Monday, July 27, 2009

Weekly Hurriyet Column: From V for Vendetta to tears in heaven

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive- in fact, you can not: As readers let me know, my columns have not been archived since July. But I have let my editors know of the problem, and they are notifying the Dogan Media executioners to punish the wrongdoers:)...

Coming to comments: First, you should be relieved to see that the titles are as cheesy as ever:) I have been eying for an opportunity to use the V for Vendetta title for a long time, as it is my favorite movies; last week's rally was the perfect opportunity. Second, I have provided more details on the Treasury's latest eurobond reopening at an entry on Friday. Finally, I have more on a false sense of fiscal responsibility at last week's column as well as at a separate entry.

BTW, from this week on, I will have the weekly column posted to the blog at the first minute of the new week. Daily News uploads the new day's news at around 2-2.30am or so; this way, I am providing a small reward for followers of my blog.

The global theme of last week was the return of the V-recovery, which led to across-the-board 2009 peaks for many asset classes.

But when you look at the details, you notice that the sharp recovery that many are betting on is not based on firm fundamentals: Signs of stabilization in US housing and labor markets are tentative at best. Corporate earnings reports were not only slightly better than dire expectations and based on belt-tightening rather than genuine improvement (in fact revenues carry on with their sustained declines), they were also coming from the second quarter, when green shoots were sprouting. In any case, Turkish assets had a swell week, and the Treasury, as opportunistic as ever, tapped international markets once again at their zenith.

Maybe it is just me, but I just fail to see how a sustained and strong recovery would take place while banks are still in need of repair in the sense that toxic assets have just been brushed under the carpet and money is parked in central banks rather than lent to the real sector. In that sense, while it is always fun to ride the risk wave waves, I can not help but heed Nouriel Roubini’s (aka Dr. Doom) warnings that what we may be seeing is the first upward leg of a W rather than a V with a vengeance.

Although homegrown banks do not have toxic assets and in many ways are sounder than their (formerly) glorious Western counterparts, a comparable play is going on in Turkey as well, with the only difference being Central Bank liquidity parked at the Treasury in terms of government bonds rather than back at the Central Bank. In a similar fashion, markets have started seeing solely the good in almost any news, whether it be the knockoff fiscal measures or latest tourism statistics, or choosing to ignore the data when there is nothing positive to be found, as in Istanbul Chamber of Industry’s (ISO) annual Turkey’s Top 500 Industrial Enterprises survey.

I see these global and domestic developments as another bout of irrational exuberance. While the economic debate has been centered on whether investors are rational, as in textbook economic models, or subject to animal spirits, as Keynes noted, the truth is grayish rather than black or white. In fact, there is some fresh-off-the-oven research that shows that rationality is actually time-varying; it tends to be enforced by high market returns, which in turn feeds back to markets. Therefore, it is only natural that the nasty details in data are being disregarded.

Coming back to Turkey, I have to give credit to the government for managing to knit together a profession where disagreement is the norm rather than the exception: Most economists, while they could not agree on the IMF implications, were highly critical of the knockoff fiscal measures for the reasons I outlined last week. Still, I am having difficulty in grasping how a couple of foreign research outfits managed to describe the measures as moving in the right direction, confirming my fears that they would provide a false sense of fiscal responsibility. To give these guys some credit, perceptions matter more than facts in financial markets, at least in the short-run. But facts always catch up with you sooner or later, and that’s when you start singing tears in heaven, at the same time blowing into a handkerchief.

The worst part of this drama-in-the-making is that important long-term issues are being overlooked, with the tourism and ISO data being cases in point. Therefore, in the spirit of commemoration, I will devote the next two weeks to such trends, first in tourism, then in industrial enterprises. If nothing big comes up in the meantime, of course. And that is a hell of a disclaimer for Turkey.

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