Hedge fund legend George Soros visited the London School of Economics on Wednesday and said recent stock market gains were the result of a “bear market rally” which would reverse course as the global credit crunch gets worse. MarketWatch’s William L. Watts wrote yesterday:

The rebound is likely “just a bear-market rally based on the false conception that the authorities can handle all these crises,” Soros said in remarks at the London School of Economics.

“The man who broke the Bank of England” also shared his latest economic outlook for the United States. Watts wrote:

Soros said he wasn’t predicting a return to the Great Depression of the 1930s, but argued that the likely path for the U.S. economy lies between two extremes: In the best-case scenario, growth begins to revive by the end of 2008. In the worst-case scenario, the U.S. experience echoes Japan’s long-running bout of subpar growth in the wake of its burst real-estate bubble and damage to the Japanese banking system.

The Hungarian-born investor also warned that U.S. home prices may “overshoot” to the downside, just has they had overshot to the upside during the housing bubble. As a result, Soros predicted the American consumer, who depended on home equity to fund consumption, would no longer serve as an engine of domestic and global economic growth. In addition, the co-founder of the Quantum Fund with Jim Rogers cautioned that the banking system is “severely impacted” by recent events, with banks reluctant to lend.

Finally, Soros said the U.S. economy faces the prospect of inflation and recession at the same time, “partly because the dollar has ceased to be accepted as the reserve currency it has been” in the past.

Source:

“Soros: Recent gains a likely ‘bear market rally’”
William L. Watts
MarketWatch, May 21, 2008

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