The turmoil in Turkey increases the odds for the global stock markets to be much lower by the end of 2018.  This week Turkey’s currency, its Lira declined by as much as 9% and fell to all-time lows versus the US Dollar, Japanese Yen and the Euro.   What has happened could accelerate the onset of a recession in Europe and cause a sharp decline of the Euro versus the US Dollar and Japanese Yen.  A further decline for the Euro versus the US Dollar will accelerate the time table for a US recession.

The effect that Turkey has on the rest of the world is discounted since its classified as an emerging market economy.  However, I believe that it’s a mistake to discount Turkey since it has the world’s 17th largest economy and 19th largest population.    

The turmoil in Turkey began on May 16, 2018, when its President Recep Tayyip Erdogan who is running for re-election in June announced that he was taking over the country’s Central bank.  Since the worst possible thing for any Central Bank for any country would be for it to taken over by a politician Turkey’s Lira immediately went to an all-time low versus all of the major currencies.   See “Erdogan’s Plan to Drive Turkish Monetary Policy Sows Fear Among InvestorsWall Street Journal May 16, 2018.    The currency had continued to steadily decline to newer and newer lows until it began to fall precipitously early this week.  

To stop the crisis Turkey’s Central Bank jacked up its discount rate from 13.5% to 16.5%.  The hike resulted in the Lira rallying versus the Euro. However, the next day the Turkish currency was back under pressure.

The reason why the discount rate hike did not work is because Erdogan over time has evolved into a dictator.  See “Recep Tayyip Erdoğan: a dictator in all but name seeks complete control”, The Guardian April 19, 2018.  Since President Erdogan is expected to win his re-election bid in June its currency is likely continue to be under pressure.   

Turkey’s currency having a low exchange rate will result in inflation since the country has a trade deficit.   Imports account for more than 50% of its GDP.

Turkey’s turmoil is bad news especially for the European economy for two reasons.  The inflation caused by the weak Lira will likely result in social unrest. Turkey with a population of 80 million is Europe’s third most populated country behind only Russia and Germany.  Secondly, Europe accounts for more than 50% of Turkey’s imports.

The pie chart below depicts that China, Germany, Russia and the US are Turkey’s largest importers.

Turkey will likely continue to add downward pressure on the Euro which has steadily declined from 1.22 to 1.16 dollars over the last month.

Turkey’s turmoil increases the probability   that the S&P 500 will not eclipse its January 2018 high for many years.   My February 6, 2018 article “BULL DEAD, BEAR DOB 01/31/18: Expect Stock Market Decline of at Least 50%) about the new bear market being born on January 31, 2018 is highly recommended.  

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