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Emerging Market Debt Crisis Deepens

By LINDON, Utah - October 5, 2018 No Comments

The American economy is doing great by most measures, but the deepening debt crisis in the emerging markets threatens to drag down the entire world economy. The Fed keeps hiking rates despite warnings from President Trump and severe pain in the developing world. I fear that we may be headed for another financial crisis soon, and I hope that you will take steps to protect yourself before the disaster unfolding in the emerging markets comes to America.

I described Argentina as a "canary in the coal mine" that would warn of an approaching debt crisis back in July, and the situation there has deteriorated rapidly. The Argentine peso has continued to plummet, the currency is now down a total of over 50% against the US dollar this year, and annual inflation is running at about 30%. The IMF just increased the Argentina bailout package to over 57 billion dollars, but even that might not be enough. Argentina is at risk of becoming a hyperinflationary humanitarian catastrophe like Venezuela.

Turkey is another trouble spot where the threats of debt crisis and contagion are growing. The Turkish lira has also fallen nearly 50% in dollar terms this year, and inflation is expected to reach more than 20%. Turkey is near the developed nations of Europe, so the risk of contagion is exceptionally high. Heavily indebted Greece would be on the front lines of a new refugee crisis if the Turkish economy collapsed. Italy's biggest bank, UniCredit, actually owns more than 40% of a major Turkish bank. The combative and unstable Italian government may have difficulty getting bailout funds from the EU. 

Asia is also at risk of being pulled into the emerging market debt crisis. India and Indonesia have already seen their currencies fall against the US dollar this year, and worse could be ahead. It was just three months ago that the Turkish lira was down 15% this year rather than almost 50%. China is waking up to its mountain of corporate debt, but it may be too late. Chinese President Xi Jinping has called reducing loans to China's wasteful state-owned enterprises, "the priority of priorities." The combination of tighter credit and a potential trade war with America could push many Chinese firms into default. 

Finally, even America is at risk from emerging market debt defaults. This isn't hypothetical anymore. The debt dominoes have started to fall. The Fed is likely to relent on rate hikes as more economies are drawn into the debt crisis.  The US dollar will decline if that happens, and precious metals stand to benefit. Informed investors are already stocking up on gold and silver. The US Mint completely sold out its inventory of Silver Eagle coins in September, which is a strong indication that physical precious metals are underpriced. This is a golden opportunity to buy gold and silver at artificially low prices and protect your financial future from the deepening emerging market debt crisis.