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May 11, 2016

Puerto Rico Defaults on Debt, Worse Yet To Come

The uncertainty that the global markets are facing continues to grow with the recent announcement that Puerto Rico, a branch of the United States, would be forgoing its debt repayment and instead using the funds to focus on essential services needed to keep the country running.

This is a growing concern, as once done, there is no going back. This is just the first round of debt defaults that the government of Puerto Rico is going to engage in. Their economy, much the same as large parts of the United States, is in shambles and collapsing. Knowing that it is only a matter of time, the government is taking a page from the books of Greek history and attempting to "extend and pretend" for as long as they can.

On May 1st, the debt payment missed was $400 million, which is a sizable sum, but a drop in the bucket when compared to the staggering amounts that they have accumulated over the years while trying to keep their sinking ship afloat.

The total "official" debt is over $70 billion. This is a truly stunning number and is likely why the FED engaged in its recently much discussed emergency meetings with the President and the Vice-President. These meetings set the markets on edge with speculation as to why they were happening.

My guess is that this was one of the major topics discussed. This news has to have the FED and government officials on edge. They know that if Puerto Rico can begin to default on their debt payments, then why can't the many states who are facing similar problems?

This is a truly scary scenario and likely could be the beginning of the end of the debt markets. If a cascading series of defaults were to occur, then the global markets would lock up, freeze and collapse overnight. It would make 2008 look like child's play.

Yet, it may not have to come to that to set the markets spinning. Puerto Rico itself could cause this. The markets are truly concerned about their next debt repayment, which is scheduled for July 1st and is much larger than their recently missed $400 million. The next wave sits at $2 billion, a sum that the markets will definitely notice missing.

Smart money is noticing this as well, as short positions continue to grow within the markets at a record pace. Most notably is Carl Ichan, the legendary investor.

Carl Ichan has increasingly taken a bearish stance against the markets and is growing worried that a collapse could occur at anytime. This has prompted him to move from a net 25% short position in December to a stunning 149% net short position today!

Clearly, this smart money is putting its money where its mouth is and foresees much greater calamity to come.
This uncertainty is just one more reason why you should have a portion of your assets allocated to precious metals. Hard times are ahead and both gold and silver have stood the tests of time, proving that they are a safe haven asset that can weather the storm and come out intact on the other side.
Ask yourself - are you prepared?

Nathan McDonald is a libertarian, entrepreneur and precious metals enthusiast. He has always taken a keen interest in free markets and economics since an early age, which naturally led him to become a true believer in precious metals and all that they stand for.
Nathan served eight years in the Royal Canadian Navy as an electronics technician, seeing the true state of the world, before starting his first successful business. He has since gone on to create a number of businesses, all of which are still in operation and growing.
In addition to this, Nathan runs a network of successful precious metals blogs, and a growing newsletter that has attracted readers from all around the world.
He is a regular and highlighted writer for the highly respected Sprott Money Blog, which covers world events, geopolitics and of course precious metals.

The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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