For most investors and traders with grey hair, the phrase “history repeats itself or at least rhymes” dominates risk and portfolio management. The hope last week was the Turkey crisis was idiosyncratic and a buying opportunity for the divergent EM, writes Bob Savage.
The move beyond Turkish lira 7.20 (TRY) led to a contagion trade on banks in Europe and further pains elsewhere in emerging markets. Buying the dip didn’t work so well last week but it remains the siren call for this week with light data.
There is a bigger philosophical story behind how to trade markets in August with light volumes and light news – and that goes back to Tolstoy’s “War and Peace” where he uses the phrase “strange lightness of being” for Prince Andrew’s death.
The heavy market moods that history repeats clashed with the view that life is fragile and only lived once. There is no means testing for past decisions in the present world because each moment is different.
The YOLO movement risk for markets this week seems significant as Turkey is breaking out of the traditional fixes for an economy suffering from an unwanted forex devaluation spurred by its battle over a U.S. pastor held in house arrest for treason. Not going to the IMF, not raising rates to fight inflation, not pulling back the government budget – all are expected to lead to more trouble ahead with money flight ongoing.
Against this dire view, we have a defiance against U.S. hegemony and the new phase of economic war. The reworking of the global world order with NATO battling the former Soviet Union and China seems a throwback to history and, also something scary as the hope for a multi-polar world becomes real and makes risk taking more difficult.
The weight of heavy decisions pressing on the present against historical standards fights against this brave new world of relativism. The push for change isn’t new, the reactions to such, however, are unique.
The coordinated global easing efforts post 2009 that supported markets is in reversal. The effects on investor returns has been notable so far in 2018 with the divergence trades obvious as the U.S. returns to just 0.8% away from its S&P 500 (SPX) highs while EM shares trade in a bear market.
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