Everyday normality in Turkey means the lira finding a new low, the Borsa Istanbul’s BIST-100 benchmark index magically remaining over the 1,000 threshold in lira terms (no hard currency is needed to avoid a collapse there since almost all of it has left while the government’s ‘invisible hand’ has chosen to stick around) and the day’s Turkish newspapers bringing more reports implying how President Recep Tayyip Erdogan is and always will be an economic genius—to explain what is afflicting the country’s economy you need only look up the attack being waged by shadowy global forces. November 2 had all three of these things, so no big deal there. Fall into the economic abyss? It sometimes seems that Turkey has learned to live inside the economic abyss, though let’s not forget that there are bone-chilling levels of poverty and repression that the curtain is rarely drawn back on.

So, with the lira’s all-time low versus the dollar having been pulled to 8.4458, officials were trying to keep a smile on (actually, is that a smile or a grimace?) while the central bank, essentially banned by the big boss at the palace from making formal rate hikes unless he gives the word, remained busy doing its best impression of a boxer in the ring with his hands tied behind his back by the coach, but still able to periodically lean on his opponent, smothering him on the ropes (while doing so it pushed its average cost of funding through 14%, with domestic government bond yields moving into the 15%s, against the policy rate of 10.25%).

Five-year credit default swaps (CDS) are a popular instrument to trade Turkey risk without being subject to capital control shocks. They were hovering above the 560s.

Whetting appetites

The current levels of the USD/TRY rate and interest rates are whetting appetites—but everyone dares each other to jump into the Turkish straits first. It’s never a surprise to see some “deep” analysis on how the central bank has tightened its monetary policy.

Turkey’s problems, however, now go over the head of interest rates. Be careful not to get married to Turkish assets while chasing up one-night stands. At the risk of repeating the already repeated, let’s be clear once more that the Turkish markets are, no arguments brooked, a veritable jungle. Sharks and vultures, you are welcome. Bears and bulls, you best stay at home.

But hey, it’s show-time in America, and any investor worth his salt will be alive to the possibility of tectonic shifts. They may call him “Sleepy Joe” Biden but he like the rest of us may be up all hours if the November 3 US election doesn’t deliver the Biden victory suggested by the opinion polls and consensus. Could the Hillary Clinton shambles of 2016 play out all over again? Or are we in for something entirely original, with the real market risk this time around being the “Real” Donald Trump, who reiterated on October 31 that Americans “are going to have bedlam” in their country if there is no clear result on election night. Will there be Turks who look at what’s going on in the US and get a sense of this is just how things play out at home?

Cluster-f***ed world

The Democrats proved the putridness of the US establishment by managing to nominate a dead-loss candidate—seriously, a near-octogenarian with his best days behind him who’s rather unlikely to deliver the kind of new ideas needed to cure the cluster-f***ed world of today, they couldn’t do better than that? So, anyways, a Chinese peasant in Wuhan ate a bat or pangolin and, as a result, the destruction of the prevailing “global” system looks set to reach its end if the Kremlin’s hackers cannot conspire to bring about a surprise as they did to get Trump in in 2016. But don’t go expecting deliverance, economic, environmental or otherwise.

A Biden term is a matter of “coming soon” if Trump is vanquished, as Biden’s term would start in January, while another Trump term would in reality start immediately should Russian hackers keep him in the White House or the incumbent shyster somehow manages to cling on in another way.

However, the current event risk is about whether the election will conclude normally on November 4.

EM traders have already positioned for a Democratic sweep of both the White House and Congress. That would allow the passing of significant fiscal stimulus, lifting EM currencies, except the Turkish lira, Bloomberg reported on November 1 in a story entitled “Emerging-Market Traders Brace for Chaos as US Election Looms”.

Turkey is an exception since Biden—who has described Erdogan as an “autocrat”—is expected to flick the switch on at least five Countering America’s Adversaries Through Sanctions Act (CAATSA) sanction items in response to Turkish President Recep Tayyip Erdogan’s acquisition and testing of ‘Made in Russia’ S-400 missiles, while there’d be no more crude interference with New York prosecutors’ efforts to bust Turkey’s-controlled Halkbank for allegedly breaching US sanctions on Iran.

Shock waves

Biden would no doubt like to see Erdogan dumped on his ass, but he might practically work with him if Turkey’s top man manages to stay top man despite all the shock waves.

Thus, a Trump victory on November 3 could mean a short-term rally in Turkish assets, while the ramifications of a Biden victory are already being seen in the ongoing collapse of the lira.

“As general nervousness levels rise—absent a blue wave or Democratic sweep—the prospect of a contested election is real. Such an outcome, which is far from a tail risk and, critically, how to hedge against this prospect, is top of the mind for emerging-market investors,” Ehsan Khoman of MUFG Bank told Bloomberg.

“Investors had begun to focus on the idea that the election would deliver a so-called ‘blue wave’, which not only sweeps Joe Biden to the White House but also delivers the Democrats a majority in the Senate and thus control of Congress. Should this materialise, the conventional wisdom is that it would pave the way for a large fiscal stimulus, which in turn would reflate the US economy. The conventional wisdom also holds that this would be positive for equity markets but negative for the dollar (since inflation expectations would also rise),” Neil Shearing of Capital Economics wrote on November 2 in a note.

“Maybe. But the experience of 2016 suggests that investors should be careful about taking strong positions on political outcomes and, worse, mechanically translating those to market outcomes. Back then, the consensus was that Trump was unlikely to win, but if he were to prevail then his rhetoric on trade and ‘carnage in America’ would spell disaster for equity markets. We all know what happened next,” he added.

“We may have to wait until later in the week to get a clearer idea of the political landscape. Even then, the close nature of the election raises the prospect of a protracted legal dispute over the result. Despite all of this, one thing that’s unlikely to happen, even in the event of a ‘blue wave’, is that Democrats win a filibuster-proof majority in the Senate. Expectations for a huge stimulus package may need to be dialled down,” Shearing warned.

You might reflect that Shearing’s mentions of “waiting until later in the week” and “legal disputes” are politically correct terminology for “chaos” or “bedlam”.

Even if the possibilities in question may not amount to trouble on the scale of armed “protests” by Republicans on the streets of America, the markets will be turbulent until the election result is clear and stability is assured.

China decoupling

Finally, let’s have a quick gibble-gabble on Trump’s so-called trade war.

“Irrespective of who is in the White House, US-China decoupling is likely to continue over the coming years,” Shearing argued.

That’s true, but let’s not overlook how China would prefer “collaborative competition” with the US establishment rather than deal with a narcissistic maniac souped up by re-election.

Capital also assesses that the Fed will continue to pursue policies that keep real rates in negative territory as the US economy continues its slow recovery from the pandemic shock, in which case equity markets should perform well under either a Biden or Trump administration over the coming years.

Also true, but that does not take into account the Trump effect on the latest money printing madness we’ve seen in recent years that has inflated US stock prices. It is just not done to say the emperor is naked or that the Fed has kowtowed to Trump. It may not see continued manipulation of stock prices as necessary under a Biden presidency. Biden believes in institutions.