“The countdown to the downgrade of Israel’s credit rating has begun,” declared Avi Tiomkin, a hedge fund consultant, in an interview we published in Globes in January. In the six weeks that have passed since then, the dollar has soared against the shekel, and yields on Israeli government bonds have risen sharply. At the same time, the legal revolution continued to advance, there was chaotic conduct in the budget debates, and this week the territories are also on fire. The downgrade scenario Tiomkin talked about seems much less far-fetched.
● The risk in Tel Aviv has increased: corporate bonds of approximately NIS 20 billion with a double-digit yield
● Investors are looking for signs of optimism, but the bear market is not going anywhere
● The upheaval in the foreign exchange market: what are the chances that the Bank of Israel will intervene and what are the consequences?
But Tiomkin, for his part, is already talking about even more far-reaching scenarios. The analogy he chooses to use to look at what is expected of the Israeli economy is that of Turkey, a country that in recent years has seen a collapse of the exchange rate, and a dramatic jump in inflation. Turkey, according to Tiomkin, is the “ultimate equivalent” of Israel.
The interview with Tiomkin was held at his home in the village of Shmariahu. On the library shelves are photos of him with former US presidents Bill Clinton and George W. Bush, and also with Yitzhak Rabin. “In total, I advised and was involved in funds of close to 50 billion dollars,” says Tiomkin. Among other things, he was a manager of the caxton hedge fund , and a consultant to the Brown Howard Foundation. “My main concern is with global economic processes. My great ability is to predict significant changes in direction.” And as mentioned, he recognizes such a moment in Israel today.
“Everyone compares to Hungary and Poland – and they are wrong”
“All comparisons to Hungary and Poland are significantly lacking,” Tiomkin opens his analysis. “Both countries are members of the European Union, and despite the pseudo-democratic regime, their dependence on aid from Brussels is dramatic, especially after the corona virus. Also, the regimes in Warsaw and Budapest have no religious dimension, or theocratic ambitions.
“The parallel example to us is Turkey, and that’s why I say ‘Turkey is here’,” he says and details the similarities he finds between Israel and Turkey, as well as between the heads of state.
Before his appointment as president, in 2014, Tiomkin says, “Erdoğan was a successful prime minister and led Turkey from a low level to a high economic status. In 2014, with his appointment as president, he began his journey to take control of Turkey, taking advantage of a kind of one-day military coup (in 2016, AP), while abandoning secularism, undermining democracy, widespread layoffs in the army and the police, mass dismissals of judges and strengthening the government bureaucracy,” Tiomkin describes the course of events, which later included the transfer of executive powers into the hands of Erdogan as president.
“Of course, the results and consequences were dramatic. The currency depreciated from four Turkish lira to the dollar to 19 today, almost five times. Inflation rose from about 8% to 90%. The bond rating was downgraded to junk bonds, and the long-term interest rate rose from 6 % to 24%. While the prime interest rate peaked at 25%. Turkey’s currency reserves were wiped from 150 billion dollars to almost zero.”
He details these data, Tiomkin explains, “because almost all the media and all the economists and all the experts and all the commentators fell in love with the comparison to Poland and Hungary. But in practice this is not true,” he says, turning to Israel. “If the rush to a coup d’état is not stopped, the economic blow we are about to take will be severe and irreversible. And here are my predictions: the shekel exchange rate will reach between NIS 7 and 10 to the dollar. Inflation of at least 30%. Interest between 10% and 15%. Loss of balances Israel’s currency. Downgrade to junk bond rating. And restrictions on transferring capital abroad.
“There is no doubt that Israel is facing an attack on the shekel, both by foreign investors and by speculative parties, but the most dangerous factor is the departure of the local population. There is no force that can withstand this,” says Tiomkin, and also explains that central banks that try to support the local currency rate Create buying opportunities for investors who want to bet against them. The result is a “rapid loss of foreign exchange reserves.” And beyond Turkey, Tiomkin points to a series of other cases in which the local currency registered a sharp depreciation, including Thailand, India, and Russia.
“The Bank of Israel, in my opinion, understands this. Of course, all these processes will lead to a very heavy recession in Israel, and a wave of significant unemployment. 10%, 20%, they are slow. This is a type of crisis that is so deep in the sense that all the concepts we grew up with are going to be completely overturned.” . To all this he also adds Israel’s departure from the WGBI global bond index, and a danger to the stability of the banking system. “Complete transparency,” he adds, “I have no speculative position regarding the shekel point. I sold all my holdings in the bonds of the State of Israel already in January, when I said here we are starting a process that could mean a downgrade.”
You are hitting very specific numbers. How do you reach them?
“I took the other currencies and considered what happens when there is a crisis of confidence of the population in the currency, and when there is a public withdrawal from the currency and the financial investments of that country, and I extrapolated. It is clear that this is not an exact science and you cannot make graphs, and between us, what does it matter if it is 6.5 (shekels to the dollar) ) or 7.5 or 9 or maybe more”.
And when you talk about 30% inflation?
“Once again, this is a kind of extrapolation. I estimate this way: if the currency depreciates by tens of percent or a hundred percent, the effects on import products will be dramatic, and then the impact on all business activity in Israel will be such that it will accelerate the inflationary process, which to a certain extent already exists Today – we are at 5% (inflation).
“You have to remember that in processes of this type, until it happens it takes longer than you think. And when it happens, it happens much faster than you think. It is much more difficult to get from 1% to 4%, than from 4% to 20%. This reality happened in other countries.”
Erdoğan, Tiomkin’s secretary, replaced central bank governors one after the other, and also appointed his son-in-law as finance minister. In Israel, too, he recognizes a dynamic of appointing “people of our peace”, such as the idea that was tested and abandoned, of appointing the Director General of the Prime Minister’s Office, Yossi Shelli, as acting head of the CBS. Netanyahu’s promises to maintain the sanctity of the Bank of Israel’s independence are dismissed by cancellation.
“Foreign investors know what happened in Turkey”
When the governor said last week at the cabinet meeting that the markets can behave non-linearly, and the chief economist says that a snowball can start, how do you interpret these statements?
“I interpreted them in terms of numbers. They have official positions and cannot say that. They do not want to be the ones to be blamed in the process itself. But such serious warnings from such positions I do not remember hearing in Israel almost ever, since (Finance Minister) Yigal Horowitz who said Crazy people, get off the roof’ (in 1979, AP)”.
Tiomkin, who in the past sharply criticized the Bank of Israel, and also received an extraordinary counter-criticism from the bank, now compliments Governor Prof. Amir Yaron. “He comes, says, expresses himself and convenes the emergency committee” – Tiomkin refers to the committee for financial stability, which the governor convened unusually last week. “I wasn’t a big follower of his and he wasn’t mine either. But he acts very wisely and very carefully. I’m sure he doesn’t sleep at night because he’s at the front.”
You described ranges of results we can reach. What time frames are we talking about?
“If the process that is being carried out in front of our eyes of the regime coup is realized – this process will happen during no more than the next one or two years.”
What is the probability of the realization of this scenario?
“One hundred percent. Absolute probability – there is no way it won’t happen if the current process is not stopped.”
Let’s say we stop now, establish a committee to find a broad consensus, which will sit for a year. Where does that put us financially?
“There will still be enormous volatility in the financial markets, the weakening process I talked about will continue, not so aggressively but more slowly. The same goes for the downgrade, the devaluation of the currency, the rise in interest rates, and the economic activity. You hit the base. You broke a model that said ‘Israel? It can not be'”.
You focus on spending citizens’ money, which is the more dramatic process. Still, could you put me in the head of the foreign investors?
“Foreign investors know what happened in Turkey. What happened in the Asian crisis. Foreign investors hear the voices from here, understand the type of process. Look at the headlines of the New York Times, and the Wall Street Journal, about how the Startup Nation is in danger. They say to themselves ‘In terms of risk/opportunity, why should I take the risk?’. Add to that the fact that the whole world is in the process of recession and moderation in economic activity – and then they say to themselves ‘Why should I be here? Why should I keep my money here? What will I explain? To my board if, God forbid, something happens?’
“Already today, there is no doubt that S&P, Moody’s and Fitch are having emergency meetings about what to do in terms of downgrading. It may be that the first reading will be enough for them, it may be that they need more things to happen, but there is no doubt that the sharp words of people like Yaakov Frankel, Karnit Flug , Zvika Eckstein, Larry Summers, Noriel Roubini, create a situation that you cannot ignore. As soon as the Economist and the FT, and the New York Times, but also the Wall Street Journal, which is a right-wing pro-Israel newspaper, put a picture of a demonstration on the front page – This means that the focus on Israel is now becoming something central.”
“I don’t remember warnings from superiors like now”
You mention Frankel and Flug. Did they do the right thing?
“Obviously. It’s like if you are the chief of staff or hold a senior position – you are sinning against your duty and your national responsibility if you don’t present things in all their severity. Especially when they were governors of the Bank of Israel for such a long period of time and have such a high international status, and there is no disputing their professionalism in the field. And it is a fact that they felt this need. It shows how deeply the understanding of what is happening has penetrated.”
On the one hand, you analyze the situation as you see it. On the other hand, I assume you don’t want to start a run to the bank, and don’t want to contribute to increasing the dynamics you describe.
“Let me say a sentence from the neighborhood where I grew up: ‘The mother who will give birth to the son who can have an impact has not yet been born.’ .
but still?
“They will say one more time, ‘Tyomkin with his prophecies, a broken clock.’ Turkey”.
I understand that you are one person who cannot affect a global macro, but we are talking about crowd psychology and yes you can contribute to it.
“In this sense, Frankel’s effect is a hundredfold,” Tiomkin refers to the statement of the former governor, who also held senior positions on Wall Street and the G30 forum, “and that is why I so respect and appreciate what he did.”
Stands behind predictions, despite missing in the past
Tiomkin is proud of the forecasting ability he has demonstrated over the years, although as he also admits, not all of his predictions have always been correct. I dwell with him on one specific forecast, which he detailed in Globes about six months ago, according to which at the current stage the US was already supposed to be in recession, and the Fed was supposed to lower interest rates. In practice, inflation in the US is higher than forecasts, and it seems that more interest rate hikes are on the horizon.
“The inflationary process is on a very clear trajectory below,” Tiomkin answers when I ask him how confident he is in his predictions, and mentions the declines in the real estate and automobile markets, and the layoffs in high-tech. “It’s happening, a little more slowly. And don’t forget that until March of last year he was still pouring money, and the interest rate was still zero. When the factor in the classic models is a year to a year and a half (until the interest rate starts to have an effect, AP). In my opinion, within two to three months the annual inflation rate will be 3%. We are already seeing a collapse in rents in New York.”
“To me, it’s a tragedy and a lot of people will be hurt”
You mentioned that you sold your bonds.
“I put my money where my mouth is”
Ordinary people don’t have a bond portfolio they can sell. Most of their capital is either in their pensions or in their home. It’s very hard to protect yourself.
“This is a terrible tragedy, because the real result of what will happen here will be social unrest. It will not be related to demonstrating for or against. It will be the result of mass layoffs, of damage to the savings portfolio. This is the tragedy of the matter, that many people will be harmed, their ability to cope or to protect themselves is very small.”
Do people in the business and financial community in Israel talk enough? Do they reflect reality enough?
“It’s getting stronger, because the understanding of the magnitude of the disaster that can happen here is starting to seep into them. It’s hard for you at first to be a flag bearer even if you see or think things.
“And another thing – and I don’t judge them, and they shouldn’t be judged – there are many business owners who understand what’s going on, but their dependence on the government or their dependence on public bodies is very great, so what they express privately they won’t express outside, because… you understand on your own.”