Author: Rebekah Stovall
Bi-Weekly Geopolitical Report – The Turkish Experiment (February 28, 2022)
by Bill O’Grady | PDF
Don’t miss the accompanying Geopolitical Podcast, now available on our website and most podcast platforms: Apple | Spotify | Google
The Turkish economy is being roiled by spiking inflation and a sharp decline in the Turkish lira (TRY). The orthodox response to such a macroeconomic crisis is austerity. Fiscal and monetary policy become tight; taxes are raised, or spending is cut, or both occur and interest rates are increased. The goal is to depress domestic demand because the root cause of these problems is usually a persistent current account deficit. Reducing domestic demand usually leads to a reduction in the current account deficit.
Turkish President Erdogan has adopted a heterodox response to the current crisis. He has fired numerous officials of the Central Bank of the Republic of Turkey (CBRT) over the past two years who insisted on raising interest rates to address the aforementioned problems. Since July 2019, when Erdogan relieved Murat Cetinkaya of the governorship of the CBRT, he has installed three governors in less than three years. Erdogan believes that increasing interest rates leads to higher inflation on the idea that increased borrowing costs will be applied to prices. This position is at odds with the normal prescription for addressing an inflation and currency crisis.
In this report, we will begin with a review of the basic economics of savings balances and how current account deficits are created and funded. From there, we will provide an examination of Turkey’s current economic situation. The next section will deal with the government’s response. We will close with market ramifications.
Asset Allocation Bi-Weekly – #69 “The U.S. Trade Deficit and Global Prices” (Posted 2/22/22)
2022 Outlook: Update #1 (February 18, 2022)
by Mark Keller, CFA, Bill O’Grady, and Patrick Fearon-Hernandez, CFA | PDF
In our 2022 Outlook: The Year of Fat Tails, we outlined a forecast with a higher likelihood of events outside the norm. To compensate for the unusual level of uncertainty, we promised to provide frequent updates to the forecast. This report is the first of the year. One of our contentions in the forecast was that the FOMC would not raise interest rates this year. In light of developments, this position is untenable. Therefore, in this update, we will discuss four potential outcomes from the upcoming rate hike cycle and the potential effects on financial markets.
Monetary Policy
Over the past three months, we have seen a dramatic shift in expectations surrounding monetary policy. One way to observe them is by the behavior of the two-year deferred three-month Eurodollar futures implied yields.
In early November, the deferred Eurodollar futures were projecting steady policy for the next two years. In a mere three months, we have seen a rapid shift to nearly four rate hikes of 25 bps each. Although similar shifts have occurred in the past, we note that when such shifts occur, the likelihood of recession does increase.
With tighter monetary policy looming, we would argue there are four likely terminal paths. They are as follows:
- Path #1: Policy is rapidly tightened, leading to a recession.
- Path #2: Policy is tightened too slowly, causing a debasement crisis.
- Path #3: Policy tightening triggers a financial crisis, leading to a rapid easing of policy.
- Path #4: A soft landing occurs.
Bi-Weekly Geopolitical Podcast – #3 “Ukraine: Key Questions” (Posted 2/14/22)
Bi-Weekly Geopolitical Report – Ukraine: Key Questions (February 14, 2022)
by Patrick Fearon-Hernandez, CFA, and Bill O’Grady | PDF
Don’t miss the accompanying Geopolitical Podcast, now available on our website and most podcast platforms: Apple | Spotify | Google
For the past two months, Russia has been mobilizing around Ukraine, leading to fears that Moscow is planning to invade. The U.S. has warned Russia against such action, lining out extensive sanctions and other potential responses.
Given the fluid nature of the situation in Ukraine, it is difficult to create a report detailing current events. After all, they are changing so rapidly that this element is best left to the media. Instead, we want to give some context to the current situation formatted in a series of questions with responses from both of us, Bill and Patrick. As always, we will close with market ramifications.
Asset Allocation Bi-Weekly – #68 “Gold: An Update of Current Conditions” (Posted 2/7/22)
Bi-Weekly Geopolitical Podcast – #2 “Two Power Plays in Kazakhstan” (Posted 1/31/22)
Bi-Weekly Geopolitical Report – Two Power Plays in Kazakhstan (January 31, 2022)
by Patrick Fearon-Hernandez, CFA, and Bill O’Grady | PDF
Don’t miss the accompanying Geopolitical Podcast, now available on our website and most podcast platforms: Apple | Spotify | Google
Over the past month, unrest has developed in Kazakhstan. The unrest began as protests against rising fuel prices, but it soon blossomed into broader, more widespread, and violent civil disorder that had the appearance of an inter-elite conflict. Although Central Asia doesn’t usually garner the world’s attention, instability in the region could affect larger countries, such as China, Russia, and India. The volatility in Kazakhstan was also something of a surprise as the country has tended to be stable during its period of independence since the fall of the Soviet Union.
Despite being often overlooked by the Western media, Kazakhstan is an important country. It’s a major oil producer and the world’s dominant supplier of uranium. Oil prices, already elevated, rose further on fears that the Kazakh disorder would lead to additional supply disruptions. Uranium and associated equities also rose in price on the reports. In this report, we begin with some background on Kazakhstan, including a short history and a discussion of the region’s role in Russia’s imperial behavior. We next delve into the reasons for the January unrest and the way it played out for Kazakh and Russian leaders. As always, we conclude with market ramifications.