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International Investments - Fat Tail Shock

By Gary Scott

Let’s also give thanks to a lively reader who sent me an article written by Morgan Stanley about the Turkish economy and Fat Tail Shock.

Read the article and you’ll see that the writer was using the term “Fat Tail” to dazzle and puzzle us 99% of the world who do not understand mathematical terms such as “probability distributions”, “standard deviations” and "5-sigma events". However smart guys like that cannot fool me. I have a secret called Wikipedia which says:

“In finance, fat tails are considered undesirable because of the additional risk they introduce. For example, an investment strategy may have an expected return, after one year, that is five times its standard deviation. Assuming a normal distribution, the likelihood of its failure (negative return) is less than one in a million; in practice, it may be higher. Normal distributions that emerge in finance generally do so because the factors influencing an asset's value or price are mathematically "well-behaved", and the central limit theorem provides for such a distribution. However, traumatic "real-world" events (such as an oil shock, a large corporate bankruptcy, or an abrupt change in a political situation) are usually not mathematically well-behaved.”

Retrieved from

Good now that I am even more confused let me at least outline some of the things about the Morgan Stanley article on Turkey I did understand.

They say that the Central Bank of Turkey’s new governor, Durmus Yilmaz, signaled an increase in short-term interest rates and confirmed the bank’s readiness to intervene in the foreign exchange market. This is good.

The article also pointed out that this is not the first time Turkey is experiencing a fat-tail shock. In 2004, for example, when the US Federal Reserve started raising interest rates, the lira depreciated almost as much as the current episode and the annual inflation rate increased from 7.1% in June 2004 to 9.4% at the end of the year. Eventually, however, strong economic fundamentals restored balance and the Turkish market once again took off.

Morgan Stanley’s view is that as long as the government keeps fiscal consolidation on track and incomes policy in line with inflation targets, the current rise in inflation should remain temporary. I concur.

They point out that Turkey’s economic fundamentals remain strong and that the current wave of risk reduction that is affecting emerging markets will eventually come to an end. I agree with this as well.

You can read the entire message at

These are essentially positive comments and my inclination based on the fundamental importance of this nation as the crossroads between Christianity and Islam suggests that Turkey will do well in the long run. I was among the very first who began recommending Turkey as a place to invest nearly 20 years ago. I recall the event well, a dinner in a Japanese restaurant in Orlando with our International Club. I can even recall a number of the delegates who were there. A few were startled. I expect a few laughed. Those who listened and heeded have seen thousands of percent returns!

Turkey has seen a number of ups and downs in the past decade. Yet the potential is vast! We, as a society, cannot ignore this market! The last time Merri and were in Istanbul I was impressed by a view of alabaster minarets and a golden arch.

Ochre shadows from setting sun cast patterns on laden tables sultry in the salt air. Market perfumes lurked in purple alleyways and beckoned the milling crowd. We watched the market, its hoards of shoppers shuffling through a square overlooked by graceful Mosques and a McDonald's restaurant.

This was the height of contrasts! Europe and Asia meet here at the Bosporus Strait in a melange that creates one of the most exotic, diverse cities in the world. East and West. Mind and Heart. Mystic and Logic, Ancient temples and modern skyscrapers. Whirling Sufi dervishes gracefully spin for God while dancers at modern discos are lost in the material world. Istanbul has it all and in many ways represents nature's irony that requires two contrasts to fit before something can be whole.

A successful Turkey can help mankind be whole so even if it was not a good place to invest, we would and should need to do it. But Turkey is a smart place to invest for those who want to take on extra risk for higher potential growth.

Learn about investing in emerging and major currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri, Thomas Fischer from Copenhagen and Steve Marchant from Ecuador and me at our September 15-16-17, 2006 International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Learn more about Ecuador import and export from Steve. Our May course was overbooked and the September session is filling up fast. Our free accommodations are reserved on a first come first served basis so do not delay! Go to

Be thankful this weekend.


June, 2006


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