The blowoff in Emerging Markets: Buy Turkey?

The Daily Reckoning PRESENTS: Chris Mayer has been investigating the country of Turkey and has some thoughts on the emerging market there. Because of the current situation, some investors are jumping into Turkish investments, but Mr. Mayer reminds us about one of those little lessons every investor must learn. Read on…


The May-June sell off mowed down all stock markets like a drunken professional boxer letting loose the latent power in his right hand in a bar full of non-fighters. It seems no matter where you looked, investors were nursing their cracked jaws and busted noses. Hong Kong. Japan. Brazil. There were more.

One of those particularly hard hit was Turkey, down about 45% in dollar terms in the space of about two months. The Wall Street-types will call it a correction. That is what I call a bloody route. As is my inclination, I am attracted to the aftermath of such calamities. I don’t always invest in trouble (i.e., we’ve avoided newspaper stocks and auto parts suppliers, to name just two). But I often find it worthwhile to take a look and see if such indiscriminate smashing left some cold, unbroken bottles of beer still in the fridge.

But Turkey? What possible allure could Turkey hold? Nestled between Greece and Syria, with the Black Sea to the north and the Mediterranean to the south, Turkey straddles the fuzzy line between Europe and Asia. Geography alone, however, does not define Turkey’s untidy place in the world. As the Financial Times observes: “Turkey is big, awkward, Muslim, poor, rural, rough-edged and not really European.”

Stitched together from the remains of the old defeated Ottoman Empire, Turkey is about the size of Texas, with a population of 70 million people. And the classic stereotype doesn’t fit what is happening in Turkey today. As the Financial Times reports, Turks are “increasingly urban, gradually getting richer, at least officially secular and arguably neither more nor less religious than the Italians or Poles.”

In recent years, the economic picture in Turkey was a bright one. Its $350 billion economy grew by a third between 2002 and 2005. Price inflation, which was once running around 70% per year, was cut down to under 10%. It also became a hot spot for global tourism, especially for winter-weary Germans and Russians. Global capital flows poured steadily into Turkish markets. Things looked pretty good.

Vainly so far, Turkey has tried to gain access to the European Union. That’s because Turkey also has problems, the kind of problems the E.U. is not sure it wants to inherit. And the recent slide in emerging markets has exposed some of those problems in stark contours.

Price inflation is threatening once again. The lira is selling off, down 21% against the dollar since April. Unemployment is still high, around 11%. And I haven’t even discussed the political turbulence in the Kurdish south and an upcoming election for the embattled prime minister.

Though investors often forget – indeed, it often seems forgetfulness is as much a force in the market as fear and greed – they have not yet forgotten the meltdown in Turkey in 2000 and 2001, in which investors lost a lot of money. Based on the action in the market, investors seem worried such a setup exists again.

Bloomberg notes, “Turkey is closing in on Argentina as the country considered most likely to default on its bonds, according to prices in the swaps market.” The price of insurance on Turkish bonds has more than doubled since May.

After all that, there is probably no chance you’ll invest in Turkey now. But price is the thing. Have prices come down enough so that they discount all that bad news and now represent good values for investors interested in the long-term story?

For American investors, the options look limited. There is the Turkish Investment Fund (TKF), which gives investors the advantage of owning a bunch of Turkish companies they otherwise couldn’t buy individually (at least not without great expense). As a general proxy on Turkey, the fund may make sense. I don’t like mutual funds all that much, even though I own a few. They are hard to analyze, and I much prefer a more targeted investment.

My experience investing in crises tells me that you don’t have to rush them. They take time to play out, and prices have a way of moving lower than anyone thought reasonably probable.

Yet a lower price doesn’t always mean a better buy. Grant’s Interest Rate Observer had an interesting interview with Arjun Divecha, who runs the $15 billion GMO Emerging Markets Fund. Since its inception in 1993, the fund has been among the better performers in its category. Divecha, commenting on Turkey, said: “The price has fallen less than the economic prospects; therefore, it’s more expensive. So in my view, it is not entirely true that stocks in Turkey are cheaper now than before the economic crisis. I wouldn’t call them cheap. I would say that their price is lower.”

It’s one of those little lessons every investor must learn, sometimes the hard way: Single-digit price-earnings ratios are not always bargains. And lower prices don’t always mean better values.


Chris Mayer
for The Daily Reckoning
August 10, 2006

P.S. I love the idea of investing in emerging markets. Sometimes you can pick up really nice investments in growing markets on the cheap. I’ve been careful in talking about this so far, because emerging markets have been a hot area for a few years now, and I’ve been expecting nasty downdrafts like the one my Capital and Crisis subscribers and myself experienced in the last two months (we did bag a double in Brazil earlier in the year, and we’ve still got a play in Mexico, along with our backdoor plays…).

Editor’s Note: Christopher Mayer is the editor of Capital and Crisis and Mayer’s Special Situations. Chris began his career in corporate banking after earning an MBA with a concentration in finance. He later started Capital & Crisis, a monthly newsletter that gave Chris’ unique brand of financial commentary a more regular and expanded format.

Last night was one of the most beautiful we have ever seen. Dinner was followed by a concert performed by the family band. After that, we wandered outside. The moon was so full, we needed no flashlight. It shone through thin clouds, so that the earth looked like it had been covered with shimmering gauze.

And then, there was a strange apparition in the southern skies…a shooting star that would not stop shooting. A comet? What could it herald?

Today’s news brings more speculation about the Fed’s recent spurt of inaction. After raising rates steadily for the last two years, this week the Fed did nothing. Not knowing which hand to raise, Fed governors sat on both of them.

Why? Do they sniff an economy in decline? Or, have they done their work well – finally bringing rates to exactly where they ought to be?

The Fed is caught between Scylla and Charybdis…between a rock and a hard place…between one hand and the other. It could continue the fight against inflation – and risk crashing against the rocks of a recession. Or, it could turn to face the deflationary threat – and wash up on higher inflation rates.

As to the former, we see that Toll Brothers, one of the nation’s biggest builders, has had to go back and revise its estimates downward for the second time. It says signed contracts for new houses are off 45% from a year ago.

We also read in the Florida press that foreclosures are up 34% in Palm Beach County.  We thought that was where rich people lived. Surely the rich aren’t losing their houses.  But maybe everyone in Palm Beach isn’t so rich after all. At any rate, rich or poor, they’re losing their houses.

Meanwhile, over on the rocks of Charybdis, the threat of higher inflation rates looms…

But, the ship of state has yet another hard place on which it could founder.

At dinner the other night, a French historian wondered why Americans supported the Bush administration’s military adventures in Iraq and Afghanistan. She judged them contrary to the country’s own interests. “You are wasting your most precious resources,” she told us. “Your military strength and your money…on nothing. It doesn’t make sense.  Why?”

We tried to explain:

“Because America’s experience with war has been rather positive for the last 100 years,” we began. “The military is the one institution in the United States that people seem to trust. People believe in military solutions…”

The truth is, attitudes have little to do with serious thinking and a lot to do with the way the wind blows. In general, people don’t really think, because thinking is private, hard.  It’s easier for people to just rely on mass sentiments and feelings. And these develop over a long time.

Americans’ faith in the righteousness of their military is an old one, only paralleled by their faith in the solidity of land and houses as investments.

“You can’t go wrong with real estate,” is a stock phrase in the United States. People presume that though there may be stagnation – and even isolated bear markets in housing – the general trend is always up. But, of course, it’s simply not true. When our grandfather bought a house in Baltimore in the 1920s, he probably paid a price that, in real terms, was not matched for another 70 years. And people who bought farmland in western Kansas in the 1880s are still waiting to break even.

People even believe in the solidity of something as uncertain as stocks. Yes, they are aware, intellectually, that prices go up and down. But who really remembers the last genuine bear market? Who really believes that stock prices might go down for 20 years?  Who really expects a Dow of 5,000 or even 3,000?

We can barely remember it ourselves, but in 1980-82, you could take a single ounce of gold, sell it, and get enough money to buy every one of the Dow stocks. Now, you need 17 ounces. And that is after the price of gold has more than doubled.

You are probably thinking: “Well, those are simply examples of markets at work; they go up and they go down.” True, dear reader, but our point is that really big moves in the market or in the military are driven by sentiment, which follows very long patterns, like the orbit of a distant comet that makes its appearance in the southern skies only once in a lifetime.

Right now, people have begun to talk about recession…about bear markets…about war.  But they don’t really feel the misery of these things. It is only an abstraction. That is why they continue to buy stocks with dividend yields below two percent. It is why they are willing to buy shares in foreign companies whose names they can’t pronounce, and why they happily steep themselves so far in debt that the least setback would bankrupt them. And, it is also why they still keep their savings in a faith-based currency, even though its own custodians have publicly announced they will destroy it, little by little, forever and ever.

Yes, Americans are aware that hard times come around from time to time, but they don’t feel threatened by them. They can’t quite imagine getting hurt themselves. If they are short money, they will always have credit cards. If they lose their jobs, well…there are always plenty of jobs in the United States. And no matter what happens, the feds will make sure that nobody suffers too much.

But, if there is one thing we know about the sentiments of crowds, it is that they change. Today it is greed. Tomorrow it is fear. But, never is it doubt. And, when mass sentiment goes negative, people stop worrying about the return on the money and begin to be concerned about the return of their money. They want six percent dividends, not 1.9%.  They want guarantees, security, collateral…before they lend. And when they save, they want things of real, tried and true, tested value – gold, for instance – to protect their wealth.

It has been a long time since that sort of fiery comet has come around and people have forgotten the sense of awe and dread it inspires…as if it announced the end of a world.  They can’t quite imagine what that might be like. They will have to see it, again, for themselves.

It’s only a matter of time.

More news from the currency experts at EverBank…


Chris Gaffney, reporting from St. Louis:

“The pound sterling fell the most in three weeks as British Airways canceled all incoming flights to Heathrow airport. It is possible that we will see more selling of the pound if the news keeps escalating. This sell off of pound sterling was not dramatic.”

Read on…in today’s Daily Pfennig.


And more views from Bill Bonner and Addison Wiggin…

*** First, news from Addison:

“Outside the cities, for most part, American’s live like savages.” Dr. Richebächer poked me again. “C’mon, you know it’s true.”

We had come nine time zones from Vancouver to visit Dr. Richebächer in Cannes. While discussing the difference between Europe and the United States at dinner, he kept pointing out the number of babies being pushed in strollers.

When we were doing research on demographics for our book Financial Reckoning Day, several years ago, we discovered France was the only country in Europe with a naturally increasing population rate. All the others, most notably Italy, were producing babies below “the replacement rate.”

“In the 1950s, when I was having my children,” said the good doctor, “France was facing a similar disposition. They were not producing children fast enough to keep their population rising. That’s when the invented the crèche [a free kindergarten for little ones] and helped working mother’s get a tax break and land help with other families who had borne a lot of children. Today, we see the fruit of those changes. France is alive with babies. It’s wornderful.”

Our babysitter here in France is 18 years old and proudly claims her “cohort” – those in their teens and twenties – to be the largest segment of society in the country. Interestingly, according to Huntington’s book, Clash of Civilizations, it is the rise of this same cohort in the Islamic world that is creating such a wave of revolutionary discontent. Huntington likens the rise of militant Islamism to the Protestant Reformation in the Middle Ages in Europe…driven by a desire for purity of soul and a healthy dose of teenage testosterone.

*** And now, over to Bill:

“Of course, you can’t say this in America…you can barely say it in England,” began a guest at last night’s dinner.

There is nothing like forbidden words to get a man’s attention. If you want to make sure people listen to you, whisper.

We listened up.

The man doing the talking was a fellow Irishman…his family cast out from the homeland many years ago, like your editor’s, by poverty, famine, and most likely, trouble with the law. His wife was Lebanese. Naturally, the talk turned to the current crisis in the Middle East.

“What is really, really amazing,” he began, “is how the Israelis have managed to get control of the foreign policy of the largest, most powerful country on Earth. There is no blue water between America’s foreign policy and Israel’s. You have to hand it to the Israelis; who would have thought it possible? They can do whatever they want in the ‘Near East,’ knowing that they have the world’s only superpower backing them up.

“And can you believe Condoleezza Rice? I read in the newspapers that she said that Americans had not faced such a threat since the British burned down their capital in 1812. What is she talking about? The British threatened to end the American experiment with independence completely, which probably wouldn’t have been a bad idea, in retrospect. But whatever threat she is talking about today is nothing in comparison.  Sometimes, you don’t know whether these politicians say things they think the public wants to hear or whether they actually believe what they say. And, you don’t know which is more appalling.

“And now, what the Israelis are doing in Lebanon – that’s appalling, too. I was in New York recently, and I couldn’t believe how lopsided the news coverage in the United States really is. Every Israeli casualty is treated as a horrible tragedy, but a hundred women and children dying in Lebanon is passed off as a military victory for our side.”

His wife picked up the conversation.

“I left Lebanon when I was three,” she told us. “But I still have a lot of family there. My brothers, cousins, uncles and aunts…they were all in the country when the war started.  At first, they said they would stay and tend the business. But now, they’ve all had to leave. Thank god they could. It’s far too dangerous to stay.

“We ourselves were planning to go there for a summer vacation, but I’d just had a baby, and we thought the trip would be too hard. Had we gone, we probably would have been caught in the fire when the Israelis started bombing the place.”

“You know,” resumed her husband, still intent on the bigger picture, “when I was growing up, we used to read things about the Zionist conspiracy. You know, like the Protocols of the Elders of Zion…things like that. It was really horrible stuff, put out by nuts and kooks…the same kind of people who like to say the Holocaust never happened.

“But now, there really is a Jewish conspiracy, isn’t there? I mean, neo-conservative Jews really have got together to take control of the U.S. military and divert it to their own interests. They already control a substantial part of the U.S. media, you know, and the financial sector. For instance, guess who owns the Federal Reserve? Goldman, Lazard, Rothschild. I was shocked when I first found out. Now, its looks like they control the U.S. army, too. Well, bravo for them!”

“But wait,” we replied. “Isn’t that like saying that if the majority of lawyers are Episcopalians, then the Episcopalians control the courts? Even if it were really so, not all Episcopalians think alike, you know…nor do all of them have the same agenda.”

“Of course,” came the reply. “You’re absolutely right. There are plenty of Jews who oppose the Bush administration and Israel’s attack on Lebanon. Don’t get me wrong; I’m not being anti-Jewish here at all. But at the same time, we have to think for ourselves and not just conform to popular shibboleths and taboos.

“And, whichever way you look at it,” he continued, “you can’t deny that there is definitely a group of Jews with a particular point of view…and a particular agenda. They have definitely gotten themselves into positions of power. Naturally, they use the power to promote their own interests…Israeli interests, I should say. Is that a conspiracy? Well, yes. Is it wrong? Well, no. I’m not saying that. Israeli interests could be just as important to us as our own. Some people certainly think they are. I’m just saying that if most Americans understood what was going on, they wouldn’t like it.”

*** Our carpenter friend left today. “You’re on your own now,” he said as he got into the car, referring to the gypsy wagon we had begun.

But he had done his work well. The frame is now complete. We have only to put on the tongue-in-groove siding…and the doors and windows…and the roof…and the…well, never mind; there’s still a lot to do. But, we don’t mind.

Jules, Henry, and Edward worked on it in the mornings, while we wrote The Daily Reckoning. We looked out the window at them…and wished we could join them. They seemed to be having such a good time – sawing, drilling, bolting, measuring, planning, sanding, chamfering. Occasionally, we couldn’t resist; we would get up from our desk and go over to offer unwelcome advice. Otherwise, we remained at our post, ever loyal to our dear readers. But, as the work progressed, neighbors came over to admire it…and too wonder why we bothered.

“I guess now you’re going to become gypsies,” said the farmer from the village. “Load everyone in the wagon and head to the south of France.

“I remember when I was little, there were real gypsies with wagons like this. They would come into town. You know, they were real gypsies, with very dark faces. They would tell fortunes and sharpen knives. People thought they stole things like children, but I don’t know…that might have been just an old wives’ tale. All I remember is that they were very colorful. We always liked to see them come. And, we liked to see them go, too, because, as little children, we were afraid they might take us away with them.

“But now that you have a gypsy wagon, you can gather the family together, hitch it to a horse and go down to the annual gypsy gathering at Ste. Marie de la Mer. They go down there and put their idol in the sea for three days. I don’t know why. It’s just a tradition…

“They used to burn their wagons too, whenever the owner died. But now they have those motor homes. I don’t think they burn those. Besides, they’re insured.”

*** And finally, a quick note received by The Daily Reckoning’s junior editor:

Hi Craig,

I’m not sure if Bill has even mentioned this to you yet, but I really would like if you all could mention this tour in the DR – it’s a wine/investment tour. The reason I’d like you to mention it is because when we go to Cafayate in the province of Salta, we will be going to see the development that Doug Casey is working on with Bill Bonner. So, it’s a great opportunity for DR readers to come along, drink some excellent wine, and be among the first to see Bill and Doug’s next project.

Here is where your readers can click to get more information:

A Wine Vacation

The Daily Reckoning