Turkey – On the way to a persistent crisis

The sell-off on the Turkish lira continues. The exchange rate against the dollar was above seven (7.2 in Asia) last night, it it now at 6.85 (just before 0400 pm, Paris time today) while it was at just 5.15 a week ago.
The graph is impressive and shows that the situation has dramatically changed in recent days.
On Turkey there are many things to look at to understand the recent weakness.
1 – In many other emerging countries, the situation has changed in April when the US dollar went up as expectations on the Fed’s monetary policy changed. Emerging currencies became weaker.
2 – The direct consequence was capital outflows from emerging to the US and lower liquidity on fixed income markets. In many emerging countries interest rates, short and long, went up rapidly. I have written on this topic here and here.
3 – The story stopped there in many countries notably in Asia. The situation is less comfortable but manageable. For countries with deficit in the current account and large indebtedness in dollar the situation went worse. This was notably the case for Turkey but also for other countries like Argentina or Indonesia. I have written on Turkey here and here

In other words, the Turkish lira weakness seen after mid-April was just the result of a stronger dollar leading to an emerging crisis. The specific Turkish momentum came from large disequilibria (current account and dollar indebtedness) that reflect the economic policy of recent years.
The recent exchange rate profile came after tensions with the US but the currency was already weak for reasons explained above. Tensions have created a run, leading to a rapid depreciation. Continue reading

The monetary policy procyclicality: a new source of concern

Central bankers are progressively adopting a pro-cyclical behavior. The global growth momentum is now lower and central banks’ strategy now have a restrictive bias. In the US, Canada, UK and in many emerging markets, central banks’ rates are higher than at the beginning of the year. This has already changed expectations and it will continue with a downside risk on the economic activity.
Continue reading

A Lower World Trade Momentum

These two graphs this morning in the “Daily Shot” of the Wall Street Journal show the lower world trade momentum. All the indicators converge to a lower dynamics. With US tariffs and retaliation the risk is an extended downward trend.

The virtuous loop seen in 2017 between trade and activity had an impulse coming from very accommodative monetary policies all around the world. There is no new central bankers’ impulse. It is even the contrary. Investors now expect that the next trend will be on the tighter side after the Fed.
Moreover the uncertainty associated with the lower global economic mood (from non cooperative strategies from the US, UK, Italy and retaliation measures) reduces the economic horizon and therefore the will to invest from corporate companies.

In other words, after a surge in 2017 coming from central banks’ impulse, there is a downside adjustment which is amplified by non cooperative behavior from many governments.
The main risk at the global level is a rapid growth slowdown. It could be sooner than later.

What really went wrong in the 2008 financial crisis?

This article is a discussion, by Martin Wolf, of Tooze’s book on the ten years since 2008.

What, finally, are the biggest results? One comes from Tooze’s remark that “the optimistic dogma under which democracy and markets were seen as necessary complements — the mantra of the aftermath of the cold war — was dead. In its place the crisis had put a more realistic awareness of the potential tensions between the two.” This is surely right.

Yet another of these big results is that power and politics are back. US power dealt with the crisis. German power shaped the eurozone’s response. Rightwing politics reimagined a financial crisis as a fiscal one. A similar politics also shifted the emphasis from the dangers of economic insecurity and inequality to the threat from immigration. The crisis has, alas, awoken the sleeping ogres of fear and hatred.

How, if at all, will liberal democracy survive the age of Trump, Brexit, Putin and Xi? That is the biggest question raised by this transformative decade.

Continu reading amp.ft.com/content/e5ea9f2a-8528-11e8-a29d-73e3d454535d

Trade War Erupts On No. 1 U.S. Farm Export to China

The Chinese’s retaliation measures have a strong impact on soybean.
The US price of soybean has dropped dramatically while at the same time its price in Brazil is surging.
Brazil which is already the main soybeans’ exporter will take advantage of the current mayhem between the US and China How a crop used in hog rations and cooking oil got caught up in a huge trade war — Read here www.bloomberg.com/graphics/2018-soybean-tariff/