Throughout my travels, I've found that many foreign peoples suffer from ethnocentrism. The less educated and less well-traveled a person is, the more likely they are to view themselves as the center of the universe. Most Turks, I've found, suffer from this type of ethnocentrism. Some of this is caused by the hubris that goes along with inheriting the rich history of the Ottoman Empire. Some of it is a product of the fledgling Republic's propaganda machine that indoctrinated Turkish grade-school children into believing Turkey and Turks were/are still the "best at everything." Ironically, the polar opposite of this phenomenon inflicts the remainder of the population. "Turkey and Turks are nonexistent on the global stage," they argue. The actual position of Turkey and Turks relative to its global peers in various metrics is probably somewhere in the middle. This type of ethnocentrism is not exclusive to the political right or left in Turkey. Militancy exists on both sides of the aisle. The most ignorant of militants are those that argue against the economic, political and military might of true global powerhouses such as the United States and to a lesser extent China. This naivete is most dangerous in the field of finance. Markets punish ego; however, leave it to the anti-government crowd in Turkey to be dismissive of the power of the U.S. Federal Reserve (Fed) and geopolitical financial developments for the purpose of scoring political points.
Over the last few weeks, all sorts of arguments were made by the anti-government conservatives - those that favor the Turkey of the ‘30s and late ‘90s. The "economists" of the anti-government forces argued that the decline in the Turkish stock market, the increased yield of government bonds and the exchange rate of the Turkish lira were all a result of the words of Turkish President Recep Tayyip Erdoğan. Specifically, his support for checks and balances to apply to the Central Bank of the Republic of Turkey as it does for all other branches of government. Ironically, an op-ed piece in Sunday's Wall Street Journal echoed Erdoğan's criticisms. The author, Alex J. Pollock, wants to "assure that the checks and balances in a democratic government also apply to central bankers." He goes on to argue for the need of "elected representatives" to "oversee unelected monetary ‘experts.' " It's apparent that the Wall Street Journal, who chose to blame the decline in Turkish financial markets in the previous few weeks on Erdoğan's criticism, only meant, through publishing this piece, that Americans can criticize the American central bank, but Turks can't criticize Turkey's. Apparently, Turks are not alone in their ethnocentrism. Although his most-ardent supporters may believe that Erdoğan is able to sway global financial markets, this is of course is not true. In fact, no one person can sway the entirety of global financial markets. Well, maybe one person. Janet Yellen, the Federal Reserve chair, is able to, through her monetary policy committee, print money; infinite amounts of money. Money which is subsequently lent, at no interest, to Fed-owned companies such as "Maiden Lane LLC," which proceed to buy securities and bonds that the committee believes will bolster the U.S. economy and its interests as well as serve its congressional mandate. The strength of the Fed and its chair is perhaps the single largest unchecked seat of power in the world, argue Fed critics. They might be right.
Yellen exercised her muscles last week in comments which have convinced global financial markets that a rate hike is at least six months away. This caused the U.S. dollar to weaken against currencies that had depreciated out of fear of a rate hike and strengthen against currencies that are fundamentally weak to begin with. The euro, for example, appreciated against the dollar immediately following Yellen's dovish remarks, but returned to their 12-year low levels after the lack of "new news" had set it in (see Graph 1). What euro investors were hopping for is still unclear.
The euro is fundamentally broken, but the Europeans are fine with that, hoping a cheaper euro will make euro goods more competitive. The Turkish lira, however, is not fundamentally broken. Demographics and increased investment in research and development hold the promise of a stronger Turkey and lira in the future. Turkish equity markets are at three-week highs, so are bond markets and the Turkish lira. So, it wasn't Erdoğan's words after all. Turkish investors were spooked by rumors of imminent Fed hikes; with the rumors put to rest, Turkish financial markets appear to be back on track.
