1 Big Thing: The Turkish lira is in a crisis
I think the Turkish lira is now extremely undervalued. It has dropped as much as 20% this week amid concerns that the country won’t be able to pay its foreign-currency debt obligations. Today alone, the lira was down as much as 12%. Total losses for the year are over 30% against the US dollar. Now, the lira is trading well below fair value
Why this matters: this is how crises happen. Fair value is meaningless because we are faced with a case of reflexivity. We are in a feedback loop where investor worry about Turkey impacts the currency level, which further frightens investors. That loop can only be broken via decisive behavior from the Turkish government to support the currency with interest rate hikes and put appropriate economic remedies in place. And we haven’t seen this.
Fitch, the credit ratings agency estimates that Turkey will need almost $230 billion this year due to a high level of debt repayments coming due. Much of that debt is in foreign currency like the US dollar. And on top of that, many Turkish companies have borrowed in foreign currency too. These loans are now much more expensive to repay.
We are in a full-fledged currency crisis in Turkey. There is no question about that now.
2. Russian ruble contagion?
It looks like we are seeing some contagion from what’s happening in Turkey. It’s early days here so there is no need for panic yet. But the headlines are not good:
Russia on Thursday sought to cast the US as an erratic and unpredictable international actor that had betrayed “constructive” talks between the two countries’ presidents, as a new round of sanctions from Washington triggered sharp falls in the currency and Moscow stock markets.
The Russian rouble touched a two-year low in the wake of the Trump administration’s decision to add more sanctions against Moscow over a nerve agent attack on a former Russian spy in the UK in March.
“Anything can be expected from Washington now,” said Dmitry Peskov, President Vladimir Putin’s spokesman. “[The US] is quite an unpredictable participant in international affairs.”
Mr Peskov’s comments reflected shock in Russia at the latest round of curbs, announced on Wednesday, and rising fears in Moscow that another set of tough sanctions targeting Russian sovereign debt and its critical oil and gas industry could find political support in the US Senate.
Moscow Exchange’s benchmark dollar-denominated RTS index shed 3.5 per cent in early trading on Thursday to its lowest level since April, before recovering to be down 2.1 per cent. The rouble-denominated MOEX index fell as much as 1.5 per cent before making up most of those losses.
Why this matters: In the US, President Trump is seen as allied with Russian President Putin. But this view has not prevented convulsions in the Russian market and currency due to targeted sanctions. Anything involving Russia is clouded by the Trump/Russia saga. So I am looking at this through the emerging markets lens and the potential risk-off mood due to the situation in Turkey. Russia bears watching from that perspective along with Argentina. Peru and South Africa are two other countries that stand out here.
The large build-up of foreign currency debt in the emerging markets over the past decade means that these economies are more exposed as US policy rates go higher. And so, despite what Jeremy Grantham and his firm GMO see as a relative value, the potential for crisis makes EM less attractive at this point in time.
3. Soybean shipload in China
Last one here on emerging markets
A shipment of soybeans worth more than US$20 million (HK$157 million) has been bobbing aimlessly in the Pacific Ocean for a month, a casualty of the escalating trade war between China and the US.
Lingering uncertainty over the cargo’s fate offered a timely reminder of the fallout from a dispute that intensified on Wednesday, as US President Donald Trump unveiled a second round of tariffs on US$16 billion of Chinese goods, prompting Beijing to respond in kind.
The Peak Pegasus, a 229-metre bulk carrier weighing 43,000 tonnes, has become the reluctant symbol of the potential consequences of this tit-for-tat trade spat.
Why this matters: Evidence is mounting that both tariffs and the uncertainty surrounding them is having a negative impact on trade. Now, for the US, a relatively closed economy that accounts for maybe 12% of global exports, this isn’t a big deal. But for some other countries, it could have a meaningful impact on growth.
Overall, reduced trade flows due to rising protectionism will hurt global growth. Right now growth is robust enough that this won’t matter. However, if an emerging markets crisis does take shape, the risks, particularly in that universe will increase.
4. Some thoughts on severe weather patterns
This summer of fire and swelter looks a lot like the future that scientists have been warning about in the era of climate change, and it’s revealing in real time how unprepared much of the world remains for life on a hotter planet.
The disruptions to everyday life have been far-reaching and devastating. In California, firefighters are racing to control what has become the largest fire in state history. Harvests of staple grains like wheat and corn are expected to dip this year, in some cases sharply, in countries as different as Sweden and El Salvador. In Europe, nuclear power plants have had to shut down because the river water that cools the reactors was too warm. Heat waves on four continents have brought electricity grids crashing.
And dozens of heat-related deaths in Japan this summer offered a foretaste of what researchers warn could be big increases in mortality from extreme heat. A study last month in the journal PLOS Medicine projected a fivefold rise for the United States by 2080. The outlook for less wealthy countries is worse; for the Philippines, researchers forecast 12 times more deaths.
Why this matters: When I read this NY Times piece, the first thing I thought about was external migration patterns and ecological refugees. When severe weather devastates communities, many people leave their home community for good in search of food, shelter and a better life.
Initially this happens via internal migration within a country where the devastation has occurred. Eventually though, we see the outmigration of ecological refugees. And to the degree that weather patterns are becoming more severe, we should expect that outmigration to increase markedly — creating friction in the receiving countries.
5. The drought devastation in Australia gets worse
Here’s another weather situation to keep your eyes on. On Wednesday, I mentioned the drought conditions in Australia, which is having a huge impact on Farmers in New South Wales. The BBC has a good story up on how individual farmers are coping. They titled it “Living with Australia’s drought: ‘It’s cheaper to shoot the cows'”. Here’s one tidbit from that piece:
Farmer Ashley Gamble says his family has been part of Queensland’s dairy industry for more than 150 years. He fears that five-generation legacy will end with this drought.
Mr Gamble says his 850 cows typically produce at least five million litres of milk each year. Due to the drought, production has halved.
His farm is running at a loss, and he can no longer afford to feed the cows.
Hit up this link for the full read. Watch the video of thirsty cattle swarming a water truck. This is serious
Why this matters: If extreme weather patterns increase, could we see an increase in weather-related crop and livestock impacts? I don’t know. I’m not close enough to the situation to have a reasonable answer. But, at a minimum, we should expect some impact this year. Weather prognosticators are talking about a 60% chance of an El Niño pattern to emerge by 2018-19 winter in the US. It will mean a less active hurricane season but more severe weather come winter.
6. How the Fed looks at jobs
Real quick one here on where the Fed is coming from on the full employment issue:
The Federal Reserve may have limited tools to deal with the next recession, making it imperative that policymakers find ways to further strengthen an already much-improved labor market before the next economic downturn, Richmond Fed President Thomas Barkin said in a speech Wednesday.
“I’m concerned about monetary and fiscal policymakers’ capabilities to provide an effective backstop in the next recession,” said Barkin, who joined the Fed in January. “But stronger underlying growth would address this concern. Stronger growth would allow the FOMC to raise rates higher without constraining the economy, giving us more ammunition when we need it.”…
“There might be other levers policymakers can pull to increase the labor force, such as providing more opportunities to rural and inner-city communities,” he said. “That includes creating jobs in both places as well as investing in initiatives that enable people to travel to, or live near, the jobs.”
Why this matters: It sounds like Barkin is suggesting that we’re not at full employment. So, despite the low headline rate of unemployment, there are voting members of the FOMC who think that broader measures of unemployment like labor force participation rates and the U-6 broad unemployment rate show continued slack in the labor force.
I know that Fed Chairman Powell has problems with the Phillips curve mentality that says a low headline rate automatically means inflation. Add this to the angst Barkin has on the uneven impact of Fed policy in urban and rural areas alike. That makes the Fed more dovish — not necessarily now, but when the economy stalls. Something to remember for later
7. Tesla needs the stock to stay above $360
It seems likely that Elon Musk’s ‘going private’ tweet was a half-baked public musing rather than the culmination of a thought-out and vetted process around the subject. And the result has been scrutiny of the Tesla Board of Directors.
The Wall Street Journal observes that most of the directors as Tesla have close business or personal ties with Elon Musk. And so they may be less inclined to rein in his volatile behavior to the detriment of the company.
The board’s role in the possible buyout was clouded by Mr. Musk’s unusual way of announcing the idea—in a sudden, very brief tweet on Tuesday. That tweet was followed more than 20 hours later by a short statement from six directors saying the board had met several times since Mr. Musk told it of his go-private idea last week, and that it was “taking the appropriate next steps to evaluate this.”
The sequence of events suggests that “the board review has been very, very informal,” said Adam Epstein, who heads corporate-governance consultant Third Creek Advisors.
Mr. Musk’s announcement attracted scrutiny from the Securities and Exchange Commission, which has asked Tesla whether Mr. Musk was truthful when he said in his tweet that he had secured funding for the buyout.
Tesla didn’t respond to requests for comment on the SEC queries.
On Thursday, Tesla shares fell for a second straight day to $352.45, leaving them below their level before Mr. Musk’s announcement and about 16% under the $420 target price he set for a buyout of the electric-car maker.
Why this matters: Tesla looks more and more like Uber every day, with Elon Musk’s behavior becoming a liability for the company. Where Musk was once seen as a hero visionary, now as the company is in a crucial phase, he just seems erratic and unable to execute.
Tesla is trading at $352.45. And Tesla desperately needs the stock price to stay above $360 a share because of a convertible bond due in February 2019. This may have been the driving factor in Elon Musk’s tweet about going private at $420, well above the conversion price. That is a case for stock manipulation, and why the SEC is investigating.
I think it’s too late to make a change in CEO before the cash flow issue becomes a problem. They are going to have to ride through the early 2019 debt repayment issues with Musk at the helm. Changing CEOs now would be catastrophic for the company. Shareholders had better hope Musk is up to the task and that the stock price stays above $360.
8. Amazon using Whole Foods for grocery delivery
Amazon has found itself in the rare position of playing catch-up with its rivals.
The e-commerce giant announced Wednesday that its Whole Foods stores will allow customers to order their groceries online and pick them up in person. Walmart, the nation’s largest grocer, already offers online grocery pickup in nearly 1,800 stores across the United States, and plans to roll out the service to as many as 2,200 stores by the end of the year.
Amazon’s new service is starting in Sacramento and Virginia Beach. Shoppers who pay the Amazon Prime subscription fee — $12.99 a month or $119 a year — can order their groceries online and pick them up 30 minutes later at a Whole Foods.
Why this matters: sorry but this New York Times article is not the way to look at Amazon and Whole Foods. It doesn’t matter that Amazon is playing ‘catch-up’ to Walmart or anyone. What matters is that Amazon has the physical infrastructure now to drive, not just grocery delivery from its website, but also deliveries of anything else it wants to sell.
The threat of Amazon is that it can rival Bricks and Mortars competitors in convenience. The number of Amazon Prime members is projected to hit 107 million members by the end of 2018. And soon, all of those customers could have access to 30-minute grocery pick up service, depending on how close they live to a Whole Foods store. Right now, there’s a $4.99 fee if you want 30-minute service. But knowing how Amazon works, that price will come down or go away entirely as they build up scalable execution quality.
Eventually, this will be a big threat to all brick and mortar stores, not just grocery stores.