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Why Soros Is Getting Ready To Break the Bank of England... Again

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Why Soros Is Getting Ready To Break the Bank of England... Again

Post by Sean on Sat Jun 07, 2008 4:10 pm

Good day Currency Traders!

Remember George Soros, you know...the billionaire who got his "celebrity status" by betting against the British pound?

Well he's back and guess what he's betting against once again? The British pound.

He supposedly made over a billion dollars off that one trade even though the Bank of England tried to fight against him.
Soros Is Etching a Tombstone for the Pound

Soros "came out of retirement" last year (I'm sure he never really retired but that's what he called it). It's been reported that he's already made US$3 billion for his own investment fund. So this guy is pretty "in tune" to the U.K. economy and the British pound.

As far as I'm concerned, Soros is like the old E.F. Hutton commercial when it comes to offering information on the pound. In other words, when he talks, I listen.

So why does he feel that the pound is in so much trouble? Well here's his grocery list:

He says the U.K.'s household debts are higher than the U.S.'s debts (seriously, that is bad). The banking and financial troubles are just as frustrating in the U.K. as they are in the United States.

Why the Same Problems Are Even Worse in the U.K.

However, he points out that the financial sector in the U.K. is a much bigger percent of the overall economy there than it is here in the United States. So he feels the impact from the bleeding financial sector will hit the U.K. economy even harder than it has in the U.S.

Soros also commented that household debt has risen to 148% of personal income in the U.K. compared with 125% in the United States. So obviously, the U.K. is the worse of the two evils then.

The financial sector accounts for 8.5% of the British economy while the U.S. economy is almost a full percentage point less than that.

But U.K. elections are also coming up. What if some other party takes office? Soros says it won't matter which party is in office because the troubles are so deep that it will take quite a while to work through it no matter who is in charge.

That's the gospel according to Soros


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Re: Why Soros Is Getting Ready To Break the Bank of England... Again

Post by Sean on Sat Jun 07, 2008 9:55 pm

George Soros has a laundry list of reasons why he's betting against the pound - including higher household debts and a damaged financial sector that's weighing on the whole economy.

But honestly, that just skims the surface of U.K.'s troubles. There are several other reasons why you should follow Soros' lead and short the pound in the coming months. I'll tell you how in just a minute. First, why does the U.K. have such a bad reputation these days?

More Mortgage Nightmares,
Not Just on Elm Street Anymore

On Monday, Bradford & Bingley - the U.K.'s biggest lender to landlords - announced they lost 8 million (US$15.6 million) in just the last four months. That is just one example of how bad the housing situation has gotten in U.K.

So now, Bradford & Bingley has to raise some cash. They're planning to sell 23% of the company to the Ft. Worth-based buy out firm, TPG Inc. And they're selling it for 42 million (US$82.2 million) less than they thought they were going to get for it.

It's not going to get better anytime soon either. The U.K. Mortgage Approvals number came out the same day and it was the lowest reading since they started keeping records over nine years ago.

Yesterday, the Bank of England decided to hold rates steady. Why? Because when many people's number one asset, their house, is going down in value, the last thing you need to do is raise rates. Higher rates make homes just more expensive - especially when many Brits are trying to sell.

Furthermore, consumer confidence numbers are down. You can't raise rates and improve. If consumers aren't confident in the economy's future they're not going to spend. If they don't spend, the economy has no "fuel."

On top of this their manufacturing and services sectors are in the tank as well. So if you raise rates you're going to make progress a lot more difficult in the corporate world too.

But if you keep rates steady for now, then you'll allow the economy to continue to hurt and slow down which could ease the inflationary pressures for now.

So that's the pound side of things. What about the ole greenback?
Big Pensions, Mutual Funds and Insurance Companies Have Been Quietly Collecting Dollars

According to State Street Corp and Bank of New York Mellon Corp, institutions have actually bought more dollars this year than they've sold. That's the first in quite a while. In fact, Bank of New York Mellon points out that the "dollar buying" is twice that of the 12 month average. These guys aren't playing around.

Why do these big-name traders feel that the buck could go up from here? These institutions are betting that rates have bottomed and have no where to go from here but upward.

Now two Fed officials have hinted that their focus has shifted back to inflation once again. That means higher rates - if the Fed follows through. For my money, I'm betting the Fed will eventually raise this year simply to fight inflation.

Also, growth is starting to climb again in the U.S. - it just went from 0.6% to 0.9%. The Fed estimates that next year the U.S. economy will grow as fast as 2.8%. I sincerely doubt growth will rebound that fast, but I do think the U.S.'s growth will exceed the U.K.'s growth next year.

You Want to Short the Worse of Two Evils

The Fed has tougher decisions to make right now than they've had in years. They're trying to tiptoe and maneuver around stagflation.

However, I fully believe that they'll raise rates later on this year and that the U.K. will probably have to cut rates as their economy is expected to slow further just as the U.S. is starting to pick up a hair.

So compared to the pound, the dollar is the "lesser of the two evils." That means the British pound vs. the U.S. dollar currency pair (GBP/USD) will drop in value in the months ahead. So look for shorting opportunities.


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