What’s happening in Turkey is a fascinating, terrifying, and a cautionary tale about how high inflation can ravage not just savings, but overall wellbeing. And if the U.S. isn’t careful with its own monetary debasement, we face a similar future that is deceptive in wealth gains relative to our ability to enjoy life.
What’s going on in Turkey? High inflation is eroding the REAL economy, but Turkey’s stock market continues to surge.
Inflation Faces Off Against the Stock Market in Turkey
Let’s level set a bit. Turkey’s inflation has been out of control for years. Consumer price inflation reached a two-decade high in October 2022, and while it had briefly fallen, it resumed its path upwards. By the beginning of 2024, inflation rates were approaching 70%. With every month, the purchasing power of the Turkish lira has worsened for ordinary citizens.
The reasons for this inflationary spiral are complex. President Recep Tayyip Erdoğan decided to lower interest rates at the end of 2021 amid rising inflation, which is normally the opposite of what you do if you want prices to go down.
Yet, if you are just looking at Turkey’s stock market, you’d think it’s an incredible place to put money to work. The benchmark BIST 100 index is up more than double the S&P 500 so far this year, making it the world’s second-best performing large-cap index, after the U.S.
What’s driving this? Domestic retail investors. When faced with high inflation, Turks find a few main outlets for their cash. The most common one is buying gold, which has become a sort of go-to replacement for the lira. But another one is the stock market. For people who want to get out of their physical money, buying stocks is the best way to at least have a chance at keeping up.
The stock market is not the economy. Rising inflation hurts the quality of life for most citizens in dramatic and often devastating ways. Combined with the growing inflationary pressures of the past few months, prices for basic goods and services have surged. Turks have increasingly faced the hardship of how to afford things such as food, rent and medicine. But wow! Look at the stock market!
The rising stock market in Turkey is a paradox. It means that Turkish investors are tough and flexible as they respond to economic pressure. It also means that the economy remains highly troubled.
For an average person living in Turkey, a rising stock market does not translate into a better life. If anything, a rising stock market only means growing inequality between people who can afford to buy stocks, and those who cannot.
The boom in the stock market itself is fueled by speculative behavior. Speculative bubbles can induce more volatility in the market and can result in pops that can leave the economy vulnerable to more instability.
This is what I worry about. Turkey is an extreme example, but investing in stocks is not the answer to inflation. Recession and a system flush is. The Turkish stock market is doing great in high inflation. So is the U.S. market. But at what cost?
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
