The Turkish Lira and the End of the Carry Trade
I have always been drawn to investment types, bears usually, who get a counter consensus call right but, because they were too early or not savvy enough in terms of marketing themselves, are not rewarded for their prescience.
Which brings me to Tim Lee, the Turkish lira and the end of the carry trade.
Lee is a shy, slightly awkward British economist who, for a time, published a dense – near unreadable – newsletter that harped on a single topic: trillions of central bank dollars sloshing around the world created artificially low interest rates that made it extremely attractive for yield hungry investors to leverage up and pile into risky assets — be it bonds from Tajikistan or momentum stocks on NASDAQ.
In trader parlance, it’s called the carry trade, and during the bull market everyone did it. Not just Wall Street money changers either: teenagers chasing meme stocks on Robinhood, a family lusting for that post-pandemic second home, the crypto chasing hordes writ large. And, since March 2009, it's been a trade that has paid off time and again, dip after dip.
Exhibit A for Lee was the Turkish lira, perhaps the most volatile of all emerging market currencies. Believe it or not though, the TL was not always the basket case it is today.
In the aftermath of the 2009 mortgage crisis the Turkish economy was humming and investors were drawn to the promise of robust returns in the bond and stock markets.
Indeed, in 2013, when Lee began to warn of the currency’s demise, the lira had been trading in a fairly tight range between 1 and 2 to the dollar for the better part of a decade.
Don’t believe what you see, he warned – the currency is going to go to 7 to the dollar.
Clients yawned.
It took a while, but things in Turkey panned out as he predicted: ballooning dollar debt, real estate excess, a gaping current account, resurgent inflation and, ultimately, currency mayhem.
Contributing to the fall was President Erdogan’s bizarre insistence that interest rates be held artificially low – higher rates did not protect the lira, he claimed, they led to inflation. Low rates, high inflation, weak currency: no incentive, therefore, for investors to be long the lira.
I had known Lee in another lifetime. In 1993, I was working for a local brokerage house on the Turkish stock exchange. My job was to lure foreign investors into the wild west of the Turkish stock market. That year the market was soaring and investors descended upon us, en masse. Lee was working as the economist for a British firm. His colleagues were panting at the bit, loading up on sky rocketing Turkish stocks.
Lee was skeptical. He has the air of a dour Anglican minister, and the frenzy and madness seemed to offend him – as if there was something louche about it all. This won’t last he told me. We did not listen to him, but a few months later the currency blew up, fell 50 percent and investors (and my clients) lost everything.
Fast forward to 2018. With the lira in freefall and pushing past his target of 7 to the buck, I thought it would be fun to give him his due and I wrote an article about him.
A big splashy story in The Times about an obscure economist who foresaw the TL’s collapse. An appearance on CNBC ensued. I checked in with him soon after – so business must be booming now, all those warnings bore fruit. Are you getting kudos from clients? Are subscription orders piling up?
Actually no. For a while, his readership had been on the decline. He was too bearish. With the markets soaring, his dire warnings of apocalypse were not worth paying for. And who cared about TL anyway, tech stocks were ripping, the S&P was up 30 percent a year. I can’t say that I blame them either, he said with a mournful chuckle. I had long time relationships with many of them, but I think they just got tired of hearing the same thing from me year after year.
Since then, things in Turkey have only gotten worse.
The currency now trades over 16 to the dollar, inflation is back in double digit territory and Erdogan is still stuck on his notion that interest rates cause inflation. A net oil importer, the economy has been ravaged by the price spike, and the current account deficit is expanding anew.
More broadly, central banks are jacking up rates, the S&P, Nasdaq are getting crushed, risk assets are plunging everywhere. All that he had warned about was happening, albeit ten years later.
Now, finally, he must be receiving some recognition. I checked out his LinkedIn page. Nope. He shut his newsletter business down in 2019 – two years before the bear market he had long predicted began.
He has written a book though: and it's a mouthful.
I have not read it. Having slogged through his newsletters over the years, I doubt that it's a page turner. And from what I can see on Amazon, it's not a best seller either.
But as the lira swoons, stocks crater, bitcoin implodes and house prices sink, I doff my cap. There is no more carry in the carry trade.