Turkeys Scared of Turkey

Turkey represents 1.4% of global GDP.  I won't pretend to be a 5-minute expert on Turkey, but anytime you get one of these emerging market scares, which is somewhat expected, they are usually an overreaction.  Turkey has been on the radar for quite some time, the president seems like a knucklehead, so this sudden currency crisis doesn't surprise me. 

Currencies just don't suddenly depreciate like the Turkish lira for nothing.  I am sure just like Argentina, the government is printing money like mad and there has been a lagged response by the market.  Unless you have the reserve currency (US), or have a healthy current account surplus (China until 2015), you cannot print money like mad and not expect significant currency depreciation. 

I am sure the contagion effects on European banks with Turkey exposure was brought up, but they are not THAT vulnerable or reckless to the point where Turkey would bring them down.  Turkey borrowed a lot of money in foreign currencies, and that was warehoused to bond funds/pension funds via the banks.  The funds can take the pain.  It is a drop in the bucket.  Turkey will just have to default and get the Argentina treatment in the future.  The market will move on to the next issue.

Still short SPX, but was tempted to cover on Friday.  Even though I am short, I don't believe there is that much downside.  At the same time, I don't believe there is that much upside either.  The overnight lows around 2820 is probably the level to get out of the short.  There seemed to be the typical Friday risk off mentality on bad news price action.  You can sense that investors are turning bearish quite quickly on pullbacks, mainly due to ongoing trade war worries.  Only when the trade war is resolved will you have the investors all in and have the good news topping phase. 

Despite the Turkey crisis and the large short base, I am bearish on Treasuries for the next few weeks.  The strengthening dollar and steady stock market gives room for foreign central banks to follow the Fed and tighten monetary policy.  And it seems like Powell is in "raise until hell or high water" mode.  He has drunk the kool aid on the US economic boom thesis and will probably want to raise 2 more times before signaling that he wants to slow down rate hikes.