CONCERNS ABOUT THE FUTURE

CONCERNS ABOUT THE FUTURE

Developed or emerging economies are all problematic; they are also unable to produce solutions based on compromise. They were obliged to create and market optimistic scenarios from the trade volume that rose by 2.4% based on the rise of commodity prices due to oil with its reduced supply in the last quarter of 2016 and on the concerns of protectionism. Naturally, the lifespan of this kind of constraints is limited, and those who are caught up in dreams and confuse the danger with the opportunity can not escape from becoming a prey. As the systemic risk rises to new records, to elaborate optimistically upon the dollar interest’s rise does not solve the problems. 

The political developments in developed countries and the geopolitical risks in the emerging ones should be seen as the pitfalls of these negativities. In the first quarter of this year, we partially consumed the remaining painkillers, and we managed to content ourselves by exploiting the shadows of the somehow temporary and optimistic scenarios. We gave a pause to the tendencies towards increasing destabilization for a while. We have to prepare for the fact that the next set of negativities will not be overcome in this way. The present structure can not overcome the problems that it produces, the unexpressed solutions seem to start to impose large and long-term self-sacrifices.

THE U.S. DOLLAR AND THE WORLD ECONOMY

The medium-term realities at global level and the expectations that take them into account and the conditions that make it possible to meet short-term needs are not compatible; while the first one feeds the tendency to avoid risk, the other requires precisely the opposite. When one of them comes to the forefront, it causes the other to be ignored! As such, price volatility is inevitably increasing, and the likelihood that the fluctuations become more and more destructive is getting stronger.

The rhetoric and actions of the new US administration point out that protectionism in the medium term can become increasingly strengthened. It is worth noting that ignoring this and other influences on all other trends means that you will have to face much more serious costs in the future and that nothing will remain the same. This fact disturbs those who are responsible for the frailties created by globalization and those who are at risk beyond normal; they are forced to admit that fear will not change their fate!

The strengthening of protectionism in the medium term means the strengthening of risk aversion and the increase in the systemic fragility. Global trade volume will start to shrink very sharply; the highly corrupted financial structure will start to disintegrate due to the uncontrolled increases in non-performing loans. Global problems that can not be solved by consensus will be tried to be overcome with cold or hot conflicts. All priorities and strategies will have to change, capital movements will shrink. Price volatility will increase and balance sheets will be worn out; the negativity in economic expectations will become chronic. The interventions in favor of the planning but against the market will increase and will become diversified. The ones who got into deep relation with the lawlessness called globalization or those who depend on taking big risks will the ones who will be the most worn out.

The tendencies that are briefly summarized above and the pricing the trade battles that the new US administration has ignited mean that the market is cutting it's own throat. Because of this, they are ignored and the overthrow of the complaint about the overvalued dollar is used as a justification to turn the agenda into their own favor and create opportunities to reduce their risk! They try to market the depreciation of the dollar with the interpretation that the risk appetite has begun to return; in order to gain some time and to save themselves, they cannot find anything else other than trapping those who do not understand what's going on!

The argument over the value of the dollar is not very meaningful for an understanding that is seeking the solution in protectionism. As the strengthening of the dollar will cause the inflation and the rise in interest rates to become more limited, those who embrace conservatism will not sincerely oppose it; it is of a tactical nature to speak of it, it is used as justification for some new initiatives, and is nothing more than a compulsion to compromise the other side. Through the rhetoric of the value of the dollar, it may be nothing less than a blissful appreciation to say that the new administration has distanced itself from the protectionist understanding!

Medium term trends indicate that protectionism will be strengthened, the tendency to avoid risk will be more decisive and the dollar will continue to appreciate for a while, even if it fluctuates wildly. This picture does not say good things to the emerging economies and the financial markets, especially to the countries that have serious levels of saving gaps.

RISING PROTECTIONISM AND EXTREMISM

RISING PROTECTIONISM AND EXTREMISM

The global trends that are unsustainable and pushing the extremes have long begun to create their own opposite. As the irrationality called globalization became monolithic and monetary authorities became ineffective, protectionist tendencies began to strengthen; the strengthening of risk aversion was inevitable. Trying to save the financial system during the global crisis,  shifting the political center to the right and anti-immigration policies especially in developed economies, were the footsteps of rising protectionism. Through the shift of production and the feeding of the perception of the systematic risk by affecting global trade volume was inevitable. From this point of evaluation, the results stemming from the UK's EU referendum or US presidential election cannot be considered as a surprise. The results of failing to produce global solutions and based on consensus to the global problems were obvious.

Protectionist tendencies that have begun to come to the forefront mean that their perspective is rapidly shifting to the medium term, and the tendency to avoid risk is likely to continue to grow in a fluctuating way. It is not time to pursue dreams!

THE FED AND TRUMP'S ECONOMIC POLICY

THE FED AND TRUMP'S ECONOMIC POLICY

Beyond the Fed’s quarter-point interest rate increase, it as the “light in the tunnel” that came afore; and this was the potential interest rates in the future. In its present state, the Fed is likely to raise at least 3 times the interest rate in 2017 by 0.25 each.

Based on this scenario, the minimum level that the Fed’s interest rate hike at the end of 2017 will be 1.50. The Fed’s economic forecasts seem to be very strong as they support this potential interest rate hike; the economy is almost at full employment level. If then, the interest hikes may become stronger.

Such a change in the outlook of interest rate increase regarding 2017 means bad news for the U.S. high yield bonds; it is the same for the emerging countries. This picture has strengthened the expectations regarding the movement of the interest rates of U.S. 10-year note to a level above 3 percent.

It seems that the Fed is reacting to the fast-changing expectations of the market regarding Trump’s potential economic policy instead of performing a calibration of its policy in accordance with it. Thus, the Fed is considering the probable change in the fiscal policy after Trump. Whatever is the situation, the Fed has warned the markets; “we can speed up!”.

The yield on the U.S. 10-year note which was 1.54 percent in July is now 2.5 percent. This picture has strengthened the prospective raise of the interest rates. By moving into 3.00-3.50 territory, the emerging markets’ bond yields will be forced to move upwards in a similar fashion and will also force the reverse flow in the capital flow that constitute the portfolio investments. And the economic stagnation that will follow will be a threat to the current sovereign ratings of the emerging countries.

TOUGH TIMES AHEAD

TOUGH TIMES AHEAD

Trump's policies will trigger the economic growth, and in turn, this growth will trigger inflation. And when the increase in debt is added to this, interest rates on bonds rose. The interest rate hike has strengthened. The strong dollar has forced gold to sink. Copper reflects the best of the developments. Growth-sensitive copper prices have risen more than 18,61 percent since 21102016.

The US presidential election ended like Britain's Brexit. The British elector turned out to be a more independent, anti-immigrant and economic protectionist policy by voting for the UK's departure from the EU. The Americans also led the United States in the same way by voting Donald Trump, an anti-globalization, insurgent, and conservative candidate.

If the promises in the election process are to be passed on, or partly implemented, the United States will be at the beginning of the process of isolation from the world economy. During his campaign, Trump promised that he would cut taxes, undertake infrastructure investments, bring American companies back to the United States, build skyscrapers with American steel, and set a wall in front of immigration and free trade. He sold his idea well and took his presidency.

Next is the referendum in Italy. It will be followed by the elections in Germany, France, and Netherlands in 2017. We will see that those who criticized today the US electorate by saying "How did the Americans chose this guy" will bring to the power their Trump. With this political wave coming after the global crisis, the world is rushing to the conservative politics in full speed. If everyone becomes inward, the results are obvious. It's like we're going through a cycle where globalization and world trade will take a hit.

If Trump succeeds in applying his promises, the American economy will win, but the rest of the world will lose. China, which can not sell its steel, will probably not keep the US Treasury paper in its possession. We can live the most severe phases of trade and currency wars in the coming period. This will bring about great turbulence and volatility in the world economy, financial markets and capital flows.

If Trump can fulfill its promises, public investments will increase, budget deficits will grow, private sector spending will increase, and growth and employment will increase. This is best reflected in copper prices. It is the most sensitive metal to growth, and it rose 18,61 percent since 21102016. The triggering of the growth will bring inflation.

Today's projection of inflation on the horizon is in the form of rising interest rates. As the interest rates increase and the policies will be implemented, the capital will be sent to the United States and the dollar will appreciate in value. As the dollar rises, other major currencies, and moreover developing country currencies, will depreciate in value.

US interest rates constitute the basis for the rest of the world. With the increase in the rates there, the interest rates of developed and developing countries are increasing as well. Country risks are rising, like it happened in the recent weeks. The first guiding against Trump's wind could be the FED again, through its speech or interest rate decision in December. But whatever happens, we have entered a period of high turbulence.

A NEW AREA IN POLITICS, GLOBALIZATION AND MONEY

A NEW AREA IN POLITICS, GLOBALIZATION AND MONEY

The US, presidential elections were won the Republican candidate Donald Trump. Two major factors influenced this.

First, Trump responded to the desire for change from the wider community after the global crisis. The image of "advocating America first" with the emphasis on protective politics, the walling and immigration prevention on the Mexican border, the image of shaking the current system with style and rhetoric has met a section of the need for change. The reaction against the FED, Wall Street and current status quo also reinforced this image. These rhetoric and attitudes jhave encompassed the unemployed, the low income, the broader sections that did not benefit from globalization and suffered from the crisis.

Secondly, the fact that the Democratic Party has been in power for two periods and that it has to change the presidential candidate due to the two-term rule is also an important handicap. The new presidential candidate Clinton was in front of the US public for a long time. She was not new as a face and was worn out. She did not say anything new either. FBI investigations of the e-mails from the Ministry of Foreign Affairsand and her health problems have also been handicaped her. She represented exactly the status quo and was defeated. With another candidate, the Democrats could have won more votes, but this could not be sufficient to win the presidency anyway.

We see that a global trend that started with Brexit in the UK and with the US selection, it is getting more clear. This trend is an anti-globalization, a nationalist and local trend that encloses countries and economies. It is due to the demands of large segments, who did not benefit from the benefits of globalization, to get more share from the economy. This can only be done under authoritarian leadership, with the determination and compulsion of the leader who is closer to the people. In the elections to be made in major countries after the UK and the US elections, we can see this in more or less the same way. The disturbances created by society and the deterioration of the distribution of income by globalization and the crisis are becoming more and more evident in the elections. Voters' orientation of politics in this way may not only increase the momentum and protection of globalization, but also increase the public weight in the economy. More statist approaches can come to the forefront.

It is difficult for the central banks to maintain their abundant and cheap monetary policies in the face of this change in the global political conjuncture. Anyway, when the signs from here are played out, it is possible that the period of abundant and cheap money ends with the influence of the developments on the side of politics. The large and inexpensive money that was launched against the crisis and sustained for 8 years did not favor the large masses. The prices of financial assets and real estate have increased, as the abundant liquidity created by the central banks were mainly used by the financial sector. Wealth and capital grew more and more. Now, the broader societies want politics to put an end to this situation.

Considering this situation, it would be more destructive for the medium and long-term effects compared to the initial impact of shocks in the markets in the short-term. Since 2008, the volatility of financial markets has built-up and moved on an artificial ground at high altitude. But it is also a big blow to the abundant and cheap money structure. The demolition of the structure will take some time.

HEADING TOWARDS A NEW FINANCIAL CRISIS

HEADING TOWARDS A NEW FINANCIAL CRISIS

The global economy has become more fragile financially than 2008 and the world will not get out without a crisis from the negative interest process. In the aftermath of the global crisis, the debt rose to $50 trillion,
assets' bubble formed with the low interest rates and abundant money.

What is important is what will happen to the US economy. If a long period of stagnation or contraction in the economy occurs there, there will be no power to keep the world economy going. The United States and the Fed can do nothing against this new shock for they have exhausted their ammunition. In this case, the world will experience a more severe debt crisis.

There's a concern regarding the outlook of the world economy; growth has dropped to the lowest level after the crisis. Although the United States caused the crisis, it recovered faster than the other economies but it's economy is much more fragile than thought. Both in the USA and in the EU, the crisis was mismanaged.
The applied policies have even made more serious the systemic and structural problems of the world economy. Income distribution has deteriorated further. The purchasing power of workers is not enough to buy the goods and services they produce and this is creating problems in the demand and reduces the production. Companies are more engaged in speculation than productive investment. They create a bubble in the stock market or real estate market by borrowing excessively.

For these reasons, there are serious and widespread concerns about heading towards a new crisis without fully resolving the crisis that began in the USA. In the case of a new economic recession, there is nothing much that the USA can do because the ammunition has been exhausted. Federal Reserve lowered interest rates, made the monetary expansion and opened a financial package. Aside the economic crisis, Europe has not been able to solve the financial crisis. The Euro-zone was able to catch up in the first quarter of the 2016 the pre-crisis level of GDP after sustaining revenue losses for a long time.

The crisis is spreading to emerging and developing countries as a third wave after the US and Europe. 3-5 years ago, these countries were the locomotive of the world economy. Currently the issue has become a part of the problem. They're all almost fragile, including China and India; some are already in recession. The rest is showing efforts to grow with debt. More importantly, the global economy has become financially more fragile. The reason for the crisis in the US and the EU, was excessive debt. The solution that was found to it was zero interest rates and rapid monetary expansion by creating more debt.

Not only in the US and Europe, a total of 50 trillion dollars in debt has been created all over the world since 2008. GDP ratio of this debt has increased 50 points over the last 6 years. Most of them are denominated in dollars and carry a serious interest and exchange rate risk. If the global economy starts to shrink once again and enters a recession, a significant portion of this debt can not be paid and there can be a larger debt crisis than 2008.

The fate of the entire world has become almost dependent on US monetary policy. It is very difficult to revert from the zero interest rate policy or negative interest rate without creating an earthquake in the capital and money markets.

What can be done against a serious and persistent financial shocks that may come from the US or from the financial markets? Most of the economies don't have many options. The economic foundations are not solid, saving and investment are very low, the balance of payments is fragile, reserves are insufficient and the industry is weak.

The area of maneuver for fiscal and monetary policy is much more limited than in 2008. The response to the shocks may be as usual like raise interest rates, use the reserves, once they are finished borrow from the IMF, rescue the banks and foreign creditors, let the IMF tighten more your belt, the economic growth will shrink and the unemployment will rise. The economies that do not want to face such a situation should plan right away what to do against the almost inevitable shocks.