If you have been paying attention to the financial news lately then you know that Turkey is now in a full-blown economic crisis. The crisis really has been going on for months, but now it has reached a tipping point as the Lira has collapsed. Take a look at this chart of the iShares MSCI Turkey ETF (NYSEARCA: TUR):
Last week Turkey’s hard fisted ruler Erdogan gave a speech to his supporters telling them that they are facing a conspiracy out to destroy their nation and told them to sell any gold they had and to go to the bank and use the proceeds to buy the Lira. I saw this live for myself on TV and his followers cheered him when he told them to do that.
In times of turmoil there is a segment of every nation’s populace that looks for a strong authoritarian leader to believe in and to obey. They want their ruler to smash their enemies to a pulp, but the nation of Turkey brought this on to itself. Today Erodagan is blaming Donald Trump for what is happening, but what we are seeing is the result of a nation that has wracked up so much government debt owed to foreign nations that it has created a funding crisis for itself with corrupt wasteful spending in Erodagan projects.
Turkey’s current account deficit broke the negative 5.5% level months ago. That’s the danger level for a nation. What the current account deficit does is measure a country’s foreign transactions with the rest of the world. It includes world trade and loans and debt. So when a country takes on loans from the rest of the world to buy imports or fund government spending its current account goes into deficit. If a country is exporting more than it imports and lending more money than it is borrowing than it has a current account surplus.
Historically when a nation’s current account as a percentage of GDP goes past the negative 5% level it runs into trouble and eventually can fall into a full blown crisis. When that happens it usually takes three to five years to get out of it and return to normal, but sometimes it can seem to go on forever, which is what is happening in Venezuela.
The best study of what happens when nations fall into economic turmoil like this and why is that done by Carmen Reinhart and Kenneth Rogoff titled This Time Is Different. It came out after the 2008 crash in the United States and noted that our great country actually passed through the 5% deficit level in the years heading into 2008.
So what countries are at risk of being next? Well, we have to put Egypt at the top of the list. It’s current account deficit is at 6.49% according to the latest date from the IMF. Take a look at the VanEck Vectors Egypt ETF (NYSE: EGPT):
This ETF is on the verge of going through its July lows to make another lower low and simply dump. This type of price action is happening with many country investment ETF’s. Another one that recently dumped is the ETF for South Africa. Take a look at the iShares MSCI South Africa ETF (NYSEARCA: EZA):
EZA closed on its July low yesterday too and looks like a mess. The current account deficit for South Africa is negative 2.27% according to the IMF’s data for last year, but it widened to negative 4.8% in the first quarter of this year. The turmoil in Turkey is putting pressure on global markets and causing bond prices to drop. That’s making interest rates rise in emerging market nations, which in turn is causing their current account deficits to grow.
That’s a dangerous situation developing and is probably why the global yield curve inverted several months ago. What does this mean for the United States?
Some say Turkey means nothing. But Turkey is the 17th largest economy in the world and this crisis is going to turn out to be one of the largest crisis in size of debt in financial history as it plays out. It will hurt European banks that lend to Turkey.
Most American commentatorss though believe that the United States is immune to market drops in other nations thanks to a rallying dollar and the fact that right now its economy is doing better than the world as a whole. But in reality most American investors are not paying any attention to what is happening, because the stock market volatility remains low in their markets. They are essentially asleep in the back seat of car going to where they do not know.
The current account deficit for the United States ended last year at negative 2.40%. IMF estimates are that it will grow to 3% next year. But the US government spending deficit is growing and growing and is expected to get close to one trillion next year. As long as the US economy grows that’s ok, but if the government is pushing on a trillion dollar government deficit when the next recession hits than its current account deficit will explode overnight.
But that’s a possible future and right now the US is still in a better position for the rest of the world and so no one cares. The reality is as long as the US stock market averages remain above their 200-day moving averages American investors don’t feel like they have anything to worry about. What is happening in Turkey is what is happening in Turkey.
There are spooky things starting to happen in the markets though. Last month we saw many popular big cap tech stocks blow up, such as Facebook when it had a tear drop price drop. And as the global markets have been sliding commodities also have been crashing, with agriculture commodities now falling to a 52-week low, which is actually an all time low for the Powershares DB Agriculture Fund (NYSEARCA: DBA):
Volatility in the US stock market is super low with the VIX even going below $11.00 last week. But volatility is now hitting markets around the world, including currencies and commodities, and is likely to bring big swings to the US stock market in the coming months. There are times when it’s best to reduce one’s risks in the financial markets and not make big bets in anything. Most of the time nothing is happening in the markets, but there are times when they start to change that we ae to be on top of them. I believe now is such a time.