Friday's Stock Market Drop Seen a Different Way
The U.S. stock market dropped on Friday. This followed a similar pattern in global markets. The financial media said the drop was due to troubles in Turkey. Maybe. But there may be a simpler explanation. We'll get to that in a moment. First, let's why what's going on in Turkey has been cited as the reason.
The Turkish currency, the Lira, has been dropping in value relative to other currencies for weeks. It dropped again this past week. Turkey is deemed to be "in crisis." This Wall Street Journal headline was typical: "Turkey Crisis Rattles Currency Markets, Pushes Dollar Higher."
So Turkey's got a currency crisis. And with that, stocks drop. Got it?
Hmmm...What are we to make of this? Let's start with Turkey being "in crisis." Is the situation in Turkey similar to what we're seeing in Venezuela? For the sake of the people who live there, let's hope not. The Venezuelan people are suffering the consequences of the dysfunctional policies of their socialist dictator. Turkey also has a socialist dictator. These sorts inevitably cause their country's economy to more or less shut down. That's just what always happens when socialist policies disrupt the normal functioning of markets.
But wait, what about China? Aren't they socialist? Isn't their leader a dictator? Yes and yes. But for years the political leadership in China has tried to allow some semblance of normal market activity. Notice the "some." China's leaders do meddle, but then again, so do the governments of just about every country, including the U.S. But it's all a matter of how much. Now that China's leader has pretty much taken dictatorial powers unto himself (instead of sharing these with a group of top guys), we'll have to see if he meddles more than his predecessors. Could Chins be pushed to the edge of economic catastrophe, like Venezuela. Let's hope not. With their military might, that would likely mean war. Does anyone thing China at war would be good for anyone?
Back to Turkey. So they might be on the verge of some sort of economic collapse, due to their currency collapse. The currency is worth less, but will it become worthless? If so, the people will suffer as they now do in Venezuela. But that's likely not what markets were reacting to. (Markets don't seem to care much about human suffering, do they?) That reaction likely has to do with the fear that Turkey's crisis will spread. One way this could happen is through the banking system. Non-Turkish banks hold Turkish bonds. That's just what happens in our international financial system. Banks in one country are connected when they hold securities and obligations of the banks of other countries. If the value of those securities and obligations becomes worth less, the integrity of banks' balance sheets is called into question, especially if those securities become worthless. If that questioning spreads beyond Turkey's banks to other banks, look out below.
Markets get rattled at the thought of what is called "financial contagion." So are we seeing the beginning of a bout of financial contagion? Maybe. But maybe there's another explanation.
The cause of the drop in stock prices in the U.S. may simply the result of stocks being "overbought." That occurs when prices are driven up "too quickly" in the short-term. Prices get ahead of themselves. When they do, they adjust.
Analysis of short-term trends has been showing this pattern of stocks being "overbought" for a while now. So this recent drop may simply be an inevitable result of this short-term pattern. Of course you'll never see this explanation in the financial media. It's too mundane, too boring. That's why they always connect daily market movements to some political or economic news. It makes a better story.
A good guess: Next week will show us whether Friday's stock market drop is this short-term adjustment resulting from this short-term trend. If not, we'll see more a more dramatic fall in stock prices. And that may be telling us that a crisis beyond Turkey's borders could be on the radar screen.
We'll just have to wait and see.
The Turkish currency, the Lira, has been dropping in value relative to other currencies for weeks. It dropped again this past week. Turkey is deemed to be "in crisis." This Wall Street Journal headline was typical: "Turkey Crisis Rattles Currency Markets, Pushes Dollar Higher."
So Turkey's got a currency crisis. And with that, stocks drop. Got it?
Hmmm...What are we to make of this? Let's start with Turkey being "in crisis." Is the situation in Turkey similar to what we're seeing in Venezuela? For the sake of the people who live there, let's hope not. The Venezuelan people are suffering the consequences of the dysfunctional policies of their socialist dictator. Turkey also has a socialist dictator. These sorts inevitably cause their country's economy to more or less shut down. That's just what always happens when socialist policies disrupt the normal functioning of markets.
But wait, what about China? Aren't they socialist? Isn't their leader a dictator? Yes and yes. But for years the political leadership in China has tried to allow some semblance of normal market activity. Notice the "some." China's leaders do meddle, but then again, so do the governments of just about every country, including the U.S. But it's all a matter of how much. Now that China's leader has pretty much taken dictatorial powers unto himself (instead of sharing these with a group of top guys), we'll have to see if he meddles more than his predecessors. Could Chins be pushed to the edge of economic catastrophe, like Venezuela. Let's hope not. With their military might, that would likely mean war. Does anyone thing China at war would be good for anyone?
Back to Turkey. So they might be on the verge of some sort of economic collapse, due to their currency collapse. The currency is worth less, but will it become worthless? If so, the people will suffer as they now do in Venezuela. But that's likely not what markets were reacting to. (Markets don't seem to care much about human suffering, do they?) That reaction likely has to do with the fear that Turkey's crisis will spread. One way this could happen is through the banking system. Non-Turkish banks hold Turkish bonds. That's just what happens in our international financial system. Banks in one country are connected when they hold securities and obligations of the banks of other countries. If the value of those securities and obligations becomes worth less, the integrity of banks' balance sheets is called into question, especially if those securities become worthless. If that questioning spreads beyond Turkey's banks to other banks, look out below.
Markets get rattled at the thought of what is called "financial contagion." So are we seeing the beginning of a bout of financial contagion? Maybe. But maybe there's another explanation.
The cause of the drop in stock prices in the U.S. may simply the result of stocks being "overbought." That occurs when prices are driven up "too quickly" in the short-term. Prices get ahead of themselves. When they do, they adjust.
Analysis of short-term trends has been showing this pattern of stocks being "overbought" for a while now. So this recent drop may simply be an inevitable result of this short-term pattern. Of course you'll never see this explanation in the financial media. It's too mundane, too boring. That's why they always connect daily market movements to some political or economic news. It makes a better story.
A good guess: Next week will show us whether Friday's stock market drop is this short-term adjustment resulting from this short-term trend. If not, we'll see more a more dramatic fall in stock prices. And that may be telling us that a crisis beyond Turkey's borders could be on the radar screen.
We'll just have to wait and see.
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