February 24, 2014

At the mercy of the markets

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One of the interesting things about emerging market crises, is that when you are in one, it doesn’t feel like a crisis at all. Turkey has been buffeted by a political crisis and mass demonstrations, which could easily have spilled over into the nightmare playing out in Ukraine. Yet the situation has been calmed by both the protestors and the government. It doesn’t mean the problems have gone away, but it means that both sides have pulled back from the brink.

Longer term, this massive country of 80 million people – a huge regional power – is clearly on the way up. Interestingly, only a few years ago, Turkey felt so insecure that it put up with put-downs from second rate EU leaders when it was applying to get into the EU. Now joining the EU appears off the agenda because the Turks are not too bothered.

The economy grew strongly for ten years, inequality shrank and Turkish companies became regional powerhouses. But the last year has been traumatic for Turkey because, along with other large emerging market economies, it has seen itself going from flavour of the month to dunce of the class. Hot money which had flowed in, flowed out again as the shorter-term hedge fund trader bet against the country.

What is going on in Turkey is also playing out in South Africa, Brazil and, to a lesser extent, Mexico.

If the global financial system is to become an instrument of geo-political stability, it will have to be reformed so that what is happening in Turkey (and elsewhere) doesn’t become the norm.

We are seeing a market-made financial crisis and yet again, the agents of disruption – the financial markets – are passing the buck. Without some form of global capital controls which prevent money flowing in and out of a country at breakneck speed, the world will lurch from one financial crisis to the next driven by greed, fear and fashion.

Last night, I looked out over the Bospherous from the lovely apartment which I am renting here in Istanbul thanks to the brilliant airbnb.com.

Across the river, the lights of Sultanahmet twinkled. To the left, at the tip of the Golden Horn, was Topkapi Palace, the royal seat of the Ottoman Sultan. Straight ahead, lit up marvellously is the Haghia Sophia, and to its right the enormous Blue Mosque. These landmarks seemed so close you could almost touch them.

This morning, as I write, they are gone. Istanbul, Europe’s largest city, home to close to 17 million people, is covered in thick, dense smog. You can see nothing. From memory, as I gaze out towards where these landmarks were, I have an idea where they should be, but everything is shrouded in mist.

The key thing when the outlook is so foggy, is to get the big things right, don’t get too bogged down in the detail and the spin and counter-spin, because when a country is in crisis (as Turkey is now), everyone is telling their own story, talking their own book and trying to pull the wool over someone’s eyes!

Last year, the Turkish economic miracle came to an abrupt end with political violence in the streets of Istanbul, Izmir and Ankara. The currency went into free-fall, as did the stock market. Prime Minister Recep Tayyip Erdogan – whose AK Party won three general elections – restructured the economy and attracted more foreign investment in a decade than in the entire 90-year history of the Turkish Republic.

This time last year he was untouchable. Today, Erdogan seems to have lost his aura of invincibility.

Istanbul is full of large posters of him with the words Iron Will’ underneath. But this 1930s-style sloganeering smacks more of desperation than confidence.

When successful quasi-autocratic leaders lose their aura, it’s hard to get it back without a big scrap. For years, Erdogan had as an ally an Islamist power base known as Gulenists – followers of a self-imposed-exile cleric called Fathullah Gulen – which, at least to the outsider, sound like a cross between an Islamic version of Opus Dei and the black Nation of Islam movement.

Originally, Gulen set up an educational system of strict religious schools, which taught a mixture of self-discipline, Islam and societal responsibility. Many thousands of graduates of these schools – Gulenists – are now in powerful positions. Until recently, they were in cahoots with Erdogan in his ”soft Islam project. This is the aspiration to combine an Islamic society, which lives side-by-side with democracy and the constitutional protection of secularism. Like all aspirations, the success of such a venture depends in significant measure, on the economy being strong, offering opportunity and generating wealth.

As the economy has fractured, so too has the alliance between the government and the cleric. My friends here are secular and are afraid that in an effort to deflect attention from corruption, the government will attack the liberals to bolster Islamic support and find someone to blame. What better target in a religious atmosphere than degenerate liberals?

Now that Turkey is experiencing an outflow of cash, the differences between all these groups have returned to the fore and the issue is whether all these various conflicting parties and objectives can be reconciled.

The apocalyptic view is that they can’t. Many commentators say it is only a matter of time before the Mullahs take over in Turkey. An ongoing economic crisis, they argue, will make this more likely.

At the heart of the economic crisis is too much debt, which constantly has to be rolled over. For example, right now how could any investor in his right mind invest in Turkish lira bonds knowing that Ankara has only $40 billion in central bank reserves (two months’ import cover), but has to refinance $210 billion in 2014 alone?

Turkey also has a $70 billion current account deficit, which is financed by offshore hot money and that has been fleeing back to the safety of the US dollar in billions every week.

In addition, as we know in Ireland, if you have had ten years of economic growth financed by massive credit expansions, when these things turn, many, many companies default. If we take out the Islamic versus secular political argument, the economic dilemmas are the same as those faced by every big emerging market country right now.

An obvious solution is to install capital controls, so that money can’t flow in, pushing up debts – and flow out again, pushing up risk. One country that has introduced controls on hot money with great success is Chile. Maybe it is time to dust of the Chilean manual of controlling the financial markets and the relentless instability which comes with too much money gushing in and out of countries as they move from being fashionable to being deeply unfashionable overnight.

As we can see in Turkey, there is far too much at stake for some of the levers of power to be in the hands of greedy hedge fund traders.

David McWilliams writes daily on international economics and finance at www.globalmacro360.com

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  1. Pat Flannery

    David you have just articulated the argument for Ireland staying in the Euro:
    “there is far too much at stake for some of the levers of power to be in the hands of greedy hedge fund traders”.

  2. At the mercy of the markets implies that that the “Markets” are a malignant force of negativity.

    our major problem, all over the world, is the Idea that markets need to be controlled, managed, fixed, handled, or manipulated. All the aforementioned are practiced by statists everywhere.

    Foremost of this is the management and abuse of the money system. This also is a world wide phenomenon.

    As money is the medium of exchange by which information is sent and received by market participants it stands to reason that the money chosen for use must be sound.

    As our money is not sound and engineered for the benefit of the bankers and not the people it also stands to reason that no economy can properly flourish. goods are produced that are un-needed and other goods wanted are in short supply. The economy is inefficient.

    All countries and the world will have economic problems until the money system is examined and corrected.

    Over to you David.

    • David NZ

      2 trillion dollars!

      I don’t think so. If you read the code, this ‘investment’ is to be in undoing red tape and removing obstacles to private investment which in reality means wage cuts.

      Goodbye AUSTERITY, Hallo austerity.

      At least the South Koreans are following the Chinese lead and doing some low income housing as well.

      • Hi David
        It matters little what is said. It is jaw boning the activity up and down
        What matters is what is actually done.
        Voluminous amounts of money are still being printed to cover deficits and to keep currencies “competitive”.
        We inflate to extinction, as the politicians and the bankers meddle more and more deeply into the economy.

        As for a 2 trillion increase in real economic activity!
        Well they do not even measure it accurately and the inflation rate is understated by around 4-6%. so in actual practice the economy will have to expand by 8%.

        Good luck with that.

        Since 1970 the standard of living has been dropping like a stone and is about 45% now of what it was in 1970.

        The us alone will pump 5 trillion extra cash over 5 years into the world economy and that will be matched by the rest of the world and then some.

        We will inflate till we die. Then the grand reset. Those that hold the gold win.(Or lose much less)

  3. The gold price is “fixed” twice a day in secret in London.

    gold has been manipulated by countries, bankers et al for the last 100 years at least and now a consultant finds it may be manipulated 50% of the time for 10 years. Well that is a start of a discovery.

    http://webcache.googleusercontent.com/search?q=cache:http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fd5e00172-9b14-11e3-946b-00144feab7de.html&ei=NM4KU6S0D_P7yAHLuIGIBA&usg=AFQjCNHaFzw47jj5Fx8c6izaXIGy-kIt5g&sig2=nxnmTWTXcVwsdGDQNyZLqA&bvm=bv.61725948,d.aWc#axzz2uDBq1WI6

  4. Question asked 2 hours ago on http://www.lemetropolecafe.com

    *Par for the market rigging course. What market is not rigged these days?…
    UBS Said to Seek Immunity in Currency-Rigging Probes by EU, U.S.

    It is not the markets you need to be afraid of David. It is those who rig , fix, set, and manipulate everything in sight.

    I assume you agree with this activity David unless you say otherwise.

  5. When Istanbul as settled by the Briton Constantine, The new Roman Emperor
    Called the city Constantinople in the early 300 ad a currency was formed there that lasted for a thousand years. That is until the Turkish invasion of the centre of the Eastern orthodox holy Catholic Church.

    The basic coin was the gold coin taken By Marco Polo on his journey to China. This coin was a Bezant.
    To his astonishment Marco Polo found the Chinese of the Great Khan using paper money.

    http://afe.easia.columbia.edu/song/econ/money.htm

    The Chinese also discovered the first paper inflation and the second and a third time. That may explain the Chinese affinity for gold. The have a cultural memory of the evils of inflation. (over printing or inflation of the money supply)

  6. You can’t believe anything today and you expect markets to function properly.

    *Trader Rog over the weekend…

    the cot report on 2/21

    hi bill,
    it’s obvious to anyone paying attention that the
    COT report is so fabricated as to be ridiculous.
    with gold and silver soaring, the commercials
    cannot possibly be so massively short both.
    the commercials just cannot reasonably be
    net short 92,000 gold contracts and 33,000
    silver contracts.
    no one believes they added 20,000 more net gold
    shorts and 10,000 more silver shorts last friday.
    i don’t even bother to read it anymore. it’s
    just disinformation to mislead the public.
    the COT report is in-house and not audited
    in any way.
    best,
    roger

    Behavioral Finance

    • michaelcoughlan

      Hi,

      Any chance this post is evidence of the price decoupling from the paper futures market and is now starting to reflect the demand for the physical?

      Just curious.

      • Michael
        Watch the eastern markets for premiums. Some physical markets have been as much as a 200 dollar premium over the london spot paper price.
        In Vancouver is showing 5% higher on silver to buy from you and to sell to you is 12% premium.
        No premiums on gold to date.

        The premise of my postings was to demonstrate that all markets are manipulated. Therefore blaming the market for short comings is inaccurate. There is no market functioning.

        In the gold market there is a physical market which as you observe will overpower (decouple from) the manipulated paper futures market.

        Hope you had a good day.

      • Hi Michael
        Comment on Midas du Metropole

        Points of note…

        *Gold is quietly running away from $1320, an objective of certain bulls at the beginning of the year. In a way gold has become a stealth move, up market, which is confounding the bears and leaving their price predictions in tatters.

        *Once again The PM fix at $1339 was higher than the AM Fix of $1332.75. The physical market is taking the gold price higher and overpowering the ability of The Gold Cartel to do their thing on the downside.

  7. The US dollar is the least safe place to put your money these days. All that inflated money sloshing around the world looking for a home is coming to a bad end.

    “Trader and financial analyst Gregory Mannarino was bullish on the stock market a few weeks ago, but he’s now done a 180. Why the reversal? Mannarino says, “What the Fed was doing was driving cash from the emerging markets into the U.S. equity market and driving cash into the U.S. bond market, and it worked . . . This is played out now . . . and I told everyone that this would not last. . . . We are right now on the precipice of a correction phase, and it could be severe. . . . The market is moving further and further away from the fundamentals that support it. This cannot go on. We’ve already had no less than six bad rounds of economic news over the past two weeks. This is going to impact, and I think it could be profound.”

  8. Cash is going to go into commodities after that initial drop.”

    Mannarino says the next crash will be no accident. Mannarino contends, “The Federal Reserve is a serial and deliberate bubble blower. They have hyper-inflated the stock market. Why? Because they are going to allow this thing to blow off . . . . This is a wealth transfer. We’ve had the pump, and now we are going to get the dump. The dump is the wealth transfer. . . .

    http://usawatchdog.com/

  9. Manager in biggest bank in the world aspires for the largest gold holdings in the world

    http://www.ingoldwetrust.ch/precious-metals-aspirations-of-the-biggest-bank-in-the-world-icbc

  10. Off Topic

    15 comments in total and 12 posts in a row Tony? Don’t you think that’s a bit crazy?

    On Topic

    DMcW: If the global financial system is to become an instrument of geo-political stability, it will have to be reformed so that what is happening in Turkey (and elsewhere) doesn’t become the norm.

    The global financial system is exactly what? We talk about reserve currency and markets? I think so, we talk about the legal framework that define the GFS, but not alone.

    Ireland being a prime example for systemic flaws as per Stiglitz, imposing high costs on people who did not participate in financial markets to begin with.

    I do not see your IF David, the GFS was used to destablize entire nations, it was used as a tool of war for geopolitical reasons. Reformists were sidelined and shadow banking was the norm.

    Ever since 2008, I called it a a global heist, a slow motion coup d’état, and the latter makes it so difficult for individuals to perceive it as such as the usual speed of a coup d’état is slowed down over years.

    • It’s our money system. David isn’t listening or he is ignoring the evidence. Western economists are brainwashed on the whole. Those who offer solutions are branded nut bars or conspiracy twits or or or o………..

      • Morning Tony,

        See Noam Chomsky’s video below.

        It is the result of deliberate policies.

        • Hi Georg
          I listened to it all. It is a deliberate policy.
          Yet he does not mention the current money system that is the root cause of the problem

          All our economists are brain washed into thinking it is the norm to have the debt based usurious money we have.

          when is going to be seriously examined. I wonder if it ever will be. It is a great delinquency and the people are thus deluded.

    • Dorothy Jones

      Off Topic
      +1

    • Joe R

      Speaking of on topic / off topic here is an ON topic comment here that I tried to post yesterday has got corralled for no apparent reason that I can fathom…

      “Here follows an article on new housing bubbles in emerging economies including Turkey and Brazil and some others…
      http://www.theguardian.com/business/2013/dec/02/housing-bubble-bust-recession

      So it shows that all over the world, rich country or poor, that speculation and greed are the norm for humanity…and the Goldmans Sachs proclaimed old new chosen ones ( BRICS, etc ) are absolutely no different.

      Actually, they are possibly quite a bit worse. To me it seems they have overcompensated an attempt to catch up too quickly and superficially with the developed world.
      Also on current accounts balance of trade and debt to GDP ratios, etc, etc there is easy available and chart-able information here at http://www.tradingeconomics.com/ on the economic performance of many countries over the last 20 years or more.

      In Turkey´s case it is plain to see that external debt has tripled in the last 10 years and it quite possibly fueled the `economic miracle´ of 6% plus growth P.A.. It is possible to see that it has not ran a surplus in its balance of trade in 30 years. 30 years in the red before you include debt it has taken on. The current account has therefore badly in the red for as many years so D McWilliam’s number dropping of minus $80 billion for last year that is neither here nor there. It was actually 20% worse just two years ago.”

      If anybody can work out why or the ‘moderator’ would like to explain I am all ears.

      Enjoy the goldbug posts – they are relevant.

  11. Georg
    The astounding thing is how few people can be bothered to write anything.
    Without me you would be the second comment of any substance discounting a subscription to a moon wobble. (No offence to you Adam)
    It is Tuesday already.

    • No offence taken Tony but the gold stuff is over the top.

      • Over the top of what. It is the way the world is going. Not that I care one way or the other but that’s what I see.
        That is going on in Turkey on topic. Selling to Iran for gold for oil On topic.
        The economic center of the world is moving east courtesy of gold and China, Russia and India, on topic.
        Our money system is a Ponzi scheme, so all countries are affected especially the emerging markets.
        On topic.
        50% mention the g word Adam Only half but all were on topic.
        Three postings from you Adam and not one on topic!! :)

      • Dorothy Jones

        +1 Adam

        • We shall see who is over the top. It is all to do with manipulated markets and the money sloshing around the world rushing into emerging markets and back out again. sooner rather than later all that money will invest in commodities.
          Art and antiques are already “over the top” and soon commodities will be too.

          What do have to say yourself on this subject Dorothy?

  12. As for GFS, I recommend this recent video from Noam Chomsky, ‘How to ruin an economy’

    http://www.youtube.com/watch?v=6mhj-j0z-fk

  13. ‘We are seeing a market-made financial crisis and yet again, the agents of disruption – the financial markets – are passing the buck.”

    It is not a market made financial crisis. Show the evidence.
    It is caused by the trillions of phony cash sloshing around the world courtesy of the central bankers. Inflation is the money supply expansion exponentially.
    the great reset is on its way. Billions impoverished while the elite cream of the top and become unimaginably wealthy. The greatest heist in the history of mankind.

    All courtesy of the shadowy elite behind the money system scam. To paraphrase, the “Greatest Ponzi scheme on Earth”

    Never mind Turkey or emerging markets. It is all of us.

    Why not examine that angle David.

  14. Off Topic

    David the official meaning of the word Dalkey in Irish is incorrect and its name and pronunciation has remained unchanged since the arrival of the first people to our shore from Africa and they were black .

    The name has two words meaning ‘ Safe Place to Meet ‘ ( from Wolof ) as in Dáil ( meeting place ) and Key ( safe) also found in Askeaton ( Co. Limerick) . Thus it is assumed these people settled in Dalkey before it was found proper to settle along the Liffey.

    Note that in your forthcoming book fair .

  15. What Mercy Have Cows at Markets

    French President François Hollande has ruled out changing the legal status of farm animals, following calls by a group of prominent French intellectuals who want them recognised by law as “sentient beings”. Talking as the country’s annual agricultural fair opened in Paris, Hollande said there was no need to write new legislation that he said would achieve very little. “Much effort is already made through France’s Rural Code, which recognises animals’ ability to feel pleasure and pain to look after their welfare without the need to write it into civil law,” adding that rules already existed “to make sure animals do not suffer unduly in abattoirs.”

  16. michaelcoughlan

    “At the mercy of the Markets”.

    Yes. But you don’t explain why. Remember the film pretty woman which launched Julia Robert’s career? The plot was that the character played by Richard geer had 10 millions shares in a company that builds ships but was experiencing difficulties. They were just about to land a contract to build destroyers for the us armed farces and geer dispatched his agents to delay the contract to kill a company he had 10 million shares in Why? Because he could make more money killing the company and dismantling the assests and balance sheet than from making things of value. Enter miss roberts with legs up to her armpits geer has a damascus conversion and decides that its better to be a builder than a destroyer.

    The markets are more than just amnipulated they are backing into, taking over a nd destroying one business and country after another because the return on capital is infinity or close to that. And the article concludes with capital controls as a solution?

    Real politck please not infantile stuff.

  17. Well have a good night yo’ll. I’ll be digging out from a foot of wet snow. BReeeeeer…. Bring on some global warming

  18. joe hack

    Gold!
    Subscribe!
    Moon!

  19. Many accounts in here of fraudulent dealers. Mt.Gox went down and bitcoin values are hit 70% and bounce back some, but several gold dealers are alleged to be fraudulent and the gold price continues to rise.

    For those who care, there is valuable info in this link

    http://campaign.r20.constantcontact.com/render?ca=f0f44b34-f582-4a58-9d56-217cdee3177e&c=877a32b0-427b-11e3-ad08-d4ae52a45a09&ch=8905dbc0-427b-11e3-ad3c-d4ae52a45a09

    Kaye is very optimistic about 2014 and beyond. He commented on the central banks and hedge funds not caring about investors being cheated, with widespread corruption. He forecasts 2014 will be an extremely good year for the precious metals. He believes a $2000 gold price and $50 silver price might be seen. He concluded, “I believe we could easily see new highs in nominal terms in both gold and silver. We may see $2000 to $2500 in gold, and $50 to $60 in silver, maybe even higher. The bottom line is that 2014 will be the year that the cartel gets broken. One of the possible consequences for the West continuing with this paper gold price suppression scheme includes the possible end of the COMEX as we know it. The rigged casino will simply close its doors and the players will go home.”

    - William Kaye, King World News, December 19, 2013

  20. At the mercy of the manipulated markets
    Reality will overcome the “Geobbels” effect.

    http://blog.milesfranklin.com/how-funny-is-this

    Bill Holter—-
    “I honestly did not think that we could have made it this far, we did. “We did” this through the use of words, propaganda, false reporting, the creation of free money and “making” markets (asset prices) through the manipulation of all markets. This will not stand as “broke is broke,” spending at the “street level” is collapsing as evidenced by retail sales (Walmart), auto sales, housing etc., even luxury sales have been affected. The top .1% has become richer but they cannot carry a gutted economy all by themselves and no amount of “words” can change this.”

  21. http://blog.milesfranklin.com/countdown-to-collapse

    If you read this you will get a fright
    If you do not read it you will be snuffed out economically

    Reality is rapidly overwhelming manipulated markets. Collapsing currencies and inflation are on the march.

  22. China declares a currency war on the US dollar and also funds indirectly the ECB via the IMF

    http://www.outsiderclub.com/china-declares-war-chinese-to-sabotage-us-dollar-with-gold-and-IMF/811

  23. Dave from Denver comments on US housing stats.
    All lies , lies, and more lies.
    No market can function with misinformation piled on pile.

    “Purchase mortgage applications have been dropping every week by double digits year over year, including last week. 93% of all new homes built are purchased using mortgages. So the Govt releases a report shows a 9% increase in new home sales from last year? That is outright fraud.

    First, the number is seasonally adjusted and annualized. Let’s see the formula. Second, supposedly new homes sales INCREASED in the northeast and the south – the very regions that we have been told ad nauseum that is experiencing a bad economy because of bad weather. But it just so happens that more people braved the “polar vortex” this year to buy a new home than last year? So consumers stayed at home and didn’t buy anything EXCEPT new homes.

    The fraud and Orwellian joke can not get any larger than this. It’s not possible to lie to any greater degree than the lies were being told now.”

  24. Deco

    David,

    The writer “spengler” in the Asia Times has some very insightful articles on what is really heappening in Turkey. It literally is a “turkey”.

    Turkey has serious problems. Corruption has rocketted upwards under the AK party. The banks are in a very dodgy state. And the currency is very suspect. (normally, if state staitistics are found to be a joke, the currency follows).

    Nepotism, cronyism, racketeering, dodgy acounting, waste, malincvestment, etc are all rife. Plus our old friend “soft touch rregulation”.

    Massive parallels with the period when Bertie, Family Firm and the PeeDees ran Ireland. A massive ponzi debt boom.

    Spengler is very good in his analysis of Turkey. The AK party has actually sent the country into reverse intellectually.

    Thanks,
    Deco.

  25. Deco

    When the populace at large is robbed of a significant amount of their earnings….you get deflation amongst that proportion of the populace.

    It is a mathematical cetainty. Because they have been improvished.

    Our current cowboy capitalism economic system ensures that the middle class get deflation. In fact it is absolutely certain.

    Therefore, it is to be expected that Mme. Lagarde will start warning about deflation, as if deflation is the problem. As if the monetary authorities not buying enough bonds is the problem. The problem is actually rigged markets.

    We live in an environment of incessant intellectual denial as to what is going on in our midst.

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