Turkey may be the tip of the iceberg
I was watching financial TV on Friday and they were talking about how it was a quiet month with stocks hitting a record and risks low.
Consider this, the worst-performing emerging market currencies since the start of August:
That group of five at the bottom includes EM heavyweights and yet despite a few days of worrying about Turkey contagion, the market has basically shrugged its shoulders.
Trouble is coming.
Consider this, Bloomberg writes about a popular trade among Japanese retail traders:
"Japanese retail investors, for example, are exposed to funds known as double-deckers, which purchase high-yield debt, then swap the income flows from the bond into a currency with high interest rates."
That's insane and something that could easily spark a rush to the exits.
The report doesn't just highlight the instruments investors are using as they reach for emerging market yield, it outlines how legal rights to the underlying assets may be tenuous.
"Emerging-market investment strategies and structures always appear to be safe until you need them to work, and then they don't. Investors must hope that these structures don't come back to haunt them. But there's every reason to think they will."
