Chapter 26 Chapter 26 The Valentine's Day Disaster

The market has a tendency to deviate. The first painful time At the beginning of 1994, Soros resorted to aggressively shorting the Deutsche Mark.However, despite Soros's initial belief that German interest rates would fall, this has not been the case.Because high interest rates would damage the German economy considerably, Soros bet that Germany would lower its interest rates, which would devalue the Deutschmark.The Germans weren't too happy about it. They didn't want to see someone like Soros betting against them. Although 1994 got off to a good start for Soros; gradually, dark clouds began to gather on the horizon.To some cynics, a January cover story about Soros in The New Republic did not bode well for Soros.It's basically a well-meaning piece, written by Michael Lewis, author of the bestseller "The Lie Exposer," and it's mostly about Soros' philanthropic activities.In November, Soros took Lewis with him on a two-week "aid trip," where he experienced first-hand a litany of events designed to show how influential George Soros was in Eastern Europe.

But within a month, the sky fell. What makes Soros' setback in February 1994 so incredible is not that he lost money, which Soros had lost before; nor that the amount this time was so large: $600 million. What makes this failure stand out is that Soros interpreted it matter-of-factly, which appears to belittle the magnitude of the disaster.This incident occurred on February 14, 1994, and employees within the Quantum Foundation dubbed it the "Saint Valentine's Day Massacre". Soros has been betting for some time that the yen will depreciate against the dollar.To better pressure the Japanese in trade negotiations, the U.S. government was at one point happy to strengthen the yen, because if the yen strengthened, Japanese exports would become more expensive and thus harder to market around the world.Soros believes that President Clinton and Japanese Prime Minister Yoshikawa Hosokawa will resolve the trade dispute between the two countries, which will make the US government willing to let the yen fall.

But Soros was wrong this time.On Friday, February 11, talks between Clinton and Hosokawa ended in failure.When the foreign exchange market reopened three days later, the yen, which had been falling, suddenly surged.Traders concluded that the U.S. was attempting to lift the yen to reduce its trade deficit with Japan.A stronger yen would make Japanese imports more expensive in the US market. The yen traded at 102.20 to the dollar at the close of trading in New York on Monday.That's almost a 5 percent change from last Friday's close of 107.18.To Soros' chagrin, it didn't take into account that the failure of the trade talks would move the yen so quickly.

Soros did not comment much on the events of February 14, 1994.On one occasion, he said, "The yen fell 5% in one bite, we lost 5% in the same day, and half of that was due to our being too vulnerable to the yen. I It’s not clear what went wrong, our own handling or the attitudes of the governments that were fighting each other to make this change.” Surprisingly, though, Soros' $600 million loss had relatively little impact on his voice.Almost no one questioned Soros's financial machine, saying that it self-destructed overnight; and no one said that Soros, a world-class investor, buried himself or would be unknown from now on.

"The market has a tendency to diverge." The second quarter is terrible Soros not only survived, but also became more energetic.To this end he used a method of great ingenuity and ingenuity. During the financial turmoil in October 1987, Soros tried to convince the media that his losses totaled only $300 million instead of the rumored $850 million, but failed.Now, in February 1994, rumors swirled that Soros had lost far more than $600 million.This time Soros knew he had to act quickly to clear up the gossip. He thought of his right-hand man, Stanley Druckenmiller, and asked him to deal with the press.For Druckenmiller to speak to the press meant an earthquake; and on February 14, 1994, it came.Soros really needed someone to save his fund from someone else's feet.

Druckenmiller met with the press.As soon as he came up, he wisely pointed out that the loss was 600 million US dollars, not much, not a lot.He said the Soros Fund lost money largely because it wrongly predicted that the yen would depreciate against the dollar, but he announced that the amount of yen the fund had shorted was far less than rumored, only about $8 billion , not the $25 billion that some market reports say.Next, Druckenmiller said that during a certain period, the Soros Fund did hold a large amount of yen, but before February 14, the amount had been considerably reduced.He also explained that some time ago, he judged that in 1994 there would be strong economic growth in Japan, and that higher output would reduce Japan's trade surplus, which would cause the yen to fall, so the Soros Fund took The practice of shorting the yen in large quantities, buying the stocks of many Japanese companies and selling Japanese bonds.From the summer of 1993 until later in the year, the relationship between the yen and the dollar worked in Soros' favor.But by the end of the year, the Soros fund was in an unbelievably "oversubscribed" position for the yen.Druckenmiller thinks that's hardly a thing today, but admits he and his colleagues should have reassessed their approach to the yen.

Now is the time to comment on this setback for Soros. Druckenmiller pointed out that $600 million represents only 5% of Soros' total assets.It seemed like it was going to plunge the Soros financial machine into abyss, but its number two insisted that there was no such thing, that people still had the remaining 95%.By the way, in those days, Soros' total net worth was about $12 billion, which Druckenmiller didn't mention. Thus, some simple arithmetic tells us that even after losing millions of dollars, Soros still holds $11.4 billion in assets.in addition.Druckenmiller claims that the Quantum Foundation has somewhat recouped the February 14 losses.As of February 23, the foundation's assets were down only 2.7%.

That was enough money for Soros to pay the staff of the Soros Fund Management Office atop the skyscraper overlooking Central Park, and he had enough money to distribute to foundations in Eastern Europe and the former Soviet Union. These mechanisms can still run at full capacity.Soros lost $600 million overnight, but that raised little doubt that he was keeping his financial machine alive.This is indicative of the great confidence he displayed in the early months of 1994. Indeed, the loss of 600 million US dollars cannot be said to have no serious impact on Soros' financial business.But more importantly, in the minds of the public, the image of Soros as a magician in the financial field has not changed, even if it is a very slight change.