Ep.45: New Covid Risk Emerges & Collapse of Turkish Lira Explained

Hello and welcome to the latest episode of the Market Maker Podcast with myself and co-founder of Amplify, Piers Curran, as we digest and review some of the main headlines in focus for this week. And before I begin, we're at 96 ratings now on our mission to 100 on the Apple Podcast Store, so get on there, take us over the line. 4 more is all it takes.

Century is in sight.

And also for anyone in the US, because I do know we have listeners looking at the data in the States, happy Thanksgiving. With everything that's been going on, I hope that you've managed to spend some time at least with your friends and loved ones and everyone's well. So again, you've missed out on a 1,000-point drop in the Dow today, but there's always tomorrow, I guess. Well, on Monday, I should say. Um, but yeah, in terms of this week then, a quick overview of some of the main things. Um, Biden finally has chosen, um, the next Fed chair, and it's gone with the continuity choice of Jerome Powell. So Brainard, which was the slight risk, has not materialized. She gets a promotion to kind of vice chair, if you like. And some would say that's actually a pretty decent team, the two. We'll talk about that a little bit more in a moment. Markets actually did see a bit of a reaction in a slightly hawkish fashion because of the more dovish risk associated with Brainard. Um, then we've got Elon Musk, busy as ever, resuming the, the selling of his shares. He's offloaded now, um, about half on his 10% pledge from his Twitter poll a few weeks ago. Um, but in terms of Tesla shares themselves, I mean, it's It's just your usual kind of 10% weekly volatility. So, uh, by Tesla terms, a very quiet week. Um, they've managed to keep their head above water, above that $1,000 mark. Turkish lira, we're definitely going to talk about that in this episode in more detail. That went into freefall. I think it was Tuesday, it fell 15% in one day. So a huge move. And then we've had some US data Um, PCE, Personal Consumption Expenditure Index, which is kind of the, the main data point the Fed like to look at as their measurement for inflation, that came in and saw its largest annual rise in 3 decades. Um, comes on the coattails, of course, of that 6.2% hot CPI print we had, uh, 2 weeks ago. Initial jobless claims, lowest level since 1969, uh, came in at 199,000. And the FOMC minutes midweek showed an openness to adapting to the speed of taper. And as we'll discuss, that in combination with Powell and some of those aforementioned numbers on the data side, particularly around inflation and the labor market, has caused quite a few more banks to fall into a more hawkish mindset with their, their rate calls. And then the latest thing, which will kick off then with the first talking point, is a new variant of the coronavirus that causes COVID-19 called the B.1.1.529. Has not yet been issued its name formally, that has to come from the World Health Organization. They held an emergency press conference earlier today and they've not yet got to the point of really having enough data to make a decision whether it's going to get escalated to that point. In fact, the World Health Organization have come out this morning and said implementing travel measures is being cautioned against, which is— would seem slightly odd on the surface, because if you're looking at the market reaction, we're recording this on a Friday morning, the Dow's down a— that was down 1,000 points overnight. Granted, it's Thanksgiving, so there's a, there's a lack of participation stateside Traditionally, markets were and are always closed on Thanksgiving Day, Thursday, but no one generally comes back for Friday and they book a long weekend. And so price reactions can be exacerbated. And not only that, oil's down $4.50, T-notes are up a full point, gold's up $20. So the market's definitely reacted to this latest variant identified specifically in South Africa. And the main cause for concern here is that the new variant is spreading rapidly there, appears to be out-competing other variants much faster than previous variants of concern had done in the past, namely Delta, which is the one that kind of ran rampant across the world because its high degree of transmissibility. The early sequencing signs show that this South African one— there's only 100 cases at the moment incredibly small amount of data. But the slightly worrying thing is about the mutations from that specific country. And I can't remember the word that they used. I heard this morning, emu compromised individuals, particularly the researchers say linked to high cases of AIDS, HIV, which South Africa has the highest proportion of. I think it's about 8.5 million people. And so those people are more subject then to having catching COVID but also the mutation then effect thereafter. And that beta one, the one that really didn't see too much global spreading, that was actually kind of the most potent in many ways. I'm not going to talk about spike proteins and all these sorts of things, but the idea being is that the Delta variant, which was a change from the Alpha variant, which was the one in Kent in the UK, that was highly transmissible but let's say less impactful than the Beta one, the South African previous one. And now that's the issue that's, that's arisen right now. So yeah, just, just what's your initial thoughts? And it's very early days, I know, but Britain's already kind of locking, shutting shop for any South African, um, travel. Many other countries are doing the same. Oil's obviously reacted as well quite sharply to this breaking news.

Yeah, yeah, I mean, it's definitely one of the biggest days of the entire year from a market's point of view. Um, we'll talk about some individual stories in a minute, but yeah, so just to kind of So basically what you're saying is— should we call it the Echo variant? But anyway, basically what you're saying, if I get this right, this could be that the reason for the extreme move in markets is that this variant could be both— A, it could evade the vaccines just based on the Beta variant from South Africa That was it.

Yes. So, so that's right. Yeah. So the takeaway would be is that take somewhere like South Africa, the actual amount of people who are vaccinated, certainly double jabbed, is absolutely insignificant. It's like so small.

Right.

Which allows them further spreading.

Yeah.

It's very different, the emerging market and undeveloped countries and how they've been able to react. And roll out vaccines. So yeah, that's what's aiding and assisting the more spreading. The other thing here is vaccines, as we know, and the reason why we have booster shots like in the UK is because the efficacy rate declines over time. So as we get to 3, 4 months, the percentage level is still relatively high, but it declines. And hence, the elder, more vulnerable people are getting boosters. But again, in somewhere like South Africa, they haven't even had the first round, rather than getting now top-ups. Um, so, so these are some of the concerns. And the concerns, I guess, is because in mainland Europe, as you and I have discussed in recent weeks, there's already an outbreak, and all— pretty much all European countries, to varying degrees, are putting much more onerous restrictions. And, you know, so oil's off well off. It was this time last month, pretty much to the day, a month ago when we were at the highs. And what are we down now? 15% in crude oil off those highs in 4 weeks.

Yeah, WTI is trading $74. Um, $74. Yeah, the high was— well, it's back just towards the end of October, was $83. So yeah, we've come $83 down to $74, um, in the last few weeks.

Yeah, so the risk is the I— one of the things I was talking about in the briefing this morning is that I think in Europe they cannot now run the risk of a new variant to then add to their already worsening COVID situation. So they were reluctant to really enforce onerous lockdowns, particularly in countries like Germany, because the economic impact. But now it switches to perhaps now they might not even have that choice. And therefore, yeah, it's not just Europe, but this will be a thing for, for everyone as well as a risk factor. And then that's, that's what's getting—

before we kind of get into the markets here, just a bit more on this, because I think with regards to— let's just stick with Europe. Um, it's been quite interesting with some noises coming out this week about the Astra, uh, vaccine and the perhaps the data showing that the UK is— is, I mean, you know, not intentionally, but it's kind of better off, it seems, having had a higher proportion. I think it's about 50% of vaccines in the UK were AstraZeneca, and it's looking like that, um, vaccine has got, um, a longer-lasting— gives you a longer-lasting kind of T-cell immunity. Um, so it— or, or actually, rather than necessary, it's not as good as preventing you from getting COVID, but it's better from preventing you getting seriously ill, is what they were saying. And because the UK, A, got a high proportion of, of AstraZeneca, and B, we've had higher case rates throughout this year, means perhaps there's a larger herd immunity which is perhaps why in the UK, whilst we've had a spike, we haven't seen the death rate rise dramatically and hospitals, you know, aren't being overwhelmed. But it is looking like that on mainland Europe, that you are starting to see, you know, hospitals start to kind of get back up towards capacity. And of course, that's the real— that's the— that's when— that's where lockdowns come in. It's when the hospitalizations rise and you're at the point of capacity and you've got to kind of lock this thing down. So this is the problem because mainland Europe were very— or they didn't allow anyone over 65 to have the Astra vaccine because of their concerns about some of the side effects, if you remember. So that their policy towards Astra might be now actually harming them. Um, and anyway, the vaccine take-up wasn't as high anyway. And I think on the booster side, the UK, I think we're about 20% now, aren't we? 20% of people have had a booster here, but I think it's like 8% on mainland Europe.

Yeah, because I do, I do think that that's a big part of it. I mean, the UK was rapid in deploying the vaccine rollout, and they are again through boosters. So yeah, I'm always a little bit in two minds when I read things about the AstraZeneca-Pfizer trade-offs and efficacy, because there's a lot of obviously political connotation that gets taken out of that, uh, obviously where these drugs are manufactured and so on.

Yeah, absolutely.

Fallout that they've had. But yeah, everything that you said I think is, is is, is correct. Um, but yeah, I do think that the UK is a benefit— it benefits from its, its success in being able to just spend money and get these agreements, take it and distribute it, which is obviously a greater challenge as well. Another great challenge for those undeveloped countries. It's like India, I mean, even if you gave them the vaccines, how do you How do you service a large proportion of people who live out in the country and countryside?

Yeah. Well, look, let's get into the market side of it. Because I mean, as I said, it's definitely one of the biggest days of the year, for sure. Massive downside. And particularly in— we're right now in that uncertain space. And for markets, markets hate— the worst thing is actually uncertainty. The bad news is almost better than uncertainty that there might be bad news, if you see what I'm saying. So we're right in that moment where there's this new possible new variant, and it's like the default reaction as a human being, let's say from an investor's point of view, is, right, let's almost like— let's just assume the worst. Let's just start there. Then, right, if it's better than the worst, okay, well, that's a bonus. And that's kind of how investors behave in the real short term. So what you're seeing today, as you said, 1,000 points down on the Dow futures, but I'm just looking at the FTSE 100. So I'm looking at actually a table of the biggest losers in the FTSE 100 today, and it tells the perfect story. It's your transportation sector that's getting hammered the most. So International Consolidated Airlines Group, uh, owner of British Airways, for example, amongst other airlines, they're down 14% at the moment. That's a FTSE 100 company. We're not talking about small cap here. This is a monster company, down 14%. Rolls-Royce is the next biggest loser, um, down 10%. So yeah, certainly transportation is the biggest loser so far today in response. And that's obvious, obviously, because the lockdown risk. And Europe is now blocking travel from South Africa. I did read there are 2 cases in Hong Kong. And I think that's probably what's spooking things the most. It's, yes, there's a new variant, and it's from South Africa. And there aren't many, but hang on a minute, there's 2 in Hong Kong. So something's— I guess the fear is it's out. Right? So naturally, stop international travel. So clearly airlines will be first hit. But then you've got others like the oil companies are down big. So BP's down 6%. Then you've got stuff like International Continental Hotels. Again, obviously same reasons, 7% down. Then you've got stuff like Whitbread, who own a lot of pubs. So again, lockdown risk. What else? Then you've got Glencore, which is a big commodities trading outfit. So again, that's about— obviously lockdowns means economically that's very bad news. If you've now got a negative economic risk, well, that normally leads to a reduction in commodity demand. And therefore that's why you're seeing oil drop and all other kind of industrial Commodities, you know, copper's down big time today, for example. Then you've got some of the banks as well in here. So Standard Chartered and Lloyds Group, they're in the top 10 losers today. And again, you know, that's just about default risk, you know, if we go into lockdown again. Because, you know, I think the big— this has always been the big, big game-changing risk, right? It's a variant that is powerful enough to evade vaccines that results in another global lockdown because governments and central banks threw the kitchen sink at it in 2020 and 2021. They don't have any kitchen sinks left. So if we have another big— if we have another proper lockdown, I don't know where you go with that because I don't think there's enough ammunition to kind of prop up.

Come on, Piers, there's always, there's always ammunition. Don't, don't get like doom and gloom. Don't become Dr. Doom on me.

Well, hang on, so we're not I'm not saying all of this is going to happen. This is what's happening in investors' heads. It's you start going through the steps of possible worst-case scenarios, and that's the worst-case scenario. Now, that doesn't mean it's going to happen. Markets today, maybe even we can narrow that to this morning, were behaving like that. But hang on, we haven't got any clear evidence that sequence of events is going to happen, of course. And You know, that's why I say it's knee-jerk reaction, bang, worst-case scenario, panic. Then we kind of step back a bit and go, hang on, right, let's just— now we've panicked, let's— now we've— it's flight, right? We've, we've run away, and then you hide, and then you go, right, okay, let's, let's, let's just stop and think about it. And so when you think about it, it's okay, fine, you know, the World Health Organization is saying, look, don't bother banning international travel. Their track record on this isn't great, so I'm not sure their advice— now remember, they took ages to actually declare it as a pandemic. Remember back in 2020, they weren't declaring it a pandemic. I think it took till the end of March for them to declare a pandemic, and it was only then that governments felt they had then almost like permission to lock down society, because it's like, hang on, it's a worldwide pandemic according to the WHO. But they were so late on that call that actually—

I was just thinking as you're explaining it then, if like you did have the worst case scenario, complete global lockdown, as the same as what we had, to the order of what we had before, and then they create another few digital zeros on the bank account and let's just pump a few more money, but then What happens to inflation then? I mean, it's at 6.2%, the highest in 30 years. If that did happen and they have to then spend, and then you've got the supply— the whole exact same thing from a supply constraint issue. And then what do you do as a central bank then? That would be—

well, Well, that's the thing, right? Governments— well, I guess you're right in that, you know, when I say they can't— they haven't got any kitchen sinks left, well, they'll make another one and throw it at it, right? But, you know, short term, fine, maybe that works, but, you know, you're just, you're just kind of building up that massive time bomb even more. In terms of a debt time bomb that, you know, at some point you're just kicking it down the road a bit, but when it blows up, it's going to be all the more kind of spectacular.

Or the crypto— I can hear the crypto enthusiasts, they're like salivating as you're describing this situation.

Wow, have you seen Bitcoin today?

Yeah, well, there we go, the, the, the classic safe haven that is Bitcoin.

Yeah, down 8% today. That's now what did it top out at? About 67,000, 68,000, was it? We're now down to 54. I'm not quite sure what that is in percentage terms. What's that? 68 to 54.

Yeah, the futures market were down—

That's over 20. That's like 25%, isn't it?

Right, 23, yeah.

23%. Yeah. But look, This morning, big panic. And then look, the ultimate question is, do you buy the dip? Because that's like the default blind response that investors have gone with basically for the last decade. Is it buy the dip? Or— I mean, most likely it is, right? But with now the— extra kind of risk factor in there that this, this kind of variant— people are gonna like next week, over the weekend, next week, will probably assume this isn't gonna be that nightmare scenario. So I'll probably start buying the dip.

Yeah, I mean, I'm just looking at S&P chart at the moment and really it's a bit incorrect, it sensationalizes the narrative by saying the Dow's down 1,000 points.

Yeah.

And the reason for that is that proportionately now the index trades at 35,000, whereas many years ago it was nowhere near that. And so 1,000 points sounds like a lot. It is a lot against a daily average move. But if I'm looking at the S&P, I mean, we were trading— I mean, we're still up still up 1.5% from where we were 4 weeks ago, even with the sell-off that's been seen this morning. And so the market is still up at all-time high territory still.

And US, US markets, US markets. I mean, you look at— I'm looking at the DAX chart right now, and the DAX has come off obviously very sharply. I think we bottomed out 15,280. We just bounced a little bit now, but look, this puts the low today— I'm looking on the futures here We haven't traded that low since October 13th, but the prices we're trading today are exactly the same prices we were trading back in the summer, even late spring. You can go back to actually mid-April. So the DAX hit levels not seen— the DAX hit levels that we were trading back mid-April this morning, whereas obviously the S&P is still miles above the the mid-April, um, levels to give you an idea on that. Hang on, I'm just trying to work out my chart here, which is now just broken. Um, what was the mid-April level in the S&P?

So where— I mean, a key level on the downside was 4548. Uh, we're trading around 4620 at the moment. In April, in the S&P, we were down at 3900.

Right.

So we were a lot— I mean, that's just— we've gone an incredible distance since that point. But like, kind of shifting this along then to talk about, um, the Fed. And, you know, barring today and the new COVID variant shock almost, otherwise the, the dominant theme had been really initiated on Monday Biden announced that he'd renominate Jerome Powell. It's all seen as a formality now that that will get passed through. So he gets another 4 years. And one thing is, as far as markets are concerned, markets love continuity. Goes back to Piers's point you just made earlier about the idea of markets react very badly to uncertainty. Brainard was not particularly an uncertain individual. She's been around operating under Powell for a while, but this kind of was like the idea of the show goes on under Jerome Powell, uh, and worst case averted, no shocks and surprises. And it was, as we've said on the podcast many weeks, as we were anticipating. The other thing then is, is that what we have seen are a few things from a data perspective. I mentioned earlier We had US personal spending rose in October from a month earlier by more than expected. PCE posted its largest annual increase in 3 decades. Jobless claims lower since 1969. The FOMC minutes came out, and I actually didn't think the minutes would yield anything of interest because it was the starting gun of taper. I didn't think it would really show much detail around their openness or flexibility to adapt that speed. I thought it would be more like, "Let's just get it going," in their normal cautious approach, but it wasn't. They actually stressed the need for flexibility and how quickly they'll scale it back and the timing of interest rates. All of that came before the inflation metrics that we've seen, which have spiked up to multi-decade Hi. So they're already saying that stuff, which further cements that idea then that they're probably going to speed things up a little bit. Um, and what that's led to then is banks like Goldman, for one, has caught quite a few of the headlines, and they've talked that the idea the Federal Reserve will likely double the pace of its tapering of monthly purchases from January, from the current $15 up to $30 billion, and then that means they'll wind down then their pandemic-era scheme by March, allowing then a bit of like a see-how-she-goes approach for, uh, for 3 months, and then commence then rate liftoff of what would be, in their opinion, 3 rate hikes in 2022 commencing June.

June, September, December.

Yeah, and those months obviously not just calendar quarters, they fit within that Summary of Economic Projection timetable of which historically the precedence is they like to act when there's more transparency to the market about their kind of economic thinking and forecasting, and hence the reason for those dates. So yeah, I mean, what do you think about this shift? I mean, certainly the Fed officials have generally been supporting this change of subtle change of direction, I would say.

I think the direction of travel on this is the same in that we've been moving— we've seen the Fed moving to a more hawkish stance, and that movement is ongoing. So they keep going even more hawkish. And I think that's— I mean, I don't know, I'm very surprised if you go back like 4 weeks This is definitely not what I was expecting. I wasn't expecting the Fed to be this hawkish. We were taught, we've been saying, chances of them accelerating tapering are very low. They'll probably keep the tapering pace as it is. They might start talking more about hiking and bring that rate hike expectation nearer. But here they are. Were wrong. They are talking about accelerating, and Goldman's forecast on that obviously reflects it. What I would say is obviously what's happened today with markets and this variant now means we step back a little bit from the idea they're actually going to accelerate tapering. Obviously, if this new variant properly becomes a thing, then actually we should start expecting them to decelerate tapering. But let's just put the COVID thing, breaking news to one side. Yeah, they're really hawkish. And we're seeing that in markets. The dollar's continued to strengthen against all currencies. The euro-dollar got down, well, to almost the one— yeah, it got down below the 112 handle. Yesterday, I mean, it's on the up actually. We've kind of traded quite sharply back higher, almost back up to the 113 handle today. So this is kind of part of that sort of COVID panic thing. But yeah, we got below the 112 handle on the euro dollar yesterday, which is another new low in this kind of very steep trend that we're seeing. And look, you're looking at the Dow and fine, they've come off heavily, but you know, they're very high. There's a lot of profit-taking going on, right? And so yeah, they continue to be more hawkish. I think with the— I think with Powell getting another term, yeah, even though he is dovish relatively, uh, Brainard is even more dovish, right? So the fact that Powell's got another term and It's not Brainard stepping up. That's why you got that slight hawkish reaction to confirmation that Powell's going to stay, is because the alternative was even more dovish in Brainard. But yeah, I, I continue to be surprised by how hawkish the Fed are willing to get at this point in time, given COVID uncertainties generally, you know, even the last 24 hours aside, you know, the winter was always going to bring another COVID situation as people are forced indoors due to cold weather. And you know, that's how the virus can spread more easily.

Yeah, and that's not forgetting as well that obviously it's Thanksgiving.

Yeah.

And, uh, US cases, although not a particular focal point right now, have been ticking higher more recently in the last couple of weeks. Not to the scales they had done before, but they are going higher. And the pattern would be then that those exact reasons, the kind of indoor gathering and travel, these types of things are not a good combination in terms of the controlling of the virus. So it will be interesting to see, this is the South African variant aside, as we go into this period ahead for the next quarter, whether or not then the job situation and confidence and things can continue. I mean, one of the good comments I saw was from a a lady called Mary Daly, and she's the head of the San Francisco Federal Reserve Bank. So she's one of the FOMC officials, and she's quite a well-known dove. And she was talking about, yep, I'm feeling, you know, definitely like this is a conversation. The labor market, inflation are pointing in that direction. But her general theme was, I need to see this repeat next month. Before then, I am convinced that this is actually the best course of action in terms of an acceleration. And I guess that's the internal divide at the moment is things have actually switched. The labor market is now falling into play, if you like, with the inflation side of things, which has been waiting for the labor market to catch up to trigger these things. So there's definitely much to watch, I think, as we go forward in the next couple of weeks. But yeah, let's change it up then and talk about The Turkish lira, as I said earlier, got absolutely hammered earlier in the week, down 15% in a day. Eddie and I put out a YouTube video which you can watch if you want to check it out on the AmplifyMe channel, but we were looking at the lira over the course of several years and it's just progressively got worse and worse. And I, I guess it kind of capitulated in a way on Tuesday and the wheels came off a little bit. And then you get those kind of momentum moves. People come in speculatively, and it really got hurt quite bad. So a lot of this is coming after the President Erdoğan reiterated his commitment to what is seen as an unorthodox view on high interest rates that cause inflation. So perhaps we could start, Piers, by just kind of talking through How does Erdoğan's view come under the unorthodox category?

So the, the main school of thought of monetary policy— the reason why do central banks exist? What is monetary policy even for? Well, it's basically to control inflation. And the reason why that's so important is because if you want— like, certainly developed advanced economies is about consumption, right? And to put a number, really rough ballpark, about 75% of GDP in a developed economy is consumption. Okay? So that's people and businesses and the government spending money, right? So consumption's key. Now, just think simply as a consumer, you're buying stuff, right? And inflation, of course, is measuring how quickly goods in the system, how quickly their prices are rising. Okay, so if you've got inflation, prices are going up, it's more expensive, right? It's fine though if inflation's kind of low and steady, and it's fine if— especially if wage growth is greater than inflation, then great, because fine, prices are going up, and that's important from a psychological point of view because it incentivizes people to buy now. 'Cause hang on, if I wait, well, the price is going to go up, so it'll be more expensive. So I don't want to wait, I'm going to buy it now. So that incentivizes consumption. But if we're earning more, if our wages are going up faster than the rate at which prices are going up, then we're getting more wealthy relative to the cost of living. And that means we're going to buy more. And that's that kind of virtuous cycle that drives a sustained economic growth trajectory. Okay, so now anything that threatens that— if prices go up too fast, right, so if inflation is too high, and actually really key, if inflation rates are greater than wage growth rates, well then your consumer is becoming poorer relative to the cost of living, right? And that now really puts at risk consumption. So if inflation is too high, it damages consumption. If your consumption is dropping, then you're recession risk. So the whole point is the central bank's there to control inflation. Now, the theory is that if inflation's too high, you raise interest rates. And the whole kind of— if you go through the steps and the sequences, this is how it's supposed to work. You raise interest rates, that means borrowing becomes more expensive. This means people borrow less. They're borrowing less, they're spending less. So that consumption gets dampened by you raising the cost of borrowing. That dampening of consumption, that's demand for goods, right? One of the reasons why prices rise is demand. So if you're just dampening off demand, it kind of brings inflation back down. That's the theory. Okay? Vice versa, if inflation's too low, bad news, again, could threaten consumption. Deflation, big no-no, because then consumers start holding off spending. Well, actually, if prices are going down, I'm not going to buy, I'm going to wait. And then you got another recession scenario. So when inflation drops, you're supposed to cut rates to then fuel more consumption, more demand, pushing prices back up.

Right. So some figures there. I'm pretty sure wages are not going up at 20% a clip. In Turkey right now, which is the annual inflation rate is at 20%.

Yep.

Interest rates are 15%, um, food price inflation is over 27% at this point in time. Yeah, yeah. So those low-income households are getting really hit at the moment.

So the thing, the thing is about this monetary policy theory Erdogan thinks that's nonsense, and he thinks the exact opposite. So he thinks the way to deal with high inflation is not to raise interest rates, it's actually to do the opposite and cut interest rates. Okay, there aren't many people on the planet that share his stance on this. Um, It's a very much— let's just call it a very unusual take on how to use monetary policy to manage your economy. And Erdoğan is all-powerful. And he's got this in his head. It's his strategy. And he is going to deploy it. To give you an example of exactly what lengths he's prepared to go to, in terms of the central bank, There's actually been 5 central bank governors in the last 5 years. We're just talking about Powell getting another term. Well, that'll mean he'll have been in office for 8 years by the time he finishes, as was Janet Yellen before him, 8 years, as was Bernanke before him, 8 years, or before her, whatever, 8 years. You tend to get a change in central banker in the US once every 8 years. In Turkey, it's every year. And there was a guy called Akbal who was brought in in November 2020 as the new central banker. He kind of got settled in, waited a bit, waited a bit. In April 2021, he basically committed career suicide because he raised interest rates. Conventional thought, inflation's too high, let's start bringing it down, let's start raising interest rates. Okay, 36 hours later he got fired. So, and got fired for raising interest rates. So now there's a new guy that's come in and he's not going to commit career suicide and he's going to do what he's told, thanks very much. And what he's told is let's cut. And this is breeding, uh, an alarming spike in panic about Erdoğan is out of control. And this has then major implications for obviously Turkey internally and major implications potentially for international investors.

Yeah, and I was just looking at kind of 3 points that really defined this emerging market idea. So with that kind of other countries like your Brazils and South Africa and so on, the government, as you said, Erdoğan, obviously unpredictability of governments is not what investors like. And that's definitely one. And just generally relaxed approaches to fiscal spending, the implications on debt, it's a kind of common theme amongst EMs. For that. Secondly, one we talked earlier, which was the COVID situation, getting hold of the supply agreements and the money to have them and then deploying them and then having education to the public to then have them take the vaccine. And then the third one is these are currencies where obviously it's against the dollar and the dollar is pretty rampant at the moment in the other direction. Which is exacerbating then this kind of downside pressure all at the same point. So I guess my question is then, for the lira, how far can this go? And at what point do authorities in Turkey then have to step in? And what does that look like if they do?

How far can it go? I very much hesitate to try and answer that question. Um, so it's trading above 12 now, right? So 12 liras to the dollar. So it's broken above 12 to this, this, this week. To give you an idea, just back— I don't know, let's just go back, let's say start of 2018, was trading below 4. So it's, it's, it's lost 75% of its value. In the last 3 or 4 years. I'm just looking at the chart. If you go further back, go back to like— well, go back to 2013, it was trading at 2. But the point is, since Erdoğan's been in office— I mean, you mentioned the word unpredictable. It's actually, in this sense, it's probably not right. He's very predictable. This is the point. He's predictably reckless and unconventional. Right? And so you've seen the lira weakening and weakening and weakening. Where does it stop? I honestly have got no idea. If you'd have asked me back in 2016 when it was trading 2.5, where could this lira weakening cycle end? I mean, what would you have said? 4, 6, 8?

I don't know.

It's now trading above 12. So if you're asking me the question now, where does— what could happen? I mean, I'm not stupid enough to try and predict that because the idea of, say, uh, capital controls has been mentioned, right?

So what does that constitute and why would a government adopt that type of strategy?

Yeah, so the— okay, so one of the reasons the currency is devaluing sharply is because money is coming out of the country. So here we're talking about international investors. Okay. We'll talk about internally in a second, but mostly when an emerging market currency sharply collapses, it's because international— some— there's been a risk event and international investors want their money the hell out of there. Okay. So to do that, let's say you own, simple example, Turkish stocks. Let's say you've invested in the Turkish stock market. Well, to buy shares in Turkish companies, as a foreign investor, there's an FX transaction first. If I'm taking pounds, I can't buy Turkish shares with pounds. They are lira-denominated assets. So I've got to take my pounds, I've got to sell my pounds, buy lira, then I can buy the asset. So think about the reverse. If I now want out, Well, I need to sell my shares, then I've got lira. I then sell my lira to convert it back to pounds. It's that selling as people pull cash out of the country, but they're also selling assets and then converting it to get the money out. So this is what drives that panic sharp sell-off. You've also got speculators who are all over this, right, who are shorting lira because they think it's going to go down, and it is. So everyone's contributing. To this downside pressure for that currency. The negative feedback loop is, we're pulling it out because, hang on, inflation's out of control. But of course, the weaker your currency gets, that's inflationary because the cost of imports goes up. The prices of imports go up and up and up. So this is where it gets a vicious cycle that could lead to Turkey defaulting. This is how international markets work. It's almost like they sniff out where there's trouble. The way international markets work is they basically accelerate that problem area towards its catastrophic end, because pulling all your money out just makes the inflation problem even worse. That's one thing, right? International. And on this, I'd say on the international investor front, there was— interestingly, there was a big bond auction literally about 8 weeks ago where Turkey's government issued $2.25 billion worth of Turkish bonds. Now, here's the point. Turkey are issuing dollar-denominated debt, OK? Not lira-denominated. That's because lira-denominated debt, the international community will not buy that. They're not interested in buying. They're not interested in taking on lira exchange rate risk. A good example of that is in terms of how the foreign ownership percentage of Turkish lira-denominated debt is now down. It's about 3% now. So the total amount of lira-denominated government debt, only 3% of it is owned by international investors. Go back 3 years, that figure was 20%. So in 2018, 20% of that debt owned by international investors, now it's only 3%. That's because in the last few years, lira exchange rate risk is just one risk too far. But here's the thing, right? In this zero interest rate environment we live in, when you look at Turkey's interest rate, which is like 15%, that— oh, that looks super attractive, right? I want some of that 15% interest action, please. So as an international investor, how can I take advantage of that high interest rate without having to take on the exchange rate risk? Well, this is the dollar-denominated Turkish bonds.

Okay?

Now, international investors in mid-September hoovered up this stuff, $2.25 billion, and it just flew off the shelf at a 6.5% yield. Okay? So international investors bought this stuff at 6.5%, and they think, look, we're safe. We're not lira exposed here. Except, I mean, fine, 6.5%. Looks great, but now you've got genuine default risk on your hands. So this is literally 8 weeks ago, they hoovered this stuff up, and now they're thinking, oops, maybe this is going to come back to haunt us. To give you an idea on that exchange rate risk, so a 12-year bond that got auctioned 8 weeks ago, dollar-denominated, has a yield of 6.5%. The lira-denominated 10-year government bond has a yield of 16%. So that's your yield gap differential that exactly prices that exchange rate risk. And that would have gone up— that data is 8 weeks old, by the way. So that lira-denominated government debt yields have now gone spiking even higher. I think they're up to 20%, I believe. Am I right in saying that? Yeah, broke 20% this week. So that yield is now above 20%. So look, that's from an international investor's point of view. You got to think about this domestically, and this is really where it gets ugly. I mean, often you think, well, international investors, if you're going to lose money because of Turkish exposure, it's your fault. You took the risk and all right, you pay the price, right? And no one's going to cry about that. Unfortunately, where it does get difficult is internally, and that's because there's a huge amount of dollar-denominated borrowing, not just from the government, but actually from companies. Okay, they've been borrowing money in dollars, which means they've got to pay their interest payments in dollars, which means they've got to pay back the loan in dollars. But if you took out— if you took out a 5— let's say, let's say you borrowed money on a 5-year basis in— let's just figure this out— in 2016, you were borrowing when the dollar— yeah, it was about 2.8 liras to the dollar. So if you borrowed a million dollars, you'd have to pay 2.8 million liras to pay that money back. So when you convert it into lira, they were borrowing 2.8. Million, but the currency's collapsed. So that $1 million bond would now mean that company has to pay back more than 10 million lira to repay the loan. So this is where you get huge default risk because of dollar-denominated debt exposure from companies in Turkey. Of course, as we know from the 2008 crisis, When you start getting companies defaulting, well, who's lending them the money? Well, it's the banks, right? So then you're going to get bank default risk. Then what happens? Well, the government needs to step in and bail out the banks. But hang on, the government's got too much debt already. And anyway, they're packed full of dollar-denominated bonds as well, by the way. And all of a sudden, the house collapses. So internally, this is— I mean, Erdoğan, I don't know what experiment he thinks he's trying to pull off. I mean, he thinks, I guess, that by cutting rates, he's encouraging more exports, which for an emerging market, exports is a big part of their economy. And maybe he's trying to think, right, if we can increase exports, then economic growth will increase and people will earn more money and we can deal with this inflation. We can afford it. It's just— I think this is what's going wrong.

So even though there's like shared characteristics of across emerging markets, is this, as you said, the fact that he is predictably unpredictable, almost the fact that that's not new, obviously that's really come to, come to a head this week. Does that limit, and as well some of the exposure numbers that you were saying of decreasing to say 3%, does that limit the contagion risk Does this keep it concentrated in a way more so now than it would've done, say, before?

Yeah. It limits it, but it doesn't stop it because even the dollar-denominated debt, investors have been hoovering that up because they don't want the lira risk. I get that. But even that debt now is at risk of defaulting. So I guess ultimately, people are so desperate for yield, so desperate, they're having to take ever more risk to get it. And they're willing to buy— I think that there was a— I was reading an article in the FT about this that was when that bond auction was happening. There was a quote about someone was saying, some investors are willing to hold their noses despite all the risk. It's like, ah, this thing stinks, but I'm going to buy it anyway. It's because they're desperate for yield. And unfortunately, that desperation in the end can come back to really bite you when you take on too much risk and it defaults. And we may be heading— I don't know. We may be heading in that direction with Erdoğan at the helm. And COVID has obviously just ratcheted up the problem because the government debt, like all governments, payments. That has just gone through the roof, right? So COVID and Erdoğan together may well be the kind of straw that breaks the camel's back here.

Well, he could always draft in Andrew Bailey if he gets in a tight spot. But, well, look, we'll wrap it up there. And just to also bring it to people's attention, if you go to AmplifyMe.com, if you've not already done so, I really encourage you to take part in one of our Finance Accelerator simulations. Doesn't cost anything, all fits into our kind of mission. We want just everyone and anyone. If you're young and aged between 16 to 21, whether you have finance or no financial experience, then, um, it's a simulation that will run you through what it's like to be a trader, a bank, or an asset manager right from the bottom up. And it's all down to then your performance and it's some cool metrics and stuff. You'll find out what you're good at, what you're bad at, and hopefully a bit of intel about what you could do for a future career. So check that out. There's been some adjustments as well to the content hub that comes alongside that. We're introducing a new Discord community that will be accessible via the hub. Love to have people engaged as well so that, you know, you can fire questions to us and we can obviously address them in the podcast at the end of the week. But with that, again, happy Thanksgiving to the people in the States, and have a great weekend, everyone. Thanks, Piers.

Cheers, Ant.

See ya.