George Soros: It’s 2008 All Over Again
Billionaire George Soros has a warning for the international markets that must not go unheeded.
Soros sees the Chinese financial mayhem trickling down to other economies, ultimately triggering something similar to the financial crisis of 2008. And when the bigwigs in the game hint at a U.S. stock market crash in 2016, investors should take note.
Twice in two days now, the Chinese stock markets have plunged, triggering circuit breakers and halting trading. The Shanghai’s CSI 300 index has crashed twice by more than seven percent this week, urging local and international investors to run for cover.
International markets are further getting buffeted by the Chinese central bank. The People’s Bank of China (PBoC) has sent shockwaves across the world by cutting the yuan to dollar offshore exchange rate to nearly five-year lows.
Markets are absolutely confused as to what the Chinese central bank is trying to achieve here, but George Soros is having a déjà vu moment.
Rising debt and slowing growth that triggered the summertime China stock market crash in 2015 brought upon China its worst economic slowdown. The tipping point was the lackluster manufacturing data last month, which became a major cause of concern for the country. Seemingly, the only way to boost exports—and ultimately, manufacturing—was to devalue the country’s currency.
The problem is that while the cheaper currency bodes well for China’s exporters, it is bad news for Chinese importers, foreign investors in local currency, and local borrowers of foreign currency.
However, more than any other group, the biggest sufferers will be the markets that sell to the Chinese. Take, for instance, U.S. corporations, which make significant profits from China. They will certainly be taking a massive hit to their bottom line from a strong dollar in the coming quarters.
“China has a major adjustment problem…I would say it amounts to a crisis,” Soros explains. “When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.” (Source: “George Soros Sees Crisis in Global Markets That Echoes 2008,” Bloomberg, January 7, 2016.)
Markets are already conceding to George Soros’ prediction. Take a quick peek at the chart below that shows the investors’ perception of fear in terms of market volatility—the S&P 500 volatility index (VIX). The volatility momentarily settled around Christmas time, when the markets went in for a Santa Claus rally, but has since then rebounded.
Chart courtesy of www.StockCharts.com
Certainly, China’s economic woes will have repercussions for all global economies. The seriousness of the matter can be gauged from the fact that this is the most populous and the second-largest economy in the world and naturally buys a good chunk of the world output.
Any upheavals here have a ripple effect across all global markets, which is why Japan’s Nikkei, London’s FTSE, and Australia’s ASX all responded collectively, sliding more than two percent, while the Dow and S&P 500 were down about 1.4% yesterday.
At this point, investors must take note of George Soros’ warning. If a 2008-like economic collapse in 2016 really is brewing up, now may be a good time for investors to hedge their portfolios.