Inside the mind of George Soros

Posted by The Pragmatic Capitalist

Share on Facebook

Tweet on Twitter

This week’s Guru Outlook takes a look inside the mind of George Soros – one of the original masters of the global macro hedge fund universe. Soros, of course, became famous for breaking the Bank of England. Soros made a spectacularly leveraged bet against the British Pound which netted him over $1B in a day.

Soros rose to recent notoriety for predicting the financial crisis. He was far more bearish than most others and appeared to have a crystal ball with a play-by-play for each step of the crisis. Like some of the gurus we’ve spoken of lately, he wasn’t bearish all the way up. Soros saw the decline in markets as a buying opportunity and has taken the liberty to make billions for his investors on both the way down and the way up.

Although Soros has turned more bullish over the course of the last 6 months he has not lost sight of the forest for the trees. Much like Jeremy Grantham, Soros believes we are confronted with massive structural long-term problems – particularly in the United States. He believes U.S. consumers are in the middle of a long-term deleveraging process and earlier this month he described the U.S. banking system as “bankrupt”. He sees very weak consumer spending and a drag from the banking sector holding down global growth for years to come.

In a recent interview, he said the market is now very overextended and at substantial risk of another downturn. But that doesn’t mean the market will turn down immediately. Soros says the market is likely to remain buoyant throughout the remainder of 2009 and will likely face its reality of weak global growth in 2010. He says the rally has been driven by the government stimulus and little else. Soros says the recent uptick in bank earnings is essentially a fraud:

“Those earnings are not the achievement of risk-takers. These are gifts, hidden gifts, from the government.”

Soros recently said the move down in the dollar was unsustainable (he obviously reads too much TPC) and that its link to the Renminbi would reduce the overall decline. Despite this, Soros is betting big on all things “real”. In particular, Soros is betting big on oil related names. Soros has over 33% of his funds invested in energy related names. He recently announced large positions in Interoil (IOC) and Headwaters (HW). Soros’ largest positions remain PetroBasiliero (PBR) and Hess (HES) which both represent over 5% of his portfolio.

Soros was also a heavy investor in convertible bonds in recent quarters. Of particular interest were semiconductor names. Soros bought large bond stakes in RF Micro Devices (RFMD), LSI (LSI), and Linear Tech (LLTC).