I suppose you’re thinking about newsprint comic strips. I haven’t seen one of those in years, but with articles like this one in great abundance, one doesn’t need Snoopy and Garfield to snicker wildly while enjoying a cup of coffee on Sunday morning.

By the way, I was tempted to extend my “Whatcha Smokin’ ?” series to include a part III on account of this article, but I think I may have already worn  the phase out. Besides, “Never reason from a price change” fits much better here.

The article title is: Two Countries, Turkey and Venezuela, Are Candidates for a Crisis

Of course, Venezuela is headed for a crisis. It has been since Chavez starting working his will. The entire country is an economic disaster looking for some time to happen – the only question is when.

But Turkey is on the list for a coming disaster? The claim seems sort of odd and this is the reasoning behind it:

David Rees, emerging markets economist at Capital Economics, said the firm has developed five criteria to identify whether a country’s economy has overheated to the point where it is threatening to develop into a full-scale problem.  The good news is that the Capital model finds no country in “immediate threat of crisis.”

Rees identifies the endangered duo [in his model] as Turkey and Venezuela.

Turkey’s stock market has surged 7.3 percent in 2013 and is up 42 percent over the past 12 months. The country outperformed virtually all other emerging markets in 2012 as it modernizes its economy and pushes pro-growth programs.

Venezuela’s markets tell an even more robust story, with the Caracas exchange booming 37 percent this year and more than 200 percent over the past 12 months. While some feared the rally might falter due to political upheaval after President Hugo Chavez’s death, the market has gone on its merry way.

Despite the powerful gains, Rees advises investors to watch five factors: Growing current account deficits; rapid credit expansion; surging short-term external debt; bubbling stock market prices (50 percent is considered a red flag); and large growth in real exchange rates.

Broadly speaking, capital inflows “are something of a double-edged sword” for developing economies, Rees said. They both can help spur development but also “can fuel overheated economic growth and asset price bubbles,” he added.

“In extreme cases, capital flight can then lead to recession and sharp falls in asset prices that can culminate in defaults on debt repayments,” Rees said in an analysis.

Isn’t comparing Turkey and Venezuela a bit like comparing apples to roadapples? It reminds me of a song I heard as a kid on Sesame St., “One of these things is not like the others; one of these things just doesn’t belong….”  I suppose that the rather fuzzy logic of bubble-fear-mongering, reasoning from a price change is rather deceptive, turning people who might otherwise be rational, sensible people in to complete raving lunatics worthy of ridicule.

The key to determining whether this is even a valid claim is this one that is in the article itself:

Turkey’s stock market has surged 7.3 percent in 2013 and is up 42 percent over the past 12 months. The country outperformed virtually all other emerging markets in 2012 as it modernizes its economy and pushes pro-growth programs.

Turkey has undergone an amazing transformation over the last decade in order to modernize and liberalize its economy – and it shows; while Venezuela has gone the other way. Venezuela has had a nagging problem with volatile NGDP growth and has instituted price controls over most necessities of life as it became more socialized, not less. So I think that points to monetary policy problems combined with the injection of supply-side rigidities driving the gains in prices in Venezuelan markets rather than anything that can be explained by just the fact that prices are rising.

Turkey also has the benefit of not being a member of the Eurozone and manages its own monetary policy. It, therefore, will most likely be spared from a Great Recession-style debt crisis.

It is only the incompetence and insistence on hardcore inflation targeting, all inclusive of headline inflation measures without a floor, on the part of central banks in the developed economies that has caused most of the world’s debt grief. It has nothing to do with asset price bubbles.

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