Thoughts

1 am: Fears of Turkish “contagion” are overblown

As you probably already know, Turkey and emerging markets are falling. If you read the latest Zerohedge headline about “Carnage”, you’d think that this “contagion” has caused a disaster in the U.S. stock market. Here’s the effect of Turkish “contagion” on the S&P 500.

We can outline 2 scenarios: a worst case scenario and a best case scenario.

The worst case scenario is that Turkey’s crisis turns into something like the 1997 Asian crisis. How did the U.S. stock market react?

The U.S. stock market made a very sharp decline, after which it quickly snapped upwards. Fears of “contagion” are almost always short-lived. This is because foreign and emerging markets are tiny compared to the U.S. The U.S. economy is $19 trillion. The Turkish economy is $857 billion, less than 5% the U.S.’ size.

I don’t think the Turkish crisis will be similar to the Greece crisis of 2010-2012. People only cared about Greece in 2010-2012 because Greece was a part of the EU. Turkey is not. If Greece’s economy cratered and Greece left the EU, that would have put the entire EU in jeopardy. Comparing Turkey today to Greece back then is an apples to oranges comparison.

The best case scenario is that Turkey’s troubles cause increased short term volatility in the U.S. stock market, which is what’s happening right now. Trading on the news is a fools game. You never know when the U.S. stock market will start and stop caring about Turkey’s problems.

Here’s proof that financial media literally invents reasons to explain the stock market’s day-to-day movements.