28 October 2016
George Soros has taken short positions in many assets and instruments that are strongly correlated in price. Photo: Bloomberg
George Soros has taken short positions in many assets and instruments that are strongly correlated in price. Photo: Bloomberg

If I were George Soros

The government-backed mainland media has been harshly criticizing George Soros recently, warning him not to speculate on the renminbi or the Hong Kong dollar — otherwise, no good will come of it.

It’s quite interesting. Soros is a big speculator.

His positions give more information about his intentions than his words.

Besides the renminbi and Hong Kong dollar, Soros claims he is taking short positions on other Asian currencies, commodities and the S&P 500.

If his base case, which is a hard landing for the Chinese economy, comes true, the above-mentioned assets, the price of oil, the aussie, the Canadian dollar, Asian currencies and US stocks will all go down with it.

The short sellers would then gain a complete victory.

The most noteworthy point, from a speculator’s perspective, is the correlation of the assets.

This newspaper noted in a commentary Wednesday that the stock market and oil prices seem to live or die together.

The high correlation is scary, as it means that only after oil prices stop falling will the stock market stabilize.

Everyone knows, however, that correlation is not equal to a causal relationship.

Nevertheless, once enough investors believe in a causal relationship, the correlation between two things, which may not be strong in the first place, may become extremely strong.

Then it seems like the various asset prices will live or die together.

Believe it or not, this is what is happening with oil prices and the stock markets.

I’m not saying the price of oil has no relationship with the stock markets, but is this really more important than a company’s fundamentals or other issues?

Another issue is whether the present situation is comparable to that in 2008.

Back then, oil prices experienced even bigger fluctuations in a shorter period.

But the US shale gas revolution had not emerged yet, and members of the Organization of the Petroleum Exporting Countries were obedient to OPEC’s quotas.

The plunge in oil prices back then had nothing to do with supply. Instead, it was a result of bearish views on the demand for oil.

At present, the supply of oil is the decisive factor in its price.

In other words, it is totally different from what we saw in 2008.

However, if I were Soros, I would hold short positions in the oil futures market instead of the stock market, where short selling is more inconvenient.

If everyone takes it for granted that oil prices and the stock market have a strong positive correlation, someone else will help you drag down the stock market once oil prices decrease.

So, it is totally reasonable for a speculator like Soros to short commodities, Asian currencies and US stock market.

This article appeared in the Hong Kong Economic Journal on Jan. 28.

Translation by Myssie You

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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