The Turkish Meltdown Unpacked

A poor speculator from Abu Dhabi took out a $139,000 loan to invest in bitcoin…and has lost at least 85%.

The 32-year-old is going to be paying over $3,000 every month until December 2021.

Ouch.

But it’s hard to be surprised — he broke several of the fundamental rules of investing.

  1. Don’t invest more than you can afford to lose.
  2. Don’t ever borrow to invest.
  3. Don’t buy at the peak.
  4. Don’t sell at the bottom.

Frankly, it doesn’t seem like he knew anything about investing in the first place.

Our team still reckons there’s a future for bitcoin and money to be made… but investors should educate themselves first.

Don’t make the same mistakes this guy did — learn about investing first, get familiar with cycles and, for God’s sake, never take out a loan to invest.

Trouble in Turkey

As you’ve probably read in the papers, Turkey is in full-on meltdown.

Turkey’s currency plunge fans fears of new global financial crisis’

The Washington Post

Turkey’s turmoil shakes global financial markets’

The National Business Review

World markets unnerved by Turkey’s financial turmoil’

The New Zealand Herald

Many headlines point to a common conclusion — fear the global contagion from this event.

It’s possible that it has already affected American and European stock markets, but recent dips have been fairly insignificant…and could have easily been caused by a number of factors besides Turkey.

I agree that Turkey’s plight could have global ramifications, but for different reasons…

For one, Turkey’s not a major importer or exporter on the global marketplace. Its main partners are China, Russia, and Germany. But only to the tune of $20 billion each or so.

For reference, that’s similar to New Zealand’s trade presence.

It’s hard for me to believe that Turkey’s slowing performance will rock the global economy.

No, the biggest casualties will be the European banks who have provided bountiful loans at near-zero interest rates to Turkey over the past decade.

Spanish banks are in it the worst — $82 billion in outstanding loans.

French banks follow up at $38 billion.

Not a lot of hope on those balances being paid up.

And this time, the EU might not be in a position to step in with a bailout.

Turkey’s been trying to join the EU for nearly three decades, but the negotiations are ongoing. It’s hard to imagine that the EU will volunteer to bear this cross.

Another casualty could be Turkey’s currency, the lira.

So far in 2018, the lira has fallen over 40% against the US dollar…and it could keep sliding.

Part of the reason that Turkey’s crisis happened so quickly was that President Trump doubled tariffs on Turkish metals. This call was a reaction to the imprisonment of an American in Turkey.

But let’s call it what it is — America flexing its muscles.

President Erdogan remains defiant and unwilling to enact emergency measures to stabilise the market.

The emotional tension between the two leaders is adding to the disruptive pressure.

 

The evils of easy money

But the core reason for this crisis is Turkey’s own doing…

When the US Federal Reserve drove interest rates to basement-bottom levels, the Turks began borrowing dollars at extraordinary rates.

Not unlike many countries around the world.

But now that the Fed is enacting market-tightening measures, many foreign currencies are losing ground against the dollar.

And since these countries borrowed in dollars, that means that their outstanding balances have become much harder to pay back.

To explain, let’s say Turkey borrowed $100 USD just after the Great Financial Crisis, when the exchange rate was about 1.16 lira to a dollar. Today, the rate is over six and a half lira to a dollar.

A $100 loan made in 2008 would feel like $567 today.

So even though the loan bears an extremely low interest rate, the currency fluctuations make the payments impossible.

And that could hold true for all those who borrowed under the easy money regime.

Including New Zealand.

Our dollar hasn’t depreciated like the lira, but our economy has certainly taken advantage of cheap borrowing to fund the past decade of growth.

The problem in New Zealand is that most borrowers never built in a tolerance for an interest rate increase. If the Fed raises rates, as it’s currently doing, that could put a significant stress on Kiwi businesses built on cheap rates.

Like Turkey and our poor bitcoin speculator, Kiwis have borrowed beyond their means in the years of plenty and it could mean that they starve when the famine hits.

But it’s too early to guess how hard it will hit us.

Fortunately, New Zealand and the US are mostly aligned politically…unlike with Turkey. So economic sanctions like the new US tariff on Turkish metals won’t likely come into play here.

Effects are most likely going to be far more gradual, chipping away at the strength of our businesses. Consequently, squeezing GDP and the strength of the New Zealand dollar.

So you can brush off the mainstream threats of ‘turmoil’, but you should look out for our ‘rock star economy playing its final encore soon.

Best,
Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


Wealth Morning Stock Market News, Finance and Investments