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.

FINANCIAL AUTUMN AT SIGHT

FINANCIAL AUTUMN AT SIGHT

During the latest period, a discussion comes to the foreground: the central banks' excessively loose monetary policies have brought the bonds' long-term yields to record low but it is believed that it is no more useful and in case of a new recession wave, the central banks don't have any weapons left in their arsenal.

There is no progress in the inflation, in the demand for loans and in the economic growth, despite issuing money to the marketplace by the massive buying of the bonds by the two main central banks of the European Region and Japan where the central banks passed to the negative interest rate in their respective monetary policies. For example, despite the buying by the Bank of Japan not only of bonds but also of stock funds too, this has not changed much the expectations.

The fact that the global bond stock of 13-14 trillion dollars has turned to negative return is not only showing the fear but it also feeds it. And this fear is the fear of the collapse of the financial sector. Due to this, the leading "investment gurus" are whispering "buy Gold".  As you know, gold is the only investment vehicle which does not carry a "counterparty risk". Whether a stock or a bond, the issuer has an obligation. The issuer has a bankruptcy, a default risk.

With the strengthening of data, the central banks may raise the interest rates but it is not the end of the world as the investment community thinks. If things go to worse, past monetary policies could be adopted as well as some unorthodox vehicles not used so far and which have been very effective in the past.

The normalization in the raise of the interest rate by the Federal Reserve is imminent but not undertaken which, in turn, hurts the Federal Reserve's credibility and the economy. Consequently, the Federal Reserve should eliminate the pressure that is felt by the economy and the emerging markets by changing this attitude.

Also, the pessimism regarding the economic growth is due to the productivity. The central banks cannot find a solution to this productivity problem with monetary policies alone and the politicians should take the relevant measures by coming into the game.

A GLOBAL VIEW OF THE WORLD ECONOMY

A GLOBAL VIEW OF THE WORLD ECONOMY

The stock markets’ transaction volumes have fallen and are still weak; there was a heightened volatility. Emerging countries are having fluctuations in their currencies. We are seeing zigzags in the stock markets. We have fluctuations in a band but the volume looked shallow. Everyone is looking at the same place: what will the Fed do?

There are problems that have resurfaced in Europe. Let’s start with the example of Spain; Spain’s debt is high; because it has not been restructured like Greece’s debt and a portion of it has not been deleted, the problem is still not solved. It has been ignored for a while but the debt is there. The problems that Spain had 5 years ago are still present and one has to take into account that it got a bit worse. Currently, because the problem has spread across the continent, Spain stayed in the background; actually, the European baking system is ill. They cannot find the formula for recapitalizing them, the central bank’s efforts are not sufficient in meeting the demand. Let’s suppose that they’re enough; as long as the emerging economies are stagnating, it will look like turning the wheel with borrowed energy. You're correcting something, but the problem continues to grow; due to this, it’s going to nowhere, it carries on regressing. Europe is very problematic…

In the United States, the Fed is about to lose its mind. Obviously they saw something.  In 2013, they determined a calendar for the application of the interest rate increase in order to get away with the least damage; they aimed at reducing the overseas risks and to avoid the ballooning of the assets in the domestic market. They did not succeed in both objectives.

The minutes state the reasons why there no rise in the interest rate and why they cannot lower it. But the problem is: central banks are becoming ineffective, the Fed is no exception. That is, it wanted to stay the sole power but it will no longer have the chance for this. Currently, the Fed cannot raise the interest rate; so be it! If things get worse, a new monetary expansion could be undertaken, interest rate could be lowered; so be it! But the problem is the following: first; USA will not be able to reduce its risks with minimum damage; second, even if the Fed lowers the interest rate, the trend of taking risks across the globe will not come back in force. The pyramid is crumbling. In this game, the play makers took a risk and will suffer the consequences. Another information ca be derived from this picture. The West is losing its ability to direct the capital. It was the West’s most powerful weapon. The other strong elements were derived from there. If it loses this power, we can say that the current days are the better days of the West. Let’s combine them: the tendency to stagnation in the world is continuing, the growth forecasts will be reduced gradually; the global employment will shrink; nonperforming loans’ volume will increase across the globe. Things are not going well and the horizon is dark. The persons who are seeing this will try to reduce their risks while everyone is asleep; the markets will be choppy and everyone’s primary objective will not be to run for a win but make others try to do it. They will try to limit their losses. This is the main strategy and the picture points to this.

This is valid for the individuals as well as for the State. As an economic system, the West is collapsing; the East is rising but no one will come out alive from a world economic crisis. More precisely, there can be some who can come out alive. Imagine two boxers who punch each other at the same time; whoever survives will be declared as the winner. But both will be worn out. Wars are the same; currently the world economy is worn out, the wear rate will vary in some regions, but all the world will be losing.

Stieglitz is talking about two currencies. What was Europe's trouble? In 1957, EU which was the EEC since then, had taken the path of homogenization. For this purpose, it determined some standards; it is obvious that it didn’t go the way they wanted it to go; they could not provide homogenization and the application of a single currency has aggravated these problems because the homogenization was not achieved. 15 years ago, Europe had a design; after 9/11, a multi-speed Europe. The activated the Convention poll; it is obvious that some are saying that the currency should be two-speed, but as long as how this subject is going to be becomes complex, it will create a problem. One thing is clear; with this current structure, Europe will be overwhelmed by problems and will not be able to solve them either.

After 9/11, the capital poured into the emerging economies. There was an abnormal increase in capacity in the emerging countries; the consumption and the employment increased rapidly as well as the investment capacity increased abnormally with the inflow of the said capital. When we look at the current situation, we can see that there’s stagnation in demand but a terrible supply has been created. If there is an excess supply, what can be done? First; one will work to increase the demand but the consumption is problematic and it cannot increase permanently. Then, the supply will shrink. At the moment, the financial markets are pricing the demand side and are ignoring the problems of the supply; but the economic balances are forcing the necessity of the urgent liquidation of the excess supply. This chaos is also an element that reinforces risk aversion. Due to this, the ones who think that today’s balances will be permanent and will go for the better are simply dreaming and cannot get rid of the wrong strategies; more serious problems may be encountered, everybody must be careful. There is an excess supply in the emerging economies. Their common feature is the following: there is a large increase in employment and the service sector has come to the fore. One creates an employment; if this is 50% in the emerging countries in the past, today this stands at 60%-70%. The increase in the domestic demand has fed from here and there’s no chance to protect this demand. What will happen then? Service sector employment will contract. In order to prevent this contraction, one can adopt public spending, loose fiscal and monetary policies and these will not solve the problem. Second; they will eliminate one way or the other the excess supply; this cannot go on forever. This imbalance will not only batter the banking sector in the emerging economies but also, it will increase the volume of non-performing loans. What do we have in the world? Economic growth will lose momentum, the employment will not increase, contractions will happen (it may differ by regions), prices will not stabilize, there will be widespread fluctuations, some of which could be devastating. The more the volume of non-performing loans increases, the more the banking system will become fragile; public deficits will grow and to hide them will not solve any problem. The world is moving towards an emerging countries’ based new global credit crisis and there’s no solution to it. 

AUGUST RALLY IN THE STOCK MARKET

One should expect a rally in August in the stock markets. Because, following the very weak growth of the USA in the 2Q2016, there isn't any single investor who thinks that the Fed will dare to raise the interest rate in the foreseeable future. And as ECB will not make additional monetary easing in the short term, there is no justification for gaining more value for the dollar. Both the EU and the US entered into a moderate increase in inflation trend, but the decline in oil prices can break this trend. When coupled with the exceptionally loose monetary stance of central banks, government securities yields in developed countries will be trading in low values. Furthermore, S & P 500 is trading at a forward 17.5 P/E as measured by the estimated profit, 2 points above the median coefficient. There is a false perception regarding the acceleration in economic growth of the emerging countries.

When one adds all this up, one can see that the direction of the money will be the Emerging Markets. Moreover, it is a necessity and because the liquidity rally does not take into account the main factors and does not care too much about the political risks. Roughly 25 billion dollars entered the Emerging Markets this July only and one may expect about the same amount to enter in August. Will this favourable trend continue until autumn? We don't have any concerns about the Fed for it cannot dare to raise the interest rate in September but the fear of the Fed may be replaced with the fear of a global recession or a wave of Emerging Markets private sector bond defaults. Due to this, it is difficult to make long-term predictions.

THE BEGINNING OF THE END IN THE MARKETS

THE BEGINNING OF THE END IN THE MARKETS

Despite the fact that the BoJ has disappointed the investors, because there is an abundance of liquidity in the marketplace, not a single investor would like to miss the bonds of emerging countries which have a high yield, if there isn't any financial crisis. And if the rally in the bonds continue, it will support the currencies of the emerging markets against the dollar and also the stocks. At the same time, the loose financial conditions and high oil prices will carry on supporting the risky assets of the emerging countries during May.

The risks start in June. According to the latest poll, those who want the Brexit in England are leading by 46% compared to those who want to stay in the EU who are %44. China's economic growth is pumped up with a very dangerous credit boom, the rise in the price of oil is in an extent due to the weak dollar; but these are passive variables. The most important reason for the change in the direction of the markets will probably still be the United States. In the first scenario, we will see that the increased employment and the rise in the inflation will go beyond the endurance limits of the Fed, the signal will be given in June and the second interest hike will take place in July. In this case, the dollar will once again enter into the appreciation trend and this will trigger a hard sell in the emerging countries. In the second scenario, the Hillary Clinton-Donald Trump race will damage the confidence in the economy and the economic growth of the United States will remain below %1 throughout the year. In this case, the dollar will continuously remain weak, and the global growth story will take an end and this time, the sales which will start in Wall Street will spread to the emerging countries.

Thus, for the June-August period, the most likely scenario is: the Fed will raise once more its interest rate and the speculative funds will leave the emerging countries. Due to this, one should hold its positions in order to catch the last buy wave in May but pass to gold in June.

AN EXPENSIVE OIL WOULD BE A BLOW TO THE US ECONOMY

AN EXPENSIVE OIL WOULD BE A BLOW TO THE US ECONOMY

The rise of price of oil could be much larger than expected. In this case, it would become a serious threat to the US economy.

The increase in the barrel price could carry a heavy blow to the economy of the United States. Given the growth of prices of the black gold, the balance between supply and demand is likely to return soon to normal. In this case, prices should stabilize between 40 and 60 dollars, the cost of a barrel.

However, some factors may prevent this scenario to occur, as many situations where the US oil market may not have time to adapt to the growing demand. This could be the case if the OPEC countries finally manage to find a compromise or if the United States reduced their oil production faster than expected.

To date, the production of oil exceeds the demand only one or two percent. In this context, if demand continues to climb and some countries cut the production slightly, the surplus will disappear.

Therefore, the oil price should rise and in this case, the United States will be deprived of all the benefits offered by a cheap oil.

Turkey: the new monarchy of the Gulf (!)

TURKEY: THE NEW MONARCHY OF THE GULF (!)

Turkey that is about to take over the temporary presidency of the Organisation of Islamic Cooperation (OIC), accentuates the rhetoric of political Islam in its internal affairs and on the international stage. The official visit of the Saudi King to Turkey became further evidence.

The events of the Arab Spring have pushed Turkey to regress within the Islamic world. The Persian Gulf monarchies, currently regarded by Ankara as its closest allies, have played an important role. The international community is worried by the attempts of Turkey to incorporate in its political strategy, ideas such as moderate Islam and democracy.

From 2011, the Turkish authorities have started making plans to boost their influence in the Middle East and to become a regional leader. The essential purpose of this political strategy was to bring the Muslim Brotherhood from Tunisia to Turkey. However, the Turkish ambitions to push the Muslim Brotherhood to the centre stage in the Islamic world have been destroyed by the joint efforts of the UAE and Saudi Arabia, and Turkey was left alone with her despair.

Regarding the situation in domestic politics in Turkey, everything is also very sad. Currently, the situation in the country is such that free and democratic elections are impossible, and the opposition parties are in effect deprived of the right to hold rallies and protest.

The Muslim Brotherhood, unlike Saudi Arabia, not only based its policy on a religious basis; this movement had long been supported by the West. Western countries call this strategy "moderate political Islam", "the Turkish model", but what is happening in Turkey, causes severe criticism from the Western press. The authoritarian government, violations in the field of freedom of expression, press, assembly, all this shows that the Turkish model is not working, even in Turkey. A particular important sign is the presence of financial resources coming from the Gulf countries to Turkey which have increased significantly since the 1980s.