Remember Black Wednesday? On September
2nd,1992, George Soros became known to history as the “Man who broke the Bank
of England.” On that day, George Soros sold short more than $10 billion in Pounds Sterling netting a profit
of around 1 Billion Euro.
Let’s delve further into Soros’ strategy,
philosophy, and his current moves.
Strategy
Simple economics: Soros trades within
boundaries derived by rules. By doing so and by understanding the dynamics
between economic giants in Europe, he puts the pieces together. Considering
interest rates fluctuations and government interventions, Soros detected an
emerging bubble.
He borrowed pounds, sold them for
Deutschmarks; and overflowed the currency market with excess supply of pounds.
This led to Pound devaluation.
1. Play by the rules
2. Detect an emerging bubble
How did Soros know?
In September 1992, United Kingdom’s
government was between two crossroads on whether to raise their interest rates to the levels of
the European Exchange Rate Mechanism (ERM) or to float its currency. Soros
foresaw pound devaluation because: UK would have to withdraw the pound from the
EERM because the Bank of England
(BOE) would not be able to keep GBP exchange rate above the agreed
limit. Therefore, the pound would have to be devalued.
Soros was aware that Deutsche Bundesbank,
German’s Federal Bank, favored Sterling and Italian lira devaluation. Secondly,
high British interest rates
would be calamitous towards UK’s asset prices. Therefore, prior to September of
1992, he began borrowing Sterling and converting them into a concoction of
French Francs and Deutschmarks.
On September 16, 1992, the British Pound was
forced out of the ERM.
Philosophy
George Soros takes advantage of the power
of prediction from a slightly different angle. Soros is a pattern-detector:
he looks for patterns of errors. He applies his knowledge regarding a social
theory--
Reflexivity—towards his financial strategies. This theory is
based on the principle within the Thomas Theorem: “situations that men define
as true, become true for them”. In other words, essentially, our decisions are
based on the predictions we make ourselves, therefore the predictions become
fact.
Analogously, within the arena of economics
and financial markets, individuals’ predictions about the market can possibly
lead to prediction-biased decisions and actions. Here George Soros
enters; detects an emerging financial bubble; predicts people’s
actions; and then he goes against just that.
We all look for patterns to make our
executions; however, discovering the minority financial strategy leads to the highest
reward.
Soros
2013
Soros latest trade has been betting against
the Japanese Yen. He has made almost $1 Billion on these trades since last
year, as he is shorting the Yen.
On April 4th, 2013, after Japan announced monetary easing measures to achieve a
2% inflation target, the Yen fell more than 3 percent against the dollar.
Soros says “If the Yen starts to fall, which it has done, and
people in Japan realize that it is liable to continue, and want to put their
money abroad, then the fall may become like an avalanche,” on CNBC.
Learn Forex – USDJPY Weekly Trend
Today
you can take advantage of the weakening Japanese Yen just like the currency
trading giant George Soros! As Japanese Yen pairs move towards higher highs,
traders can utilize a breakout strategy.
