George Soros on the World

National Post column for Tues. Jan. 31:

DAVOS - Financier and philanthropist George Soros was surprisingly positive America's economy and predictably negative about its president's foreign policies and other geo-political issues.

He is still very much involved in managing his hedge funds and other investments, but he is also immersed in politics through his support for NGOs [non-governmental organizations] devoted to political change, economic development and human rights causes. He invested heavily, for instance, in helping Georgians toss out their autocratic leader last year through their “Rose Revolution”.

But as part of a wide-ranging discussion with a dozen journalists here, I asked him what his bets were on oil prices, the U.S. dollar and the U.S. economy. He replied that he didn't reveal his actual financial positions but, nonetheless, he gave expansive answers that were revealing.

“The supply-demand situation in oil means there is a greater risk of oil prices rising than of oil prices falling,” he said. “Everyone can see this. There is the crisis with Iran looming and therefore countries like China are accumulating oil reserves to keep their economy going. The situation also presents an incentive for people to make trouble by disrupting supplies such as in Nigeria.”

Iran's regime is “inept” and weak at home but its nuclear program is very popular. For this, and other reasons, he believes 2006 will be a “dangerous year”.

“The U.S. made a mistake in not allowing China to buy Unocal. It forced China to look for reserves in rogue states,” he said. “This has made it more difficult to put pressure on those regimes. I see China now as a spoiler in this regard. There was a cold-blooded massacre in Sudan recently and the next week the ruler flew off to China and was feted because they need the oil. And China gave an honorary degree to Robert Mugabe in Zimbabwe.”

Higher oil prices has also given Russia more leverage to control or weaken its neighbors, such as Georgia and Ukraine.
“Russia has the upper hand and it is very worrisome,” said Soros who is originally from Hungary. “This is very sad and I'm very disappointed.”

Europe is not very helpful because it is also dependent upon Russia for energy and is undergoing an “identity crisis” following the rejection of a proposed constitution last year.

“It's not an acute matter because Europe will continue through inertia for some time, but in 20 years a new dynamic will arise,” he said. “The European Union is an elitist project and a brilliant feat. But they introduced referenda which meant the elite lost its control.”

For all these reasons, oil is headed higher, but the U.S. dollar isn't, he said.
“As for the U.S. dollar, I don't like to predict but in the long run it has to fall in order to be part of an adjustment process,” he said. “The dollar's recovery has probably reached its peak, but that doesn't mean it's about to fall out of bed. The interest rate differential is still there.”

The U.S. trade deficit won't have much of a negative effect on the dollar and is, on balance, a natural outcome of the high savings rates in Asia and high consumption rates in America.

“I think the trade, 6% of GDP, is sustainable indefinitely because there are two willing partners to that game - one over consuming and one over-saving,” he said.

U.S. stock markets will be lackluster this year.
“The U.S. economy will likely slow down in 2007 which will cast its shadow on markets in 2006,” he said.
The housing boom in the U.S., which is an economic driver in terms of construction, financings and consumption of goods or services, may slow this year.

“As the boom falls off, the U.S. savings rate will increase and lead to a shortfall in demand [by consumers] that will bring about a global slowdown,” he said. “The U.S. consumer is the biggest engine of growth in the world.”

He believed the handover to a new Federal Reserve Chairman this week would be a non-event. Some experts at the World Economic Forum, such as Morgan Stanley's Chief Economist Stephen Roach, predicted a crisis within weeks of a change in governorship, based on history.

“Bernanke [the new Chair] will have to increase interest rates at first to establish his credibility,” he said.
Soros is also been heavily involved in American politics and financially supported Democratic candidates against George Bush.

“The political risks confronting us in the world now are due to the strong decline in America's power and influence in the world,” said Soros. “Mice [Iran and Russia] are busy when the cat is incapacitated.”

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