Money Morning: This $700 Billion Ticking Time Bomb Could Cause the Next Stock Market Crash

Article by Alexander Bird on Money Morning

As the current bull market stretches into its ninth year, the major indexes could hardly look better. And that could lull complacent investors into a false sense of security.

The Dow Jones Industrial Average is hovering around 26,500, on the verge of setting a new all-time high. Tech stocks are driving the Nasdaq toward 8,000, and the S&P 500 continues to deliver reliable returns to investors as it pushes toward the 3,000 mark.

These great returns have fueled rosy headlines and optimism in the financial media.

But they are obscuring dangerous developments overseas – developments that are setting the stage for the next stock market crash.

Recent currency troubles in the world's largest emerging economies are on the verge of overturning the current bull market – and triggering the next financial crisis.

 

Emerging Market Contagion Could Be the Market's Death Knell     

As I noted last week, rising domestic inflation and slowing foreign capital flows into emerging markets are fostering economic instability that could spread to markets in the developed world.

You see, lower capital flows into emerging markets indicate there are fewer developed-world currencies being used to purchase government bonds in emerging markets.

A central side effect of this is lower demand for emerging market currencies.

With weaker currencies, emerging markets have a hard time covering current-account deficits – deficits caused by a nation spending more on imported goods than it takes in from exporting goods.

Inability to manage current-account deficits is likely to force developing nations to default on their debt obligations, rocking the stability of creditors – including those on Wall Street.

However, that's just the tip of the iceberg.

According to The Wall Street Journal,emerging markets across the globe have roughly $700 billion of debt currently denominated in American-backed currency.

That's roughly equal to the entire gross domestic product of Turkey, one of the emerging market's largest borrowers.

Plus, this massive debt is due over the next 18 months. With the developing world's economies tanking, managing to pay back these debts would be a miracle.

Since February, the strength of the U.S. dollar relative to numerous foreign currencies has risen roughly 7%.

A rise in the American dollar makes it exponentially harder for emerging market governments to service Dollar-denominated debt loads with weak domestic currencies.

If nations that rely heavily on American-denominated capital flow from Wall Street can't meet their debts, investors are likely to lose confidence in banks' ability to meet other outstanding obligations.

And it could happen sooner that you think. $200 billion in U.S.-denominated debt is due from emerging markets by December while an addition $500 billion is due by the end of 2019.

Any inability for a developing market to meet these increasingly heavy debt obligations will send shockwaves through the bull market and could trigger the next stock market crash.

Now, we're not trying to scare anyone, and a stock market crash may not be likely.

But we also want you to be prepared.

With the current bull market run breaking records to become the longest ever, it's easy to fall into the trap of complacency.

Millions of investors will lose everything as the average stock traded on Wall Street is poised to plunge by at least half.

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