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On "Black Wednesday" in 1992, hedge fund managers George Soros and Stanley Druckenmiller capitalized on the UK's unsustainable fixed exchange rate, forcing the Bank of England to withdraw the pound sterling from the European Monetary System after losing billions.
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⏱️ Video Chapters
0:31 Understanding the European Monetary System
3:00 The UK Joins the EMS
4:13 Drunkenmiller and Soros Start Position
4:58 Breaking Down the Trade
5:46 The Catalyst
6:47 Stanley's Greatest Lesson from George Soros
7:57 The UK's Fatal Mistake
8:53 The UK Exits the ERM
9:30 Did George & Stanely Really Break the Bank of England?
❗Copyright Music: Juvenile by White Vacancy (www.artlist.io) Public Domain Design and Footage: Pexels and Canva
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0:00
on September 16th 1992 a day that shook
0:02
the financial World George Soros made a
0:04
staggering 1 billion in just a few hours
0:07
this trade often hailed as a master
0:09
stroke in financial history didn't just
0:11
make headlines it spark controversy and
0:13
debate but were Soros and his team
0:15
actually responsible for breaking the
0:17
bank or is there more to the story today
0:19
we're going to delve into the intricate
0:23
details how did George and his team
0:25
orchestrate such a Monumental feat what
0:28
can you learn from this trade to make
0:29
more money in the markets and did they
0:31
truly break the bank of England before
0:34
we understand the trade we need to
0:36
understand the setup this means
0:38
understanding the European monetary
0:39
system the EMS and its Central component
0:42
the exchange rate mechanism or ERM the
0:45
origins of the EMS can be traced back to
0:48
1960 when the heads of the member states
0:50
of the European economic Community met
0:52
in the ha and agreed to move towards the
0:54
goal of a single European economy in
0:57
1970 prime minister of Luxembourg Pier
1:00
Werner produced a wner report outlining
1:02
the structure of the EMS or European
1:04
monetary system and moving toward the
1:07
goal in three stages with the ultimate
1:09
goal of pegging the currencies together
1:11
to make crossb transactions easier to
1:15
theoretically usher in new levels of
1:16
Peace in 1972 the European economic
1:20
Community currencies were pegged to each
1:22
other in a scheme called the snake in
1:23
the tunnel which created a single
1:26
currency band combining the currencies
1:27
together akin to rock climbers hook
1:30
together for safety while they move
1:31
across Rocky
1:34
terrain this sther ERM did make it
1:36
easier to transact across borders and
1:38
pav the way for a single European
1:40
currency but it put pressure on each
1:42
country's Central Bank and collaps a
1:44
year later when there are lots of
1:46
transaction selling one currency for
1:47
another it pushes the sold Currency
1:49
Price down and increases the purchased
1:51
Currency Price supply and demand
1:53
mechanics work for currencies just as
1:55
they do for goods but with the ERM there
1:57
was a catch if a currency's price moved
2:00
outside the agreed upon bands the
2:02
central bank would need to keep the
2:04
currency within the bands by buying when
2:06
the currency fell or selling when it
2:08
moved too much above the band and this
2:10
requirement to keep the currencies
2:12
within the snake as we soon will see SED
2:14
the seeds of
2:15
Destruction but first a little political
2:18
drama European currency exchange rate
2:20
stability was one of the most important
2:22
objectives for policy makers since the
2:23
second world war the desire LED for
2:26
leaders of Germany and France to
2:28
successfully Champion the EMS on
2:31
December 5th 1978 France Denmark Belgium
2:34
Luxembourg Ireland Netherlands Germany
2:36
and Italy's currencies formed the Snake
2:38
once again and even though there was no
2:40
formal anchor the German Central Bank in
2:43
the Deutsche Mark stabilized the
2:45
so-called
2:46
snake the UK didn't join the party as
2:48
prime minister Margaret Thatcher feared
2:51
history might repeat itself but of
2:52
course this time's different right but
2:55
due to poor economic conditions she
2:56
caved a few months after joining the ERM
2:59
she resigned signed and Chancellor John
3:01
Major who championed the ERM and held
3:03
positions beneath Margaret came to power
3:05
it was done the UK entered the ERM in
3:09
October 1990 agreeing to join with a
3:11
fluctuation ban of 6% at entry the pound
3:15
sterling had 15% inflation three times
3:18
the rate of Germany and low labor
3:20
productivity but joining house Slytherin
3:22
wasn't a Magic Bullet over the next 2
3:25
years the economic climate in the UK
3:27
went from bad to worse as the economy
3:29
continued to shink with an inverted
3:30
yield curve typically when an economy is
3:33
recession central banks will cut rates
3:36
making borrowing easier the cheaper debt
3:38
helps fuel growth but since they had to
3:40
maintain their currency exchange rate
3:43
they couldn't do this and on the other
3:45
end of the snake again Germany being the
3:47
anchor kept interest rates high so
3:49
demand for its currency stayed high and
3:52
if this wasn't bad enough the UK had
3:54
double deficits the government was
3:56
spending more than it was making from
3:57
taxes and it was also spending more on
3:59
train than it was earning all of these
4:01
factors weakened demand for the pound
4:03
over time forcing the UK Central Bank to
4:05
forego its foreign currency reserves and
4:08
buy its own currency the writing was on
4:10
the wall setting up one of the greatest
4:12
trades in history starting in August
4:14
1992 dren Miller and Soros began
4:17
building a position the trade thesis was
4:19
simple the snake in the tunnel was
4:21
unsustainable and the artificial demand
4:23
from the central banks would eventually
4:25
break they started shorting the pound
4:27
and the Italian L they would borrow
4:28
these currencies from the banks to buy
4:30
German marks while paying interest the
4:33
idea is that when the ERM broke the
4:34
currencies would drop relative to German
4:36
marks and they would buy back the
4:37
currencies at a discount earning the
4:39
difference minus interest paid as profit
4:41
but understand that George and Stanley
4:43
are pushing serious cash run and that
4:45
slippage can be massive to reduce the
4:47
liquidity risk and leverage returns they
4:49
used the marks to buy German and French
4:51
bonds while simultaneously purchasing
4:54
equities in Weak currencies and selling
4:56
short equities in strong currencies
4:58
let's break this down
5:00
Bonds in strong currencies move up in a
5:02
flight to safety assuming No
5:03
deleveraging Effects the rationale
5:05
behind bonds is simple the underlying
5:07
currency is strong and bonds add
5:09
additional yield on top stocks do the
5:12
opposite and it's a little more nuanced
5:14
when a currency Falls stocks in that
5:16
currency move up the reason is due to
5:19
something called purchasing power a
5:20
parody if you think about it it makes no
5:23
sense for Tesla's value to drop just
5:25
because the value of the US dollar
5:26
plummets Tesla is priced at what the
5:29
market thinks it is worth irrespective
5:31
of currency now don't get me wrong this
5:34
isn't to say that a weak currency over
5:36
time can't be bad for business it can
5:38
but the opposite is also a hidden gem
5:41
finding companies in Weak countries
5:42
where most of their revenue comes from
5:44
strong currencies is a is that Hidden
5:46
Gem but I digress let's get back to the
5:49
bombshell Catalyst for this $10 billion
5:50
trade in early September the president
5:53
of the bundus bank helmet Schlesinger
5:55
spoke privately in an interview with the
5:57
Wall Street Journal where he stated that
5:59
he believed believe some currencies
6:00
might come under pressure what helmet
6:02
didn't know allegedly is that he was
6:04
being recorded and his story was ready
6:06
for publication but more than that in a
6:08
second on the 13th of September Germany
6:11
cut interest rates by .25% or 25 basis
6:14
points causing the Italian L to drop by
6:17
7% in response this massive asymmetric
6:21
move made the untenable relationship
6:23
between the German marks and the weaker
6:24
ERM currencies crystal clear on the
6:28
evening of Tuesday September mber 15th
6:30
1992 helmet's bombshell interview was
6:32
published this was a catalyst drunken
6:35
Miller and Sor needed George's on record
6:38
stating that bundes bank was basically
6:40
egging the speculators to speculate
6:42
against the weaker currencies and he
6:43
took the queue from this article and
6:47
when Jan Miller told Soros that he was
6:49
going 100% short of the fund on the
6:51
British pound against the Deutsch Mark
6:53
George was pissed he said when you have
6:55
tremendous conviction on a trade you
6:57
have to go for the jugular George
6:59
thought this was a once- in a-lifetime
7:01
opportunity and that dren Miller should
7:03
be short 200% of the fund and dren
7:06
Miller states that this was the greatest
7:08
lesson he ever learned from Soros what
7:11
separates average investors from Super
7:13
investors is their ability to make big
7:15
bets when they think that they are right
7:18
if George and Stanley lose they stand to
7:20
lose very little but if they win they
7:22
stand to win big and this is a perfect
7:24
example of an asymmetric bet but can't
7:26
the bank of England just stop accepting
7:28
orders to to sell pounds preventing its
7:30
currency from freef Fall well no and
7:33
this is why the snake is so apt the ERM
7:36
required the bank of England to accept
7:38
any offers to sell pounds so when
7:40
trading began sell orders came in like
7:43
an avalanche to prevent the collapse
7:45
Chancellor Norman Lamont and Robert Lee
7:47
pton governor of the bank of England
7:49
smashed the buy button they began by
7:51
buying 300 million pound twice before
7:53
8:30 a.m. but to little effect around
7:57
10:30 a.m. on September 16th 2 hours
7:59
later the British government made a
8:01
fatal mistake they announced an increase
8:04
in the base rate from 10% to 12% to
8:06
tempt speculators to buy pounds and cost
8:09
the short sellers money the thought
8:10
process was that increased interest
8:12
rates would hurt short sellers burrowing
8:14
the currency due to the interest expense
8:16
and cause interest from others reaching
8:18
for higher yields as selling continued
8:20
they increased base rates from 12% to
8:22
15% but it only added fuel to the fire
8:25
their move backfired it was clearly seen
8:27
by the markets for what it was active
8:29
desperation after all when your economy
8:32
is in recession you reduce rates to Spur
8:34
growth you don't invite a depression by
8:36
increasing your rates by
8:39
15% Traders smelled blood they dumped
8:42
pounds as fast as they could but this
8:44
time spook businesses started
8:45
liquidating too by 7:00 p.m. that
8:47
evening Lemont announced Britain would
8:49
leave the ERM and rates would remain at
8:51
the new level of 12% however on the next
8:53
day interest rates came back down to 10%
8:56
what a day this September 16th 1992 2 is
8:59
forever known as black Wednesday the
9:01
currency eventually devalued by around
9:03
20% making short sellers of Fortune
9:06
especially for George and Stanley who
9:08
had the foresight to see the inevitable
9:10
and bet big and by big I mean $10
9:12
billion big on Equity of $7 billion in
9:15
other words for every dollar in equity
9:17
they borrowed 43 cents to make a143
9:20
position now that's going for the
9:21
jugular but was it really George and
9:24
Stanley's bite that had defeated the
9:25
bank of England I'm not so sure the
9:28
daily turn over in exchange markets in
9:30
the early 1990s was typically over a
9:32
trillion dollars per day and while 10
9:34
billion bet is a massive amount a
9:36
trillion is much more the truth is that
9:39
Stanley and George saw the structural
9:41
imbalance and made a killing from it but
9:44
they didn't break the bank the truth is
9:46
that the snake in the tunnel bit off
9:48
more than it could chew and this
9:49
indigestion wasn't a matter of if but
9:52
when and another thing it's conventional
9:54
wisdom that the devaluation caused a
9:56
boom making some call it white Wednesday
9:58
since was followed by years of increased
10:00
growth however the economies of similar
10:03
countries that didn't devalue also
10:05
experience similar growth rates so while
10:07
conventional wisdom around the historic
10:09
event is wrong does it really matter as
10:12
I like to say when it comes to markets
10:14
you can either be right or you can make
10:15
money the choice is up to you if you
10:17
like this video and want to watch a
10:19
fantastic documentary on how George
10:21
conquered the markets check this out
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