Monday, April 6, 2009

Weekly Hurriyet Column: Quantum of Solace

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. For once, I really liked the title, until I found out this morning that it had already been used on Friday by Atilla Yesilada. Anyway, as a great economist, who also happens to work with Atilla, once said, "Great men think similar titles", so kudos to Atilla for coming up with such a great:) title. BTW, his analysis, which is more or less along the lines of mine, is in Turkish and as part of a fee-based service, so I could not provide a hyperlink. But if you are interested in the minority view and speak Turkish, email him and he might send you the piece himself (his email is on his web page).

Solace may be the best word to describe markets last week. Signs that the US economy might be have hit bottom, a boost from the G-20 meeting and more lenient US accounting rules for toxic assets all contributed to the relief that decreased risk aversion and lifted markets. But at the end of the day, these are just quanta, tiny pieces of data that do not change the big picture at all.

Take the US economy. I maintain my view, stated in this column at the beginning of February, that the US will not start recovering before inventories are worked down, household savings rise or house prices stabilize and banks get rid of their toxic assets. Last week’s housing data were mixed at best. As for the toxic assets, I can not help but wonder how the banks would be willing to sell those (the essence of the Geithner plan) unless they are coerced by the stick of mark-to-market accounting.

In a similar fashion, I do not believe that much came out of the G-20 meeting. The summit fell short of a global stimulus package towards correcting global imbalances or concrete action against protectionism, Moreover, as I had feared, the gathering was diluted by measures towards tightening financial regulation; definitely important matters, but totally irrelevant to the problem of containing the global recession. But, as I had stated in a special piece for this paper last Tuesday, the smaller the expectations, the greater the bliss, so the 1.1 trillion package and the five-trillion stimulus (US dollars) were more than enough to lift markets.

In fact, a closer look shatters this rosy picture: For one thing, the stimulus is nothing but the IMF estimate of the rise in G-20 government deficit from 2007 to 2010. Moreover, at most a third of the package is new commitments, the rest being simply shinier wrapping. Finally, the bill is not as emerging-market friendly as you’d think. For example, only about a third of the 250 billion dollars of special drawing rights (SDRs, IMF money that can be used as foreign exchange reserves) will be available for middle-income or poorer countries. Still, even the word of half a trillion dollars of new provisional IMF money, along with the announcement that the Fund was easing loan payments for borrowers, provided yet another boost for emerging markets. While Turkey’s external debt payments were reduced by 2.1 billion dollars (18% of total) this year, it was the news that Turkey and the IMF had reached an agreement that buoyed markets.

In fact, Turkey could not have asked for better conditions: A good global environment, yet a better one for emerging markets and the best for this particular emerging market. In this setting, domestic data were unsurprisingly overlooked. But these quanta were nevertheless hiding bad omens. For example, economists concentrated on the 2008 GDP figures and March inflation, which they took as non-negative. But more important than these were the trade statistics: Official February turnout and preliminary March exports. Both pointed to a near-double digit yearly contraction in growth in the first quarter, which will probably confirmed by Wednesday’s February industrial production data. As for the IMF deal, call me a skeptic, but with the primary balance set to fall into deficit territory, I will have to see the ink on the agreement before I become convinced.

In the global tunnel, there is definitely some light. But for one thing, we do not know how far that light is- or whether it is the sunshine or the lights of an approaching train. As for Turkish assets, I know I am in the minority, but I kind of feel like Jack Nicholson walking into his shrink’s office and lamenting upon seeing the other patients: What if this is as good as it gets?


Anonymous said...

Istanbul Stock Index is jumping ahead for two weeks, and dollar depreciated substantially in the mean time. I guess markets just want to religiously believe the crisis is over.

Emre Deliveli said...

First of all, global markets are in full steam. But honestly I am still in the Roubini camp that the crisis is far from over. In this respect, I really like your "religiously believe" comment- I think it captures the mood in markets perfectly. Let me just give a few examples from the US: Wells Fargo may have posted record profits, but Fed officials are saying several of the major bank will need capital injections. Retail sales are good, but not for Walmart. Similarly, the fall in unemployment claims does not change the upward trend in unemployment rate, which is set to hit double digit territory soon. But markets are choosing the ignore the ugly data in favor of the beautiful ones:):):)There was a term in psychology for that, but I am too tired to remember at this hour. Anyway, have a look at Bob Shiller for more on this.

In this environment, emerging markets have joined the bandwagon, especially after the positive interpretation of the G-20 meeting. But this still doesn't explain why Turkey is at the top of the pack in emerging markets. My trader buddies think that most of the Turkey premium of the last few days is based on the IMF expectations, especially in the bond market.

But at the extent of sounding like an idiot, I have to say that I still think the current rally, in developed and emerging markets alike as well as in Turkey, is not much more than a quantum of solace.



Y. Kursat Onder said...

I realized I did not put my name under my posting.