Push & pull, cycle & trend

► In an incredible way, real oil prices didn’t change much between 1880 and 1973. The volatility smile even remained smooth for over a century.

► In other words, neither the mean nor the variance changed much in an extended period encompassing two world wars. However, this changed after the 1973 “First Oil Shock,” and especially after 2005 when open contracts gained momentum.

► There has been a lot of volatility in the last two decades. It has become harder to estimate oil prices since 2005, and especially since 2014. For example, after the 2014 price drop, investments declined.

► Similarly, the USD/TRY exchange rate volatility has increased a lot since 2008. Furthermore, there has been a secular trend formation: the L ira has depreciated continuously, jumping from one plate auto another every couple of years.

► This has reduced visibility. The increased risk is not onlythe CD S, but also in option volatility trading of all sorts. For a small open economy without adequate energy supplies or a country within sufficient savings,matter. Without them, there can be no warranted growth. Foreign capital inflows have drastically declined over the last decade.

► If warranted growth is high, e.g. 5% or more, the potential growth rate of the economy is contingent upon foreign capital in order to forge ahead and to keep unemployment in check.

► The push factors are normally common factors. Basically, overseas investors’ risk appetite matters. The pull factors range from reserves to growth and value, chasing alpha, and beyond.

► There may also be trend or co-trend factors such as openness, policy consistency, rule of law, business indicators, skilled labour, education, and more. Institutions matter.

► There are times when analysts confuse various factors’ impacts. Trend factors may not be appealing, but international risk appetite might be high enough to compensate for that.

► The basic pull factor maybe the rate of interest or the growth outlook. If pull factors don’t work and structural problems a bound, the only important factor will be risk appetite.

► Another point that can be decisive is the mean and volatility of a country’s risk premium. This bears on its stability or persistence. Some risk profiles can be deemed excessive.

► If the risk process is excessive ly sensitive to smallmaybe problems ahead. In this case, any stabilizing device can help shift from one risk smile to another (less risky) one. The only stabilizing device left is a return to orthodox monetary policy.