POITOU, FRANCE – “Do you follow what is going on in Turkey? That guy is a real moron…”
Thus began a conversation at a party we attended last night.
Reuters provided some background:
The Turkish lira has long been falling on worries about Erdoğan’s influence over monetary policy and worsening relations with the United States.
On Friday the currency dropped as much as 18 percent at one point, the biggest one-day fall since a 2001 financial crisis in Turkey.
“That guy,” we later realized, was the president of the country, Recep Erdoğan.
Meanwhile, America’s number one guy, Donald J. Trump, did not rush to Erdoğan’s aid. Instead, he whacked him hard in a tweet that flabbergasted everyone:
I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!
That ought to help!
Now, The Donald’s trade war includes a currency war.
And Erdoğan fought back, giving like for like. That is, he came back with a pile of irrelevant nonsense:
Don’t forget this: if they have dollars, we have our people, justice and God. We will come out of the economic war successfully.
But wait… What sense does any of this make? Why declare war on countries whose currencies go down? What is the U.S. president doing interfering with markets and stirring up trouble?
Erdoğan is a “strongman” president, recently sworn in for a five-year term with enhanced powers. Among the enhancements was the right to control the central bank by appointing its directors.
The trouble with strongman governments is that they are no better than the “strong men” themselves.
Alas, they are human, subject to all the weaknesses to which flesh is heir. With the possible exception of Frederick the Great and Lee Kuan Yew, they almost always turn out to be morons… especially in modern democracies.
And for an obvious reason: The strongman leader can only incite the support of the masses by dangling a gaudy fantasy in front of them.
Free money is almost always part of the promise. Nobody sells a weight-loss book that tells people to eat less. Nobody sells a financial program that tells them to work hard and save their money.
And neither Erdoğan nor Trump got into power by offering restraint, modesty, and pay-as-you-go government.
Donald Trump is famously a “low interest rate” guy. While he said he wouldn’t interfere with the Fed, he made it clear that honest interest rates were not something he was hankering for.
For the moment, he has nothing to worry about. Stocks are still very high. And interest rates are still very low.
The inflation number we got last week showed consumer prices rising at 2.9% year-over-year. The Fed funds rate is now 1.9%.
That means that with a 2.9% Consumer Price Index reading (which probably significantly understates inflation), the Fed is lending to member banks at a real rate that is nearly 100 basis points below zero; that is, nearly a full percentage point below inflation.
Our guess is that in the next crisis, even that will turn out to be too high.
Here’s a prediction…
When stocks plunge and the economy goes into recession, Donald Trump – like Richard Nixon and George W. Bush before him – will blame the Fed. And he’ll be right.
When you’ve put your economy in a hothouse of negative real interest rates for more than a decade, the delicate plants can’t survive out in the cold. They’re indoor plants now.
So as the Fed makes its classic Mistake #2 (raising rates after leaving them too low for too long), Mr. Trump will be fully justified in saying that the Fed is causing the next crisis.
When it comes, he will then call upon the Fed to reverse course and cut rates, which, of course, it will do promptly (Mistake #3).
But then the Fed will be in a jam. Because while it is fully committed to providing aid and succor to America’s strongman president, it is also charged with keeping a lid on inflation.
That was easy to do when the inflation rate was below 2%. But now, the rate appears to be going up.
Fed governors are already preparing for the inevitable. Chicago Fed president Charles Evans, for example, says “…2.25% would not be troubling at all, and even 2.5% as long as that is expected not to accelerate, could well be consistent with symmetry of our 2% objective.”
The Fed will hesitate – at least for a moment – before lathering on the grease.
Turkey enjoyed low interest rates, too, and borrowed – in dollars – to fund infrastructure projects, among other things. But Turkey doesn’t print dollars. So paying back the loans can be tough… especially as the lira – the Turkish currency – goes down against the dollar.
The Turkish government and Turkish companies earn their money in lira. As the lira goes down, it becomes harder and harder to make the loan repayments. So, fearing a default, investment capital leaves the country and drives the lira down further.
Look at the problem for Erdoğan’s central bankers. The Turkish lira has lost 35% of its value over the last 12 months. The natural and normal thing for the bank to do would be to raise rates to defend its currency.
But while Donald J. Trump is a “low interest” guy, Erdoğan is a “no interest” guy. He says interest rates of any sort are “evil” and calls himself the “enemy of interest rates.”
Lending money at interest is a no-no to conservative Muslims. Instead, lenders have other ways of making money – such as charging fees for services rendered.
But a modern central bank typically manipulates interest rates to get the outcome it wants. When a currency sells off, rates should go up. But the strongman always wants rates low – to finance his visionary program.
Usually, he gets it.
And the country gets it, too – good and hard.
By Joe Withrow, Head of Research, Bonner & Partners
As Bill mentioned, Turkey’s currency is collapsing. But the trouble in Turkey could be causing a ripple effect elsewhere.
Emerging market stocks are plummeting…
Today’s chart maps the MSCI Emerging Markets Index – which tracks stocks in 24 countries that are on their way towards developing advanced economies – from August 2017 through today.
As you can see, the MSCI Emerging Markets Index has plunged 17% from its peak in January of this year. By comparison, the S&P 500 has gained 14% during that time.
One of the likely reasons for the recent fall is the economic crisis brewing in Turkey – an emerging market country represented in the MSCI Emerging Markets Index.
So far this year, Turkish government borrowing costs have increased 18%… inflation has hit 15%… the Turkish lira has plummeted against the dollar and the euro… and President Trump just doubled tariffs on Turkish steel and aluminum.
– Joe Withrow
Here’s Who Might Buy Tesla
Last week, Bill reported on the plans announced by Tesla CEO Elon Musk to take the electric car maker private. Our editor was curious: Who would buy Tesla? Now, a possible answer: Saudi Arabia.
A Turkish Collapse Is the World’s Problem
As Joe Withrow just showed, the trouble in Turkey is having an effect on emerging markets in general. And in the event of a full-blown collapse, trouble could spread to Asia… Europe… and America.
Why the Government Will Come for Facebook
Is Big Tech too big? Technology firms like Google and Facebook have provided the world with fast, free services like online search and social media. But their success has brought them power… and made them a target for ambitious politicians.
In the mailbag, it’s all Trump…
It looks like China is the one that is being made a fool of. The world revolves around the U.S. If the U.S. were to fail, every country would suffer. Sorry, but that is the reality. People are rallying around Trump because people are succeeding during his administration. He actually talks like he wants this country to succeed, unlike Obama, who continually apologized for it. Or worse yet, tried to undermine it.
– Gene S.
Trump is an amateur in D.C. and not an experienced politician, so half the time, he is like a bull in a china shop. To me, it’s like watching Don Quixote charge the windmills. However, the good thing about Trump is that he is attacking and trying to expose, weaken, or bring down the Deep State. I have been waiting for a president to do that.
The Deep State and its lapdog media are fighting back, of course. Here are the dots and lines as I see them: The Deep State will enact the nuclear option and bring about a severe market crash and recession, just in time for the 2020 elections. The media will see to it that Trump gets the blame, of course, and then we will get Elizabeth Warren in the White House. That, to me, is the definition of going from bad to worse. Keep up the great, informative writing, Bill. We are benefiting from it.
– Hank L.
You obviously have a high opinion of yourself and a low opinion of a duly elected president. Unfortunately, you have joined the anti-personality group of smug, “he’s not one of us” Trump-haters who claim Trump is “incompetent” and “unqualified’ without being able to define either term or admit that neither of those terms have been proven.
Do you consider your tiresome screed to be patriotic in any sense, or doesn’t that matter? Has abuse of the First Amendment ever entered your mind? Or does having a lot of money make you exempt from such plebeian considerations? Stick to remodeling your new Irish property, as if anyone cares. From a lifetime subscriber who enjoys the investment ideas, but not your blather.
– Anthony B.
Your tongue-in-cheek is protruding so far that it looks like you have a baseball in your mouth! We all know this last hurrah in the market won’t last or end well. But to his credit, the “great negotiator” has stunned the crap out of our trading partners who have been cheating us for years. I didn’t see it coming or I would have dumped gold and silver a long time ago. Unfortunately, we’re racking up losses for the time being. Is he correct on 5% GDP growth?
We all laughed a year ago at 3%, and here we are. Your guess (and that’s what it is) is as good as mine. Maybe we should behave like prudent investors and buy the dips. I look forward to your next letter.
– Steve B.
Bill, Bill, Bill… You have to lighten up. Your angst is bad for everyone’s health. The alternative candidate to Trump in 2016 was and is completely amoral. The decision to vote for Trump was not difficult – considering his opponent.
– Benise B.
Meanwhile, Bill’s silver lining from Venezuela draws a mixed response…
There is no good news when people are not on a diet by choice, but rather by a government that wants its own people to starve. Are you mentally challenged? Your black humor is not funny when kids are dying from starvation and health-related issues. Grow some common sense before you open your mouth.
– Carl G.
I was laughing so hard at your gallows humor that I nearly choked on my energy drink. The thought of obese Americans shedding pounds thanks to the inevitable economic collapse that is heading our way is hilarious!
Your advice to the One Percent to “get out while the getting is good” is sound. Unfortunately for us poor slobs who will never be wealthy enough to open an offshore bank account, much less buy foreign real estate to establish a rural hideaway where we can ride out the storm, the “Trump Diet” is our likely future.
The really smart ones are the so-called “preppers,” who are buying freeze-dried survival food in bulk and are loaded up with guns and ammo to protect it. When the average American looks like the living skeletons who were liberated from Nazi death camps at the end of World War II, the preppers will be well-fed and healthy. I’ll take health and food over money any day of the week. You can’t eat gold or make a salad from $100 bills.
– Dale E.
Two months after taking office, President Reagan started a secret initiative…
It was a plan to bypass the big banks and politicians and return America’s money to the people. But these so-called “Reagan dollars” were never circulated. The plan was forgotten…