. Instead he argues that markets are constituted by two processes, what he calls the cognitive function and the manipulative function and because these two processes constantly react to each other, prolonged periods of disequilibrium, or bubbles, can develop. It is a bit heavy reading but one could perhaps view what he is saying like a game of chess between those trying to understand what is going on, and those trying to affect what is going on. Because each player react to the other players move, those trying to understand will never fully understand, and those trying to manipulate will rarely reach the exact outcome they were aiming for, and almost certainly both players are working on assumptions/expectations that are wrong.

It is actually a very interesting concept. Particularly interesting is a piece he is quoting from a Ron Suskind article, which I will re-quote to you.

In the summer of 2002… I had a meeting with a senior adviser to Bush… 

The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do."

Soros comments that the Aide, presumably Karl Rove, did not merely recognise that the truth can be manipulated, he promoted manipulation of truth as a superior approach.

More than anything it was the above quote that stayed with me, it is one of the most powerful things I have ever read, and I have thought about it countless times in so many situations since.  

Then what kind of players are Merkozy? How about Cameron? How about the other EU leaders? S&P, IMF and ECB? Are they cognitive or manipulative or both? When I wrote the post "Angela Merkel Kann ich bitte mehr Taschengeld haben?" those were precisely the questions I was struggling with.
So what would George say? Well he has been saying many things, about the risk of defaults, countries leaving the euro, probability for double-dip recession etc. Unsurprisingly not a word about the manipulative function, and his narrative should of course be viewed in the light of his own theory on market formation.  Let’s not forget this is exactly the stuff his fortune is built on, and I will therefore be keener to study his retrospective analysis when all of this is over.

In any case, if you are interested in finance, politics and their interdependence,  I encourage you to read the book. Its only 160 pages, so most people will be able to chew their way through it.


  1. I've read Soros....and what always strikes me is how much bis ability to make money depends on his easy access to funds. Looking at his record, he makes some pretty big blunders...but the money's always there for another go.

    Use of Marxist dialectic is handy when trying to grasp what is going on...the quantifiable and recognisable acting upon each other to produce unforeseen consequences.

  2. @ the fly: That probably strengthens the point. Gaining access to funds is more important (and much less transparent) than making the trades.

  3. Hey. Tried to write you off-blog, but no dice.

    I'm part of the Occupy movement & curious about your point of view.

    What're your thoughts on the U.S. bailout, the Wall St. theft, the million dollar bonuses and the Occupy protests?

    What do you think needs to change, if anything, in American & the greater Western society?


    ps - To tip my hand, I tend toward liberal-progressive on most issues. But not all (abortion, a few others). Frankly, I'm like a lot of people -- I don't really care about tax policy or regulation, as long as the thing works.

    So, in that you have some background in the field, I'd like to know your thoughts.

  4. @ Conrad: Excellent that you found my blog, I'm also very interested in your views. You ask a pretty big question and it deserves a proper answer,so I'll try to find some time tomorrow to write a full reply.

  5. @Conrad: I have posted "Bank Regulation for Beginners" to answer your question. It nearly killed me, so I hope you like it.