Turkey will default, precipitating a financial crisis. How widespread? Temporary. Volatile. Not widespread.
Turkey is a mess. Its lira has fallen 40% this year and will fall further. The Euro also will fall since German banks have lent Turks money they can’t repay. It’s actually already fallen in the last few days. My ATM rate to buy Euros is down from 1.16 to 1.154. Just in the last day.
But, Turkey precipitating a global financial crisis and a major hit to our markets? It’s hard to see.
This is a good time to have cash. Be ready to pounce should stock prices drop big-time. Today is a good day to put in buy limit orders on your favorite stocks at ultra-low prices. Upcoming volatility could snag you some bargains. Try 15% below where we were on Friday.
Previous overseas financial crises all bounce back. And quickly. You can read about them all on Wikipedia.
The common causes of financial crises are:
+ Too much borrowed currency doesn’t bring in many dollars.
+ The local currency drops and drops and drops some more.
The country’s ultimate recovery depends three things:
+ The loans being “restructured” (i.e. a million dollar loan is now a $500,000 loan)
+ The IMF and/or someone steps in with loans and help.
+ The local government steps up and acts intelligently. That means raising interest rates, restricting capital flows and making financial reforms. That’s not the situation with Turkey nor Venezuela — today’s two disasters — whose “management” is blaming their disasters on the U.S.
Venezuela’s total disaster has not affected world financial markets. Turkey is bigger at 80 million people, Its inflation is around 20% — but rising. The Turkish Lira’s loss of 40% this year is huge for any currency. Venezuela’s currency doesn’t exist. So Turkey has a ways to go for more collapsing. More than half the people in both countries (and Iran) wish they had different rulers. But the rulers control the military and enforce their rule harshly — killing and imprisoning their own people.
That’s my simple words and advice. Lots of thinking and lots of reading.
Put in low buy limit orders on your favorite stocks.
Now for some fantastical stuff. Remember Joel Ross? He writes The Ross Rant. Here’s are some excerpts from his latest newsletter (from this weekend):
The black swans are really circling now in the Mideast. There is a very high chance for war on several fronts at once. It is my view that the whole Mideast geopolitics are going to change dramatically over the next year. It will be extremely violent, and when it is over, it is likely the US, the Sunnis, and Israel will be in control. Iran will be driven out of Iraq. Iran will be under a new regime, Erdogan may be deposed, and Russia and the US will have arrived at some sort of modus operandi in Syria so that the risk of confrontation is minimal and refugees can start to return. Hamas will be decimated. Hezbollah may be greatly weakened, or at least left unconnected with Iran no longer there to back it.
Iran will fight to disrupt oil shipping, but the US, Israel and Saudis and UAE will fight back and destroy the Iranian navy and air force. There is nothing China and Russia can do to save the mullahs. The war in Yemen will end with some type of agreement with the Houthis, but with the Saudi/ US backed government in control and Al Qaeda wiped out in Yemen. Destroying the Iran regime is the key to everything. There are so many sparks and flashpoints, that it seems almost inevitable that war will break out in the next week to one year. The current situation cannot go on without some sort of war or revolution occurring, and there is nothing the UN or the EU can do. They are just not relevant in all of this.
I have no information as to exactly what the administration is trying to accomplish with Turkey, but one can speculate. I do not believe the confrontation of this magnitude with Turkey is really about the one pastor. That is just the excuse. Turkey has gone much more Islamic under Erdogan, and has cozied up to Putin. They have created serious issues for the US and its Kurdish allies in Syria. In various ways, Turkey, under Erdogan, has become a major problem for the US and Israel. Related to that, it appears the Mideast is about to explode. Israel is very likely to invade Gaza again, and this time maybe they will really end it, and wipe out Hamas once and for all. Having the US full backing makes a huge difference, as opposed to the resistance to Israel and the Sunnis by Obama who was intent to do the nuke deal with Iran. Nicky Haley will have Israel’s back at the UN this time, as opposed to Obama stabbing them in the back with their refusal to veto.
The current situation cannot continue, and if they do wipe out Hamas, that is a major setback for Iran and allows Fatah to once again take control. That is key to any hope of a resolution of the Palestinian issue. When I was in Turkey, and based on reports since, it is pretty clear, 50% of Turks are against Erdogan, so this time, he might be overthrown by the generals if the economy crashes and he loses popular support. He cannot fight the US trashing the Lira and imposing tariffs which will crash his economy. He might throw the US out of the airbase, but that is no major setback to US military interests. They have many options.
Once the oil and banking sanctions are in place on Iran in November, their economy cannot survive. It is already crashing, and the protests are growing rapidly. This time the protestors know the US is there for them working for regime change, and it is very unlike the situation in 2009, when Obama sided with the mullahs and against the people. Things will get very violent inside Iran by early next year, if not much sooner. If we can bring about regime change in Turkey and Iran, everything in the world of geopolitics changes for the better. The Obama support for the mullahs is over, and now is the moment when Trump can exert maximum pressure to encourage a regime change. The EU still does not get it at all, and continues to try to help the mullahs instead of the US and Israel, and the people of Iran.
… There are direct parallels to the Reagan Gorbachov era, except Gorbachov understood that the Soviets could not compete, and acted to change the world without war. There is no such leader in Iran and Turkey. We need to be prepared for a very uncertain and potentially violent period over the next year. Erdogan and the mullahs in Iran are not going quietly. It is a shame and a real issue that the Dems will resist this effort, and even try to impeach Trump if they get control of the House just as all of this is playing out.
…This will likely lead to a lot more volatility in the markets, currencies and the economy of the EU. However, we have been here before, and the stock market will be fine since the economy is so strong.
No jokes today. Sorry.
Harry Newton, who is writing this blog in the ultra-modern Venice Airport (more about that later). Susan and I are on our way to Copenhagen (where it’s thankfully cooler). We’ll join a cruise around the Baltic, with three days visiting museums in St Petersburg, Russia. This is only our second cruise. My idea is you use cruises to visit hard-get-to places, like Alaska’s Inland Passageway, which was our first cruise.
For more things to read on Turkey and other financial crises:
Click here and here and here and here. and here. and here and here.
Your buy order prices are all wrong. This is a contagion that is going to DESTROY markets and ruin lives. More people will be jumping out of NY City buildings than on 9 Eleven.
Hey Harry
The last thing I’d be doing on a European Vacation is writing a daily blog, especiallly one so lengthy based mostly on using someone elses questionable material and opinions. At least try using a proven expert on geopolitical events and not the usual hacks of financial propaganda.
My heart goes out for Susan. I suspect she finds you quite boring on these trips. Put the damn computer down, play a little and give her a break.
I can’t see the a greater financial crisis than in 2008. Under the otherwise disastrous Frank Dodd bill, our banks are sitting on bundles of assets that are just waiting for something like this to happen so they can show us they aren’t a problem anymore. Certainly we can have a 20% drop in the market and we might be overdue for something like that spurred by a catalyst such as the Turkey situation, but like 2008? I’m not buying it.
I agree that there is a larger backstory happening than the pastor in Turkey, but I’m surprised they haven’t given him his freedom. Then again, Islam isn’t rational, but it is political.
Hey Harry, I’m impressed with your confidence. Buying on the dip is a great strategy until it isn’t. And maybe this time it isn’t. I see nothing that indicates this couldn’t be the trigger for a much bigger and long overdue correction. You might want to read this article in the NY Times about a guy that saw the Turkish meltdown coming and what he thinks is coming next.
https://www.nytimes.com/2018/08/11/business/turkey-lira-crisis.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region®ion=top-news&WT.nav=top-news
Have you placed orders at “ultra low prices” and how low is “ultra low? Do you think you will change your mind if we start to plumb those depths indicating that maybe your confidence in this being “Temporary” and “Not widespread” is not the sure thing you seem to be indicating?
Thanks!
Hey Harry, I thought Ross was an economy expert but now I see he is also Middle-East expert. About 15 years ago the US embraced Erdogan and supported him to power as a symbol of “modern Islam”. The US never understood Middle-East and never will -and believe me Trump has no clue leaving “peace” process to his clueless money hungry son-in-law shows-. Replacing democratically elected president in Iran with Shah, supporting Bin Laden in Afghanistan, and always being cheek-to-cheek with terrorist Saudis are a few flawed examples of how wrong US policies have been in the past century. Ross seems to be leaving in a fantasy land by replacing “this-with-that”.
Doug Kass today: The Risks of a Flat, Interconnected World – As We Find Out Who Is Swimming Naked
AUG 13, 2018 | 9:33 AM EDT
* Tesla and Turkey are examples of excesses exposed as the era of monetary easing ends
* The chances that the Turkish currency issue mutates into a broader financial and economic crisis are growing
* Non coordination and lack of cooperation as well as political, economic and investment dogma are dangerous in an interconnected world
* The Administration’s hostility towards the other G-7 countries and lack of sense of world community jeopardizes the US leadership position and poses economic and market risks
“Please continue to remember several of my questions that I ask myself everyday — especially the last question (as it relates to the possibility of a trade war, which was heightened last week)
In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
In a flat, networked and interconnected world, is it even possible for America to be an “oasis of prosperity” and a driver or engine of global economic growth?
With the G-8’s geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?
The reason I want you to remember these questions is that the answers might serve as valuation busters in the fullness of time…”
– Kass Diary, With Global Coordination at an All-Time Low, How Slow and Inept Will the Reaction Be If the Wheels Do Come Off? (Part Deux) (June, 2018)
Tesla and Turkey are examples of the excesses exposed as the era of monetary easing ends.
I have long held to the view that the world has become ever more flat, networked and interconnected – serving to produce a more risky global economy dependent upon cooperation between companies, countries and governments.
In this backdrop there are more outcomes (many of them adverse) that justify more of a contraction in valuations than we have already seen (about two S&P points) in 2018.
Last week, I envisioned a possible “Tesla Market Top” and as the week progressed, in an eerie recollection of the Asian Financial and the Thai Baht induced global market crash — the Turkish Lira is on the front page.
But, the problem is much deeper as, today, we are far more interconnected than in the past.
Turkey’s currency collapse and crisis is far larger than the recent Greek crisis – it’s a function of irresponsible reliance on government debt and the perceived inability of the government to control the budget .
Most models of these sort of crises (developed by Flood, Garber and Krugman) argue that speculative attacks can result in a sudden devaluation when the central bank’s store of foreign reserves is depleted and no longer can defend the domestic currency.
Capital flees and the government’s need to finance the debt becomes its overriding concern and eventually leads to a collapse of the fixed exchange rate regime and to speculative attacks on the domestic currency.
Business schools teach Krugman who, in his academic work, presented models in which a fixed exchange rate regime is the inevitable target of a speculative attack. An important assumption in the model is that a speculative attack is inevitable. The government defends the exchange rate peg with its store of foreign currency. As agents change the composition of their portfolios from domestic to foreign currency (because rising fiscal deficits increase the likelihood of devaluation, for example), the central bank must continue to deplete its reserves to stave off speculative attacks.
The crisis is triggered when agents expect the government to abandon the peg. Anticipating the devaluation, agents convert their portfolios from domestic to foreign currency by buying foreign currency from the central bank’s reserves. The central bank’s reserves fall until they reach the critical point when a peg is no longer sustainable and the exchange rate regime collapses.
I could spend all week discussing currencies and the role of irresponsible (country) fiscal conduct that leads to currency collapses – but I would put most subscribers to sleep, so I will keep this short (and I remain short in overall exposure!).
Turkey’s currency crisis, like an octopus, has a long reach – it involves both the ECB and the European banks (which own an outsized amount of the country’s debt).
The problem is that a large portion of the account deficit is being financed by US dollar denominated debt which becomes problematic when Turkey’s currency value is collapsing while the US dollar is appreciating in value.
Moreover, should Turkey’s currency totally collapse it could have a major negative geopolitical impact because Turkey is a NATO member and Turkey would likely blame the US – potentially splitting an already fragile alliance due to the President’s trade polices and demands for higher military spending by its allies.
A second order issue is the possibility of a contagion – spreading to other troubled and/or emerging nations and, in the extreme to the developed economies (who also have a heavy exposure to US dollar denominated debt).
“We know the past and the present and, at times (and perhaps too often) we project the familiar out into the unknown. At inflection points, this act of projecting the familiar frequently produces unsatisfactory results.
History teaches us investment lessons but it doesn’t tell us which lessons to apply and when. As Howard Marks writes, “The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.”
I have observed that, at the end of every Bull Market, progress is blurred and becomes fantasy. A new Utopianism dominates financial thinking and the consensus is swayed towards the notion of a long and uninterrupted economic and profit boom – world without risk . (Who can ever forget Peter Schwarz’s and Peter Leyden’s, Wired Magazine (1997) article, ” The Long Boom: A History of the Future, 1980-2020?)”
– Kass Diary, The Tesla Market Top
The world is flat, networked and interconnected – global economies and international banks are linked and investors have not paid much attention to the plethora of risks which have been materially masked by the massive injection of global liquidity and the “ZIRP” and, indeed, negative interest rate setting outside the U.S. which has predominated the financial and economic scene over the last decade.
The movie is now being played in reverse as we find out who is swimming naked.
Position: None
Enjoy St Petersburg Harry…in spite of what they say…though beautiful…the Hermitage is NOT the Louvre and the Gypsy beggars attack you in droves…don’t miss out on the Summer Palace and its spectacular Hydraulic fountains. I hope they have painted some of the buildings, they were very drab looking when I was there some years back. They called the cops on myself and two others for not paying to enter the Peter and Paul Fortress (bad advise from an Englishman)…we paid-up then casually walked out with our very nervous tour guide as the cops drove into the compound. The Russian people never smiled…said they had nothing to smile about.
Let’s assume, for the sake of argument, that the rant is accurate. Wouldn’t Iran/Hamas have cells in the U.S. to activate if we get serious?