The Terrible T's

| August 13, 2018
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Tiger {As in Tiger Woods}

Tidal Wave {As in riding an 80-foot wave!}

Turkey

Welcome to a quiet summer of trading!

Today we will focus on Turkey. Their currency – the Lira – has crashed over 23% last week (38% year-to-date) due to continued economic weakness, massive credit issuance halting due to higher borrowing costs, a rising US dollar, and additional santions announce by President Trump.

First, some perspective.

  • The Turkish stock market is worth ~$150 billion or roughly the market capitalization of Netflix (NFLX).
  • It makes up less than 1% of Vanguard’s Emerging Market ETF (VW) and just half a percent of the iShares version (EEM).
  • This is not new news: Turkish debt was downgraded to junk in 2016 and its currency has been in decline since 2010.

As you can see from the chart below, Spain is by far the most indebted nation in terms of Turkish exposure.

Is Turkey similar to what happened during the 1997 Thai baht crisis? Thailand’s external debt was $109 billion or 65% of GDP. Turkey’s external debt is ~$450 billion or 56% of GDP.

I think Joachim Fels of PIMCO summed the situation up nicely this weekend when he wrote:

I’m not an EM {Emerging Markets} expert, so I refrain from commenting on the vertiginous drop in the Turkish lira and asset prices this past week or even attempting to forecast where we go from here. The one thing to note from my 30,000 feet perspective is that this looks like yet another example of how a combination of bad domestic economic policies {from Turkey} turning worse and deteriorating global liquidity that makes bloated dollar-funded balance sheets vulnerable can produce high volatility and contagion. Who said shrinking the Fed’s balance sheet and raising the funds rate in a gradual fashion wouldn’t have global repercussions?

Finally, while in a vacuum Turkey should not be a global issue to shake the confidence of the markets. However, contagion is real and we will continue to monitor as always for further developments and implications. Already we are seeing continued weakness in emerging market currencies and stocks, in particular the South African rand saw it’s largest plunge in a decade overnight. Also, watch Brazil as exposures are widespread. We saw China continue to weaken the Yuan overnight. While this is not necessarily and unexpected event, the question is will this start a chain reaction?

 

Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R = O

 

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