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Friday, January 22, 1999 Published at 12:48 GMT

Business: The Economy

Soros: Share crisis looms

The oracle... George Soros' predictions make investors listen

A growing "bubble" in the US share market could soon trigger a new world financial crisis, according to international financial speculator George Soros.

In an interview in New York, Mr Soros said a developing "asset price bubble" would provide the next threat to the global financial system.

Mr Soros pointed to two factors creating the bubble:

  • An exodus of capital out of crisis-hit emerging markets into the relatively "safe haven" of Western markets.

  • Historically low interest rates, producing extremely low bond returns.

As a result, money was flowing into US shares, driving up prices - people were feeling rich and spending accordingly, he said. "American consumers can now spend more than they earn because of the inflow of savings from all over the world."

'Unsustainable' rises

This was neither healthy nor sustainable, he told Japanese publication Nihon Keizai Shimbun.

[ image: The spectre of 1998's mini-crash returns]
The spectre of 1998's mini-crash returns
Mr Soros, via his speculative hedge fund Quantum, has reaped billion-dollar gains in recent years, successfully picking movements in the world financial markets.

His prediction follows similar comments in a speech to a financial conference in Paris on Thursday where he pointed to a similar situation in European markets.

"I see the development of an asset bubble as the next major threat to the system," he said via satellite from the US.

'Wonderful world cannot last'

He said the crisis in Asia, Russia and Latin America over the last 18 months had had a reverse effect in America, bringing near-zero inflation. "Today, American consumers ... are spending more than they are earning ... this is a wonderful world but it cannot last for ever," he said.

Wall Street and European bourses have rebounded strongly to test record levels since last year's crisis in emerging markets which saw stocks plummet.

New York's Dow Jones index has risen 23.5% from its low last September, while London's FTSE 100 has added more than 26% over that time.

The rises have been on the back of unprecedented merger activity among major companies on both sides of the Atlantic and extraordinary growth in the telecommunications industry - mainly mobile phones and Internet infrastructure.

Bears emerge

A noted Wall Street analyst, known for his optimistic outlook for US shares in recent years, has also turned bearish, echoing Mr Soros' warning on Thursday.

Ralph Acampora, chief technical analyst at Prudential Securities, foreshadowed last year's downturn and now says another is likely soon.

"Recent favourites such as the Internet stocks appear to be under pressure and are expected to move lower," Mr Acampora said.

He cautioned his readers to expect the share market to turn volatile and head downward soon, perhaps triggered by a collapse in Internet stocks.

And further warnings came from a member of the Federal Reserve Board. The President of the Richmond Federal Reserve Bank, J. Alfred Broaddus, Jr, said that although the outlook for the US economy was generally favourable, many people now saw equities as over-valued, and there could be a "significant correction."

"This change could cut sharply into consumer confidence and consumer spending if, as many say, the strong stock market is fueling the high household consumption and remarkably low savings so evident in recent quarters," he added.

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