Why Turkey And Argentina Are Doomed, In One JPMorgan Chart

It was all the rage in 2017.

Not long after contrarians like Jeff Gundlach and Russell Clark said to go long Emerging Markets, suddenly everyone was doing it, either as a standalone trade or as part of a pair trade shorting one or more DMs. Of course, maybe all they were doing was indirectly shorting the USD, which was arguably the biggest driver behind EM outperformance. But, in no small part due to the recent surge in the dollar, after outperforming developed equity markets by 20% in 2016-2017, EM is underperforming by 2.5% so far this year.

Of course, it's not just the dollar, but also interest rates, which until the recent Italian fiasco, were at 4 year, or greater, highs.

And, as JPM's Michael Cembalest writes in his latest "Eye on the market" note, investor fears are predictably focused on the impact of rising US interest rates and the rising US dollar on EM external debt, and on rising oil prices.

And yet, despite the occasional scream of terror from EM longs who refuse to throw in the towel, a closer look shows that the market reaction has been orderly so far, with two exceptions: Argentina and Turkey, which are leading the way down. However, as the JPM Asset Management CIO shows below, the collapse in these two countries has been largely a function of state-specific/idiosyncratic reasons.

The chart below, courtesy of Cembalest, shows each country’s current account (x-axis), the recent change in its external borrowing (y-axis) and the return on a blended portfolio of its equity and fixed income markets (the larger the red bubble, the worse the returns have been). This outcome looks sensible given weaker Argentine and Turkish fundamentals. And while Cembalest admits that the rising dollar and rising US rates will be a challenge for the broader EM space, most will probably not face balance of payments crises similar to what is taking place in Turkey and Argentina, of which the latter is already getting an IMF bailout and the former, well... it's only a matter of time.

Below, Cembalest lays out his concise justification why while both Turkey and Argentina appear to be doomed, one should not extrapolate their unique problems to the rest of the EM complex:

  • On Turkey (0.9% of the MSCI EM Index), President Erdogan lost a battle with markets when he finally agreed to  higher interest rates to defend the lira. The big risk, (as we noted earlier in the wee)k, is the inadequacy of Turkish international reserves to cover its short term external debt, particularly since some reserves could evaporate if it looks like capital controls will be imposed. There’s also $80 bn in Spanish bank exposure to Turkish borrowers. Turkey looks like an unstable EM economy of the 1980’s and 1990’s, and is a country whose problems should not be over-generalized. This goes double for Argentina.
  • With Argentina dominating EM headlines again, let’s remember what country we are talking about here and not overgeneralize its problems. As shown above, Argentina spent the last 3 years borrowing an enormous amount of money; it has defaulted on its international debt 7 times since its independence in 1816; and spent most of the last decade in investment purgatory (it was jettisoned from the MSCI EM Equity index into the MSCI Frontier Equity Index alongside countries like Lebanon and Kenya).

Putting Argentina in context, JPMorgan's cluster model illustrates how risky the Latin American country has been for investors. In the chart below, the closer countries are to each other, the more similar they are with respect to competitiveness, regulation, investor protections, labor markets and ease of doing business. Like Bangladesh and Zimbabwe, Argentina lies at the outer edge of this known universe, far from other EM countries like China, Peru, Indonesia and Mexico and Vietnam, and lightyears away from the developed world. Only in a world of financial repression by central banks could a country like this issue an oversubscribed 100-year bond.

And speaking of Argentina’s ill-fated 100-year bond issued less than a year ago, it is already down 20% from its December peak with what JPM says are "are echoes here from 2001, when Argentina issued new debt just a few months before defaulting on it."


LetThemEatRand Thu, 05/31/2018 - 22:51 Permalink

"most will probably not face balance of payments crises similar to what is taking place in Turkey and Argentina, of which the latter is already getting an IMF bailout and the former, well... it's only a matter of time."

Isn't it about time we called a spade a spade and said "the government officials are getting an IMF bribe so they can retire in luxury after they leave the tire fire they left?"

foreignlander revolla Fri, 06/01/2018 - 08:44 Permalink

This I heard rumors of since my youth in Argentina.  One, I think that the economic damage is mostly self inflicted by corrupted politicians operating as puppets of the money changers since the days of Independence. Two, it probably is worse than Patagonia alone being taken, Argentina hosts the third largest heeb community in America after the USA and Brazil in total numbers, probably second as a percentage of total population.  And THAT is a problem, as most juice consider themselves juice first, then Argies.  That is such a non-issue than when the terrorists attack on a big Argentine Jewish association happened, the president at the time a POS son of a Syrian immigrant that sold off all the public assets and precipitated the big Default of 2001 after a spending fiesta, sent his condolences to Israel...

Which he was called for on the basis that the attack happened in Argie soil to Argie? citizens but then again...

Anyway, there's no freedom in Argentina to talk about the wandering tribe as it is a hard taboo, just like everywhere else.  Recently, an actress, a daughter of a prominent family was taken to the shed for saying nonchalantly that "it seems there weren't 6 million and they were probably much less victims".  The cabal had her walking on her knees over broken glass publicly and then, privately behind close doors with the local Sanhedrin and then the president of the Juice Assn invited himself to her house to extract an $ 80.000 dollar ransom for a trip to Israel as a restitution/rehab/cleansing PR operation AND wanted to fuck her too, while he kept on telling her "I'm not gonna fuck you, I'm not gonna fuck you, don't fear".  

Talk about a big backfire!!!  Lol.  I went through several buckets of popcorn for weeks on end!!! This, ladies and gentlemen, is the real face of the power of the cabal. And finally it's out there in the open for all Argies to see.

In reply to by revolla

dratalux foreignlander Fri, 06/01/2018 - 13:13 Permalink

I've listened Adrian Salbuchi on Jeff Rense Show talk about the Patagonia issue in Argentina/Chile. At least, I think most Argentinians are aware of the 'tribe' problem. Here in Brazil, this is not the case and then we have the Christian Zionist freak show...there are so many of them here! Even Jair Bolsonaro - who many Brazilians believe to be the answer for the massive corruption/violence going on here - is a Christian Zionist.

The media in Brazil also do not there to speak against the chosenites. I quit watching mainstream media. They're all controlled. Rede Globo is the worst.

If you haven't researched about the Sabbatean-Frankist Jews, I highly recommend. The Rape of Justice channel on Youtube has very good info about them: https://www.youtube.com/user/TheRapeOfJustice?pbjreload=10

In reply to by foreignlander

katagorikal Millennial Permabear Fri, 06/01/2018 - 07:53 Permalink

They have done a lot of things right by diversifying the economy. An improved education system has enabled movement up the food chain, from cheap manufacturing to offshore software development centers. The cost of living is still low compared to SG and HK. It is a relatively successful multicultural environment, including Muslim majority, significant Chinese & Indian minorities, colonial Christian veneer with many expat Westerners. The visa system is open for business and retirement (MM2H). KL is about to get a new high-speed rail link to Singapore...

However, the overall financial situation still depends on the oil price and political stability going forwards. A peaceful democratic change of power is a positive sign (so far).

In reply to by Millennial Permabear

foreignlander Pernicious Gol… Fri, 06/01/2018 - 08:58 Permalink

No it's not.  If it is a colony it's a colony of the Money Changers pal.  Germans came after a defeated and occupied (to this day) fatherland was starving, just like Italy, and the country became a big social engineering experiment with whoever had a passing whiff of having been associated with the Reich hunted down.  And those even that had been expelled from former German land now controlled by Poles and Checks, killed in the millions, MILLIONS on their march inland.

I wish more of those "lazy Germans" immigrated to Argentina along with the Italians that help to loose the language. Great Italian food culture, German industriousness, what's not to like?  But then again, what do you know about the Spanish Language to opine anyway?


In reply to by Pernicious Gol…

AurorusBorealus Thu, 05/31/2018 - 23:14 Permalink

Lol... there is no cure for stupid.  Argentina, which had little or no external debt 3 years ago, returns to seeking foreign debt for the first time in a decade, and JPM produces a chart claiming that this "massive" growth in external debt in the past 3 years is a harbinger of doom.  Well.. when you start at 0, all growth is "massive."

How big is the red idiot bubble for 24-year chart-makers at JPM with undergrad degrees in economics.  Is it as big as the idiot bubble for liberal arts professors? These two groups of people are certainly outliers from the normal.  Maybe a gender-studies student can make a chart to show us.


LiberateUS Thu, 05/31/2018 - 23:33 Permalink

Gee, where would the USA be if MS was honest enough to include them in the graph? Rising current account deficit and external debt?

Oh, right, USA doesn't have to be included because it can just print money.

GooseShtepping Moron Thu, 05/31/2018 - 23:37 Permalink

A few more years of can-kicking is all it will take to turn Argentina into Venezuela. If that happens, Brazil will not be too far behind. It will take quite a bit of pain to finally liquidate all the bad debt and capital misallocation that has been running amok in Latin America for decades. Now that their own birthrates have fallen below replacement, there is nowhere left to turn. Unfortunately, this is never going to get better in our lifetimes. This elevator has no bottom floor that we can currently see.

farmboy Fri, 06/01/2018 - 00:23 Permalink

Let us see how they stack up to the current account deficit and rise in external debt for the US. With trade war heating up let us see how long foreign creditors will finance that.

Tiny Ripple Fri, 06/01/2018 - 01:04 Permalink

What is missing in this analysis is the GDP growth rate. Turkey's GDP grew 5.5% average in the last 15 years and 7.5% in 2017. You can always cut back GDP growth to reduce current account deficit. Turkey has a lot of room to play.

shortonoil lizzoilz Fri, 06/01/2018 - 08:11 Permalink

It looks like JP forgot South Africa, Venezuela, Indonesia, the ME and about a dozen other countries who's FX markets have been slammed. But what would you expect from a TBTF bank; but more fairy tales and another pound of pixy dust? As long as the EM keeps contracting the developed economies will continue to see capital inflows. After that; booom. The world is burning 9 barrels of oil for every 1 it finds. When those last irreplaceable reserves are gone so is JP Morgan, and the rest of the money cartel. The doctors are telling the world it has cancer of the liver, but it just wants to pretend that all it has is a common cold.

In reply to by lizzoilz

To Hell In A H… Fri, 06/01/2018 - 04:32 Permalink

Do people know their history? Argentina-Argentium=Silver. Do people know why the old world abandoned the silver standard? Because parts of the new world was full of silver and did not want any competition, so they slowly crushed the system.

These charts are bullshit, because they they hide and omit facts regarding the worse offenders. Take the bank of France for example. Their current account and foreign reserves figures are supplemented by the 14 African countries yoked to their 2 African franc variants.

These countries as part of the deal of using the West and Central African Franc, have to place their foreign reserves with the bank of France and are only allowed to hold 14% of foreign reserves for themselves. These foreign reserves are counted as belonging to the bank of France.

The French always claim, if they don't like it they can leave the currency. lol  When countries leave, they find their new currency as worthless as Argentina, Zimbabwe and Venezuela. It is only recently because the attacks are effecting white Europeans, that the residents on ZH, realise how and why the banksters are attacking Italy.

The sad truth of the matter is this has been practiced on the turd and developing world since they gained independence. Fiscal prudence, debt ratios, GDP, its all bullshit. These charts are bullshit, because these fundamental issues apply to some countries and are ignored for others.

If the money-changers decide to attack a currency, then it goes to the shitter. The dollar is worse under EVERY FUCKING CALCULABLE METRIC than Turkey, or Argentina, yet diddly squat happens. Fuck this kabuki show of smoke, mirrors and optic illusions. 

foreignlander To Hell In A H… Fri, 06/01/2018 - 09:12 Permalink

Well that's quite an uppercut! Thank you for educating me and closing the knowledge gap on the West and Central African Franc.  See, when the Sid Blumenthal memo to Hillary leaked to the public, we learned that one of the reasons for Sarkozy being the spearhead of the attack on Lybia was to eliminate the threat of Qaddafi's jumping ship to his own gold backed Dinar with a confederation of African countries, thus, the Franc in use in the former? colonies with the concomitant rent due to France, would go the way of the Dodo. 

What I didn't know was these little details that you handily explained.


In reply to by To Hell In A H…