Global Agenda: Cold turkey

The global market shake-up continues this week, with the real bloodbath happening, as always, in emerging markets. And as usual, herd instincts are out en force.

financial graph 88 (photo credit: )
financial graph 88
(photo credit: )
The global market shake-out discussed here last week is still very much underway. Trading in most of the global financial markets has been exceptionally volatile this past week, with massive swings in both directions, even in larger, developed markets. But the real bloodbath has been in the 'emerging markets' - as usual. Within this global mayhem, the Israeli media has been focusing for the last couple of days on Turkey, because one of the biggest and savviest businessmen in the country, Eliezer Fishman, has lost a packet of money speculating on the Turkish lira. Fishman is a remarkable person and a truly amazing business story, but that's for another time. Suffice it to say that in addition to being very smart, he is also - and this is much rarer among tycoons - a genuinely nice guy and an extremely generous person. He is also extremely rich and, therefore, able to indulge in what is clearly a personal obsession, namely playing the currency markets, big time. Over the years, he has scored some major successes. For instance, he was one of the first to grasp the opportunity in the mid-1990s of financing his activities in cheap and depreciating Japanese yen instead of expensive Israeli shekels. But in that kind of activity, even if you win more often than not, you also lose some - and when you do and you play on his scale, you lose big. However, Fishman has two big advantages. First, he can take his loss whether it turns out to be hundreds of millions of dollars, as the rumor mills claim, or merely hundreds of millions of shekels. He may have to sell some assets to cover that loss, which would surely be painful, but far from fatal. Second, he knew what he was doing and what the stakes were. That's more than can be said for many of the other fools now being parted from their money after another brief and disastrous fling in the dangerous arena known as emerging markets. In these situations, which recur at least every few years, I always recall a quote in the Wall Street Journal in late 1994, when the 'tequila crisis' broke and the Mexican currency collapsed, triggering a bout of global contagion and, yes, an emerging market crisis. In an interview, a New York money manager was asked why he had been caught in the crash (with hindsight, these collapses are always obvious). He must still have been shell-shocked, because he had no reply but to admit that "when we went in [to Mexico] we didn't know why we were going in, and now we're getting out, we don't know why we're getting out." That has got to be the best and truest description ever of the herd instinct at work in the financial markets. The so-called professionals should have seen the writing on the wall - in Mexico in 1994, in Russia in 1998, in Argentina in 2001, and now in Turkey, India et all in 2006. But they are always blinded to the blindingly obvious by the twin bugbears of greed and hubris. Greed - because they are making such high returns in the boom that precedes the crash; and hubris, that they will know when to get out, just before the inevitable crash occurs. The lucky few do get out in time but, by definition, most investors don't. Among small investors, virtually none escape in time - either because they don't know they were there in the first place, which happens when their pension funds put their money in, or because they knowingly bought mutual funds and ETFs giving them exposure to high-risk investments, but they came in toward the end of the boom, just in time to be clobbered in the crash. That is what has happened in Turkey - a country with a long record of periodic crises, but which has seen tremendous economic reforms in recent years. The former aspect is the red warning light, the latter the green light beckoning those willing to believe that most dangerous of all siren songs: this time it's different. Other markets and currencies, from South America to East Asia, have also been hammered. In almost every case, it's just variations on the standard themes. Thus, for the last year, the hottest thing in financial markets has been 'BRIC' - Brazil, Russia, India, China. These four totally different countries and economies were packaged together and sold to the unsuspecting public by the combined power of Wall Street and Madison Avenue - and their peers in every other developed economy, including Israel. As always, what was really hot simply evaporated, leaving rueful speculators with a pile of bric-a-brac, swearing to go cold turkey on emerging markets. Until next time.