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Turmoil in Turkey Puts Pressure on World’s Stock Markets.

The Lira's fall could accelerate the onset of a recession in Europe, which might then spread to the US.
Michael Markowski writes for
Michael Markowski writes for

Image via Burak Su/Wikimedia

The turmoil in Turkey increases the odds for the global stock markets to be much lower by the end of 2018. This week Turkey’s currency, its Lira declined by as much as 9% and fell to all-time lows versus the US Dollar, Japanese Yen and the Euro. What has happened could accelerate the onset of a recession in Europe and cause a sharp decline of the Euro versus the US Dollar and Japanese Yen. A further decline for the Euro versus the US Dollar will accelerate the time table for a US recession.

The effect that Turkey has on the rest of the world is discounted since its classified as an emerging market economy. However, I believe that it’s a mistake to discount Turkey since it has the world’s 17th largest economy and 19th largest population.

The turmoil in Turkey began on May 16, 2018, when its President Recep Tayyip Erdogan who is running for re-election in June announced that he was taking over the country’s Central bank. Since the worst possible thing for any Central Bank for any country would be for it to taken over by a politician Turkey’s Lira immediately went to an all-time low versus all of the major currencies. See “Erdogan’s Plan to Drive Turkish Monetary Policy Sows Fear Among InvestorsWall Street Journal May 16, 2018.The currency had continued to steadily decline to newer and newer lows until it began to fall precipitously early this week.

To stop the crisis Turkey’s Central Bank jacked up its discount rate from 13.5% to 16.5%. The hike resulted in the Lira rallying versus the Euro. However, the next day the Turkish currency was back under pressure.

The reason why the discount rate hike did not work is because Erdogan over time has evolved into a dictator. See “Recep Tayyip Erdo?an: a dictator in all but name seeks complete control”, The Guardian April 19, 2018. Since President Erdogan is expected to win his re-election bid in June its currency is likely continue to be under pressure.

Turkey’s currency having a low exchange rate will result in inflation since the country has a trade deficit. Imports account for more than 50% of its GDP.

Turkey’s turmoil is bad news especially for the European economy for two reasons. The inflation caused by the weak Lira will likely result in social unrest. Turkey with a population of 80 million is Europe’s third most populated country behind only Russia and Germany. Secondly, Europe accounts for more than 50% of Turkey’s imports.

The pie chart below depicts that China, Germany, Russia and the US are Turkey’s largest importers.

Turkey will likely continue to add downward pressure on the Euro which has steadily declined from 1.22 to 1.16 dollars over the last month.

Turkey’s turmoil increases the probability that the S&P 500 will not eclipse its January 2018 high for many years. My February 6, 2018 article “BULL DEAD, BEAR DOB 01/31/18: Expect Stock Market Decline of at Least 50%) about the new bear market being born on January 31, 2018 is highly recommended.

For those investors who want to keep their risk minimal and yet have the potential for their portfolios to grow I am recommending the deployment of a 90/10 Crash Protection Strategy. For information on the strategy which is the only fail-safe strategy that one can utilize to protect liquid assets from crashes, recessions and depressions view video below entitled “Profit From the Crash”.

Disclaimer. Mr. Markowski’s predictions are frequently ahead of the curve. The September 2007 predictions that appeared in his column stated that share-price collapses of the five major brokers, including Lehman and Bear Stearns, were imminent. While accurate, they proved to be premature. For this reason he had to advise readers to get out a second time in his January 2008 column entitled “Brokerages and the Sub-Prime Crash”. His third and final warning to get out, and stay out, occurred in October of 2008 after Lehman had filed for bankruptcy. In that article “The Carnage for Financials Isn’t Over” he reiterated that share prices for Goldman and Morgan Stanley were too high. By the end of November 2008, the share prices of both had fallen by an additional 60% and 70%, respectively — new all-time lows.

Any change significant enough to matter draws vigorous opposition from those who depend on the status quo.
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