Socionomic Alert: Military Takes Control in Turkey

Turkey's slow motion slide into an Islamic state appears over as the Turkish military once again moved to restore secular rule.
Bloomberg: Turkey’s Army Says It Seized Power as Premier Vows to Resist

The army said in an e-mailed statement that it took power to restore freedom and democracy. It said all international agreements will be honored.
The coup effort won’t be permitted to succeed, Yildirim told NTV television. He said army units have besieged “some institutions,” and he said police -- traditionally closer to his government than the army -- have been ordered to use arms if necessary. He said the elected government remains in power.

It wasn’t immediately clear how much of the country is now under military control.

Since 1960, the NATO member has experienced at least three takeovers by the secular-minded army. But since the Islamist-rooted Ak Party government came to power in 2002, the political influence of the military has been trimmed.

Assuming it is not an extremist Islamic faction in the military, this is good news for Turkey and regional stability. ISIS just lost it's supply line.

Back in August 2015 I posted Geopolitical Forecasting Through Technical Analysis: Is Turkey About to Destabilize the Middle East?

All of which is to say, I can see the Turkey ETF (TUR) hitting single digits solely through currency depreciation and financial crisis. There's enough fuel there for it. However, geopolitical developments concern because they are likely to deteriorate along with the economy. If the chart is correct, economics and politics are going to get much worse for Turkey in the months ahead. Of course, the chart might reverse and the pattern may break, making a short of TUR a bad trade and a forecast of instability a wrong one. If it doesn't, Turkey may quickly become the new center of attention in the Middle East.

It was a direct hit in terms of expecting something major out of Turkey, but wrong as a trade so far. On the day of the post, TUR was $37.77 and it closed Friday at $41.60, falling after hours to $39.02 after hours. The dip to $33 was a result of global markets, not Turkey specific news.

Other posts on Turkey: 2016 Forecast: Turkey Collapses
2016 Will Be A Bad Year for Turkey

Things could go badly for Turkey in the short-term given the credit bubble, but as with Thailand's coup, things could also improve quickly. The second chart shows that relative to emerging markets, Thailand has consistently outperformed since the coup.

A difference from Thailand's coup is that it came after a long spell of turmoil. The coup was a last stage event in Thailand. In Turkey, it may be more middle stage because there are outstanding problems with debt.

Reuters: Bad loans and bankruptcies sound the alarm for Turkey's economy

After years of growth fueled by credit and domestic consumption, bad debts and bankruptcies are rising in Turkey, squeezing banks and exposing a fragile real economy which risks denting support for the ruling AK Party.

In its first decade in power, the AKP, founded by President Tayyip Erdogan, built its reputation on growing Turkey's wealth, overseeing a sharp rise in incomes and providing new roads, hospitals and airports in what was long an economic backwater.

But as he seeks support for an executive presidency to replace Turkey's parliamentary system, a decision that could be put to a national vote later this year, Erdogan may no longer be able to count on Turkey's rising prosperity to win him votes.

FT: Turkish corporate debt: ‘a few shocks away’ from a crisis

It is a big problem,” says Ozgur Altug, chief Turkey economist at BGC Partners, an international brokerage, in Istanbul. “Turkey’s next crisis will be caused by the huge increase in private-sector debt.”

He argues that while the level of debt is already high, it is not alarming, yet. But there is an immediate problem, he says, in the ability of Turkish companies to generate enough foreign currency to meet their obligations.

There are three ways Turkish non-bank companies can earn foreign currency: as exporters; as members of the tourism industry; or as sellers to the domestic market who use their revenues in Turkish lira to buy US dollars on foreign exchange markets.

All three sources, says Mr Altug, are under stress. Exports, which were growing at 10 to 15 per cent a year for most of this century, have collapsed in the past 18 months. Revenues from tourism have suffered under a Russian boycott, the threat of terrorist attacks and the Syrian refugee crisis.

Assuming the coup is successful, this will restore stability to Turkey and the Middle East over the long-run. There's too many factors to turn bullish, but the immediate impact shifts the long-term outlook in a positive direction.

Update: A claim that this coup is led by the Gulenist faction, in which case it would not be the purely secular Kemalist military. If true, this throws the outcome of the coup into question.

#BREAKING TURKISH JUSTICE MINISTER SAYS US-BASED IMAM FETHULLAH GULEN'S FOLLOWERS IN MILITARY ATTEMPTING TO SEIZE POWER

— Ragıp Soylu (@ragipsoylu) July 15, 2016

Daily Caller: New Ties Emerge Between Clinton And Mysterious Islamic Cleric

A newly-released email and lobbying documents filed with Congress reveals new ties between Clintonworld and members of a network operated by a mysterious Islamic cleric from Turkey.

Connections between Clinton and acolytes of the imam, Fethullah Gulen, could muddle the complex relationship between the U.S. and Turkey, a key NATO ally, if the former secretary of state wins the White House.

Turkey’s president, Recep Tayyip Erdoğan, has mounted an aggressive crackdown against Gulen and his followers, known as Gulenists. Erdoğan, who was once allied with Gulen, has even personally asked President Obama to extradite the 74-year-old guru, who has lived in self-exile in Pennsylvania’s Pocono mountains since 1999.i

Gulenists are effectively funded by the U.S. government.

The economics of the Gulen cult's American charter schools

Why does the Gulenist cult of Turkey want to be the largest operator of taxpayer supported charter schools in America? What's in it for them?

One reason is because it allows the cult to build up a caste of Gulenist businesses at taxpayer expense by doing business largely with other Turkish Gulenist immigrants. They appear to be skimming somewhat, but not too much that they get in trouble. Instead they are playing a long game to use American taxpayer money as seed capital to build up Gulenist economic power in America.

Think of it this way: banks are one of the big gatekeepers to deciding who grows and who fails in run of the mill businesses like construction and food service. Banks like to give loans to companies that have sizable government contracts, such as from schools, because the government's checks are less likely to bounce nor will the government suddenly vanish. So, firms that have cozy relationships with public schools can get loans to grow bigger.

The Shadowy Imam of the Poconos

Hizmet runs something like 130 charter schools in the US. Why? Because that’s the kind of thing you do in 21st-century America when you have tons of money and a potential image problem: teach math to black children. Remember when Mark Zuckerberg of Facebook was concerned about the upcoming Social Network biopic, so he suddenly gave $100 million to Newark public schools? Think of the children!

In contrast to the Zuck’s donation, however, the Gülenist charters are paid for by you and me to the tune of many hundreds of millions of dollars annually in American taxpayer money. Charter schools represent a giant opportunity for anybody skilled at bureaucratic maneuvering. It’s common for schools costing $50 to $100 million to be turned over to charter operators claiming to be in it for the children.

It is rumored that Gülen’s charters are intimately wrapped up with immigration fraud.

From July 13: File to request Gülen's extradition from US ready

Prosecutors in the capital Ankara have prepared a file for extraditing U.S.-based Fetullah Gülen, who is accused of leading a terrorist organization, as well as trying to infiltrate and overthrow the elected government, sources said Wednesday.

Sources from the Ankara Chief Public Prosecutor's Office, speaking on condition of anonymity due to restrictions on talking to the media, said the file will be sent to the Justice Ministry on Thursday, and then to the U.S. Justice Department with a formal extradition request.

The network led by Gülen, who is self-exiled in the U.S, is accused of wiretapping senior Turkish government figures, including the former prime minister and current president, National Intelligence Organization (MIT) chief, and Cabinet ministers, as well as journalists and other prominent figures via state officials.

Last October, an Istanbul court issued an arrest warrant for Gülen after approving a 1,453-page indictment charging him with "attempting to overthrow the government of the Republic of Turkey or obstructing it from conducting its duties by force."

Update: Reports of the coup failing.

Return of the Market

Now is your last chance to resign from your high profile job at a central bank.
Thailand: Bye Bye Baht If Bank Of Thailand Cuts Rates Again

How independent is the Bank of Thailand really? The central bank may be tempted to cut rate again to encourage growth. “Drag from mainstream Asia and European demand for goods is outweighing the positive impact from Chinese tourists and goods demand from Frontier Indochina,” wrote Teather. This is not a consensus view according to economists surveyed by Bloomberg, however. Most expects the central bank to stay put.

China and Thailand Want to Cut Out Malacca

Thailand, China to team up on long-proposed Kra Isthmus canal

China and Thailand recently agreed in Guangzhou on a canal project through the Kra Isthmus, the narrowest part of the Malay peninsula in southern Thailand, which means the project, in the pipeline for years, may start construction soon, according to the website of Hong Kong-based Oriental Daily.

The agreement follows on from efforts by China to hammer out the implementation of its New Silk Road Economic Belt and 21st Century Maritime Silk Road initiatives, with the ongoing push to establish a China-Pakistan economic corridor and a Sino-Russia high-speed rail project. When the canal of over 100 kilometers in length opens, ships will be able to pass from the Gulf of Thailand in the Pacific directly into the Andaman Sea in the Indian Ocean, cutting down the current route by at least 1,200 kilometers, the website stated.

...Liang Yunxiang, a professor at the School of International Studies of Peking University told the website that the memorandum of understanding suggests that China is going to be the main driver behind the opening of the canal, which has important political and strategic significance. Liang said the project will help strengthen China's cooperation with the Association of Southeast Asian Nations (ASEAN) Free Trade Area at the same time as ridding itself of its reliance on the Strait of Malacca. It will also cut short the route ships have to take, cutting the time taken by two to five days and consequently reduce costs and boost the development of ports in Hong Kong and the mainland. Liang said, however, that there are also political risks to the project, as it is subject to the political climate of countries in Southeast Asia and US-Thai relations.

Another motive behind the project is China's fear that the US could blockade the Strait of Malacca, cutting off the country's oil supply, according to the website.

Macau-based military analyst Huang Dong said that the canal will also improve the PLA Navy's ability to react to international incidents. The PLA Navy recently evacuated citizens of several countries from Yemen, for example, after the civil war there escalated.

Li Zhenfu, a professor at Dalian Maritime University, stated said that as Chinese companies will participate in the project, China will likely be granted some level of authority over the canal and may even be able to negotiate to refuse passage through the canal to warships from certain countries, increasing China's influence in Southeast Asia.

iFeng: 中泰开建克拉运河 大陆可摆脱“马六甲困局”

Emerging Market Currencies Outlook Negative, RMB Favored

Reuters: Reuters poll - Asia FX sentiment turns down

Foreign investors continued to sell Thai bonds as top policy makers expressed a preference for a weaker baht as exports sagged and the economy struggled for momentum.

India's rupee experienced its largest short positions since mid-August. Sentiment on the rupee had been bullish since early October last year before souring in recent weeks.

...In the previous poll published on April 30, views on most emerging Asian currencies turned bullish for the first time in six months amid views that the U.S. Federal Reserve may wait longer before starting to raise interest rates.

The latest survey showed long positions in the Chinese yuan fell only slightly even as the economy continued to lose steam in April despite a series of policy easings, including an interest rate cut on Sunday.

Overall optimism on the renminbi held firm as China's top officials including Premier Li Keqiang and PBOC Governor Zhou Xiaochuan have pledged to keep the yuan stable despite downward pressure exerted on the currency from the slowing economy.

Other emerging Asian currencies weren't so lucky, with sentiment turning negative on the slowdown in the world's second-largest economy and as the global bond rout prompted investors to dump government bonds in the region.

WSJ: Asian Currencies Hit by Bond Market Turmoil

Following the global bond selloff and the recent rise in oil prices, the region’s bonds are beginning to show signs of outflows with yields, which move inversely to prices, inching higher in recent days. As investors’ risk appetite wanes, analysts from Morgan Stanley say currencies that have seen outsize inflows in recent months will be most vulnerable. They point to Thailand’s baht and note that the Korean won, Taiwanese dollar and Singapore dollar “also appear exposed, given the magnitude of inflow over the past month.”

As economies in the region grapple with a broadly stronger U.S. dollar and looser monetary policies, currencies have become the only tool for central bankers to spur growth. Weaker currencies can help languishing export sectors.

WSJ: China Market Fails to Lift Other Boats
iFeng: 新兴市场货币人气"急剧"恶化 人民币意外"独领风骚"

The Other Trust Problem

Does trust in the government matter? Well, the word credit comes from the Latin word for believe, trust. The financial system is based on credit and the fiat currency printed by the United States is backed by "the full faith and credit" of the United States federal government. When trust in the government falls that directly impacts the financial and monetary system, leaving aside the socionomic reasons for the decline of both systems.

Trust in U.S., other governments plummets after state missteps

Just 37 percent of college-educated adults told the Edelman Trust Barometer that they trusted the U.S. government - 16 points down on a year earlier and seven points below the global average.

The United States was not quite at the bottom of the heap as levels of trust in governments in some Western Europe countries including France, Spain and Italy were even lower, but the scale of the American decline was particularly dramatic.

Public Trust in Government: 1950-2013

Waning trust in government

A recent Eurobarometer survey has shown a significant loss of trust in the government. When the poll was taken last autumn, six months after the Labour Party’s sweeping general election victory, trust in the government had fallen from 59 per cent to 48 per cent, a drop of almost one fifth. I dare say that if another poll were taken today, the level of trust in the Maltese government would have dropped even further.

Ukraine: 3 protesters dead amid clashes with police in Kiev

The clashes are an escalation of weeks of largely peaceful public protests prompted by President Viktor Yanukovych's decision in November to spurn a planned trade deal with the European Union and turn toward Russia instead.

The European Union and United States have urged all parties in Ukraine to exercise restraint and find a democratic solution to the political crisis.

Russian Foreign Minister Sergey Lavrov also warned Tuesday that the situation in Ukraine was "getting out of control" and urged dialogue between all the parties.

Thai 'red-shirt' leader shot as emergency rule begins

The World’s Most Visited City Is Again Marred by Violent Protest: Here’s Why

Turkish Government, Shaking Up Police, Now Seeks More Power Over Judiciary

Beijing's crackdown on corruption

The Loss of Trust in Higher Education

Climategate, Public Opinion, and the Loss of Trust

In 2007 and 2008, climate change reached the top of the international agenda......By the end of 2009, however, the situation had changed.

SECOND general in charge of nuclear missiles is fired over 'loss of trust' as Pentagon is forced to deny he's an alcoholic

For Obama, loss of trust over health-care law poses major problems for his agenda, legacy

Lack of trust can tell us what is missing

It was disheartening to read this headline, recently: “Poll: Americans don’t trust one another.” Disheartening, yes, but not surprising.

Anyone who can think critically about what goes on from day to day has developed an internal gauge that registers when something “seems” odd or not quite right. For younger observers, it’s a feeling. Feelings can and do pass. For the older observers among us, it’s a reflection of life’s experience. Experience, good and bad, is what it is.

The poll conducted in November by AP-GfK found that Americans are suspicious of each other in everyday encounters.

Diversity isn't helping matters, it only adds a fundamental structural loss of trust on top of declining social mood.

Pop Goes the Credit Bubbles: Turkey and Thailand in Crisis

Political problems follow accompany or quickly follow on the heels of credit busts because the decline in economic activity follows a turn in social mood that eventually spreads to politics.

Thaliand

April: Booming Thai banks wary of credit bubble
November: Thailand's Bubble Economy Is Heading For A 1997-Style Crash
December: Thai Opposition: Yingluck Will Leave Or Die

Turkey:
April: Turkey's ticking debt time-bomb
August: Turkish lira may need higher interest rates to escape emerging markets rout
December: Turkish PM struggles to contain corruption probe

Bonus: 1997 Asian Crisis Redux - Thailand Is Imploding

Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lender–borrower relationship. The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level

Politics appears to be leading in Thaliand this time, but this paragraph is more applicable to China, the mother of all emerging market credit bubbles. Rough seas ahead in 2014.