You know it’s a bad day for investors when the word “contagion” continually scrolls across the cable business news chyrons.

The major stock market averages swooned today, extending Friday’s steep losses, as Turkey grappled with a financial crisis triggered by new U.S. tariffs.

Will Turkey’s woes soon spawn a full-blown market collapse? Movie producer Samuel Goldwyn, one of Hollywood’s founding fathers, once said: “Never make forecasts, especially about the future.”

Goldwyn was famous for his malapropisms, but it’s true, forecasting is a mug’s game. However, you can still prepare for known risks. Below I examine the most salient risks, including Turkey’s slide into economic chaos.

President Trump last Friday announced that he would slap higher tariffs on steel and aluminum from Turkey. The U.S. is the biggest importer of Turkish steel.

Trump’s tariffs have tanked the Turkish lira and exacerbated preexisting concerns about the financial stability of Turkey, an influential emerging market.

Turkey’s currency hovered near another record low Monday, infecting global markets with worries that the country’s economy would meltdown. European banks, many of which have lots of Turkish debt on their books, got clobbered for the second trading session in a row.

Wall Street sometimes shows shortsightedness of breathtaking proportions. Such is the case with investor complacency over the risks of this trade war. The dismantling of the world’s multilateral rules-based trading system already is exacting severe investor pain, as we’re seeing with Turkey.

A concurrent problem is the corporate debt bubble, which gets insufficient attention. The financial TV shows are too busy cheerleading for charismatic CEOs to cover the topic. Let’s face it, the bloated debt market is a ratings killer. But you can’t afford to ignore it.

Since the financial crisis of 2008, corporations have taken advantage of low interest rates to gorge on debt. Investors desperate for debt instruments that pay robust interest have been overpaying for highly risky obligations.

As interest rates rise, many financially shaky borrowers who took on debt under lenient conditions will encounter difficulties paying back this debt. Add to the equation a recession, which looms around the corner, and we could witness another global financial crisis.

Trade war in the 1930s worsened the Great Depression and stoked international clashes. Ten years after the 1929 stock market crash, World War II broke out. It has been 10 years since the market crash of 2008. Consider the parallels. Perhaps our leaders should spend less time on Twitter and more time reading history.

Turkey’s economic sickness…

Turkey’s central bank on Monday pledged to provide “all the liquidity the banks need.” Investors were unimpressed. Turkey’s stock exchange closed deeply in the red today, with the benchmark BIST 100 index losing 2.4%.

Turkey is deeply indebted and run like a fiefdom by President Recep Tayyip Erdogan. Mr. Erdogan holds some rather strange economic views.

The Turkish dictator asserts that higher interest rates lead to higher inflation (yes, you read that right), so he likes to run the economy hot by pressuring the country’s central bank to keep rates low.

This perverse policy prevents the central bank from shoring up the lira. Turkey is a NATO ally, with the world’s 17th-largest nominal gross domestic product. Global manufacturers have heavily invested in the country, which boasts a skilled but cheap workforce. Accordingly, industrial stocks took it on the chin Friday and again today.

The Turkish lira’s continuing slide against other major currencies underscores a major risk in emerging markets. Countries that rely disproportionately on U.S. dollar-denominated funding have been under pressure from the strengthening greenback, which has been on an upward trajectory since April. See the chart of the U.S. Dollar Index (DXY):

The DXY today surged 1.23% to approach June 2017 highs. A rising greenback places a burden on emerging markets. Over the past decade, many of these nations, such as Turkey, have taken on enormous dollar-denominated debt. A higher dollar makes it harder for emerging markets to pay back their debts, which in turn pressures their economies.

The tariff battle also raises input costs for U.S. manufacturers, which is passed along to consumers. Stirring inflation could prompt the Federal Reserve to more aggressively hike interest rates, which would further strengthen the U.S. dollar.

Amid these risks, any signs of U.S. economic slowdown could send stocks reeling. The calendar for the rest of this week is chock full of potentially market-moving data:

Tuesday: NFIB small business index, import price index; Wednesday: retail sales, productivity, unit labor costs, industrial production, capacity utilization, home builders’ index, business inventories; Thursday: weekly jobless claims, housing starts, building permits; Friday: consumer sentiment, leading economic indicators.

Stay invested but remain prudent. Re-calibrate your portfolio toward value plays. Increase your exposure to hedges, such as precious metals. Elevate cash levels; a good rule of thumb now is 20%.

As for expensive momentum stocks? I’ll again cite Sam Goldwyn, who once rejected a deal by saying: “Include me out.”

Monday Market Wrap

• DJIA: 25,187.70 -125.44 (0.50%)
  
• S&P 500: 2,821.93 -11.35 (0.40%)
  
• Nasdaq: 7,819.71 -19.40 (0.25%)
  

Monday’s Big Gainers

• Diebold Nixdorf (NYSE: DBD) +16.46%

Security systems provider in talks with lenders

• Nielsen Holdings (NYSE: NLSN) +12.02%

Activist investor pushes to sell ratings service.

• Veritone (NSDQ: VERI) +7.63%

Artificial intelligence developer buys podcast agency.

Monday’s Big Decliners

• Hailiang Education Group (NSDQ: HLG) -15.00%

Analysts turn bearish on China-based operator of private schools.

• iShares MSCI Turkey ETF (TUR) -10.97%

Currency turmoil sinks Turkey-pegged exchange-traded fund.

• Leap Therapeutics (NSDQ :LPTX) -5.34%

Biotech posts weak operating results.

Letters to the Editor

“Why does Trump call China a currency manipulator?” — Richard P.

China’s central planners have kept the country’s currency the renminbi (aka yuan) artificially low by storing huge amounts of money denominated in other currencies. The goal is to boost the attractiveness of China’s manufactured goods overseas, by making them cheaper. A cheaper yuan means a stronger dollar, which hurts U.S. manufacturers that want to export to China by making American-made goods more expensive.

Questions about geopolitical risks? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.