Soros and market visibility - by the noneconomist

George Soros has 'come out of retirement' albeit to launch his new book Credit Crisis 2008 and what it means. I haven't had time to read it yet so I'll go by his spoken words. Recent statements by Mr Soros on market transparency and market dynamics give food for thought. Perhaps if he could have given a little earlier warning of what was to come it may have been more helpful, but I knew what was coming at least a year ago, and I'm sure that I was not alone.

The difficulty in highly performance oriented jobs like trading is that the first guy to take his foot off the pedal, get's the axe. This doesn't really encourage the prudence that is required when trading as part of a system playing with funds exceeding the household wealth of the U.S. It encourages pushing as close to the edge as possible. Looking back, winners brag about how they got out at the top of the market and losers lament that they didn't hold just a little bit longer or go a bit shorter. The speed at which we can transact complicates the issue as traders demand millisecond timing on trades to catch the very last drop of profit out of their position.

George says that markets tend toward disorder rather than equilibrium. Traders work in the absence of perfect knowledge. Well that's fairly obvious, and if prices stayed the same for too long, traders would make neither trades nor money. The market demands movement. With the vast sums available using leveraged 'products' traders can move the market if it slows down too much, even without having a specific goal, just out of boredom and the desire to move to the new deal. The hedge funds did this with oil while the lenders freely handed out cash to real estate speculators.  Well not exactly cash…and this time many people bet the farm.

In times of little market movement everyone hangs on the next message coming out, hoping it will move the market enough for them to profit. A small announcement can have an irrational effect. A big announcement such as 'we are heading for recession' is probably a self fulfilling prophecy, even without the many irrational and uninformed investors clutching at some snippet of knowledge that might turn them into a winner. I just don't think we can sustain the big bang theory in the markets, in the real universe it takes an awful long time for the dust to settle and coalesce into something new.

I believe George has moved a few markets in his time. At present he is carefully trying to promote caution and co-operation, limiting the use of leverage in the markets and monitoring where it is. Put CDS etc being traded on an exchange or just listed as being in place, at least so that parties can determine the risk of their counterparty. He counsels balance in legislation but suggests that the market cannot be left to itself. We can see the results of leaving an unregulated market, circulating trillions of dollars in cyberspace, to itself.

No-one wanted to call a halt to the fantasy until it began spiraling out of control, it would have been a self fulfilled personal recession, and nobody truly knew the extent of it, although we all recognised the danger and the probable outcome. The one trillion dollar estimate seems too low to me but then I'm not an economist.

As we sit waiting for handouts knowing that at the end of the day the governments would have no choice but to bail us out and reinforce bad behaviour with reward - where to now? As I said in an earlier piece, it's time to stick together and all eyes are watching and the merest transgression may incur the wrath of the frustration that consumers and governments feel through the circumstances they didn't control. Consumers did borrow and spend, banks did carelessly lend and governments missed the ball, but someone else to blame is always a morale booster, don't let it be you. One thing that is as sure as night following day, there will be regulation to list these oddly structured debts and dubious instruments of risk because if they don't - they'll miss the ball again next time.

Now it all comes back to trust - who can you trust? It'll still be a while before we know the full effect, as George warned, we'll have to see what happens in the real economy, and the effect it has on the markets, but we already know don’t we?

The real economy is of course where the answer to our pain may be found. There's really no point in being immature and sitting around sulking, get out and do some deals. The world is still there and everyone still wants to go forward.  It might be wise to take a look at your corporate citizenship first and bring it out for a polish, because if you pick the right deals in these early days pre-recovery, it'll have a positive effect on your business way beyond the bottom line and you can't really get it wrong, if you get it - right?

People are more likely to trust the optimist and there's nothing wrong with some realism too, but we need a good news week or two, so get together and make some.

p.s. I mentioned up and comer Santander recently, they’re doing some deals. Could they be one to watch?