All FX Forecasts Are Out The Window, Kalen Says

don't forget this. If they have got dollars, we have got our people are right? Are all state media quoting the President as saying that coming from President Urduwan overnight and driving some significant weakness and a fragile global market joining us to discusses. Mark Chander Brown Brothers Harriman, head of Currency Market, morning to you. What a morning. Your thoughts on Turkey please? Yeah. So, I think that there's really Turkeys in the between a rock and hard place.

I think there's three possible courses of acting for them, and none of them are very good. First, Turkey could make a bold announcement, and that would be to regain investor. Conference has got to return to the orthodox policies that the investors. That goes with money value and that is giving back the independence of the central bank, raising interest rates sharply, curb inflation, slow down the economy, to bring the current account deficit back into closer balance. They don't

want to do that. Let's talk about management. Mark the president Urdwan set to speak in the next hour, what kind of words does he need to drive towards an international audience? And the policies you talk about the central bank, what kind of policy do you want to see at five dred basis point move on short rates? What do

you need to see? Well, I I think to regain confidences can't just be about interest rate because think about what's happened plunge in the in the Turkish era, there's no level of interest rate they will compensate and invest it for say a ten percent slide in one week. The kind of overnight interest rate they have seventeen and three quarters percent, that's an annualized rate. We talked about a currentcly as plunging ten percent in the past week.

So interest rates aren't you enough. They've got to change policies, but they could also impose capital controls but capital controls are temporary measure just to buy some time to do the right things. Alternatively, they could go to the I m F, but the IMF will demand conditionality which they cannot accept because it requires the return of the orthodox policies. So I think that Turkey is fighting a losing battle, and I think the Turkish there is gonna have to

weaken further. Maybe you know we we we said we test the sixth level today after moving about five earlier in the week. I think we might not be on our way towards seven. And then I think then the sort of the crisis mentality default. And this is why you've got the euro making new new loads for the year today and the dollar making new highs for the year as well, and reports coming out of Turkey suggesting that the president now says Tom that Turkey is to

prevail in economic warfare. The lyra is prevailing right now. We had to spake up almost touching six. John the last time we were at six lera per dollar. I'm eyeball on this with the official surveillance mouse. And Friday was four fifteen a m. New York time. Yeah, I call it three hours. We've never seen this before. Well, well, we've we've had a better tape over the last two or three hours and had abruptly reversed off the single

headline we see at seven zero zero. For anyone not familiar with the situation in Turkey at the moment, in terms of the management of the situation, it is the equivalent of President Trump putting Jared Cushner in charge of the Treasury. That's what's happened. It's the son in law running the treasury in Turkey, right, It's very hard. It's the equivalent. It's the equivalent of the president pushing out j power from the Federal Reserve and running monetary policy himself.

I mean, that's how crazy the situation is in Turkey. Here in the United States that isn't familiar with how bad the league this is being managed. And Mark Chandler, there's a real question coming from from Financial Times reporting this morning suggesting now that the ECB is concerned because there are several European banks with exposure to loans in Turkey and those loans are paid in what foreign currency? Does it become a little bit of a problem around

the corner. How close are we Mark Well, I think that Uh, the e c B is there, so it's watching things. And we're not talking about systemic risk in Europe. We're talking about a handful of banks with substantial exposure that the most Uh, this is not really effecting the outlook for the European Central Bank monetary policy, which you know is they've indicated not going to raise interest rate for another year. And so of course, the pressure on

Turkey it's part of the end. The pressure on the euro today, it's part of a larger picture of this divergence. It's been papering the dollar. In any event, the reason we can make new loans in the euroityas because you're so close to them yesterday, in the day before, in the week before. Mark within your study, and we should point out that Mr Chandler has written two very thoughtful

books on the astronomy of the political economic system. I don't think we understand mark interest rates and what that does to a society. How does the society work in a I'm going to guess ten real rate or twelve percent inflation adjusted rate. Yeah, and I think I think

you have a right question. I think this is a really the lemon, not only for Turkey, but the other countries and remindine of what Thomas Friedman, his book about the Electors and the Oil Tree, talked about many years ago, and that is that given the mobility of capital, many countries are have the golden street jackets, which they do not pursue orthdox policies, they get punished. And this is

what spurs people like Aerogan's nationalism. It's it's it's sort of a battle between piecing investors during the orthodox policies, but at the same time the unorthodox policies they're gonna are leading to high inflation, is going to lead to the weaker economy. It's the people are gonna win. Okay, But but mark, I mean, I mean, folks, it's a log hyperbolic chart. I'll put a whole bunch of charts out today. I already put one out on standard deviations

in Turkish Lira. Let me cut to the non mathematical angle. Are we on the edge of Zimbabwe here? I think it's a bit earlier to say that. I think that Turkey is a much more diversified economy, much more integrated economy. But I think that's in the bigger scheme. Do I think you're right? That we need to worry about is just you know, many years ago, the EU has made it clear to Turkey in many different ways that it's not really going to be welcomed as an EU member

anytime soon. So Turkey's future it's been turned away from the West, even though it's a NATO member, And so that leaves it with allies that we personally don't like. We in the US don't like Russia. I ran, where else is Turkey going to look towards future? And I think that the geo political issues here are probably a bigger, longer laughing than the economics. Mark Chennith, thank you so much.

With Brown Brothers hereman greatly appreciate that. Away from his desk and his advisement to Brown Brothers and Herriman clients as well. For four minutes, folks, we've got to do the most important interview you will hear into the weekend on TESLA. This is Teresa Goody. Formally, of course, we're the Securities Exchange Commission. She was personal counsel to Chairman Pitt in Washington and she joins us now in private

practice with her a Goody group. Teresa, thank you so much for joining us under uh this incredible news flow that we have. What is Mr Musk's decision point this weekend? What does he need to do and think about to stabilize the Tesla story? Well, thank you for having me.

And what he needs to do is find a way to assimilate all of the information that he has, to show that all of his tweets were true as I mean that they are true, and make that disseminate that through the customary ordinary means of disclosing information to your shareholders into the marketplace through an eight K, through press releases and get all this information out to the marketplace.

Mr Musk needs to clarify everything. Tesla now has a duty to clarify everything and just put full accurate information out there as to whether or not this offer is going forward, whether it's true statements and um and and the company has this has a duty now to do that as well. Theresa, two more questions if we could, before you're busy at work day, what should be the response of the board and particularly more visible board direct

board of directors such as James Murdock. What is there to do list in a conference call during this Friday. I think that they also need to find whether or not everything that he said was true. And I think they also need to talk about using Twitter to disclose this type of information. You know, I've heard a lot of people reporting out how Twitter and social media has been okayed by the SEC as though it was unqualified. When the SEC came out and said you can use

social media, it was very qualified. There's a rigorous analysis that that goes under that has to be undergone before you can put that kind of information out. So the board needs to be talking figuring out why this happened, why he came out and said it this way, Did it with the board actually approve this. I don't think that they did, but they really need to find all of the facts and circumstances around this and get their arms around it, and then they need to get it

out in the marketplace. So it's a one more question if we can within the crushing news slow this morning. The criticism of your SEC when you work there was always you guys are too slow, too slow, too slow. Defend the Securities and Exchange Commission process. The process is going to be a little bit different in this case because my understanding is the was already an investigation under way, in which case they are broadening an already existing investigation,

so they can much move much more quickly. I think that maybe one reason why we've heard reports that they've already the SEC has already been getting information out, requests out there, and they've already started this inquiry process. Because usually the SEC has to start with it's a more slow process to start and there's a lot of checks and balances that take place. But this has been able

to move more swiftly. So a full investigation that is fair and takes into consideration all of the many different rules that are that are taking place there that are in play here, as well as everything that's taken place and all of the facts. It takes a while to go through that, so any investigation is going to take considerable time. But I think they're moving very swiftly in this case, if they indeed have already requested information. Well,

Teresa Goody, thank you so much. Under huge news slow this morning course formally with the Securities Exchange Commission working with your pit and now are their company and consultancy in Washington, Finance Minister of Turkey talking about budgetary discipline structural reforms and then as lera weakened. He moved over finally to what people want to know, Megan, which is an anti inflation fight and GDP growth not alternatives. How

do you do, Megan in your textbooks? How do you do an anti inflation fight as non alternative with an imploding crisis? Yeah, So the the only way to get out of this this what is it now currency crisis is to high rate massively. That is the only way, and then accepts that you're going to go into your recession. Um. And everyone doesn't want to do that. Um. And I

don't really see him betting on that. There's some talk about, you know, Turkey maybe going to be I M s instead, but the I M s going to demand the same thing, so absent that, UM, I don't know how Turkey gets out of this. Um. Certainly what the finance minister has been talking about sort of his philosophy is not what investors are looking for. I think they want to see talk of race going up, but I think they'd also

need to see some personnel changing. And and to be honest, you know son in Law as Finance minister would be a key candidate to change with your with your London background, your a student on the allies of Turkey, who is Mr r to Wan's friend in Europe. So there are a couple of smaller European countries that he's trying to cozy up to. But in terms of real players with real money, UM, you know, he who he would need on his side would be Germany probably if he's looking

for any real backstop. Relations between Germany and Turkey have have been following significantly. Um. I would say though, that Turkey does have one card to play with Europe, and that's the refuse d deal that was struck a couple of years ago. So Turkey could say, look, I need more money if you really want me to stop refugees at our border rather than opening the Flight eight because it would pose huge problems for America in particulars he

did have refugees start flowing into Europe. Our relations with Turkey are not good at this time. Exclamation point finishes the President's tweet on sanctions, and yet that folds into political economics and the knock on effects. What are the knock on effects to London into the European economies of this US Turkey tension. So I think they're not going to affect for the U S and Turkey tensions is

just a general rejiggering of um of allies. So Turkeys now actually posing up to Russia UM and Iran potentially, So there's there's just a total re of UM who's actually an ally of who? And of course that's been called into question. UM move noticeably by Germany with respect to the US, right, we're not obvious allies anymore. So I think there is a redrawing that map if you're just joining US. Megan Green with US of Manuel Life. Let me do a data check and Jonathan helped me

here with the repeat of the Trump tweet. First on the data negative thirteen down future SMB futures earlier, we're

negative sixteen. There's a true stability within the risk off versus UH Turkey and you see that in yen one eleven point zero zero did not strengthen off of the Trump tweet, as we see Turkish lyra at six point to four and it has gone through the early two am weakness is well, gold doesn't move all that much, and I'm watching the German two year yield moving more negative hours ago and right now with some German to year yield stability. Jonathan review that important tweet again that

was market moving. Well. Basically, what it boils down to is the President of the United States has authorized a doubling of tariffs on Turkey steel and aluminum. Let me read you the direct tweet. I've just authorized a doubling of tariffs and still an aluminium. Megan Green says, I have to say aluminium, even though the President wouldn't say that with respect to Turkey, is their currency. The Turkish

lira slides rapidly downward against our very strong dollar. Goes on to say, our relations with Turkey are not good at this time, so it's almost like fire can of gasoline. We're going to continue to follow this, but with Megan Green, we must divert to her Financial Times essay of the other day, which Megan really really plays into asset management in the bombshell from Fidelity of a week ago that they will offer a set of funds fee free that are index funds. You have studied our wave of passive

passive investing in its effects, discuss that please? Yeah. Sure. So we've had a huge change in market structure over the past decade towards passive investing and that's index funds ets, but also kind of AI quant funds. And what all these different funds have in common is they're completely priced agnostics. They don't care about fundamentals at all, so they're not waiting for my analysis of CPI data today to trade. For example, they don't care why markets moves. They've just

cared that the view. And there's a huge piling on effect. When a strategy works, everybody jumps into it, or when a stock goes up, all the EPs bloat up on more of that stock, and so stocks that are doing well get disproportionately bought on the way up. But that means that on the way down the will probaly just be distently solved and there will be a liquidity crunch. I think in a downturn, let's go math thee here.

If they go up and they go down, is it a symmetric dynamics like a Bell curve or a Gaussian space, or there's some log normal joys here that makes going to own more painful. So I think in good times they provide a lot of liquidity, but in in bad times, I think it might be symmetric. Actually, they provide as bigger risk to liquidity um as they as they contribute to liquidity on their way up and and the impact

is that on growth so is much bigger. If you get liquidity crunch, It's not clear who's going to step in. Is it really going to be thanks who are being a market maker when times are good? I'm not sure that they'll be willing to or if they can. So if you get a usual liquidity crunch, UM the FED could maybe step in, but that could have huge impacts not just on the markets, but on economic growth as well. So if we get the start of a downturn, UM

funds could really exacerbate it. Megan twenty seconds. Can the Red Sox sustain seven D baseball? Yes, definitely, thank you as long as I keep going to their games because they keep winning when I'm there. That's very good Beggy Green, thank you so much for that, and we say good morning Boston one of six one FM. She is with Manual Life, which has a nod to a firm called Johnny Hancock. I should say in Boston as all Josh

Brown's wisdom is perfect to speak to. Phoenix Kalin, a suck gen right now is expert in emerging market Phoenix to Josh Brown's wisdom there, why are we so upset about Turkish lira if it's so small? Well, I think still in terms of the debt markets, it's quite sizeable, and a lot of investors have exposures to Turkish assets, both on the currency side, equities and across six income

as well. UM. And I think more importantly, it's it's very strategic to the whole global security infrastructure in terms of you know where we stand in the US versus NATO and our relationship with our our European peers, and so it's plays such such a regional UM, it's such a regional critical importance to that infrastructure. What is the symbolism of seven lira per dollar? We're spiked out the six point eight seven, we've come back since you started

talking Phoenix Kalen single handedly strengthening lira right now? Is there a big deal to seven lira per dollar? There is UM. That's typically the level at which the capital adequacy buffers of the Turkish banks get eroded to the minimum required levels UM, and so they'll run out of capital, they'll need to face UM lots of considerations around what they'll do to protect capital and that means cutting dividends, that means curbing lending appetite UM, and that can accelerate

the economic um contraction in Turkey. Yeah, one nine yen strength, the down negative one sixty seven, SP negative sixteen, the VIX moves a stick in thirty eight one point three eight points twelve point six five Phoenix. Does this mean that Turkey's gon I have to pay a visit to

the International Monetary Fund in Washington? Well, I think that is one possibility, but it does not look likely because well we've seen already that the US has UM is trying to pass a bill through Congress to UH restrict Turkey's ability to access international financial institutions like the I m F or the World Bank or even the e B r D. So I think the vito's power that the US has is quite imposing, and they can place a lot of conditionality around any I M S packages

that might be eventually awarded to Turkey. And I don't think that's a pallorable situation for for the Turkish population. Does the decline in the Turkish lira affect other emerging market currencies? Oh, certainly, today we are seeing some contagion across markets um or across Russia, across South Africa, so the dollar block is getting disproportionately hit UM. But overall, the amount of linkages that we have seen over the past several months between Turkey and the rest of em

has has decoupled. Essentially, it's it's weakened, so there's less contagion than we might have experienced in years previously. So that's of some comfort to emerging market investors any opportunities in emerging markets as a result of today's sell off in the Lira, so I think we're we're seeing um a lot of valuation dislocations in places like South Africa.

I think that's still a very attractive place to invest in, especially on the fixed income side, if you hedge out your currency exposure, especially given the kind of normative economic policies that the Round Process administration is trying to put in place. Within all of this, everybody has to regroup what's going on right now as we right for the weekend in e M strategy and what's going on right now in global wall streets, e M desks. I mean, is there a lot of sweat out there? Are people

worried about red Sox Yankees what's going on? Well, I think what we've seen today with President air to one speech and with m President Trump's tweets in retaliation is is a lot of further posturing. I think there's still a lot that we're not not seeing behind the scenes in terms of still diplomatic channels seeing open and further negotiations. Are you are you you know you're you're one of the sophisticated trades as you just discussed on South Africa.

Are you constructing trades today? Are you going to take it early lunch? I mean, what's the action that pros do on a day like this. On a day like this, you have to sit back and watch all the forecasts go out the window. It's not a time to It's not a time to put on trade because you're the moves are magnitude order magnitude higher than your stoplasses. You

can go to lunch with kid chooks, right, Phoenix. If, as you say, the decline in the Turkish lira will affect other emerging market currencies, or at least some of them, are there other emerging market economies that have similar structure that would be affected because they cannot repay their dollar denominated debts because their currency is fast devalue against the US dollar. UM. A lot of the places where there are vulnerabilities, UM. You know, previously we would talk about

the Fragile five for instance. UM. A lot of those places have reduced their external vulnerabilities dramatically over the past five years, UM, since the Taper tantrum, and they've made a lot of progress. So I think you know, there are a few places remaining, like Turkey, Argentina where these these vulnerabilities are still high in persistent. Phoenix, Thank you so much, Phoenix Kalen, where this sarch on this morning,

very very valuable as well. Word we are thrilled to bring you as we just spoke with Phoenix Kalen of her colleague and crime Kit Jukes, who has seen this before. Mr Jukes, we have a certain ancient to us were you and I have seen this? How correlated are we

right now? And what's different this time? UM? Well, I guess you know, if if this is the biggest single day move in a I mean a major traded currency and TA does get traded since since probably two thousand and eight, I can't I can't think of an alternative candidate. And if I look at in that sense, Um, this is still while it's getting a bit more correlated at the moment, it's it's still less correlated than we have been used to you and I over the over the

last decade. So um, much of all sorts of assets are looking as if, um that they're correlating, and stalks are down and volatilities up. In the end is strong, and gold prices are higher on the dollars strong against everything including the euro. Much as though a lot of that is going on, Um, it's still less correlated than than you would have thought. So that that's you know, look at it as it is on the day. One

of the things is different. And I've got a chart up, folks of Indonesian rupea back a zillion years, and I'm going to do a bloomberg percent change on this and long ago and far away. In the course of a week or so, we enjoyed a hundred percent weakness in Indonesian rupia from out to um, excuse me, in five fifty seven percent weakness Indonesian rupia, we didn't have the President of the United States piling on kit. How critical is it the press? And Trump chooses to pile on

a Turkey flat on its financial back. Well it you know, it makes it, it makes it more personal in the eyes of the market on both sides. The You know that some of this is there's an underlying economic problem with the size of the current account deficit, that the need to reassure foreign investors that you're not going to slap on capital controls and that you are going to run a credible monetary policy to encourage them to finance

your construction industry. Um. But but some of it has become You're not personal, but it's become a spat between two countries and two leaders with neither side wanting to um wanting to to give in at this point in time, and that just leaves I think investors in the middle

feeling extremely nervous on that specific issue. Kit Chukes, with your experience, can you describe what it would be like in the meeting rooms of b b v A and Unique Credit and BNP party bar today there are among some of the biggest lenders to Turkey in the European Union, I think today for anybody, for anybody implicated, and part of the problem is, you know, again, when when you have a fiftcent moving a currency on a day, and you know that, you know that the response maybe a

maybe a very aggressive interest rate rise, although the hints are not that way. It may be just to kind of tough it out for a while and hope it's okay. Which hasn't gone well today. Um, you know, what do you do before the weekend? You can't necessarily do much.

There's not many things. You know, in the past, if we if we went back to the taper tantram that the fund managers who were concerned about was what was happening as that started that they sold other emerging market currencies, if you remember, in two thousand and thirteen, to get some kind of a partial hedge. So so wherever it started.

Once the bond market was selling off in the US, people started selling Brazilian rail, South afric and Rand, Turkish rror then as well, but they chose the big liquid emerging market currencies and sold them across the board. So in a sense, at the moment, the people directly affected with this, they have a problem, they have a problem with with assets in Turkey and they it's not entirely clear that there's a really clever hedge by going out

and selling the rand. So the rand is down, but it's you know, it's not keeping up on the rands down two point seven percent on the day that that's a seventh of the move in the Turkish lerror. Does the fact that Turkey remains a member of NATO and that it is involved in political and military issues in the Middle East? Does that complicate the ability of an investor to figure out whether their investments are money good? Um, I'm not sure it complicated me does lots of complicated bits.

And certainly if if access for Turkey to the large international institutions gets limited, and that complicates it if if you know, I'm not you know, Turkey is politically important, are politically important, It's economically important, um, both in the region, and it's it's a it's a player. So there are there are huge complications out of a deepening spat between

Turkey and the United States. Um. But for for someone who's for someone who's got money at risk in the country, um, you know that they're trying to work out what they can do to hedge anything. And actually on a daylight to day the answer is not necessarily a great deal. Can you if you don't take that. You don't have the courage to take a position on Lira weak or short? Can you go to other currency pairs to take a position or is it just so risky you don't I

think people are. I mean, there is clearly some contagion. Everything in Latin America is down this week now, and it's the big liquid one. So Brazil is down, Mexico, which has been very popular, down the rams popular. But you know, don't look too much further and say this is why we've taken Europe or through one fifteen and we're driving it. We're driving it down. There was a technical level in place. There's a head and shoulders formation

to push and the market is pushing. Okay, well you gotta go back to Sterling here because you've been so kind to be with us in your London afternoon arsenal, Manchester City. What is it this weekend? Kid? It's a Sunday four pm my time? Are you like a gold level guy? Like are you down, you know, like throwing the ball in let's sit on the countdown or are you up in the cheap seats? I'm I'm in perfectly nicely. Thank you very much. Oh my daughter this weekend. Oh

with your daughter? Very good? Are you gonna feel more brokenfied there? Because Sterling is at one I've I've seen Sterling go up and down against it. I'm still more concerned about what's happened to Sterling against the Euro. But I'm frankly right now I'm going to be looking at what's happening to the Euro and worrying that I might see I might see Sterling at one twenty five next week. If you're at allar break through, what does that mean

for U K society with a one euro? Literally in terms of not moving to I think it's going to um. It's going to principally make this a place. Whether we have a huge number of American tourists and found at the moment, I'm all of them getting rained on today, but this will be tourists full. I will probably have American friends arriving on planeloads asking me if they can come and watch the best football team in England. Okay, what's what's your most important bet right now? What is

your currency pair? This is a pin fox question. What's your currency pair of great interest? Right now? Mr jukes Um, they're all a bit marginal in the sense that I think we're supposed to be long again against things like the Korean one because this this this volatilty will pick up at this point. I think we're supposed to be short the pound against things like the Swedish crona or the Norwegian chrona, things that have been held out by the Euro but but are not the Euro. They're the

same political provinces. Thank you to you and Phoenix Kalen for making a smarter today from society General Mr Jukes, who provides wisdom and well have they pim like seriously hugely anticipated early Monday morning note for all Bloomberg US investors ye thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom

Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio