Turkey’s Monetary Policy Committee (MPC) recently completed its March meeting. Officials agreed to increase the benchmark one-week repo rate by 200 basis points to 19%. The move surprised markets, with many expecting, at most, a 100-basis-point boost. The central bank wanted to fight consumer inflation and stabilize prices, promising to deliver additional tightening if it is warranted.
Was It Something He Said?
Foreign exchange markets were pleased. The lira, which has weakened over the last month after becoming one of the world’s top-performing currencies, strengthened by nearly 5% against the U.S. dollar. The Turkish stock market (BIST 100) climbed 1% on the news. Governor Naci Agbal, who was appointed in November, had finally reclaimed investors’ and financial analysts’ trust and confidence by adopting a more orthodox approach. It was a welcome change of pace following months of reckless abandon to the Turkish economy’s foundation.
One person was not pleased: President Recep Tayyip Erdogan. A day after the central bank powwow, Erdogan terminated Agbal only three months into his four-year term. But was it simply a matter of time anyway? The former finance minister adopted a different approach to economics than his boss. While Erdogan wanted low interest rates to spur growth, Agbal approved a cumulative 875 basis points in rate hikes since accepting the job in November.
Ostensibly, Erdogan was outraged by a snippet in the central bank’s statement: “…to implement a front-loaded and strong additional monetary tightening.” Erdogan, perhaps looking at other institutions worldwide, may have wanted additional easing – or, at the very least, for rates to stay where they were.
Does this spell the end of fiscal and monetary orthodoxy in Ankara? Will interest rates and foreign exchange reserves slide again? Whatever the case, it should be interesting to see how the lira performs against the greenback and the euro at the end of March. Turkey had recently returned from the abyss. It might head back to the unknown.
Who You Gonna Call? The Eccles Building!
It has already been a year since the stock market endured Black Mondays, falling knives, trading halts, and a bloodbath on Wall Street. March 23 was the day that the market bottomed out and went on a long trip to the moon. With that in the past, the big money is looking ahead, and it might not be pretty. For the first time in a year, institutional investors’ chief concern is no longer the coronavirus pandemic. That was so 2020, apparently. According to a new Bank of America Fund Manager Survey, the market has two new worries: inflation and the Federal Reserve.
The survey revealed 37% of investors with $630 billion in assets under management are fearful that inflation could wreak havoc on the broader financial markets. This is followed by 35% of respondents who are worried that the Eccles Building will start to throw some taper tantrums, an unexpected reduction in monthly asset purchases. COVID-19 and problems with the vaccine rollout were the third-biggest headache for the survey participants.
As a result, investors are adjusting their portfolios. Money managers have reduced their exposure to technology stocks, shifted toward commodities, and added to their bank stock positions.
But are their fears legitimate? While inflation is already on the way, the Fed pulling back monetary stimulus and relief mechanisms is unlikely, even if prices destabilize. Fed Chair Jerome Powell has reiterated time and again, including after the recent Federal Open Market Committee (FOMC) policy meeting, that the central bank will support the economic recovery for “as long as it takes.” The markets will always have a friend in the Eccles Building.
The Debt of Wall Street
What has happened after a year of printing trillions of dollars and pumping the newly-created cash into the financial markets? Companies with no substance are going public. Digital art, known as non-fungible tokens (NFTs), is going for upwards of $2 million. The benchmark indexes are posting record highs nearly every trading day. Everything has turned into a bubble, from real estate to sneakers. But a more troubling trend is brewing on Wall Street: The rise of margin debt.
Margin debt is the amount that investors borrow against their stock holdings, which is monitored by the Financial Industry Regulatory Authority (FINRA). In addition to the red ink, brokerage firms attach interest rates to the borrowed cash, especially for anything less than $25,000, ranging from 3% to 8%. Overall, this is an important metric to determine how leveraged the equities arena is.
According to FINRA numbers, compiled by WolfStreet.com, margin debt surged $15 billion in February to an all-time high of $813 billion. Compared to the same time a year ago, margin debt has skyrocketed 50%. The previous record high was $120 billion. It should be noted that this may not be the total amount, either, since other kinds of leverage measures are not reported.
That said, this could lead to devastating consequences. When stocks crash, brokers will request that clients add more money to their accounts or sell stocks in the falling market. As history has shown, when there is a significant increase in margin debt, the market tanks a few months later. While the Fed has continued to flood the market with cheap money, there is an eerie feeling that the financial colosseum is on the cusp of imploding.
Read more from Andrew Moran.