Legendary investor George Soros says the stock market is trapped in a Fed-fueled liquidity bubble

Reuters

• The stock market’s rally is trapped in a Federal Reserve-formed liquidity bubble, billionaire investor George Soros said in an interview with Italian publication La Repubblica.
• Valuations rest on hopes for a second fiscal stimulus bill and President Trump announcing a coronavirus vaccine before election day, Soros added.
• The legendary investor advised investors to assume fallibility and reflexivity in markets, as participants’ worldviews “are always incomplete and distorted.”
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The Federal Reserve’s monetary relief flooded markets with liquidity but prices now rest on shaky foundations, according to billionaire investor George Soros.

Stocks’ lofty valuations are underpinned by hopes for a second round of fiscal stimulus and the expectation that President Donald Trump will announce a reliable coronavirus vaccine before the presidential election, Soros said in an interview with Italian publication La Repubblica. The next spending bill would need to eclipse the CARES Act’s $2.2 trillion sum to meet investors’ expectations, he added.

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Concerns of the Fed’s actions forming a market bubble “hit the mark,” Soros said in the interview published Tuesday, adding that the central bank has been “more successful than President Trump” in buttressing markets.

Soros no longer plays the market, but he shared some tips for those navigating the volatile landscape. The interplay between thought and reality is crucial, Soros said, as the market acts is “a testing ground” for balancing the two. Investors must assume fallibility in the market, and that participants’ worldviews “are always incomplete and distorted,” he said.

Reflexivity, or the assumption that “distorted views lead to inappropriate actions,” is Soros’ second key to success.

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Soros sees the US as better equipped than Europe to handle the coronavirus’ economic fallout, despite Trump’s leadership remaining “very dangerous.” The president is “fighting for his survival” and “will do everything to stay in power,” the investor said.

Still, Soros expects Trump’s time in office to be “a transitory phenomenon, hopefully ending in November.”

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