Do you know who the real 'turkey' is?
That is the underlying message of today's note from former fund manager and FX trader Richard Breslow as he points out the utter hypocrisy and irony of today's Turkey crisis and its potential to spark global contagion.
There have been no dearth of articles detailing everything Turkey has done wrong. Suddenly everyone is an expert on, or more laughably, an advocate for, responsible, long-run economic management. Lessons we are meant to have learned from past economic crises are tortured into Dear Abby type columns detailing the bitter medicine which now must be taken. Those who advised feeding on anything with a yield advantage are now cautioning about contagion and being properly rewarded for risk.
If Turkey is causing global markets a problem, we’ve done it to ourselves. Train investors to buy everything in sight regardless of quality. Make it a fact of life that failure to do so risked grossly underperforming and being fired. Treat our friends like enemies and always opt for the nuclear option in any disagreement. Destroy a functioning inter-bank market and pretend liquidity exists. Have central banks become activist investors in markets negating the need for prudent portfolio construction. And then pretend to be shocked that we should come to this.
We’ve spent the post-financial crisis period with virtually zero interest rates and an insatiable appetite for buying dollar-denominated debt from anyone prepared to print up a prospectus. Now we get to pay the real cost of that allegedly free money.
The contagion we are witnessing around emerging, and even developed, markets isn’t because of trade, central bank independence or some other basic economic issue. It’s because the cost of dollars is going up and the availability down.
Turkey can jack up rates all they want, but the only solution to the larger problem is for the Fed to keep flooding the global market with liquidity. And that hasn’t been happening. The FOMC has been modeling an insular global economy that no longer exists. Turkey has done some unfortunate things, but until now, it’s done so with our blessing. And they aren’t alone.
On Friday, markets were shocked when the ECB cautioned that various banks within the EU had significant exposure to the Turkish market. Now that’s a stunner. It also tells you that regulators need to stop pretending they can run, or even understand, these businesses for management. The only way to have a stable banking system is to require adequate, as in large, capital buffers. With all due respect, doing whatever it takes can’t be perpetual manipulation of the capital key. The ECB should look at the 30-basis point yield on bunds and be ashamed.
There are indeed many lessons to be learned here. But to think this is just about Turkey would be misguided. And to think we have put the financial crisis behind us and it is back to business as usual is a convenient and dangerous narrative. We broke it and we own it. I wonder if we will have the “Courage to Act”. Or just write about it.