Geopolitical Developments: Turkish Inflation Is Key to Saving The Middle East From Water Woes

The drama in the Turkish currency market is far removed from the bullish feeling in equities, which i expect to persist through Thanksgiving. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is bull flattening. But there was also one negative factor across global asset classes. Inflation expectations are rising based on measures of Treasuries and TIPS. But taken together, the market looks set to overcome these concerns and rise moderately over the next few days.

The Turkish Lira has lost about 15% in the past few weeks and that spells more inflation for longer in Turkey, something that will harm President Erdogan’s popularity. The geopolitical consequence is the Turkish mainstream benefits and if they can parlay this into electoral victory, that will reduce the suffering in the Middle East. Since elections aren’t required until mid-2023 the key is whether the various anti-Erdogan parties can unify and demand early elections. Since Erdogan has played his nonsensical economic policy before and pulled back, there is a chance voters will sour enough to incentivize unity among the opposition and lead to Erdogan’s ouster.

Erdogan’s economic nonsense has salience among the left since it’s based partly on a tradition of “structuralist economics” which posits that a developing economy is so dependent on oligopolies or static financial relationships that a fall in interest rates supposedly leads to a drop in costs and thus disinflation. This logic extends in the other direction too, where supposedly a rise in interest rates leads to higher costs and thus inflation. An economy would have to be fairly closed, noncompetitive and highly dependent on bank lending for this to make sense, and that is not Turkey. Al-Jazeera notes “Before the decision, the chairman of Turkey’s biggest business group Tusiad said the central bank shouldn’t forget its main target of controlling inflation. It reflects mounting concerns that extended currency weakness risk destabilizing the economy which sits on $446 billion of gross external debt, according to central bank data.”

So the economic suffering of the Turkish people under Erdogan’s nonsense policies is key to easing suffering across the Middle East. The reason is water, the commodity in short supply across the region and increasingly subject to the vagaries of climate change. Erdogan is simply a malevolent actor with regard to water, having pushed through dam-building which reduces the flow of the Tigris and Euphrates rivers across Syria and Iraq.

Middle East Monitor reports “The Iraqi Ministry of Water Resources yesterday warned Turkey that its plan to build a new dam on the Tigris River would affect Iraq's share of the river's waters.” Arab Weekly quotes a Norwegian Refugee Council analyst: “Iraq is facing its worst drought in modern times. This is due to record low levels of rainfall, reductions in water flow from its neighbours, which has primarily hit the Euphrates and Tigris rivers and there is no doubt climate change has contributed to this crisis,” she said.”

Sensible water policies require sensible leadership and that makes Turkish inflation the key to changing the situation across the heart of the Middle East.

Yesterday I sold my position in Apple (AAPL): my current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a small net long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).