Turkey May Have Changed Its Name But The Desultory Song Remains The Same — How Money Impacted GeoPolitics This Week

Recep Erdogan’s 49.5% take of the vote this past weekend is just one more example of geopolitics conspiring with domestic politics to curtail long-term confidence in global equities. Even the bulls are beginning to suspect delusion in a market that takes 10-year projections of AI as reason to upgrade earnings estimates in 2024, let alone the complete disregard for geopolitical implications of Erdogan’s remarkable resonance with Turkish voters. But where geopolitics and utopian technologies fail to bring the bulls to their senses I expect Fed actions to do so in the near future. For now the market is heading straight for resistance at 4210 as 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 neutral. There are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days then fall hard.

The Fed technically reduced liquidity this past week (-$47bn) but in fact the move by Treasury to spend its balances ahead of the debt ceiling impasse put money back into the banking system, increasing excess reserves by $54bn. The PBOC similarly added liquidity (Yuan 27bn). Some see liquidity increasing another 5% through this year (Michael Howell via Liquidity.com). But depending on what actually happens with the negotiations, it’s highly likely Treasury replenishes its account at the Fed, resulting in a further tightening to ongoing QT and tightening credit standards by banks. The PBOC might counter some of this, but if Japan eases its yield curve control and the ECB makes good on tightening then very likely global liquidity flatlines or even declines, led by the Fed.

America’s contribution to flat or declining liquidity is bad for the global economy and particularly for EM nations who need a weaker dollar and America’s dominance in fostering robust global trade. Countries like Argentina, Pakistan and Lebanon are feeling the effects most profoundly, and nothing China and Russia can do can save them from deeper decline. But Turkey presents the rare case of an anti-American conservative leader with bad policies who managed to survive this negative macroeconomic environment. The consequences for Turkey will be the same, but the fact that it will take longer to play out will have profound geopolitical implications for Eurasia.

The consequence of Erdogan’s remarkable showing last week is that he likely wins the runoff and Turkey’s budget deficit widens to 5% of GDP while interest rates remain too low and feed inflation of 50%. The only reason the Lira hasn’t devalued more is that Erdogan has effectively de-linked the monetary economy from Global Wall Street. So while Erdogan’s own policies have created artificial liquidity to counter the negative liquidity flows from Federal Reserve’s QT, Erdogan couldn’t win an outright majority since his policies do little but keep people employed so they can partially afford the goods and services they enjoyed before the Pandemic. This unsustainability likely leads to deeper autocracy, oppression and economic decline, with predictably negative consequences for the other autocracies and poorly functioning democracies around Turkey.

Erdogan is winning because most Turks want a pious pro-business leader who allows a degree of cosmopolitanism but stays true to traditional beliefs and manners. Erdogan is far from this but has been all of these things at different points in his career, and is a strongman who survived a coup and projects strength in a bad neighborhood of new and ancient antagonists. Most Turks are like most people when it comes to national liquidity — clueless and suspicious of manipulation by elites near and far. So Erdogan’s constriction of global monetary links resonates with most Turks, despite terrible economic and humanitarian outcomes during this reign. Worse still is the example Erdogan sets for other autocrats, forestalling inevitable decline by using Global Wall Street as a bogeyman rather than an investor and lender. This could lead to more instability as autocrats boldly implement bad economic policies, hurting global confidence even further. Erdogan may have won a battle but the long-term future for Turkey mirrors the short-term fate for investors as the bear market rally collapses in short order.

Yesterday I sold a portion of my position in the leveraged ETF UPRO. Consequently my current positions include a larger cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a moderate long position in large-cap equities.