Notes From Underground: The World Is Talking Turkey

For a long time now, we at NOTES FROM UNDERGROUND have been discussing the danger of Turkish President Erdogan in his role as a potential disruptor to stability in the Middle East. Last week’s violent action in Turkey’s stock and currency markets is just one element of the instability for which Erdogan can be held responsible.

Several followers of the popular narrative were citing the key geopolitical risk emanating from Turkey because the U.S. warehouses nuclear weapons at the airbase in Incirlik, Turkey. This is nonsense of the first order for the nuclear weapons are under U.S. control and all codes are the purview of the U.S. National Security Agency.

The greatest threat posed by Turkey is its ability to foment major instability in Syria, Iraq and other hot spots in the Middle East. The Erdogan government will PROBABLY move against the KURDS, especially as the U.S. has provided military and financial support to the KURDS, which has irritated the Turkish government.

On Friday, there were rumors that President Erdogan was in discussions with Russian President Putin after President Trump threatened to increase sanctions on Turkey.

The Turkish situation is what I have referred to as a potential spark to start a major prairie fire. The early effects of the Turkish instability appeared to fall upon the Europeans because of the vast amount of loans that several large banks have made to Turkish corporations and other institutions. The ECB has noted that they will be watching for potential fallout from the Turkish crisis. Mario Draghi’s ECB has very little room to respond to a crisis as interest rates are already negative and QE is still in full force. It was interesting that the Spanish, French and Italian banks were all named as areas of great concerned but the German banks were part of the narrative. German bank stocks fell regardless, but it would be unusual for the Germans not be vulnerable as Germany is home to the largest Turkish population in Europe.

Another area of geopolitical concern is NATO, an issue I have cited for several years. Turkey is a member of NATO and privy to much of the strategic policy upon which NATO is based. I have maintained that a major problem for Nato is Article 5, which calls for collective action when a member of the alliance is attacked. The question I continually ask is: Would NATO defend Turkey if it was attacked by a foreign power such as Russia (think back to when the Turks shot down a Russian fighter plane)? Summer doldrums have now seen the rise in the winds of instability in which there are many sources for a major storm to strike.

On Friday, the U.S. dollar became the repository for those seeking some shelter from the building storms. Geopolitical instability has a tendency to disrupt financial complacency, especially with a global financial system loaded with debt.

I will be discussing the tempest with Rick Santelli on CNBC at 9:40 a.m. CST. Enjoy but trade knowing the huge amount of risk involved in every decision. I would also urge my readers to scroll back through the NOTES FROM UNDERGROUND archive to find relevant analysis on the three most dangerous actors on the world scene: Putin, Erdogan and Draghi.


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7 Responses to “Notes From Underground: The World Is Talking Turkey”

  1. Rob Syp Says:

    China Shenzhen down 25%
    Argentina Merval down 23%
    China SSE composite down 21%
    Turkey ISE national down 21%

    Throw in appreciating US$, trade spat and does the US continue decoupling or does it succumb?

    After Labor Day markets can’t get here soon enough

  2. Trader 1 Says:


    With gold looking like it wants to flush somebody out at the exactly the wrong time during this rolling currency carnage: What was the price that India bought that gold??

  3. Richard H Papp Says:

    On 11/02/09 India bought 200 tons from IMF at $1048 and the price in Yuan was 7,147 that day

  4. Stefan Jovanovich Says:

    Where in the world in July could a single trade ticket be written for $10B – or a Euro, Yen or other currency equivalent – without swallowing up the liquidity for that particular market, without being the first part of the classic joke that ends with the punchline “Sell to Whom?”

    In terms of capitalization, the Federal debt and stock markets would both seem large enough. Surely, that much money could be handled in a trade for Google or T-bills. $10B is slightly less than 3% of Google’s total market cap) and roughly 2% of the total Treasury bills outstanding for the month, according to Sifma.

    But U.S. Treasuries are the only market where a large amount of money can change hands without a prior appointment. The average daily volume for Treasury bills last month among primary dealers was $107B. $10B would have been slightly less than 10% of the total market volume that day. In its most active day last month (July 24th) Alphabet A stock traded over 5 million shares in a range around $1250 per share. A $10B trade would have been THE MARKET for that day; in most other days in July a trade of that size would have been 2-3-even 4 times the total transactions. So, Treasury bills are the only cash market that can handle a $10B trade.

    Oh, wait, I forgot. There are those places/computers that deal in futures and options – like the one that offered the backdrop for our host and Mr. Santelli’s commentary today. They can handle a $10B nominal trade. I leave it to Yra to comment on what a properly managed transaction of that size would do to the Bid/Ask for one of the more active Interest Rate contracts/options.

    The dollar will continue to vacuum up the world’s flight capital precisely because (1) the U.S. banks are the only lenders and traders who cannot expect the central bank and domestic Treasury for the currency to do a Lombard Street rescue if a counter-party fails, (2) the U.S. – unlike China, Europe, Canada and the U.K. – does not have the bulk of its citizens private savings in the leverages and illiquid asset of residential real estate, and (3) where else can any large amount of currency now go and have confidence that the money can be withdrawn as quickly and easily as it was paid in?

    The “crash” will come when the money finds some other place to go; right now, it is only beginning to emigrate here.

    • Yra Says:

      Stefan–you have been on this narrative for awhile and it has been a very prescient view.All points you raise are proven to be quite correct–lack of liquidity is a very high cost to the investment world and nobody has it like the U.S.The volatility in the European sovereign debt markets is proof of continued cross border intervention into markets –are lack thereof.As far as a $10B nominal trade in the Gold/Yuan it will take many phone calls to arrange the block trades to execute—oh wait disclosure prior to execution is a violation of CFTC and SEC regs—but I must be spoofing

  5. Chicken Says:

    Based on what I think I know, Erdogan doesn’t fit the definition of a respectable bird. Thus in the end, his goose is cooked (IMO).

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