Issue date:Feb. 2, 2004
Posted Jan. 23, 2004
By Kenneth R. Timmerman
The idea was floated first by former Treasury secretary RobertRubin, now the chairman of Citigroup. Unless Congress scales back theBush tax cuts, he argues in a new study, U.S. government budgetdeficits could lead to a crisis of confidence in the dollar and thestock market and potentially staggering losses for investors.
To conservative economist Bruce Bartlett, Rubin was "laying thegroundwork for a political assault on President George W. Bush overhis budget policies, hope[ing] to give the Democraticpresidential candidate an issue to run on that could propel him intothe White House."
But Wall Street sources say Rubin may have had other designs aswell. A consummate insider who talked the market up when he wasworking for Bill Clinton, Rubin today could be trying to talk themarket down. "This market is thin enough that if you made a big moveall of a sudden you could move it," Bartlett tells Insight. "At somepoint, something could happen on its own, and then someone likeGeorge Soros could turn a minor blip into something else."
The Hungarian-born Soros is one of the world's richest men, with afortune estimated at $7 billion earned in part from brazen assaultson world currency markets. He has gained political notoriety forproviding $18 million to support a change in the U.S.campaign-finance laws and then using that change in recent months tooffer more than $15 million to radical organizations dedicated todefeating Bush this November [see "Soros Resolves to Bring BushDown," Dec. 9-22, 2003]. Asked recently by the Washington Postwhether he would trade his $7 billion fortune to unseat Bush, Sorosthought hard. "If someone guaranteed it," he said finally.
Investment adviser and author Don Luskin (www.poorandstupid.com)thinks investors should watch Soros carefully but calmly. "At leasttwo of three conditions must be met for a speculative attack on themarket to succeed," he tells Insight. "First and foremost, thespeculators have to be right." When Soros sought to break the Britishpound by massive currency trades, he played into a market that knewthe existing exchange rates were unsustainable. "So he speculatedagainst the Bank of England, not against the whole damn world,"Luskin says. "You can influence the market by the very act ofbetting."
Ideally, Luskin says, there should be technical market conditionsthat force other players "to take action triggered by what you did,independent of wanting to help you." Such was the case during theOct. 19, 1987, stock-market crash, when computer-driven sellingaccelerated as the market went down, driving prices down evenfurther. By the end of the day, prices had plunged by 20 percent.Since then, the New York Stock Exchange has installed "circuitbreakers" that cut off trading to prevent panic selling.
"Soros believes that if he can force the market down, he will havean effect in the real world," Luskin says. "If it happens on Oct. 31,people might go into the voting booth with fear in their hearts."
Insight put two questions to Luskin and to private investmentadviser Jim Klima of Klima and Associates in Ellicott City, Md.Should Soros decide to make a power play on the eve of the November2004 elections, how would he do it? And what is the likelihood hewould do so?
Luskin believes Soros could choose to sell stock index-futurecontracts massively. If Soros succeeded in driving the market downand keeping it down for several days or more, then his early tradeswould make a profit. "With this strategy you only lose at thebottom," Luskin says. But when the market turns, Soros could losebig, just as he did during the October 1987 crash.
Klima thinks Soros would be more inclined to stick with what heknows best, which is the currency market. "By playing the futuresmarket, he could win whether the dollar slides further or whether itrecovers," Klima explains. But Soros could have the most devastatingimpact on the U.S. economy by betting the dollar higher, not lower."A dramatic rise in the price of the dollar would dramatically hurtU.S. exports," Klima says.
These advisers say concerned investors should be watching forincreased market volatility, starting in the futures pits, and forfutures trading at a discount.
But for all his Bush-bashing bluster, Soros will be thinking longand hard before throwing real money at this market. "George Soros hasgotten his tail burned badly in the U.S. market when he's been a bigseller," Luskin says. "If he's wrong, it could cost him severalbillion dollars."
But if he's right, and Howard Dean gets elected president in apanic, his doomsday trading could become a self-fulfilling prophecyas U.S. financial markets collapse. And that would leave Soros evenricher than he is today. "In the end, it could be a pure financialplay, not a political play," Luskin says.Place your bets.
Kenneth R. Timmerman is a senior writer for Insight magazine.