Turkish tragedy | Financial Times


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Turkey and emerging markets

Recep Tayyip Erdogan believes that interest rate cuts will help stabilize the Turkish currency and control inflation. He was wrong. This is the exchange rate of the lira against the U.S. dollar since he became the President of Turkey in 2014 (this chart and the following chart use data from Bloomberg):

The red circle shows the latest currency crisis in Turkey, after the central bank of Turkey lowered interest rates to 15% (from 19% in September), and Erdogan delivered a combative speech condemning global finance on Tuesday.

The following is the performance of Turkish stock investors in lira and U.S. dollars:

It is worth noting that, given the depreciation of the lira, hard currency investors lost only half of their funds in Turkish stocks. But for this country, the situation is desperate, and some measures must be taken. A statement from the central bank on Tuesday indicated that the government may intervene in the currency market to support the lira, but it does not have sufficient reserves to do so.

Edward Glossop, an emerging market economist at Abrdn, told me that the current basic choice is to raise interest rates and capital controls, but Erdogan’s belligerent tone indicates that interest rate hikes are unlikely. “Soft touch” capital controls, such as requiring the exchange of hard currency deposits into lira within a certain window, may be the next step. Edward Al-Hussainy of Columbia Threadneedle believes that by contrast, the possibility of interest rate hikes is increasing day by day.

The good news-everyone except the Turks-is that this crisis is mainly caused by Turkey’s unique poor policies, and it has almost no channels to spread to other places. As Jonas Goltermann of Capital Economics concluded, Turkey’s imports are not important enough on a global scale, so that their collapse will cause great external damage; foreign investment in Turkey has even shrunk to a focus on emerging markets. A small part of the portfolio; Turkey’s chaos is unlikely to make investors worry about the possibility of crises in other markets, because everyone knows how bad Ankara’s policies are and how fragile its currency is.

But that’s not all, because the prospect of a stronger U.S. dollar and US monetary policy tightening is making the situation worse. In the past decade, the value of emerging market assets (stocks, bonds, and currencies) has become more and more sensitive to capital flows from developed countries, and therefore more sensitive to the degree of easing of financial policies in the developed world. The following is the 10 years of the Morgan Stanley Capital International Emerging Markets Stock Index, compared with the Goldman Sachs U.S. Financial Conditions Index, which tracks interest rates, the strength of the U.S. dollar, and stock market valuations:

This is a strong relationship. However, it is worth noting that the US financial situation has relaxed this year, and emerging market assets have not strengthened. This boils down to two factors: inflation and China’s chaos, which is about one-third of the MSCI Emerging Markets Index. The following are the Standard & Poor’s 500 Index, MSCI Emerging Market Index and MSCI Emerging Market Index, in which China has been excluded in the past year:

In the first half of this year, emerging markets (except China) outperformed US stocks; inflation and the consequent rise in commodity prices provided a seemingly ideal environment. But when inflation was really hot in June, except for China, the index began to trade sideways. With the strengthening of the US dollar last month, the US stocks continued to advance by leaps and bounds.

Central banks in emerging markets cannot be as lovely as the United States for inflation. They must quickly stifle it by increasing the kill rate, which most people outside of Turkey have done.

The tightening of monetary policy in the United States is a bad time for Turkey-and it is also a bad time for emerging markets. The underperformance of emerging market assets is not surprising. However, what remains a bit perplexing is the behavior of risky assets in developed countries. Except for a few super speculative stocks, they behaved as if stricter policies did no harm to them.

Bitcoin ETF: A terrible product with good performance, thank you

Unhedged does not like Bitcoin exchange-traded funds. They are opaque and expensive. The SEC’s fraud problem means that the Bitcoin ETF is indeed Bitcoin-futures ETFs, as the expiring futures contracts are sold and expensive new contracts are purchased, will incur heavy “rollover” costs.

The genius saw this when the product debuted, and it is now obvious. As Steve Johnson reported in the Financial Times on Monday, compared with the dozen or so submitted to the US Securities and Exchange Commission, only three Bitcoin futures ETFs were actually launched. Anna Paglia, head of Invesco ETF, said after Invesco withdrew her Bitcoin product:

“We have conducted many simulations, and the cost of rolling futures has caused a drag of 60-80 basis points [a month]. We are talking about some big numbers, with an annualized rate of 5-10%.It will not be a simple copy [bitcoin] index. “

on the other hand. . . who cares? Bitcoin! Approximately $1.6 billion flowed into the three first Bitcoin ETFs-ProShares ($1.5 billion), Valkyrie ($57 million) and VanEck ($3 million):

We asked what happened to Valkyrie CEO Leah Wald. She told us that demand comes from institutional investors and retail investors, but for different reasons.

For institutions, ETFs provide tax-free Bitcoin exposure through retirement accounts. In this case, Bitcoin itself is impossible to hold. ETFs can also help investors avoid dealing with annoying cryptocurrency trading or custody issues. We think this is terrible-simply concealing the risk-but it is logical.

When asked why retail investors should not only buy from Coinbase or Robinhood and avoid rollover costs, Wald pointed out the costs associated with direct trading of crypto, including:

  • Every purchase or sale of cryptocurrency may trigger a tax event (the tax guidelines here are vague);

  • Blockchain transaction fees;

  • Exchange withdrawal and transaction fees;

  • Custody and/or wallet costs.

According to Wald, some of these costs are not transparent and may be invisibly included in the spread of bitcoin transactions. Therefore, savvy bitcoin investors may think that the ETF route is actually more cost-effective than buying spot bitcoins.

Even if you buy that line (we are not sure), this is not a sure statement-it is just an argument that owning physical bitcoin is also expensive. The success of the Bitcoin ETF, if it continues, is tantamount to a malicious criticism of Bitcoin itself (Wu Yusen).

A good book

Okay, okay, maybe the permanent team is correct about inflation.

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