There is currently a lot of focus on Turkey, and for good reason, but Turkey is really only a second or third derivative of the global macro story.
Turkey represents the catalyst for a new theme, which is “too much debt and current account deficits equals crisis”. In that sense, we have come full cycle from deficits and debt mattering in the 1980s and ‘90s but not in the ‘00s and ‘10s post- the Nasdaq crash and great financial crisis under the biggest monetary experiment of all time.
In our view, the order of sequence for this crisis is as follows:
1. The debt cycle is on pause as first China and now the US have deleveraged and ‘normalised’.
2. The stock of credit or the ‘credit cake’ has collapsed. First it was the ‘change of the change of credit’, or the credit impulse, which tanked in late 2017 and into 2018. Now it is also the stock of credit. Right now, global M2 over global growth is less than one, meaning the world is trying to achieve 6% global growth with less than 2.5% growth in its monetary base… the exact opposite of the 00’s and ‘10s central bank- and politician-driven model.
3. This smaller credit cake is spilling over to a stronger USD (as US growth increases versus the rest of the world) and a higher marginal cost of funding (as the amount of dollars available in the credit system shrinks), leading to a mini-emerging market crisis.
4. Finally, the Turkish situation was really created by the aforementioned factors but it was made worse by President Erdogan’s autocratic and naive monetary and fiscal response. The reason this mini-crisis is not idiosyncratic is points one through three, but the market is still treating Turkey as the starting point of the current EM mini-crisis.
…click on the above link to read the rest of the article…
