Soros warns on bear-market rally

Bloomberg

George Soros, the billionaire hedge-fund manager who made money last year while most peers suffered losses, said the four-week rally in U.S. stocks isn’t the start of a bull market because the economy is still shrinking.

"It’s a bear-market rally because we have not yet turned the economy around," Soros, 78, said in an interview Monday with Bloomberg Television, referring to the recent rebound in stock prices. "This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime."

The Standard & Poor’s 500 Index of largest U.S. companies has climbed 24 percent since March 9 on optimism the worst of the 16-month U.S. recession is over. The economy continues to contract, and there’s a risk the U.S. falls into a depression, Soros said.

"As long as we deal with this in a multilateral and more or less coordinated way, I think we’ll get through," said Soros, whose Quantum Endowment Fund rose 8 percent last year, compared with the average 19 percent decline of hedge funds tracked by Hedge Fund Research.

Marc Faber, managing director of Hong Kong-based Marc Faber and publisher of the Gloom, Boom and Doom Report, said in a separate Bloomberg TV interview yesterday that the S&P 500 may drop as much as 10 percent before resuming gains.

Views on Obama

Soros gave a mostly positive review of President Barack Obama.

"He’s done very well in every area, except in dealing with the recapitalization of the banks and the restructuring of the mortgage market," said Soros. "Unfortunately, there’s just a little bit too much continuity with the previous administration."

Soros said the U.S. housing market hasn’t bottomed, even as transactions in states such as California have increased. "There are some signs of hitting bottom, but we are not there yet," he said. "A lot has been done to forestall foreclosures."

U.S. stocks fell for the first time in five days Monday on concern that government measures to shore up banks may not help as much as estimated by analysts and loan losses will exceed levels from the Great Depression. The S&P 500 fell 0.8 percent to 835.48.

Soros said the banking system is "seriously under water" with banks on "life support."

"They are weighed down by a lot of bad assets, which are still losing value," he said. "The amount is difficult to estimate, but I think it’s in the region of maybe a trillion-and-a-half dollars."

Soros said the change to fair-value accounting rules will keep troubled banks in business, stalling recovery.

"This is part of the muddling-through scenario where we are going to keep zombie banks alive," Soros said. "It’s going to sap the energies of the economy."

The Financial Accounting Standards Board relaxed so-called mark-to-market rules last week, allowing banks to use "significant" judgment in gauging prices of some investments on their books. While analysts said the measure may reduce writedowns and boost net income, investor advocates and accounting-industry groups said it will help financial institutions hide their true health.

Bank nationalization

The "bugaboo of nationalizing banks," which the Obama administration wants to avoid, means "we are nationalizing only one side of the balance sheet," Soros said. "We gradually take over the deficits on the balance sheet. But we aren’t actually going to benefit from the banks recovering."

Money being injected into banks under government rescue programs should be used to finance new lending, according to Soros. He said he participated in HSBC Holdings’s rights offer, which raised about $19.1 billion.

Soros’s firm oversees $21 billion. Its Quantum Endowment Fund rose 5.2 percent this year through February. He ranked last year as the industry’s fourth-highest paid hedge fund manager, earning about $1.1 billion.

Hedge funds should be regulated like other financial firms, Soros said. It would be appropriate for authorities to monitor positions to see whether managers have "excessive exposure," he said.

"Recognizing that markets are inherently unstable does require a different kind of regulation," he commented.