As Trump put it on Monday evening after the FBI raided the offices , home, and hotel room of his personal lawyer Michael Cohen, “it’s frankly a real disgrace” that we live in a world where the President of the United States is held accountable for his actions.
It’s also “frankly a real disgrace” that the Kremlin, who (allegedly) helped that same President (allegedly) rig the U.S. election is now paying the price for meddling in the affairs of Western democracies and also for poisoning ex-spies on UK soil.
In the same vein, it’s “frankly a real disgrace” that the market is punishing the lira for the unorthodox (read: batshit crazy) economic views harbored by Turkish Sultan (and man who has never met a “good” Kurd) Recep Tayyip Erdoğan.
I don’t know what kind of upside down world we live in where the leader of the free world can’t pay off porn stars, rig elections, and obstruct justice with impunity and where Russian oligarchs aren’t free to operate as they see fit and where notorious dictators aren’t free to insist that higher interest rates are the cause of weak currencies without FX traders driving those currencies to all-time lows.
But alas, this is our reality. A reality where would-be dictators and autocrats are subject to laws and are investigated and punished when they break those laws and where people who pursue lunatic economic policies for political gain have to watch as the market punishes their currencies.
Consider that the backdrop against which global equities rose on Tuesday.
Russian assets look poised to enter a veritable death spiral as international investors confront an uncertain future following the latest round of punishing U.S. sanctions leveled against oligarchs and Russian corporates. The ruble plunged to its weakest since December 2016 on Tuesday and Moscow was effectively forced to yank a bond sale for the first time since the annexation of Crimea. They’re going to have to sell dollars if this doesn’t abate.
Meanwhile, the Turkish lira continues to slide. It hit yet another new low today as investors ponder a defiant Erdogan who is characteristically refusing to budge in the face of an overheating economy, twin deficits and calls for immediate action to arrest the lira’s rapid depreciation. Turkey’s bond yields hit record highs on Tuesday.
Stateside, the political situation is laughably precarious. Reports that Rod Rosenstein personally signed off on the Michael Cohen raid make it all the more likely that Trump will ultimately move against his Deputy AG on the way to closing down the Mueller probe. The DoJ was the subject of Trump’s ire during a Monday evening diatribe (linked above) delivered at a meeting ostensibly convened to discuss options for Syria.
Speaking of Syria, you’re reminded that Trump, Putin and Erdogan all have a stake in the outcome there. American, Russian and Turkish boots are on the ground and Washington, Moscow, and Ankara are all keen to advance their own interests, efforts which are complicated immeasurably by the fact that Putin and Erdogan both have deep ties to the Mueller probe (Erdogan for his connections to Flynn and Putin for obvious reasons).
And all of that is to say nothing of the trade tensions.
Not to put too fine a point on it, but this is the stuff crises are made of. That’s not an attempt to spread fear and it’s not an effort to overstate the case. It just is what it is. You’ve got the makings of an EM meltdown (if China were to devalue the yuan to counter Trump’s trade bombast, the situation would likely get even more chaotic) and you’ve got the conditions for an actual constitutional crisis in America.
For now, FX vol. has somehow managed to remain subdued, but I’m not sure how much longer you can expect volatility to remain confined to equities.
Whatever the case, we’re reaching a point geopolitically where you don’t need to be fearmonger to posit a worst case scenario. You just have to be a person with working eyes and ears.