The Swing to Center

Letter from Istanbul, Cycles & Markets

“Everything we see in the world is the creative work of women.” Ataturk.

---

THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH

---

Turkey and the Cycles

Today I want to talk about the political cycle, with a guest post from my Turkish friend Cansu Aydede, and cycles in general. The summary: emerging markets move in a cycle, which we just saw in Turkey and I saw in Argentina, the economy moves in a cycle and specific industries move in cycles. To have an accurate view of reality you need to visualize all the cycles swirling at once, like Van Gogh’s starry night.

Letter from Istanbul

A guest post by Cansu Aydede

I grew up in Turkey, one of those countries (like Russia and China) where one guy (Erdogan) has been in charge for a long time but, unlike the others, with real elections. It’s an odd dynamic, both authoritarian and democratic at once. Erdogan is willing to play checkers (democracy), but he can flip over the board if he wants. I didn’t expect him to lose.

Following last weekend’s regional elections, for the first time in 22 years, President Erdogan’s ruling Justice and Development Party (AKP) found itself trailing behind the Republican People’s Party (CHP) in the local government elections. CHP is more secular, AKP more religious and populist. The opposition not only retained the big cities (Istanbul and Ankara) but also advanced into traditionally conservative rural areas. Why? It’s the economy, stupid.

As a rule, austerity loses elections.  Before elections a year ago, Erdogan opened the fiscal and monetary taps. That helped win an election but also caused hyperinflation, so he was forced to pull back. Either the austerity or the policy zig zag shook confidence. I suspect that is what caused the loss.

Last year, I spent five months in Istanbul with my husband and our newborn, the longest stay in my home city since I left for Harvard nearly two decades ago. If you’ve spent time strolling the Bosphorus, you know it’s a breathtaking city. It’s also a place at the crease of East/West and North/South and Erdogan is a master at playing those divides. Part of that is unorthodox monetary policy which people initially liked, until they didn’t.  

It's possible, but cumbersome, to navigate hyperinflation. When I was there, I opted for installment payments for purchases, no matter the size.  I never left money in a Lira checking account, instead owning foreign currency, real estate, and gold. People know the USDTRY or EURTRY exchange rate like they know the weather. Prices are on QR code menus or in erasable markers. If you are expecting (as I was), know when the hospital’s semi-annual price updates and try to time your delivery accordingly to get a steep discount.

Going into last year’s election, official inflation was near 50%. Hardly the time for a splurge. The central bank, whose independence Erdogan had rescinded, defied conventional economic wisdom and maintained easy monetary policy. Erdogan also eliminated the minimum age requirement for retirement, immediately making over two million workers eligible to receive pension payments from the government.  This strategy initially paid off and, in 2023, Erdogan won.

Afterward, the central bank raised rates by 40% (yes, that's percent, not basis points).

Upon returning to Istanbul last month, the tangible effects of austerity were obvious. As prices caught up to slower inflation, the real cost of goods soared. My personal inflation gauge, the price of diapers, jumped by 50% in USD terms. Erdogan, in rallies across the country, pleaded for patience, admitting the government budget was insufficient to match the inflation rates affecting the pensions of the (newly expanded) 16 million pensioners.

In Turkey, like most countries, taxi drivers are philosophers, political analysts, and economists. Leading up to the election, one told me that despite being an AKP supporter all his life, he was going to sit this election out. “I just don’t like AKP’s candidate. Everybody calls AKP voters sheep. Well, I am not. I hope AKP officials will get the message.” When I asked him how he thought the economy was doing, he said, “it is terrible. People can’t make ends meet. Look at the state of the retired people. They can’t live off of those pension payments.” 

After the loss, Erdogan conceded defeat. In an introspective speech, he acknowledged AKP’s “loss of altitude” and vowed his party would learn from their mistakes. Rack this up as a win for Democracy, similar to what we saw recently in Poland and Argentina. Voting can spark invaluable policy course corrections.

Cycles and the Investment Outlook

In terms of markets and investment strategy, I (this is Paul now writing) want to give an update both on what I am thinking and why.

Why

The most impactful thing I learned at Bridgewater was the importance of thinking in frameworks.