Financial Wars
Posted on Sunday, August 19th, 2018
It’s all Uncle Sam’s fault! The current crisis in the Turkish Lira and other emerging market currencies can quite simply traced back to the tightening of US Federal Reserve monetary policy. As the Fed tightens and raises rates the US dollar floats higher causing emerging markets to flounder. We have said multiple times that when the Fed starts a tightening cycle they inevitably tighten until something breaks. Something could be breaking sooner than most anticipated. We are on guard for a 1998 type of currency crisis exacerbated by politics as our trade wars seem to be morphing into financial wars.
Markets around the world are floundering this year with negative returns with the exception of the US stock market. Why is that? While we are joking that it is all our fault the reality is that capital goes where it is treated best. Capital is being treated better here in the US than the rest of the world as we have rising interest rates and those rates are multiples higher than what one can find in the rest of the developed world.
“Turkey is trying to rewrite the crisis management chapter in the playbook for emerging markets. It’s trying to go without interest rate hikes. It’s trying to do it without the IMF. That’s hard. It’s not impossible, but it’s hard.” Mohamed El-ErianAllianz
“There’s denial and a refusal to accept market realities and the fact they will have to hike rates and/or cut spending very sharply. There’s no way of getting round it. It seems like they think they can.“- Julian Rimmer, Investec Bank
While we have seen a nice bounce in the Turkish Lira we feel that this is nothing more than a dead cat bounce. Nothing has materially changed. This crisis for Turkey has not played out yet and it remains to be seen how it will effect other emerging markets and the US.
While we think that a currency crisis is rising in its probability we still see US markets as being pressured to move higher (especially in illiquid late summer markets) as more capital chases a return here in the US. High and rising short positions in US Treasuries and gold tell us that perhaps investors are leaning too far out over their skis in some areas. Whenever everyone thinks something will happen something else will. Last week was a very good test for the bulls and they passed. Let’s see if they can hold on to the ball as we are on guard for a late summer whipsaw in light markets.
Market valuations are very high and the gap down in the S&P at 2850 had us giving the bears the edge and with all of the currency and emerging market issues we thought that perhaps the bears might take over command of the stock market. This is why we wait for proof. So much for the bears. This is what we had to say last week.
While we have been a practitioner of technical analysis for over 25 years we subscribe to JC Parets, who we feel is one of the best on the street, to give us his input. He has been bullish on the market for quite some time now and in the face of every onslaught he has stayed bullish. This week put him on negative watch for the S&P. His feelings were that given the recent gap this week on the S&P 500 the pressure is on the bulls to confirm they are still in charge and 2800 is critical. He could turn bearish should the market push below 2800.
Needless to say we did not break through the 2800 level on the S&P 500 although it was very close. Not only did we not break down through 2800 level the bulls covered the bearish gap in the S&P at 2850. Now it’s the bulls turn to press the issue. While one can very easily get whipsawed in lightly traded summer markets we wait to see if key lines are crossed. Last week we pointed to 2800 are being important for the bulls to hold. This week we watch to see if the bears hold the line at 2865 on the S&P. The bulls need a close above 2865 to take control. If they can close above that number then they will have the bears on the run. If not, we are still stuck in our trading range and the summer doldrums continue. Even more than the S&P 500 we see greater pressure on the bears in small caps and mid caps.
Turkey has some real problems. Their currency issues and their refusal to address those issues will cause some contagion as it can already be seen in several European banks and weaker currencies. Keep an eye on Turkey but China as well. The Chinese stock market has taken a tumble and its economy looks to be weakening.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill