Friday, April 30, 2010

More on the Beauty Contest Story

Loyal reader (and occasional brainstorming partner) Mary Stokes of Roubini Global Economics had more to add on the beauty contest theme of this week, which first appeared in a post last weekend and then featured in my weekly Hurriyet column as well as a couple of addenda to the column. The last addendum, by the way, will form the pillar of my Hurriyet column for next week, which will be on the Bank's latest Inflation Report.

Anyway, coming back to Mary's points, first she agrees with my beauty contest idea:
I really liked a number of the points you made in your most recent beauty contest blog post. I completely agree that Turkey's hailed performance of late is the result of the economy being the 'least ugly' compared to its peers. And a related issue that I'm struggling with is that perception can drive reality. Turkey, along with Poland, are arguably the 'least ugly' in the emerging Europe universe and both are seeing a pick-up in capital inflows.
She then goes on to note that the figures do not support a fast recovery for now:
I agree with you that what we are seeing in Turkey thus far does not signal a robust recovery. Much of the strong y/y numbers we're seeing (eg. IP) have to do with the severity of last year's downturn and I can't wait to see the hullabaloo that results when the Q1 print comes in.
As I noted in a Roubini Global Economics post, I held the view that fast recovery was a myth, along with stable politics and loose financial conditions, until last week's public capacity utilization & real sector confidence data, as well as for-my-eyes-only Konda unemployment figures, all for April. In terms of probabilities, I would have gone for the slow recovery scenario 85% a week ago. After Monday's releases, I was down to 70%, and after working with the Konda survey, I am at 51%, a la Nostrada-Mustafa. Anyway, without digressing too much, let's come to Mary's key point/question:
But my question is: could the appearance of strong growth actually help stronger growth come about, at least in the near-term?
I would think, yes... Maybe, that's what's going on with the latest real sector and consumer confidence numbers... Measuring the direction of causality would be a great exercise, which I plan to do in my spare time. For example, one interesting exercise would be to measure how much the relevant subindices of consumer and real sector confidence turn into actual figures (consumption, investment, etc) in the timeframe specified in the surveys...

Mary goes on to make another important point:
In Turkey's case, it looks like portfolio investment has turned positive since November 2009. I wonder how much of that is money looking for a safe place to park and I wonder what will happen to such flows (and how quickly they could reverse) if Greece turns into the next Lehman moment the way some are now suggesting.
The Greece situation turned even sourer after Mary wrote this email several days ago, but EM flows continued to be as robust as ever, according to latest EPFR data, at least. So we'll see....

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