The Economic Crisis Looming in Turkey
and Buffett's Berkshire Strategy
By: Kevin Dombrowski
As of 7/31/18
Past performance is not an indication, prediction or guarantee of future results.
Weekly Update
Markets were down this week, as worries about the global economy continue to loom over the long-running bull market. While US stocks are up over 5.5% this year, many analysts believe the recent declines may reflect investor skepticism that they can continue to outperform nine years into the bull market. Also, the volatility in Turkey continues to concern some investors as similar bouts of economic weakness in other countries from Brazil to Italy have jolted markets in recent months. 

In other news, retail sales continue to exceed economist expectations and were up over 6% from the same time last year. Additionally, with demand strong, production also is up.  U.S. factory output rose 0.3% in July and was up 2.8% from a year earlier, largely on higher auto and computer production. With a robust economy, the Fed will most likely stay on track to raise short term interest rates to a range between 2% and 2.25% when they meet next month, and then again in December. 

Finally, many analysts say we are approaching the market milestone of the longest bull market ever . Beginning March 9 th , 2009, this streak could surpass the previous record, set in the 1990s. Should you be worried? Tough to tell. Some believe a correction is imminent. Others believe that the bull market may continue for a few more years due to strong economic growth, continued government spending, solid corporate profits, low inflation, and strong spending. Perfectly timing markets is nearly impossible so the best thing you can do is work with a trusted financial professional to ensure you are properly diversified to meet your goals.

Turkey Lira Crisis
Over the past week, you’ve likely heard about economic unrest in Turkey. The country’s currency, the Lira, tumbled 34% this year while inflation skyrocketed to 15%.  What exactly is happening? Quite a bit. In fact, many analysts call this a ‘perfect storm’ of poor economic and trade policy happening simultaneously. First, President Erdogen refuses to follow basic economic theory and has not increased rates despite inflation being over three times the central bank’s target. Second, the country is low on cash reserves, and they are running huge deficits. Third, Turkey continues to side with Russia and against Western countries on a variety of geopolitical issues. This has resulted in the US increasing its tariffs against Turkish steel and aluminum imports. 

In Turkey, unlike the US or the EU, the government controls the central bank, allowing control over interest rates and inflation. This means that most decisions in Turkey flow through President Erdogen, who is deflecting blame for the crisis on what he calls, “an operation against Turkey” by Western countries. 

What does this mean for investors? Turkey, like Italy earlier this year, will be closely watched by global investors. All efforts will be to contain the affects as much as possible. Many European banks are especially concerned as many have high levels of exposure to the Turkish Lira. All hands will be on deck to ensure Turkey’s economic uncertainty is contained and does not bring down global markets. 

To be prudent, have a financial professional review your exposure to Turkey and other emerging markets, as they may be the most exposed.

Buffett invests further in Apple, Airlines, and Banks
Regulatory filings on Tuesday disclosed some of Berkshire Hathaway’s Q2 activity . What’s notable? Warren Buffett and crew continue to find the same companies within the same industries attractive. In the second quarter, they increased their share in Apple by 5%, Goldman Sachs by 21%, Delta by 19%, and Southwest by 19%. Berkshire remains committed to airlines and banks, sending a strong signal that they believe the long-term value of these companies and their competitive positioning remains strong.  
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