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Soros-Druckenmiller: The Student Has Become The Master

In which George Soros gets a lesson from his old protege in a little thing called reflexivity.
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(Getty Images)

(Getty Images)

The moments following the election of Donald Trump to the highest office in the land could have provided George Soros an excellent opportunity to put his little theory of reflexivity into action. The hedge fund elder's guiding philosophy, essentially, is that people can be dim, but that doesn't keep them from making the world around them equally dim. Through positive feedback loops, even our dumbest fantasies can effect a dumb reality.

How might we apply this to the election? Soros didn't want a President Trump. He lavished $2o million on Democrats and their allies in the run-up to the election in order to avoid that eventuality. He considers Trump a “con-artist and would-be dictator.”

But none of that has any bearing on what the market would do in the wake of Trump's surprise victory. Soros bet on a zig. The stock market zagged. The Wall Street Journal reports:

Mr. Soros was cautious about the market going into November and became more bearish immediately after Mr. Trump’s election, according to people close to the matter. The stance proved a mistake—the stock market has rallied on expectations that Mr. Trump’s policies will boost corporate earnings and the overall economy.

As a result, some of Mr. Soros’s trading positions incurred losses approaching $1 billion, the people say. Mr. Soros adjusted his positions and exited many of his bearish bets late last year.

Soros can be excused for coming up wrong-footed in the immediate wake of the election. All the signals leading up to November 8 indicated a bearish turn in case of a Trump win. Soros went with the prevailing sentiment and missed the narrative shift. It cost him $1 billion, people told the WSJ.

But the fact that it took Soros a month and a half to reverse his call is curious. The Trump rally is basically an object lesson in reflexivity. Trump talked up infrastructure spending, tax cuts and deregulation. The market narrative quickly shifted to price these in as near-certainties, while any sense of larger risks under the Trump presidency – trade war, nuclear annihilation, etc – evaporated. There was constant mumbling about “animal spirits.” Optimism bred optimism, and soon every other macro report was gushing about the inflationary potential of trillions in tax breaks and infrastructure spending. Stocks went up, which helped stocks go up more.

Whether you think the rally was justified, it's about as pure a demonstration of reflexivity as you're going to get out there in the markets. And Soros missed it.

His former protege Stanley Druckenmiller did not.

Days before the election, Mr. Druckenmiller predicted to an investor that if Mrs. Clinton emerged victorious the stock market likely would rally initially but then would fall. Mr. Druckenmiller said if Mr. Trump won the election, the opposite result likely would occur—stocks first would tumble and then soar.

It might matter that Soros and Druckenmiller each bet more or less along the lines of their politics – the former a Democrat, the latter a Republican. And Soros has a record of missing good trades when he has some political skin in the game. He could have shorted the ruble during the Russian financial crisis in 1998 – he had the inside information to make a killing – but instead he acted the diplomat in an ultimately failed effort to shore up Russia's finances.

But maybe it's worthwhile not to overthink the decisions of a guy who has given millions of dollars to this guy.


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