Pride comes before a fall
In a previous incarnation, I was managing a 24-hour dealing operation for a bank in London at the time when the U.K. was forced to leave the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS).
EMS was designed to give everyone a flavour of what it would be like to live without currency fluctuations, a precursor to the common currency that a lot of readers of this will have become used to and very comfortable with.
In the UK at the time, there was a lot of controversy about whether the UK should join with then Prime Minister Margaret Thatcher against and Chancellor (soon to become Prime Minister) John Major in favour.
When Thatcher stood down and Major took over the UK joined the EMS but since the UK and Germany (whose currency was considered the benchmark) had vastly different inflation rates, the pound was likely to fall versus the Deutschemark. However, the UK entered at a Central Rate of 2.9500 which was far too high considering the economic differential between the two countries.
Soon the pound came under pressure and the Bank of England tried several different tactics to stabilize it all of which failed.
The Bank of England “spent” around six billion pound of the UK’s foreign currency reserves attempting to prop up the pound all to no avail.
The man who had a short-sterling position
George Soros the legendary investor and head of the famous Quantum Fund had believed for some time that the pound would have to be devalued versus the Deutsche and the artificially high exchange rate was both building pressure in the system and allowing him to build a significant short position.
There have been rumours about how big the position was and just how much profit was made as the pound collapse. As someone “who was there” all I can say as the manager of the most active desk at that time is the position wasn’t as large nor the profit so great as legend has led us to believe over the years.
This story has become something of a fable in the market, justified my employers view that twenty-four-hour dealing was coming and made Soros one of the most “quotable” investors in the world. He has since been overtaken, primarily by Warren Buffet who has built his “aura” in a wider range of asset classes, but also by several “new kids on the block”, namely Bill Gates, Steve Jobs (sadly no longer with us) and Elon Musk.
Soros was short Sterling, but so was the rest of the world. The following day there were some incredible stories from those inside as well as outside the market, but the most lasting thought is that it was a day that defined what was to come from the Euro.
The threat returns
I read yesterday that Soros is back with yet another quotable quote. He believes that another financial crisis is “just around the corner”.
There is a significant difference in the way in which Soros operates compared to other major investors in that he leverages his reputation to bend markets to his way of thinking. It is interesting that when he is right, Soros is spectacularly right since the market is told through several well-placed pieces of gossip but when he is wrong (as we all are from time to time) silence ensues.
This is, of course human nature, but when you invest as Soros does, it is difficult to accept at face value.
The EU is under pressure form a rise in populism. The election results in France, The Netherlands and Germany last year appeared to take the steam out of the movement, but it is rising again, and Italy is now the flagship.
It is the EU not the Eurozone that is under most pressure since across the region country by country there is more than 50% support for the common currency in every country. It seems that a single currency is a great idea just not a centrally managed single currency