Market News – August 13, 2018

TURKEY TROUBLES: Turkey’s economy had been chugging along for some time. After the 2008 financial crisis, the central banks in the U.S. and the European Union (and other countries) flooded markets with newly printed money. The liquidity crisis turned into a liquidity glut and that allowed Turkey (and other emerging market countries) to access cheap capital. The downside was that it was easy to borrow too much, and many companies in Turkey did. Total foreign borrowing by Turkey’s non-financial companies was over $340 billion. The U.S. and now others have been slowing down the flow of cheap money and Turkish companies are struggling to keep up their debt payments. This year, Turkish lira has lost 44% of its value against the U.S. dollar causing many Turkish companies to rush to restructure their loans. Meanwhile, the Turkish government has not responded with structural reform. It has seized about $11 billion of assets (which always causes foreign investors to back away) and employed “hostage diplomacy”. Turkey has detained about 50 Western nationals on political charges trying to extract concessions from its allies. The detention of U.S. pastor Andrew Brunson has caused a major crisis with the U.S. Bipartisan bills have been introduced in Congress to punish Turkey, and last week, the president made remarks, including punitive tariff threats, that seemed to push Turkey’s economy, and its currency, to a tipping point. This roiled global markets on Friday. Turkey will likely be front page news all week as this crisis, and the showdown, continues. How many European banks are exposed to Turkey? Will the IMF step in? If so, what concessions will they seek, and will Erdogan cave in to their demands? Will Turkey free hostages?

GAIN STREAK ENDS: Trading was pretty quiet all week without much movement up or down, so Friday’s drop caused a negative week in the S&P 500 after five straight weeks of gains. The culprit once again was global trade tension, this time exacerbated by serious difficulties in Turkey.

INFLATION EDGING HIGHER: The Consumer Price Index increased 0.2% in July after rising 0.1% in June. Over the last 12 months, it has risen 2.9%. We haven’t seen that kind of rise for a while. The CPI minus food and energy also rose 0.2% in July and is up 2.4% over the last 12 months, the largest 12-month increase in ten years.

HEAVY TRUCK SALES UP: Sales of heavy trucks are up 13% over the last 12 months. It is no surprise that this statistic cratered during the Great Recession. From that trough, sales climbed steadily until mid-2015 when another steady decrease occurred until October 2016. Sales have been climbing since.

PRODUCTIVITY IS NOT IMPROVING: A component of the U.S. recovery that has been lagging is productivity growth. Wharton finance professor Jeremy Siegel was recently asked for his view on U.S. productivity. I’ll quote him:

“Unfortunately, although the economic recovery that started nine years ago has been very good in terms of jobs created, it has been very poor in terms of productivity growth. It has in fact been the poorest productivity growth that we’ve had in any economic recovery in the post-World War II period….Economists don’t really know all the reasons why productivity growth has been so poor. Is it the younger workforce that isn’t as experienced as baby boomers that are retiring? Is it that we are on the verge of new technologies but not yet in them?….We’re in a terrible lull, and that’s one of the reasons why wages after inflation have not risen as they should have during this economic recovery.”

BROKE SENIORS: Since 1991, the rate at which Americans age 65 and older have filed for bankruptcy has more than tripled from 1.2 per 1000 to 3.6 per 1000. The culprits: reductions in Social Security and a shift away from traditional pensions. The age at which full Social Security benefits are available has been rising, to 67 for those born in 1960 or later, up from age 65. Pension dollars have shifted from traditional, income-for-life plans, where the risk of bad markets was on the employers, to 401k plans where the risk is on the individual. Finally, the percentage of households with debt headed by people 55 or older has risen steadily for the last 20 years, to 68% in 2016. This trend is expected to continue moving in the wrong direction for a while.

References:

INFLATION EDGING HIGHER: https://www.bls.gov/news.release/cpi.nr0.htm; https://www.calculatedriskblog.com/2018/08/bls-cpi-increased-02-in-july-core-cpi.html|
HEAVY TRUCK SALES UP: https://www.calculatedriskblog.com/search?updated-max=2018-08-09T08:42:00-04:00&max-results=10
TURKEY TROUBLES: https://www.politico.eu/article/recep-tayyip-erdogan-donald-trump-sanctions-turkey-perfect-storm/; https://www.washingtonpost.com/business/2018/07/13/turkeys-economy-looks-like-its-headed-big-crash/?noredirect=on&utm_term=.0f8d93bb9d28
BROKE SENIORS: https://www.wsj.com/articles/bankruptcy-filings-surge-among-older-americans-1533641401?emailToken=75037ad4694cbceaf9984d1ffec2238617pLW676Ls5dm/sTPbQkfPSuORO31xDv0mSPLjuZW54Hr8vmiIHwtlW6n0GX9V8Yxo249QIZgkS5ezaXJNRTPnOvEu5jH3+yHchgmZhvQfw%3D&reflink=article_email_share
PRODUCTIVITY IS NOT IMPROVING: https://horsesmouth.com/will-interest-rate-hikes-hurt-stocks-ask-jeremy-siegel