Feb 3, 2022
This episode was recorded on Jan. 27 and aired for premium subscribers on Feb. 2, without ads or interruptions. To become a premium subscriber and take advantage of a host of other benefits (including the Daily Contrarian briefing and podcast), sign up through Substack or Supercast. Dave Fishwick joins the podcast to make the argument for investing in the Turkish lira after it dropped half its value versus major currencies. The appeal is not just the value but the carry, resulting in the equivalent of 30% to 40% annual interest income. To Fishwick and his team, the trade is not only contrarian but an example of the type of idiosyncratic idea that has no correlation to other parts of the portfolio. The conversation is not limited to Turkey but expands to the U.S., China, and other emerging markets during the second half of the episode.
(This podcast was recorded in person at the iConnections conference in Miami. The acoustics were not ideal and there is some background noise as a result. Apologies for the inconvenience.)
Content Highlights
- The macroeconomic policy experiment in Turkey, where the country's central bank took the highly unorthodox step of combating a sovereign crisis by reducing interest rates. The Turkish lira went into freefall as a result (2:24);
- The lira looks attractive on a real basis, but the real appeal comes in the so-called carry, an often-forgotten part of foreign exchange markets. How this works (3:29);
- Some background on the strategy by the Central Bank of the Republic of Turkey, which is on the surface frightening. But therein lies the appeal (5:22);
- Why buy the Turkish lira when the CBRT is cutting rates while the Fed is raising rates? (11:07);
- If the CBRT succeeds with this experiment, could other emerging market countries follow its example? The strategy is not unprecedented... (13:15);
- Background on the guest (16:19);
- Fishwick's view on current markets. The market has re-rated asset classes, despite upbeat economic news (18:43);
- The present situation may appear bizarre, but it not without parallel. Why it's hard to be bearish for the longer-term (21:48);
- Other areas of the world that are interesting for investors, especially contrarians (24:11);
- There are "some similarities" with what happened the last time the Fed entered on a sustained interest hiking campaign (2004 to 2007), but many differences. The key? Watch the inflation data, though the Fed's record on engineering soft landings is poor (27:05).