The Turkish tragedy | Financial Times

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Türkiye and emerging countries

RECEP TAYYIP Erdogan believes that interest rate reductions will help stabilize the Turkish currency and control inflation. He is wrong. Here the Lira has been compared to the dollar since 2014, the year in which he became President of Türkiye (this and the following graphics use data from Bloomberg):

The Red Circle shows the latest Turkish currency crisis, which follows that the central bank lowers interest to 15 percent (in September it was 19 percent) and Erdogan gave a combative speech on Tuesday that destroyed the global financial world.

This is how investors in Turkish stocks in Lira and dollars have behaved:

In view of the devastation of the Lira, it is remarkable that hard currency investors have only lost half of their money in Turkish stocks. But the situation is desperate for the nation and something has to be done. An explanation of the Central Bank on Tuesday indicates that the government may intervene at the foreign exchange markets to support the Lira, but it does not have the reserves to do this to a significant extent.

Edward Glossop, Emerging Markets Economics at ABRDN, told me that the basic options are currently interest rate increases and capital controls, but Erdogan's warlike tone indicates that interest rate increases are unlikely. "Soft-Touch" capital controls, such as B. the conversion of hard currency deposits in Lira within a certain time window can be the next step. On the other hand, Edward al-Hussainy from Columbia Threadneedle argues that interest rate increases become more likely from day to day.

The good news - for everyone apart from the Turks - is that the crisis was primarily caused by a bad policy that only exists in Turkey, and that there are only a few channels to spread elsewhere. As Jonas Goltermann summarizes from Capital Economics, Turkish imports are not so important that their collapse would cause great external damage; Foreign investments in Turkey have become a small part even in emerging markets geared towards emerging countries; And the chaos in Turkey will probably not give investors fearing possible crises in other markets, because everyone knows how unique Ankara's politics and how uniquely susceptible its currency is.

But that's not all, because the stronger dollar and the prospect of tightening US money policy worsens the situation. In the past ten years, the value of EM systems (stocks, bonds and currencies) has been increasingly sensitive to capital streams from the industrialized countries and thus to the looseness of the financial policy of the industrialized countries. Here are 10 years of the MSCI Emerging Markets Aktien index compared to the Goldman Sachs US Financial Conditions Index that depicts interest rates, dollar strength and stock market reviews:

This is a strong relationship. It is noteworthy, however, that the US finance conditions have loosened this year and that the EM systems have not been strengthened. This is due to two factors: inflation and chaos in China, which is about a third of the MSCI EM index. Here are the S&P 500, the MSCI EM index and the MSCI EM index with China last year:

In the first half of this year, emerging countries without China performed better than US shares; Reflation and the associated increase in raw material prices offered an apparently ideal environment. But in June, when inflation got really hot, the ex-China index began to tend sideways, and last month when the dollar became firmer, US shares shot forward.

The central banks of the emerging countries cannot afford to finish inflation as the United States can. You have to suffocate it quickly by increasing the growth rate, and most of them did this outside of Türkiye.

The tightening of US money policy comes at a terrible time for Turkey-and at a bad time for the emerging countries in general. It is not surprising that EM systems have an under-performance. However, what remains a small puzzle is the behavior of risk systems in the industrialized countries. With the exception of some super -speculative stocks, they pretend that a tighter policy would not harm them at all.

Bitcoin ETFS: A terrible product that is going well, thanks

Unhedged is not a fan of the stock market-traded Bitcoin funds. They are opaque and expensive. The fraud concerns of the Securities and Exchange Commission mean that Bitcoin ETFs really make Bitcoin- Futures ETFs high "Rollover" costs, since expiring futures contracts are sold and expensive new ones are bought.

It didn't need a genius to see this when the products made their debut, and now it is brutally obvious. As Steve Johnson reported on Monday in the FT, only three Bitcoin futures ETFs were actually launched, compared to about a dozen that was submitted to the Sec. Investco ETF boss Anna Paglia said the following after investco had hired his own Bitcoin offer:

"We carried out a number of simulations and the costs for rolling the futures created a resistance of 60-80 basis points [a month]. We speak of a few large numbers, 5-10 percent of the year. It was not a simple vanilla replication of the [Bitcoin] index."

on the other side. . . Who cares? Bitcoin! About $ 1.6 billion went into the first three Bitcoin ETFs-proshares ($ 1.5 billion), Valkyrie ($ 57 million) and Vaneck ($ 3 million):

We asked Valkyrie managing director Leah Wald what is going on. She told us that demand would come from both institutional and private investors, but for various reasons.

For institutions, an ETF offers a tax-free Bitcoin exposure via age accounts that are impossible to keep Bitcoin itself. ETFs also help investors not to deal with annoying cryptocurrency exchanges or custody problems. We consider this to be bad - simplicity covers the risk - but it is logical.

When asked why private investors not only buy from Coinbase or Robinhood and avoid the rollover costs, Wald pointed out at the costs associated with the direct trade in crypto, including:

• Potential tax events with every purchase or sale of a cryptocurrency (the tax guidelines are ambiguous here);

• Fees for blockchain transactions;

• stock exchange and transaction fees;

• depot and/or wallet fees.

Some of these costs are not transparent according to the forest and could bake invisibly into the spread of a Bitcoin trade. Experienced Bitcoin investors can therefore assume that the ETF route is actually more cost-effective than buying spot-bitcoin.

Even if you buy this line (we are not sure), this is not a positive pitch - it is just an argument that owning physical bitcoins is also expensive. The success of the Bitcoin ETFs, if it is sustainable, is equally evident in Bitcoin ( ethan wu ).

a good reading

OK, OK, maybe Team is permanently right with inflation.