August 16, 2018
What Happens in Turkey...*
What Happens in Turkey...*
Client (“C”): I’m gonna be sick this Thanksgiving.
Advisor (“A”): What are you talking about? Thanksgiving is three months away.
C: Well, I keep reading in the paper that turkey is contagious.
A: That’s Turkey, the country, and the word is contagion, not contagious.
C: Same diff. What’s this all about?
A: Well, people are concerned that Turkey won’t be able to pay back their debt.
C: Why won’t they be able to pay back their debt?
A: Because they borrowed money in dollars, but they spent it in Turkish liras, some on investments and some on social welfare. But the lira is becoming worth less every day. Now it costs more liras to buy a dollar, and it will cost more liras to pay back the dollars they owe.
C: So the same dollars buy more lira. That means if I want to buy that Turkish rug from the guy off the back of his truck, it’ll cost me less. Go cheap lira!
A: Only if he’s selling it in lira, not in dollars. He has dollars, you have dollars, nothing changes.
C: A bummer.
A: Right, now contagion is like contagious, only it’s for sick countries, not sick people.
C: Yeah but only Turkey is sick, right? But it could become contagious like the bird flu, get it?
A: You think you’re funnier than you really are. Turkey is an emerging market, or third world country. If one goes bad they could all go bad.
C: Is that what they mean by contagion?
A: Yes, investors start getting scared. They take money from all the third world countries and put it in investment grade money, like the U.S. dollar.
C: Investment grade? I thought we owed $21 trillion.
A: We do, but that’s a lesson for a different day.
C: Okay. So is that why the dollar is getting stronger while the other currencies are getting weaker, because people are buying dollars and selling emerging market currency?
A: You are a very quick study.
C: Thanks, I have a good teacher. By the way, who would lend money to a contagious third world country?
A: Again, that’s contagion, not contagious. The banks would lend money.
C: THE BANKS LENT MONEY TO A THIRD WORLD COUNTRY? DON’T THEY EVER LEARN?
A: No they don’t. One in particular that didn’t learn is BNP Paribus, a French bank that owns a Turkish bank.
C: Hey I own stock in that company. You told me to buy it.
A: I did not. I told you to stop by the BNP bank to pick up your ATM card.
C: Whatever. I love the French. French soccer, Ole!, but French banks, Boo.
A: So investors think that all emerging markets could get sick, and the banks that lent them money could lose money or even go broke. That’s contagion with emerging markets and with banks.
C: I think I’m missing something. Why would anyone lend money to an emerging market country?
A: When you invest in an emerging market you take more risk and you can make more money.
C: So are you going to finish this blog on a high note?
A: There’s nothing funny about contagion.
C: You’re such a downer.
A reader from Philadelphia (Go Eagles!) had asked me to explain Contagion.
*Any other requests?