As you know, Turkey is in the financial market spotlight again.
It seems funny how these emerging market incidents flare up from time to time. We go from not hearing anything, to all of a sudden reading about Turkey being on the brink.
That’s because in the eyes of the Western media, Turkey doesn’t matter until a financial crisis threatens to spread.
I’ve got a soft spot for Turkey. My wife is part Turkish and has family there. I’ve visited the country on a number of occasions. Istanbul is one of the world’s great cities.
The Turkish people are amazing. The food is amazing. The culture is amazing. I’ve never known anyone not to have enjoyed a visit there.
But underlying this vibrancy is a national melancholy. It’s subtle. I don’t really know how to explain it. Perhaps it’s a result of once being a global superpower, and now being a strategic pawn on the geopolitical chessboard.
That’s a guess. I don’t really know what it is. But there is something there.
Turkey’s financial troubles
First, a little background. In the 1400s, the Turks (Ottomans, or ‘east men’) pushed relentlessly westwards, and eventually took out the most prized city in the world, Constantinople (formerly Byzantium).
Within a hundred years or so, the Ottoman Empire was at its peak, under the reign of Suleiman the Magnificent. Its rule covered the Middle East and North Africa, Greece, the Balkans, and eastern Hungary. At its furthest point west, it got to the gates of Vienna. Suleiman laid siege to the city in 1529, but was unsuccessful in taking it.
That was the height of Ottoman power. From there a long, slow decline set in. The final nail in the coffin was defeat in the Middle East in the First World War. It was the end of the Empire.
Following the end of the Great War, Turkey continued its own battle for survival. Only the perseverance of Mustufa Kemal, the hero from Gallipoli, saw Turkey prevail over invading Greeks and meddling great power interests.
Kemal set up shop in Ankara, away from Istanbul and the meddlers. That’s why Ankara, and not Istanbul, remains the capital of the nation. He led Turkey to victory in the War of Independence in 1923, and become known as Ataturk, the Father of Turkey, in the process.
He was a great moderniser, and saw the need for Turkey to be a secular state if it was going to reach its potential. That is, there needed to be a separation of religion and state.
Ever since, Turkey has been dominated by the military. They see themselves as guardians of Ataturk’s legacy.
Until recently, that is. Turkey’s current President/Dictator Recep Tayyip Erdogan, has brought religion back into the fold…and suppression of any voice that disagrees with him.
This is a big reason why Turkey is now under financial pressure. Capital doesn’t like hanging around in countries where a dictator masquerading as a President acts with impunity.
And when you try to defy the US, capital freaks out. As the Wall Street Journal explains…
‘Turkey’s currency plunged again Monday, rattling other vulnerable emerging markets, as a defiant speech from President Recep Tayyip Erdogan and policy moves from the nation’s central bank failed to assuage investors about the country’s perilous financial condition.
‘The lira dropped 8.2% to 7.01 against the U.S. dollar, after falling as much as 10% in Asian morning trading. The country’s debt and stock markets were also swept up in the turmoil.
‘The lira is down more than 40% this year, battered by concerns about the North Atlantic Treaty Organization member’s political and economic stability and a continuing trade spat with the U.S.’
Will Turkey’s turmoil effect other markets?
Is this enough to spill over into more developed asset markets?
I don’t think so. Not immediately, anyway.
More broadly though, the performance of the emerging markets as an asset class is worrying. Check out the chart below. It shows the ishares MSCI Emerging Markets ETF.
[Click to open new window]
It’s well off its highs from earlier this year and trending lower. It signifies capital fleeing the ‘periphery’ and moving towards the ‘core’, which are the US financial markets and developed stocks markets in general.
For me, this is a red flag for the continuing bull market theory. The chart above is telling you that global economic growth is slowing. When that happens, emerging markets feel the pain first.
And don’t forget, the US Federal Reserve will continue to increase interest rates this year. This will inflict more pain on emerging markets.
And, in time, the effects will show up in the US too. My best guess is that within a few months, you’ll start to see cracks in the bull market narrative for US stocks.
Tomorrow, I’ll present more evidence of this…
Editor, Crisis & Opportunity
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