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
Retrieved from http://en.wikipedia.org/wiki/Fat_tail
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 www.morganstanley.com/
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
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
Be thankful this weekend.