Look out markets.
George is back.
He’s been away for a while — not too far away, mind you.
He’s always kept at least one eye on the market.
But now George is back. And he doesn’t do things by halves. That spells trouble.
Here’s our take on where George could think about placing one of his famous big bets…
The George we’re talking about is George Soros.
He’s one of the world’s most famous investors. According to the Bloomberg Billionaire Index, Soros ranks at number 27 in the world.
His estimated net worth is US$24.7 billion.
How did he build that wealth? Not by constructing a conservatively diversified portfolio of stocks, that’s for sure.
Soros is a multi-billionaire due to his willingness to make big bets. His most famous bet was in 1992, when he bet against the Bank of England — and won.
But after directing his investments from the back seat for a while, Soros is now firmly back in the driving seat. And, no doubt, he has his next financial victim in sight…
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We remember it well. It was September 1992.
The UK was part of the European Exchange Rate Mechanism (ERM). It was a precursor to the euro.
The idea was that Europe’s currencies would trade in a tight band with each either. The aim was to bring more stability to currency markets, and provide more certainty on exchange rates for companies trading across borders.
In order to keep currencies within the bands determined by the ERM, governments and central banks had to keep close tabs on money flowing in and out of their economies.
If a country had a ‘hot’ economy, it likely meant that a high demand for that country’s currency. Unless that country counteracted that high demand and sold its currency in the market, it could put pressure on other countries and economies.
Furthermore, problems would increase if countries had set their exchange rate within the ERM at an inappropriately high or low level.
That’s what happened with the UK. Its currency, the pound sterling, was too high, especially relative to the German mark (Germany’s currency at the time, before the euro, was called the ‘mark’ or ‘Deutschemark’).
So, big currency traders began ‘attacking’ the pound by selling it in favour of other currencies. This drove down the pound’s value. That was a problem for its position in the ERM. Remember, currencies were supposed to trade in a tight range.
The short story is that even after the UK government raised official interest rates to 12%, and made a promise (not kept) to raise them on the same day to 15%, the UK government took the pound out of the ERM.
The result? It cost the UK government an estimated £3.4 billion, as it tried to keep the pound in the ERM. The date became known as ‘Black Wednesday’.
As for George Soros. Estimates are that his Quantum Fund bagged a whopping £1 billion profit by short selling the pound.
As you can see, when George Soros finds a target worth betting on (or against) it hits it with everything he’s got.
This time, it’s not the pound he’s after
So, what exactly is it that brings George Soros out of ‘retirement’?
Maybe it’s just a coincidence, but on 23 June this month, the UK holds a referendum on whether to remain in or leave the European Union.
If ever there has been an event in the last 10 years that’s sure to move the currency markets, the UK’s referendum on the EU is it.
Is that Soros’s plan? Is he gunning for the pound again? Maybe. Or, maybe he’s going for a proverbial bigger fish — the euro.
Some analysts believe that the market has already factored in most of the downside for the pound. It’s already down 15% from the 2014 peak. And it had fallen 13% from the 2015 high to the 2016 low.
Since then, it has rebounded.
But the bigger question is whether the euro is most at risk of a Soros attack. Some analysts think that if the UK leaves the EU, it could put the entire European project at risk.
If investors begin to doubt the stability and sustainability of the EU, that could have a knock-on effect on the euro…which could send it spinning lower, and result in higher interest rates for Europe’s already heavily indebted nations.
A resumption of the Eurozone debt crisis, along with a crisis in confidence for the euro, would spell trouble. And given the much bigger size of the currency markets today, and the much bigger size of Soros’s wealth, a successful and profitable attack on the euro could make his profits from Black Wednesday look like chump change.
George is back. Watch the euro. We will.
For The Daily Reckoning
PS: This article was originally published in Money Morning.