220 THE BiG DROP
pened to emerging markets? They collapsed immediately.
Why is that? It’s because of the “carry trade”. That’s when
interest rates are at zero, and investors say “Okay, I’ll borrow
dollars at almost no cost, convert them into another currency,
and buy local stocks and bonds in places like South Africa,
India, Brazil, Indonesia, Thailand and other emerging markets
that have much higher yields.”
Investors do this on a leveraged basis. That means they
have a low cost of funds, a high returning asset, probably an
appreciating currency — all of which could lead to thirty per-
cent returns on equity.
What’s wrong with that trade? Well, the risk is that U.S.
interest rates go up and the whole thing falls apart. The min-
ute that Ben Bernanke started talking about tapering in 2013,
people reversed the carry trade.
They dumped emerging market stocks and currencies...
went back to dollars... paid off their debts... reduced their bal-
ance sheets and went to the sidelines. It’s a good example of
why emerging markets are not necessarily a safe haven. Think
about the linkages we’ve discussed so far. If you’re going to in-
vest in emerging markets, put in the due diligence beforehand
and don’t go all in.■ istanbul
I recently returned from Istanbul, Turkey. I had the opportu-
nity to meet with a director of the central bank, along with
stock exchange officials, regulators, major investors and one of
Turkey’s wealthiest men, Ali Ağaoğlu, a flamboyant property
developer known as “the Donald Trump of Turkey.”
I also spent time with everyday citizens from storeowners
to taxi drivers and more. Invariably, such a range of contacts
produces information and insights beyond those available
from conventional research channels and buy-side reports. It