The 1 quadrillion dollar question and questionable journalism

There has been a concerted effort on the part of some journalists to portray current global currency volatility as unique to Turkey. In the age of the Internet, it astonishes me that some reporters are doing their best to mislead their readership, to further their agenda and I'm going to challenge them to stand by their words after reading this column.

I'm often asked for investing tips by friends and family. I generally respond with long-term ideas in well-diversified indexes or funds. In Turkey, I've noticed people go on to ask a second question, a question which is unique to developing countries: What currency should I invest in?

Turkey has experienced many currency crises in the last 35 years - it was a closed economy in prior years - the last of which occurred right before the incumbent Justice and Development Party (AK Party) government took office. In the past, government collapses, military coups, and failed currency pegs were responsible for extreme currency volatility. These events resulted in the Turkish lira depreciating over 50 percent on several occasion, practically overnight. This makes older Turks, those who were of voting age when the AK Party won its first election, keenly aware of the currency "basket" they hold in savings accounts.

My response to the currency investment question starts with a number: $1.3 quadrillion. This is the minimum expected total volume of foreign exchange (FX) transactions for 2015.

Currently, nearly $6 trillion exchange hands daily, making the FX market by far the largest market in the world, many times larger than any other commodity or asset. The breadth and depth of these currency markets make it nearly efficient. This means that if 100 professionals, bankers, traders, and money-managers are asked what will happen to any given currency over the long term, 50 of them are wrong. A coin flip is as accurate as well-paid, professional, "currency investors" working at the big Wall Street banks in the long-term. This is according to "Overconfidence in Currency Markets," a scientific paper published in the Journal of Financial and Quantitative Analysis by professors Thomas Oberlechner and Carol L. Osler. This paper, published in 2008, is the most famous of many papers that make this point. These facts haven't prevented some journalists reporting on Turkey to predict currency exchange rates going forward and assigning the cause of their choice to lira depreciation.

Currently, there is a global currency crisis brewing. The U.S. dollar has been appreciating against nearly all global currencies in the last year. The reasons for this include an improving U.S. economy, a deteriorating European economy, a slowdown in China and most importantly, potential for interest rate hikes by the U.S. Federal Reserve (Fed) making U.S. government bonds more attractive to investors.

Why would raising U.S. interest rates hurt foreign currencies? Well, currently U.S. government bonds yield practically nothing, about 0.25 percent for a one-year bond. To be clear, this means that you if you lend the U.S. government $1 million for one year, they pay you $2,500 in interest at the end of the year. Should the Fed raise interest rates to the levels predicted by economists, this number will most certainly double if not triple. For this to happen, you need to move out of foreign currencies, buy U.S. dollars and then buy bonds with those dollars. This causes non-dollar currencies to lose their value. Explanation of the mechanism for depreciation here is important in understanding the current depreciation of the lira isn't because of Turkey weakness, but rather dollar strength.Let's look at some examples:





The first graph clearly illustrates the depreciation of the British pound. One British pound sterling currently buys only $1.51, whereas the pound would have bought $1.72 only six months ago. This means it has lost 12 percent of its value.

You wouldn't know that the pound was in such bad shape had you been reading the articles and comments of Istanbul's Wall Street Journal Bureau Chief, Joe Parkinson, or one of his journalists, Emre Peker. "'It's [President Recep Tayyip] Erdoğan versus [Central Bank of the Republic of Turkey (CBRT) Chair Erdem] Başçı, which worries markets the most. ' Why Turkey's lira is hitting record lows" asked Peker, in referring to their joint article and theory that the lira's drop is not attributed to global dollar strength but to comments made by Erdoğan pushing for lower interest rates.

The British pound is also at record lows, however, Parkinson chooses to highlight the drop in the lira versus the British pound, tweeting "When I arrived in Istanbul at the end of 2010, the Lira was 2.3 versus the pound.... its[sic] now 3.9 and racing towards 4." Not only does the Wall Street Journal Bureau Chief omit the fact that the Turkish lira appreciated against the British pound by more than 25 percent in the five years prior, he also predicts the Turkish lira is "racing" towards four lira to the pound.

Parkinson is not alone nor do I fault him, personally, for his words. He works at the Rupert Murdoch-controlled Wall Street Journal, not exactly the biggest fan of Erdoğan. Speaking of media-barons who are not big fans of the president, Aydın Doğan and his English-language newspaper, Hürriyet Daily News, published a "financial" piece by one if its columnists in which the columnist goes over graph after graph of carefully chosen speculative reasoning why the Turkish lira's drop is going to be an existential threat, titling the piece "Turkish economy heading towards a crisis." The columnist forgets to mention that the Turkish lira actually has appreciated against the currency of its largest trading partner, the eurozone, by 10 percent in the last year.

The second graph illustrates the Turkish lira appreciating against the Euro in the last year. Where was this graph in that article? Why no mention of the way 169 of the world's currencies that have depreciated against the dollar? Is Erdoğan's criticism of the CBRT responsible for the fall of the British pound and the euro? Were his words so influential so as to cause the Canadian dollar to depreciate against the U.S. dollar by 25 percent in the last year? Or is global dollar strength giving anti-government newspapers the opportunity to mislead their readership? Columnists like myself, express their opinions, which everone is entitled to, however blatant omission of the most important facts is not fair to readers and "journalists" doing the bidding of their boards should do a better job at concealing their biases by injecting some facts now and then.