Americans have learned a thing or two over the past 16 months about the prospective pitfalls of allowing a President to put his son-in-law in charge of important projects like, say, bringing peace to the Middle East.
Of course the U.S. is new to the authoritarian regime club so egregious nepotism has been met with some pushback from the country's previously free press and also from voters who didn't cast their ballot for Donald Trump, which is most of them.
But you know, "give it time." Eventually, dictators wear down the populace and a weary public, exhausted with trying to preserve democracy, finally resigns itself to one-man rule and all of the things that go along with living under an authoritarian regime. Things like the President making his son-in-law economic czar in the midst of a currency crisis, which is what Turkish strongman Recep Tayyip Erdogan did on Monday, after being sworn in for another term as Sultan President.
I'm not going to trace the entire evolution of this story here (if you ain't up on thangz, you can read the second post linked above and work your way back), but suffice to say things aren't going well in Turkey and in addition to a challenging fundamental backdrop (both from a domestic economic perspective and in the context of the broader challenges facing emerging markets as the Fed tightens policy), the beleaguered lira is being weighed down by Erdogan's unorthodox theories about rates, FX and inflation.
Basically, his version of economics is the exact opposite of how economics actually works, and when he promotes his "views" on that, he's fond of explaining the discrepancy between those views and reality by reference to international and domestic conspiracies. In fact, he regularly suggests that interest rates themselves are conspiring against him, and the language he uses almost seems to suggest he imagines interest rates are living things capable of having a sense of purpose.
Anyway, the lira has been in free fall this year and back in May, when things were getting really bad, Erdogan showed up on Bloomberg TV. You'd think he would have taken the opportunity to say something that might allay fears. But this is Erdogan we're talking about, so instead of reassuring everyone that come hell or high treason, the central bank would retain its independence, he literally said he would take a more active role in monetary policy after the elections.
That should have been a signal to sell the lira hand over fist and for a while it was. But traders being morons, some folks were actually bidding up the currency following the election two Sundays ago as though Erdogan hadn't said what he said just a little over a month prior.
So here we are, the day after Erdogan picked his cabinet and analysts are once again shaking their heads in disbelief as though there is anything at all surprising about an autocrat with a history of brazen power grabs and an express disdain for higher interest rates, putting a family member in charge of the economy and leaving no room for Mehmet Simsek, whose presence was one of the only things the market was still hanging its hat on.
Here's Rabobank's Piotr Matys:
[The] exit of market-friendly Simsek reignites concern Erdogan will implement unorthodox policies, which include lowering inflation by cutting interest rates.
We may have to abandon our cautiously optimistic view that the lira should be more stable based on the assumption that the Erdogan administration will allow the overheated economy to slow down, will phase out fiscal stimulus and will focus on implementing structural reforms over the next two years or so.
Poor fucking guy. Yes, Piotr, you "may have to abandon" your "cautious optimism", which you never should have been harboring in the first place.
2-year yields in Turkey breached 20% on Tuesday amid mounting concerns, prompting one trader at BGC Partners to concede that anyone who was, like Piotr Matys, "cautiously optimistic" now looks like a moron. To wit:
There was conviction that the central bank would increase interest rates to fight inflation, though investors are now questioning whether they could be done or not. The more the lira weakens, the worse inflation gets; and this is becoming a vicious cycle.
Commerzbank is raising the specter of capital controls, something analyst Tatha Ghose says "cannot be ruled out in the medium term".
To be sure, it's not that Erdogan's son-in-law, Berat Albayrak, is completely bereft when it comes to the type of training you might need to run an economy. Rather, it's that there are only a handful of people on the entire planet with the balls to tell Erdogan "no", and you've got to believe that his son-in-law isn't one of those people.
Here's a hilarious quote from Nigel Rendell, a senior analyst at Medley Global Advisors, who spoke to Bloomberg via e-mail for a piece dated Tuesday:
Yes, he’s got an MBA from a U.S. university and he’s been a CEO, but is he really going to stand up to his father-in-law? Would he be prepared to argue that interest rates should be significantly higher and economic policy much tighter? If we look back and ask who’s stood up to Erdogan and come off better, it’s a short list. In fact, it’s a list with no names.
Right. Actually, if you made a list of people who have stood up to Erdogan and then tasked a super computer to cross-check that list against a list of people who are both alive and not in prison, the only name you'd come up with is Fethullah Gulen, who Erdogan will eventually get his hands on even if Michael Flynn has to kidnap him in the middle of the night (allegedly).
So for anyone on the sellside who is still clinging to the idea that maybe Erdogan isn't going to let you down this time, trust me, he is.
"We remain bearish the TRY, retaining the forecasts presented in the mid-year outlook (USD-TRY at 5.18 by year-end and at 5.50 by mid-2019) amid poor domestic fundamentals, policy risks, and expectation that EM currencies will weaken in 2H18 due to challenging external conditions," SocGen's Jason Daw wrote on Tuesday.
At least someone gets it. Good for Jason.
As for Simsek, he'd rather continue on in the world of the free and living rather than push back against a man who is now firmly in charge of virtually ever lever of policy.