Puerto Rico: “You can’t get more deflationary than that.”

Cash-strapped Puerto Rico is unable to meet its debt obligations as a key deadline passes. Investors in the Commonwealth's General Obligation Bonds have taken a big haircut. Other municipalities are next in line.

Puerto Rico is in a big financial mess.

The Commonwealth missed the May 2 midnight deadline to restructure its debt and now creditors have the legal right to sue.

This is all too predictable when a government follows a reckless fiscal path.

Here's what Robert Prechter's Conquer the Crash noted when the book first published in 2002:

Generally speaking, the intelligent way for an individual to approach the vagaries of his or her financial future is to have savings or buy insurance. Governments almost invariably do the opposite. They spend and borrow throughout the good times and find themselves strapped in bad times, when tax receipts fall.

And such a scenario has unfolded in Puerto Rico (WSJ, April 30):

Bankruptcy was not an option for Puerto Rico or its municipal corporations when together they issued the $73 billion of debt that is now outstanding. A long history of willingness to pay back creditors had given Puerto Rico a high credit rating … .

It also made it too easy for the political class to pile up unproductive debt. [emphasis added]

And, now, the chickens have come home to roost.

EWI has been keeping subscribers ahead of the island's deflationary trend: The July 2015 Elliiott Wave Financial Forecast said:

On [June 29, 2015], Puerto Rico announced that government efforts to “slash expenditures and restructure debt have failed.” In the words of Puerto Rico’s governor, “The debt is not payable.” You can’t get more deflationary than that.

EWI's May 2017 Financial Forecast offered this chart and commentary:

Puerto Rico Road to bankruptcy

The chart shows that the popular 8% Puerto Rico General Obligation Bonds due in 2035 are trading at 65 cents on the dollar. Whatever the final outcome of bankruptcy proceedings, investors who purchased Puerto Rico's muni bonds anywhere near par will lose money. Investment advisors tout muni-bonds as one of the safest havens for your money, but the impending Puerto Rico default points out the very real risks involved with these tax-sheltered securities. When deflation intensifies during the next bear market, creditor battles for "cents on the dollar" will play out across a vast array of cities and states.

Indeed, some municipalities are already in financial hot water. As the Financial Forecast has mentioned, prime candidates for insolvency include the states of Illinois, Arizona, Ohio and Nevada as well as the cities of Chicago, Dallas, Houston and El Paso.

As we see it, it's only a matter of time before deflation becomes obvious to almost everyone.

Now is the time to prepare.

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