'..Things turn really crazy at the end of cycles. Monetary Disorder, Manias and Market Dysfunction. The parallels to 1929 turn only more compelling and ominous.''Erdogan’s desperate call for Turks to “cash in their gold and invest their savings to shore up financial markets” is reminiscent of the devastating 1997 “Asian Tiger” Bubble collapse. Turkey would today appear to have all the characteristics of acutely fragile financial and economy structures vulnerable to a currency/debt crisis of confidence.
Sure, Turkey has repeatedly dodged bullets over recent years, bailed out by the loosest global financial conditions and associated yield-searching “hot money” EM flows imaginable. But will global markets once again prove so accommodative? I have serious doubts.
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And while EM bonds and currencies have been under significant pressure, there is generally little concern at this point for a systemic emerging market crisis. Indeed, this week’s eruption of instability in Turkey coincided with a rally in the major U.S. equities indices. There were some incipient indications of fledgling risk aversion early in the week (i.e. higher corporate and bank CDS prices), along with a drop in energy prices. At Thursday lows, the small cap Russell 2000 Index was down 8.2% for the week (a late rally cut losses to only 2.9%).
Yet, for the most part, heightened instability at the “Periphery” underpinned the “Core.” The dollar index gained 0.9% to a four-month-high. Importantly, after trading as high as 1.75% last Friday, 10-year Treasury yields were down to 1.59% by Wednesday – as safe haven bids developed for Treasuries, bunds and JGBs. Instead of inflation trepidation and nightmares of a “behind the curve” Fed impelled to “slam on the brakes,” holders of Treasuries could again daydream of global EM instability, another round of disinflation and QE forever.
The analysis is exceptionally challenging. Fundamentals are in place for a major EM crisis, and I see reasonable probabilities of an unfolding crisis in Turkey providing the catalyst. We’re seeing significant weakness in key EM bonds and currencies, as I would expect preceding an acceleration of Crisis Dynamics.
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The week also indicated the worst-case scenario is anything but a longshot. Instability at the “Periphery” feeds “Terminal Phase Excess” at the “Core.” A faltering EM stokes speculative flows to booming U.S. and “developed” currencies, equities market manias, and corporate Credit. The Manic “Core” douses fuel on the burning “Periphery” – Double Trouble. Things turn really crazy at the end of cycles. Monetary Disorder, Manias and Market Dysfunction. The parallels to 1929 turn only more compelling and ominous.'
- Doug Noland,
Double Trouble, March 27, 2021
Context (Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..''We’re currently farther away from “typical” expected returns than at any moment in history, including the 1929 and 2000 market peaks.‘'..the disconnect between Wall Street and Main Street .. unsound money is incompatible with social and political stability.''Current policy and market structures ensure instability and persistent hardship.''The only cure for a Bubble is to not let it inflate.' - Dr. Kurt Richebacher2021: The Year of Acute Monetary Disorder and Fragility'We’re today in the most financially unstable environment of my over 30 years of analysis.'(Banking Reform) - 'The second-half of 2020 marked the emergence of a full-fledged market mania..'