Weekly Hurriyet Column: The referendum countdown

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. No cheesy title this time around.

As for the column, I don't have much more to say, except that I will be getting  (or was supposed to get, since it is almost 11pm, I and still haven't from them) the August KONDA survey tonight (August 10, Tuesday), so I might be able to share, either in the blog or in next week's Hurriyet column, some new/updated results.

As for my election calculator, it is quite simple to do: You just have to know about the mathematics of the Turkish electoral distribution system. Then, you take one (or the average of several) election poll, use the past election(s) to project the nation-wide poll results at the province level and build an Excel sheet that will distribute the seats according to your projection and the d'Hondt method.  Then, you just wait for the PM to try to get you fired. By the way, I actually stumbled upon a website that does that: You just enter the poll results on the left and it spits out projected electoral distribution on the right.
 
Anyway, on to the column:

Since polling firm KONDA asked me to write on the upcoming referendum for their August Barometer report, I have been immersed in their last two surveys, trying to find the magical determinants of an aye or nay on Sept. 12.

I am bound my KONDA’s commitment to their subscribers to keep the numbers to myself, but I can reveal that while the race seems to be quite close at first glance, you encounter a lot of voters who are unlikely to switch votes when you look at voting behavior by party affiliation. Go out and find me a Republican People’s Party, or CHP, supporter who will vote yes in the referendum, and I will be impressed. Find me a Justice and Development Party, or AKP, supporter who will vote no, and I will put your name down for my quest for the Holy Grail.

The same results hold true if you look at voting behavior by ethnic and religious identity as well as stance on current political issues. In fact, referendum voting choices are just another reflection of the political polarization I had demonstrated when I had first started working for KONDA in March. One surprise is Kurdish voters, who do not seem to share Peace and Democracy Party’s, or BDP, distaste for the constitutional amendments and are more likely to vote yes than any other ethnic group.

So does this mean that the referendum is already decided (remember that I am not telling you who is ahead)? Hardly, once you notice that neither the ayers nor the nayers hold the majority. The first place goes to the undecided and those who have no idea, what I call undecideas. Then, it is my civic duty to tell a bit more about these folks, in case any of the campaigners out there are reading my columns.

The undecideas are more likely to be women than men. The probability of being undecidea decreases with education. Finally, someone from Thrace is more likely to be undecidea, even after controlling for other factors. The latter result is a bit surprising, but digging a bit deeper (but not as deep as Bilica) reveals that polarization is considerably less in this region. It may then as well be that Thracians, known for their secularism, are torn between their distaste for AKP and merits of the constitutional changes.

This last result hints on the possibility of last-minute swing votes. Regardless of all the white noise in the academedia, worsening economic conditions or more terrorist attacks are unlikely to pull votes to the nay camp a lot. The anti-AKP camp’s only viable strategy at this stage would be to try to reach out to the less polarized among the undecideas and convince by reason.

By the way, I had nothing better to do on a Sunday morning, so I reran my election modeling toolkit from my days as a bank economist, which was dusting in my hard drive. As CHP has been arguing for the national election threshold to be reduced to 7 percent, I was wondering what would be the magical number that would deny AKP majority in the Parliament.

According to my calculations from the last two KONDA surveys, a 7 percent threshold is not much different from a 10 percent one, as both result in a three-party Parliament and an AKP majority, not much different from the status quo. But things change when the threshold goes down to 5 percent, letting BDP in. Suddenly, AKP has lost around 40 seats, all to BDP, as well as its majority in the Parliament.

I showed last week that AKP advisers were well-versed in Excel. It could be that they are working with different numbers than me, but their colleagues in CHP just do not seem to be as deft. Or maybe they are just making a conscious tradeoff between the lesser of two evils, as they see it, which is, when you think about it, is actually worse than being a skxawng.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at http://emredeliveli.blogspot.com.

EconNews Roundup

Daily News has managed to squeeze the recent news on tourism into an analytical piece.

The government's intentions on the fiscal rule are becoming clearer by day.

Durmus Yilmaz defending the floating exchange rate. The guy has a really high patience index; the academedia would have driven me mad long ago. Zaman, probably anxious not to hurt its beloved Anatolian tigers, adopts a different angle to the same speech.

Bad checks down more than 50% in 1H10 yoy.

Zaman's take of yesterday's release of the 2010 World Investment Report.

I love it when analysts or journalists try to explain short-run asset prices. For example, the Constitutional Court decision is cited (perhaps a bit ideologically) as the main reason behind the surge. Had Turkish stocks plummeted, the same decision would be cited for the reason of the plunge... There is actually exactly this example (from Bloomberg) in Taleb's Black Swan. BTW, there is a much better piece in FT's Beyond Brics blog on the record-breaking day in ISE, which is in the Interesting Picks I just posted.

Interesting Picks

Krugman on why he thinks Rogoff is wrong (about not overdoing fiscal policy)

The negative fiscal multiplier in Brazil.

The IMF argues for a central EU fiscal agency, but I am not sure if that would be possible without political union. And Euro Zone officials say IMF is being unfair.

Turkish stocks excelled yesterday. Well, in fact, they break a record.

Tim Duy's post-Bernanke Fed watch.

A statistics that fits with my tourism moonlighting.

More intellectual shift from the Fund, this time on Central Banking.

The Solow Congressional testimony is getting a lot of attention in the blogosphere.

Explaining the Baltic Dry sell-off.

Buiter revisits the game of chicken between ECB and national governments.

Roubini Post: A Fiscal of Liras

This post already appeared in the Hurriyet Daily News on Monday; Europe Economonitor is just republishing it, but I just wanted to cross-link for the readers who might have missed it the first time around...

There is also a blog version, which has some useful (link to my complete fiscal rule writings) as well as utterly useless (explaining the cheesy title) stuff.

Interesting Picks

Lessons from Argentina for potential Euro Zone deserters.

Brad DeLong joins the fiscal policy debate at the FT.

A recent paper on the optimal inflation debate- via Econbrowser.

Alan Blinder argues for deficit-neutral stimulus.

Getting internships at the Mayor's Office in NYC- a la Turca. That reminds me; I have been neglecting my memoirs for a long time; it is time to return with my experience with that during my Ankara days.

Morgan Stanley does a debt sustainability exercise and finds Turkish bonds relatively cheap. I will have more to say on that later today, so keep watching.

Rebecca Wilder answers James Hamilton's question on who will buy all those Treasuries.

Turkey economist Haluk Burumcekci argued some time ago that fiscal and monetary policy should move in tandem like the two central defenders in a football team- Jose Vinals has a similar approach.

One of the better pieces on sovereign debt ratios of late.

Cleveland Fed's expected inflation curve.

As a die-hard Seinfeld fan, it is my duty to post another news about it.

EconNews Roundup

The trust in financial institutions has decreased- I wonder why:) I am more curious about Turks' response, not on Western banks, but on Turkish ones, who have fared well during the crisis. But my work with Konda has taught me, if anything, to be very skeptical of surveys, so that's all I have to say about that, at least until I see the actual survey questions.

Turkish growth expected to slow down after 2011- Obviously, there are slowdown, and there are sloooooowdowns, but I doubt we'd have to wait that long:) BTW, I recently wrote about the current slowdown.

Turkish companies make use of social networking apparently. I can personally tell you about one that does:)

I have been fascinated by the economics behind hemserilik, which simply means favoring the people from your town. It is basically the economics of social capital, but why that and not other types of social capital is prevalent in Turkey, I wonder.

My time-share neighbor argues economic growth doesn't mean development. That's what Amartya Sen, and more recently Joseph Stiglitz, both Economics Nobel Prize winners, have argued.

Sorry for the Turkish, but there is no other way I can phrase this: Anlayana sivrisinek saz, anlamayana davul zurna az! For God's sake, has the recent CBT indices fallen on deaf ears?

Final (AND MOST IMPORTANT) question on blogger appreciation day

The blogger appreciation day is almost over, so let me cut to the chase with the most important announcement/question you'll ever see from me in this blog:

My aunt is having an aneurysm operation at the Baskent Hospital in Altunizade on August 3, and we are desperately looking for blood donations on August 2 and 3. We need a total of six people, and so far I am the only donor, so we have a long way to go.

She is 0RH+, but even if you are not and would like to help out, there is a possibility:A blood exchange with the hospital is possible, but we won't know for sure until August 1.

By the way, it seems the current system of blood donation, whereby each patient and hospital is to its own, seems to be extremely inefficient. But I have not done any mechanism design since the first year of graduate school, so maybe Al Roth and his Turkish sidekicks could write a paper on this similar to their seminal kidney one.

Anyway, please contact me via this blog or via email if you are willing to part with some of your blood at the beginning of August, and I will call you to explain the details.

As a footnote, in case you are wondering, I have already donated my organs, to the eziks:

So I am hoping some eziks will help me out:):):)

Second question on blogger appreciation day

I have half an hour before the end of blogger appreciation day, so let me move on to the second question:

Since I am one fat lazy bastard, I never moved my bank account after I left Citi, for which I have finally gathered the resolve. And since I am spending a lot of time moonlighting in tourism @ our family business, I have decided to move my account to the Marmaris branch of Garanti or Yapi Kredi, for the simple reason that we do most of our business for those two banks and therefore I would get near-private banking services at those two.

This process allows me to bring to life a pet project of mine: To show that economists know shit about trading, markets and investing. To demonstrate, I would like to do some trading on the side from my tourism and Economics/consulting work and publish the results here. So I am wondering how the trading services of both banks compare- I would like to know particularly on trading platforms (I already got a trial at Yapi Kredi's tradebox), breadth/choice of instruments available and of course fees. I am not interested in quality of investment advice, not because I think I am a hotshot, but because that would defeat the purpose of my experiment:)

And while I am interested in those two banks particularly, if you insist another would be infinitely better, by all means write that as well (you are more than welcome to advertise the bank you work at as well, provided you provide objective as well as subjective info.)

And please hurry, the experiment is scheduled for kickoff in the next couple of weeks:)

Addendum to First Question

Thanks to another loyal reader, I noticed an unacceptable error to my first question on blogger appreciation day:

I had started writing up that question towards the end of last week, right after the Reuters piece appeared. In fact, I had almost finished it, so just proofread and sent it hastily last night. But in the meantime, I totally forgot that Akbank had gone through with the issue, which was at 5.3% and 2.5 times oversubscribed. So apologies for the error; maybe, I should wear a t-shirt as well every time as I mess up.

By the way, I spoke to another loyal reader, who also happens to be an insider. She told me that in conversations with colleagues, they too thought that the borrowing was a bit on the expensive side. And although she is in completely different department, she was able to come up with the following reasons:

• The bond provides maturity match, which is an important advantage over deposits. ED: Sure, but you get that from syndicated lending as well.
• The amount is rather small for a bank of Akbank's size, so the bank might just be testing ground, i.e. getting the feel of it since bond issuance is its infancy.
• Related to the previous point, not getting sufficient demand would have been a loss of prestige, so the bank might have decided to play it safe this time around.

First Question (partially) answered

I really have loyal readers; less than 10 hours after I wrote out my first question of the blogger appreciation day, I got a couple of responses.

First, a reader wrote the following:

Akbank most likely needs to refinance its debt. They most likely do not match the tenure of their debt to the tenure of the assets that they book (i.e. the lending that they make.) They make a 20 year construction loan worth $50 million, but raise debt in the amount of $50 million with a tenure of 5 years instead (maybe because they can't do longer term deals, or, they have a sophisticated interest rate risk management eight-ball on the chief risk officer's desk).

Makes sense... Then, another reader sent me a recent note by Goldman Sachs (unfortunately, no link) that more or less makes the same points I am making, concluding that the bond issue won't help margins much.

Now, I know at least that I wasn't missing something grand. And the first reader has given a plausible explanation. But if you have something to add, don't be shy:)

Need help from a banker (I)

or someone knows banking- BTW, this is my first question in the Blogger Appreciation Day.

There was a report at Reuters last week that Akbank was issuing 5-year bonds at 362.5bp above US Treasuries of same maturity, which would bring the yield at around 5.5%. A similar news appeared yesterday about Yapi Kredi. So far so good, but when I burned some brain cells, I began to get confused.

For one thing, the yield on corporate loans is around 5.5% right now, so if I am not missing something, the banks are breaking even. How about the cost of of the issue in local currency? With 5-year cross currency swaps at around 7.5%, the cost in local currency of the issue would be 13%. Now if you look at domestic currency lending rates, while consumer loans would be higher, housing loans are around 13-13.5% as well.

I am not a banking analyst, so I would really appreciate if a banker or banking analyst or someone who knows more about banks than me would enlighten me on what is going on? Is this competition eating away profits, or am I missing something? And if these issues are not profitable at the going rates, why are Akbank and Yapi Kredi going through with them?

I declare July 20 Blogger Appreciation

I had already declared June 29 blogger appreciation day, but since I am the ruler supreme of this blog, and since I love to be appreciated, like almost everyone else, I am going to have a second blogger appreciation day. This is how it is going to work:

I am going to pose questions on a few posts tomorrow. You can show your friendly neighborhood economist your appreciation by helping him out with those questions. If I don't fall asleep, you can expect the first question in the next hour or so...

Weekly Hurriyet Column: A fiscal of liras

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. I went for a movie reference + wordplay (fiscal-fistful; I know I am not very creative) this time around for the title.

As for the column, I don't have much to add to the column for a change, except that I have short post that summarizes, with the appropriate hyperlinks, all I've said about the fiscal rule since it first surfaced in September. 

By the way, obviously, I was not the only one who had something to say about the fiscal rule. Roubini Global Economics has a neat summary of some recent and other not-so-recent stuff on the fiscal rule, including a few musings from your favorite Turkey economist (subscription-only, but highly-recommended if you can afford it).

Anyway, on to the column:

This past week was not a good one for fiscal optimists, with the release of the June central government budget figures and the surprising piece of news that the fiscal rule had been postponed until October.

If you are to believe the majority of research reports, fiscal performance remains strong. It sure does, if you forget that the 23 percent yearly increase in tax revenues is mostly due to the weak base of last year. With the pace of growth slowing down and base effects dying out, tax collection is not likely to be as strong going forward.

On the other hand, there is some increase in non-interest expenditures on the back of transfers to social security institutions and local governments. I try not to make too much of one month of data, but it is nevertheless my civic duty to note that those two items recorded their highest levels this year.

It is also important to emphasize that the unassuming end-year target of 0.3 percent of GDP consolidated government sector, or CGS, primary deficit is likely to be met, although CGS is already roughly in balance, according to your friendly neighborhood economist’s calculations. But it is exactly this modest goal that has been threatening the viability of the fiscal rule, which was brushed under the carpet at least until October.

Coincidence or design

Using the formula for the fiscal rule, this year’s deficit goal and growth forecasts of 6 percent and 4 percent for this year and the next, it turns out that the government would have to make around 3 percent of adjustment in 2011 - an election year. Since most of the adjustment in the fiscal rule is front-loaded by design, a more aggressive adjustment for this year would have meant a realistic one for the election year. In other words, the government has shot itself in the foot with this year’s fiscal goal.

Such a lax target does not make sense in terms of economics, either. The IMF actually warned implicitly and as tactfully as it could at end of May by stating that, while suitable when conceived in the midst of the crisis, the ambition of the 2010 primary balance target had been overtaken by the stronger 2009 outturn and upward revisions to 2010 growth and inflation forecasts. According to the Fund, adhering to the original target would now imply no structural improvement this year, while macroeconomic conditions and external developments argued for a structural tightening. But a word is enough to the wise, while drums and clarions would be insufficient to the unwise.

Anyway, it would not be too much to assume that the PM’s advisers know enough Excel to have gone through these calculations and might have been tempted to advise on the enactment of the fiscal rule after the elections. I declared the fiscal rule as dead before it was born, but such a complete U-turn would surprise even a disciple of the dismal science like me and rattle markets.

As I argued back in September, the cost of messing up the fiscal rule would be enormous, much more than having no rule at all. In this regard, the Medium-Term Economic Program would need to be disclosed as soon as possible, with growth and deficit projections realistic as well as in line with the fiscal rule. That would soothe markets ahead of a heavy Treasury redemption schedule. Then, we’ll have to wait until October to see if the fiscal rule would be enacted then and whether the 2011 budget would be in line with the fiscal rule and Program projections.

I really would like to stay optimistic and give the benefit of doubt to the government, but you know what they say: First time's an accident, second time's a coincidence, third time's a trend. This past week took us beyond the first two posts already.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at http://emredeliveli.blogspot.com.

Roubini Post: Turkey’s (un)Holy Trinity

This post already appeared in the Hurriyet Daily News on Monday; Europe Economonitor is just republishing it, but I just wanted to cross-link for the readers who might have missed it the first time around...

There is a nice little addendum in my blog, if you are interested...

Interesting Picks

U or L, Roubini ponders. Others are more optimistic, but  I have been seeing too much double-dip stories of late.

A couple of week aheads from Pragmatic Capitalism and Calculated Risk.

The Week in Pictures from Econompicdata.

Francesco Giavazzi argues Central Banks were bound to fall into the low interest-rate trap.

The Big Picture honors the kickoff of the FT series, The Austerity Debate.

More deflation warnings- this time from the Cleveland Fed's updated inflation expectations series.

Direct buyers surpass bond dealers at US Treasury auctions.

EconNews Roundup

They call it remigration, but I call it demigration: Turkish professionals laid off during the crisis returning to the Vaterland for good.

I have yet to see the draft law, but if done right, an arbitration court would help in easing pressures off commercial courts.

Another one bites the dust.

Energy has got the bulk of FDI this year. And if you do not believe the piece:

Can anyone tell me the item(s) in April (for energy, of course)...

The title says Turkey wants more trade with the US, but the actual article talks rather about more FDI.

I really hate ignorant rating comparisons. For one thing, cash-strapped Greece has the backing of EU.  But that is not to say that Turkey does not deserve an investment grade (upp, I did the double negative again).

Last but hopefully not the least, you friendly neighborhood economist sings fiscal blues this week. Zaman takes on the delay to the fiscal rule, one of my main themes. As for my second theme, Zaman says health expenses are down, but you can go to my column to see which expenses are up.

A very late Addendum to last week's Hurriyet column

My latest Hurriyet column will be up in 3 minutes, so I am really ashamed to do such a late addendum, but I just cannot deprive my loyal readers of vital extra info. on last week's column.

First of all, let me start by giving you comparison graphs for the old and new RER. First, by CPI:

Then, by PPI:

A couple of words on the impossible trinity are also in order: First, Greg Mankiw does a really good job at summarizing the tradeoff between exchange rate stability, monetary policy autonomy and capital mobility in his NYT column from last Sunday. Menzie Chinn of Econbrowser fame, in response to the Mankiw article, sketches a paper of his where he and his coauthors look at how different countries have traded off these objectives through time.

A more general statement of the impossible trinity is that you cannot have more targets than instruments. Then why not embed targeting the real exchange rate into the Bank’s monetary policy reaction function? That, I think, is the most sensible suggestion among the many floating around. Note that the traditional Taylor rule has inflation and the output gap, so you can simply think of this as an extended Taylor rule.

One final point on the exchange rate overvaluation argument: I think there is a great confusion between the ability to export and the amount exported/profits made. Having co-authored a paper that makes that distinction for FDI back in my Ankara days, I feel that the former would be affected much less by the exchange rate. And if you are interested in how much the exhange rate matters in the first place, a couple of CBT papers from last year would be a good place to start (and finish)...

And here's my journalistic (and gossiping) instincts kicking in: An ex-Central Banker told me she was really surprised that the Bank had published the methodology paper. More transparency is not always better in Central Banking, but in this particular case, to publish the paper was a really smart move to quell cries of data manipulation.

Interesting Picks

The Economist looks at the a paper that analyzes how policy rates affect Treasury yields and exchange rates.

Scary jobs graph we need to replicate for Turkey. And another one whose Turkish version I love to look at.

RGE's Rachel Ziemba summarizes a few take-aways from the May TIC data.

Annaly Capital Management's take on the latest US data- via Pragmatic Capitalism.

Tyler Cowen takes on Larry Kotlikoff's financial reform proposal.

Mark Tahoma on Gloomy Roubini.

James Hamilton summarizes his recent paper on calling recessions in recent time.

Why EU leaders should hush about EDRM.

How economists see movies:)

Krugman's mini deficit-model.

EconNews Roundup

The CBT left the policy rate unchanged, as expected.

In case you wanted to do some advanced reading for your favorite Turkey economist's Daily News column for tomorrow.

As I am moonlighting in tourism, I should report of  new project in Fethiye.

Interesting piece on a topic I've alluded to a couple of times in the blog or private emails with readers: That certain firms in certain sectors/regions have not only remained unscathed during the crisis, they have also managed to do well. But from the article, it is difficult to infer whether there is a product, firm or locational effect going on here. And again, they would have done better if they had foregone the ideological propaganda and not claimed this was TUSKON's work.

I'm really sick of the pointless debate on the effect of the Mavi Marmara incident on Israeli tourism, but I will post this anyway- at the end of the day, the number of Israeli tourists visiting Turkey is so small to make a difference at the aggregate level. But it'd be really interesting if one journalist could look past the aggregate figures and analyze the hotels (the grown-up's Club Med used to have lots of Israelis, for example), or regions affected by the Israeli boycott.

Interesting Picks

El-Erian not optimistic on the stress tests.

Don't put too much emphasis on behavioral economists, say behavioral economists.

Latest WSJ survey.

I am a big movie-rewatcher, so I was happy to see Marginal Revolution share his rewatching guideline. I kind of agree with him, except that I love rewatch comedies as well, Dumb and Dumber and The Princess Bride are two favorites, for example.

A new Econ Phd recruiting database.

Mark Tahoma expands on David Altig's post on the Beveridge curve.

How supermodels are like toxic assets.

J-Lo learns getting into politics with the Turks is not a good idea.

I just feel a bit geeky today, so here's the Solow model with Mathematica.

Econpicdata on the relationship between S&P 500 earnings and yields.

BIS paper using gravity model to look at cross-border bank flows to EMs.

FT Money Supply has a new neat policy rate tab.

Summer reading of a strategist.

The correlation between high-yields and VIX.

A primary look at IPOs through a microeconomics lens.

Why did I miss blogging yesterday?

I was busy working on my food inflation index-  I am really too old for this shit, so I am still entangled with the weighing, I am sure that unless there is some sectoral seasonality effect I am not aware of, we are almost certain to get a positive food inflation print (mom) this month.

Correcting a Misunderstanding

I realized that I have completely misunderstood a recent reader question: Whereas the reader was asking about how banks failed their stress tests in the 2007-2008 crisis, I was thinking about the Eurozone stress tests, as my mind has been kind of fixated on that for the last few days.

Anyway, I see that crisis a mainly an incentive and irrationality problem- basically, noone had any incentive to case; for the interested, I highly recommend Gillian Tett's book on the crisis. A recent article pushes this case even further by arguing for vested interests as the main culprit of the crisis.

As for the Eurozone stress tests, I plan to write on that, either in Turkish for a magazine or in English for the blog.

China: Importing Disinflation

Again from the same Turkfinans group I had mentioned in a recent post- and even the same person:

Turkey's trade deficit with China has been soaring in the last few years, as someone noted in the group a couple of days ago:

So the person who is interested in the soaring trade deficit with China is wondering on the impact on employment and inflation (or rather disinflation) and she has already been conducted preliminary analysis.

One problem towards testing inflation is that the official TURKSTAT statistics are not released at the depth that would allow for a proper statistical test on whether goods imported from China have seen more disinflation, controlling for other stuff, of course.

But Turkey is also part of the EU's  Harmonized Index of Consumer Prices (HICPs), which offer much more detail. As for the actual methodology, there is quite a work like this done for the US, so making use of those should not be a problem.

As for unemployment, it is possible to make use of the TOBB and SPO firm inventories to see if the provinces/industries that were competing with Chinese goods had the least favorable employment outcomes in the last few years. As seen from the graph below, you can also make the case if these provinces did see the least employment losses during the crisis, but again, the key is controlling for other stuff.

Stealing ideas is not a habit of mine, and I don't have time anyway, so I will not attempt to do this analysis, but wait for the person who posed the question to finish her work.

EconNews Roundup

Istanbul Stock Exchange among best-yielders.

Preview for tomorrow's MPC: I decided to put this in, not because anyone cares, but because the Daily News has managed to come up with a really good piece from a no-event; that's what journalism should be about.

My Daily News neighbor across time argues that there are alternatives to every policy.

Treasury land for sale.

Deflation is Coming!

If you write a post with this title a few days after claiming that inflation is coming, you are bound to be right:)

Joking aside, it is not deflation coming, it is inflation expectations falling across the globe, at least for the developed world, as Rebecca Wilder discusses. Being your ever friendly neighborhood economist, let me provide the picture for Turkey, compliments of the folks at Turkey Data Monitor:

Rebecca argues that Eurozone woes are playing a part in the decline in inflation expectations in the UK, US, Germany, Italy and Canada. David Beckworth adds that there is Fed's monetary policy hegemony going on as well.

Without contradicting Rebecca and David's arguments, let me add a couple of small observations on Turkish inflation expectations:

• Citi economists claim (gimme a break, it is way too late for me to search their paper, but I promise I will email it to you if you ask for it) that more than half of Turkey's inflation is global-based. So if global inflation expectations are rational (Rebecca says they are a bit overdone for the US, UK and Canada), then Turkish expectations are just reflecting to the fact that inflation will fall in Turkey as well.
• I am no expert in Rebecca's countries, but for Turkey, inflation expectations are extremely adaptive and tend to overreact to positive (lower than expected) inflation prints. Actually, I kind of sensed that argument from Rebecca's post as well, although she does not state it explicitly.

By the way, it feels great to argue that inflation is coming when the global trend is exactly the opposite. But, I was just claiming that inflation is likely to be higher than expected in July because of the very same food prices that have been behind the better-than-expected prints for the last two months.

Interesting Picks

I still have to write the addendum to yesterday's Hurriyet column, but when I do, the best impossible trinity graph I've seen is sure to find a place.

Having written a paper on determinants of FDI, I love to see the practicer's perspective.

Daniel Gross and David Beckworth explain two types of deflation- supply or demand-based.

Sources of the US fiscal deficit- nice follow-up to the earlier post on costs of warmongering.

Tips on reading research papers for the ignorant blogger.

Roubini's latest FT article.

I don't get academics; they first teach you a zillion confidence and sell-fulfilling equilibria models- then say they don't work:)

Yves Smith takes a column from today's FT that I really liked as her base to discuss the Eurozone Stability Fund.

Delphine Strauss discusses the latest Turkey CEM- the main theme is the shadow economy.

Menzie Chinn summarizes a conference on trade costs.

A couple of knockoff Eurozeone bank stress tests.

Since high frequency trading (HFT) is a a la mode at the moment, FT Alphaville summarizes a paper that tries to quantify the HFT effect in stock movements.

Charts like this make me wish I had Bloomberg.

Another Turkey piece: Ripples of BNP-Fortis merger in Turkey. Nice piece Caleb!:)

War, What is it good for?

According to Elaine Benes of Seinfeld, Tolstoy would name his most famous work War, What is it Good For?, when his better half intervened and convinced him for War and Peace instead.

I am not in for a philosophical treatise for the merits of war, although I did compete in an international philosophy olympiad almost two decades ago.  But thanks to a post in Turkfinans, a yahoo group I am a member of, I became aware of a recent paper that goes over the costs of the wars in Iraq and Afghanistan.

The paper led me to think about the costs of Turkey's more than two decades of fighting against the PKK. When I asked the same group if anyone was aware of such a study, I was sent an article that refers to an academic study (unfortunately in Turkish).

Since I could not find the mentioned study on the web, I can not provide a critique. I can, however, emphasize that the noted study does not mention the loss of lives or the cost of the injured at all. If you are interested, there is a huge Economics literature on valuing a human life.

Anyway, if you are aware of a study/article that tries to estimates the costs of the war on terror a la Turca, please let me know.

Really Ironic

In my Interesting Picks on Saturday, I had referred to an article that argued that both the Chinese trade surplus with the United States and the amassed foreign reserves result from the savings decisions of Chinese consumers. Loyal reader Sinan, who also happens to be one of the few communist eziks (I was trying to convince him last night that the word is as oxymoronic as an ugly Russian, at least for the female of the species, but nevertheless), responded, via email, that Americans, with their manufacturing base largely gone, at least for consumer goods, had nothing to offer to the Chinese.

Well, he emailed me last night, he had actually found one thing the Chinese were interested buying from the US: Grain!

As Sinan noted, this is really ironic:)....

EconNews Roundup

I guess it is Hurriyet's monthly tourism day: First, a Turkish tour operator goes bankrupt. Then, to make a general point, there is a piece about plummeting margins: The article is about travel agencies, but this is a big problem with hotels as well and will make make one of the pillars of the tourism column I plan to write for Hurriyet soon. Finally, Thomas Cook acquires Oger, a Turkish-owned (or rather half-Turkish) travel specialist. As an economist/blogger moonlighting in the hotel business, I would be worried about concentration in the travel agency business, but as the elders would say, one swallow does not a summer make.

Given my semi-organic ties, to the Daily News, this will sound like biased reporting, but I have been very critical of them in the past as well. Anyway, read the piece on the recovery reflecting on FTZs and then have a look at the picture below:

Hmmm, sloppy reporting I guess. But a very good piece could be written on how the average figures reflect the extremely different performance of FTZs and what could explain those differences.

Another case of no shit, Sherlock. I don't want to teach anyone journalism, but the road to the referendum would have been much more interesting. My friends at Istanbul Analytics/Global Source/Turkey Data Monitor, for example, have some excellent analysis on how the referendum will be shapred by other political events such as terrorist attacks.

BOP data continues to disappoint. And there is a Daily News version as well.

Last but hopefully not the least, you can read what your friendly neighborhood economist has to say for this week.

Competition

Here's what a reader sent through email:

Read the last section. Unless we sign up Paul as an exclusive contributor to the Emre Deliveli blog some competition might be expected:


http://www.spiegel.de/international/zeitgeist/0,1518,705989,00.html

But the reader is paying me too much of a compliment. If the last three years thought us something, it is that economists make awful forecasters. But, I am still behind my latest forecasts:)...

Interesting Picks

What caused the subprime crisis? Vested interests? Or local thinking?

There are still some housing bubbles out there.

Useful distinction between revolving and non-revolving credit.

BIS paper on chronicles of currency crashes.

More from CalculatedRisk on sovereign default research.

James Hamilton looks at demand for US sovereign debt.

CalculatedRisk's Weekly Summary and a Look Ahead

Tim Duy's Fed Watch

The European sovereign crisis in a few powerpoints.

The VIX futures contango bubble.

Weekly Hurriyet Column: Turkey’s (un)holy trinity

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. I opted for a religious reference for the title this time around.

As for the column, because of the strict 3700-character limit, I was not able get into everything I wanted to discuss. In particular, I wanted to summarize the exchange rate discussion in the international context as well as discuss the most sensible solution to the exchange rate problem so far. But since I am in a hurry and really hungry, those will have to wait for the addendum later today.
 

 

Whenever Turkish exports falter, exporters and their sidekicks from the academy and media (academedia for short) begin to whine about the exchange rate.

It is an entirely different question whether the exchange rate is to blame for the country’s trade deficit and the high import content of exports - one which was addressed at a conference organized by the Central Bank of Turkey, or CBT, back in November. Instead, I would like to discuss whether the exchange rate is really overvalued and what, if anything, can the Bank do about it.

But which exchange rate should we be talking about? The most obvious choice is the nominal exchange rate, weighed by the size of Turkey’s trade with its trading partners. However, what matters for competitiveness is not the nominal, but the real exchange rate, which is simply the nominal exchange rate adjusted by price differentials. Intuitively, the real exchange rate compares prices of a basket of goods in different countries.

A new index…

Although it is possible to come up with simple measures of the real exchange rate such as The Economist’sBig Mac Index , a complete index is rather laborious. Fortunately, the CBT has been preparing such indices for some time, and it recently revised its methodology.

The first result that stands out is that the new indices point to less overvaluation than before. And to quell accusations of data manipulation, the CBT has published an accompanying paper on the methodology, earning high marks for transparency as well.

The CBT has also started to publish separate developing and developed country-based indices. These show that overvaluation is less evident in comparison to developing countries, which are Turkey’s main export competitors. A brand-new index based on unit labor costs, a better measure for comparing costs across countries, points to a favorable post-Lehman real exchange rate.

Moreover, once you decompose the change in the indices into the nominal exchange rate and the inflation differential between Turkey and the rest of the world, it becomes clear that most of the recent upward trend in the real exchange rate is due to the inflation differential. So exporters should think twice before criticizing monetary policy, less they want to risk shooting themselves in the leg.

All this is not to say that the real exchange rate is undervalued. On the contrary, different methodologies such as its long-run trend, the external financing outlook and macroeconomic theory all point at overvaluation. But the new indices do suggest that the overvaluation is not as large as often claimed, especially when making the right comparisons.

… But the same ancient mindset

Even if the exchange rate were to blame, at least partially, for the country’s export woes, the most-common solution suggested by the whiners, that the CBT should manage the exchange rate, simply would not work in context of inflation targeting and the absence of capital controls- this is the impossible trinity of international macroeconomics.

This is why learned critiques have started to discuss limiting capital controls and even dispense with inflation targeting altogether. While there are some merits to some of their points, their arguments are also extremely short-sighted and asymmetric. For one thing, they ignore the theoretical underpinnings of the overvaluation based on growth and productivity differentials. They also never mention the benefits of a strong lira such as low exchange rate pass-through to inflation and a growing services sector. A balanced discussion needs to involve these factors as well.

But Turkey’s unholy trinity of exporters and academedia will continue their attacks, as balance is the last thing on their minds.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at http://emredeliveli.blogspot.com.

Interesting Picks

Both the Chinese trade surplus with the United States and the amassed foreign reserves result from the savings decisions of Chinese consumers.

A mixed review for EU stress tests.

Shadow Government Statistics- I would subscribe to them if they had a section on the Turkish budget figures:)

Tim Duy asks what the threshold is for more Fed action.

David Beckworth wonders about the current stance of monetary policy and what the Fed can do now.

Interesting charts on the history of sovereign defaults.

I couldn't see rsp ccg zz yldrm there, but still quite useful.

A business dynamics explanation on why US firms are hoarding cash.

John Mauldin on US employment figures.

In case you want to lose more sleep waiting for the stress tests.

I was thinking about the impossible trinity myself for Monday's Hurriyet column (obviously in the context for Turkey), but Greg Mankiw has beat me to it. When am I going to learn not the leave that to the last minute, by the way... I can still go for it, or I can do the World Bank poverty paper I have been delaying for a long time..

According to Rajan, it is inequality caused by skill-bases technological change that fueled the crisis.

Inflation is Coming!!!

One of the column and blog ideas I had posted more than a month ago was a quick and dirty way to measure inflation.

The idea is quite simple: I have been handling the food&beverages purchases of our family business for a month now and have this Excel sheet full of prices on thousands of items bought, with the quantity, pricing and supplier info. as well.

While I am not sure whether I will have the time to do a monthly food inflation at the end of July, as I hope to (the procedure is quite straightforward, but rather time-consuming), I am also informally following price rises. And the early signs from July don't look all that promising. Had I come up with a number, I am sure than it would have been higher than the expected figure for this month of the year, which I present, along with the headline figure, for your viewing pleasure:

Now, before you start dumping your Treasuries, there are important disclaimers you need to read: For one thing, since I don't have a time series, but merely one month of data, there might be some seasonality effect going on. For example, there is anecdotal evidence that suppliers serving to hotels pump up prices in the high-season months of July and August. If I had been doing this data collection for a couple of years, I could have easily corrected for that.

You might be also worried that my purchasing power will be stronger than the average consumer, so it will underestimate inflation. This wouldn't be a big problem as long as my purchasing power were constant through time, but as I explained in the previous paragraph, it might have actually decreased.

But if I am right, it seems I have sketched out, along with my earlier comment on Treasuries, a neat boond strategy for end-July and early-August:Wait for the CBT Inflation Report on July 27, where the Bank is expected to clarify its late hold-for-longer stance and even revise down its inflation forecasts. Sell on the ensuing rally and then wait for the worse-than-expected July print to buy again. Very simple, no complex hedging and the like here- let's wait and see what happens. Note also that the Treasury is facing TRY 20bn redemptions in August, but there are no auctions until the 10th of the month and it will all be over in a week.

BTW, there are also other interesting facts about this data: For one thing, everyone knows that food inflation is infamously volatile, not only in Turkey, but also in almost everywhere else, but I am surprised by the intra-monthly volatility. Obviously, since we are not making purchases of much else, I can not comment on whether, say, table tennis balls, are more volatile- but then again, for the average Turkish consumer, food matters much more than table tennis balls...