WASHINGTON. Monday’s Wall Street action was unpleasant. Tuesday’s was uplifting. So naturally, today, Wednesday, stocks are getting crushed again as investors head back to the Slough of Despond. All three trading days have been almost solely influenced by the ongoing, bipolar Turkish crisis and the collapsing Turkish lira.
Actually, when it comes to Turkey, this once pro-Western country with its rapidly modernizing and growing economy in the midst of a prolonged – and disastrous – 180-degree turn. Both political and economic. In the direction of the Bolivarian Republic of Venezuela, unfortunately.
Turkish authoratarianism leads to a downward spiral
Back in 2016, a headline and lede in The Atlantic crisply summed up Turkey’s sudden shift to bad-guy status.
How Erdogan Made Turkey Authoritarian Again
“It wasn’t so long ago that the Turkish leader was seen as a model democrat in the Islamic world. What happened?”
With Turkey’s apparent Dictator for Life, Recep Tayyip Erdoğan, taking a lefty-tinged Islamist turn and getting all pallsy-wallsy with Russia’s President for Life Vlad Putin, anti-U.S. antagonism was never far behind in Turkey’s political shift. Evidence included Erdoğan’s snagging and holding hostage an American minister with longtime missionary-based ties to Turkey.
He’s since served as a bargaining chip for Erdoğan. The dictator demands a Turkish cleric living in the U.S. in exchange for the American’s release. The stated reason: Said Turkish cleric was allegedly the mastermind behind an almost-successful coup to remove Erdoğan from power.
Regardless of its actual merit, the current anti-U.S. political flap is at least in part the usual dictatorial smokescreen. Aided and abetted (correctly) by President Trump – who wants our fellow American released – this international stand-off has exacerbated Turkey’s already considerable economic problems. These include increasingly high inflation and, unsurprisingly, a Turkish lira that plunges in value almost daily.
The Turkish crisis and the rapid decline of the Turkish lira
It’s that element of the Turkish crisis – the fast-declining Turkish lira – that’s got traders and investors spooked. And it’s not just occurring in U.S. and Turkish markets. The ongoing Turkish crisis is rattling markets all over the world.
The simple reason, as we indicated a bit earlier, is that Turkey’s economy – once nearly a major player in international trade and wealth – is rapidly sliding toward the low end of Third World status. En route, business and financial structures are under extreme stress. Alarming many analysts, this stress bears a remarkable resemblance to what happened in the U.S. in 2008. That’s when one systemically important financial institution after another began to collapse as rapidly as a row of dominoes.
Turkey appears dangerously close to doing an instant replay here. And if the current Turkish crisis gets worse, a crash in the Turkish banking structure and economy is almost inevitable. Not that it would equal the disaster we saw in 2007-2010. But a Turkish banking and economy collapse would still be pretty nasty, given that neither the U.S. nor the Eurozone has entirely recovered their own earlier travails.
More on Wednesday’s market crash
All of which is why markets got spooked Wednesday morning after Tuesday’s brief, bullish respite. CNBC picks it up from there.
“U.S. stocks fell on Wednesday as lingering concerns over Turkey’s financial crisis weighed on investor sentiment. Declines in tech shares and banks also pressured the broader indexes.
“The Dow Jones Industrial Average dropped 206 points, while the S&P 500 declined 0.8 percent. The Nasdaq Composite pulled back 0.9 percent.
“Bank shares fell broadly as Bank of America and Citigroup both dropped more than 1 percent. J.P. Morgan Chase also fell 0.8 percent. The tech sector also dropped more than 0.6 percent.
“A Turkish regulator said Wednesday it was limiting banks’ currency swap transactions. The move is likely aimed at curbing short selling against the lira, which has recently taken a beating.
“The Turkish lira fell to a record low earlier this week as global investors fear Turkey’s economic troubles could spell trouble for other economies around the world. Last month, Turkey’s inflation rate hit 16 percent, well above the central bank’s 5 percent target.
Buy Turkish stocks during the Turkish crisis. NOT.
“Pedro Martins, a strategist at J.P. Morgan, reiterated his underweight rating on Turkish equities, noting “we need to see comprehensive macro and policy response” to revisit the recommendation.
“‘J.P. Morgan’s macro team believes that a policy response would need to consist of the following components: policy rate hikes between [5 percent and 10 percent], fiscal commitment to backstop and recapitalize banks and deal with problem loans, targeted fiscal support for the most distressed sectors – a general policy framework which acknowledges the need for deleveraging and recognizes a recession is a natural side-product of this process,’ said Martins in a note Tuesday.”
Turkish crisis, lira collapse, make things worse on Wall Street
Things worsened on Wall Street since CNBC posted that earlier piece posted. The Dow Industrials are heading for negative 300 territory on the day. As of 10:35 a.m. ET, that average, based on the current 30 biggest U.S. industrial and technical stocks, just hit 24,999.92 or thereabouts, down 300 points for about a 1.2 percent loss. The broader-based S&P 500 and the tech-heavy NASDAQ are off 33 points (-1.16 percent) and a whopping 129.18 points (-1.68 percent) respectively.
The latter average tanked, courtesy of reports that Turkey plans counter-tariffs and, perhaps, product blockades of Apple (symbol: AAPL) and other U.S.-based tech companies to counter President Trump’s increased punitive tariffs on steel and other commodities coming from Turkey. Apple is currently down 0.70 cents per share, not much given its current price, circa $209 and change per share. (But things could get worse if China decides to get nasty.)
What’s a small investor to do?
We’ve been picking up dribs and drabs of index-based ETFs to take advantage of today’s repricing of those assets during the ongoing Turkish crisis and lira collapse. But in general, this is a tough environment for trading, unless you’re a high-speed machine that can take advantage of this seemingly endless chain of up-and-down days.
So we’re generally staying on the sidelines. And avoiding plunging Third World emerging market-related stocks which are also getting a beating. These countries’ economies can get clobbered if the Turkish crisis and its sinking lira continue to worsen.
As for the rest of us, it’s probably best to tread lightly here while avoiding panic.
Headline image: Public domain duplicate of the 200 Turkish lira note. Pictured on the front of the note, Atatürk, the founder of modern secular Turkey, would likely be displeased with current developments.