What I’m about to put here has gone through many evolutions. The latest came out in the form of a Seeking Alpha article which I just had published the other day under the headline, “A Preliminary Case For Chile Over Mexico.”
For a couple of weeks now I’ve been looking at the merits of either buying the Chile ETF (ticker: ECH), shorting the Mexico ETF (ticker: EWW) or both. And by the way things have been looking recently, not only do my instincts look about right, but I may have even missed the boat. For those who have been watching the elections in Italy, the fallout for the euro has been pretty hard, on the order of 300 bps in Monday alone. So what does this have to do with Latin America? Well, a lot, actually. I initially wrote about this back in June last year for Seeking Alpha here, and apparently my thesis still holds.
The storyline as I see it is pretty simple.
Basically, at a meta level, world markets still generally move according to one question: do we like dollars or not? And if it’s time to not like dollars, which it has been for the past couple years, then everything else benefits: euro, mexican peso, brazil, oil, gold, etc. If it’s time to like dollars, then all those other things get sold off, the main exception being the Japanese yen, but that’s an entirely separate conversation. And by “dollars”, all we’re talking about is the actual currency, plus US treasuries. US stocks qualify as “not dollars”. There are minor subplots that people can be distracted by in smalller fits and starts, but that’s the basic meta narrative.
I don’t know if I’d go so far as to say the dollar is starting its capital C Comeback, but the extent to which this Berlusconi thing is scaring the hell out of people tells me that nobody really bought the euro-optimist rhetoric over the past couple years. They were just willing to take it as long as Bernanke and company were setting interest rates at zero. But now even zero interest US rates are apparently more appealing than a hung parliament in Italy.
The tallest midget strikes again!
But I digress. Anyway, the point is that for those of you who want to geek out on macroeconomic indicators of Mexico versus Chile, the latest Seeking Alpha article is for you.
For those of you who don’t, I’m going to try a different format and since this is my first try at this, I’d love to hear any feedback on the effectiveness of this. I’ve made a prezi file entitled, “Is Mexico’s Economy All It’s Cracked Up To Be?”, which takes the essential points of the Seeking Alpha article, but focuses a bit less on the Chile end of it and aims more at all this ridiculous gushing over Mexico. From an operational standpoint, I like it better than powerpoint, but none of this matters if it isn’t received as being more readable than powerpoint. Check it out and let me know what you think. If you want something emailable or twitterable, this is the link.
As you state so aptly on the “About Diverging Markets” page, “The focus is more economic and financial than political or cultural, but as anyone versed in this realm is aware, it is impossible and foolish to completely ignore politics and culture.”
One cultural advantage that Chile has over most (if not all) of its Latin American neighbors is a strong cultural aversion to official corruption. Chile is considered one of the least corrupt nations in the Western Hemisphere. Even tourist guidebooks advise prospective visitors who might be asked by a police officer to present identification to avoid letting the officer catch even a glimpse of a bank note, lest the officer think that (s)he is being offered a bribe.
You’ve mentioned elsewhere the February 27, 2010, earthquake in Chile that killed 525 people. It registered 8.8 on the Richter Scale and shook for three long minutes. It was the sixth most powerful earthquake ever recorded. The quake was powerful enough to throw people off their feet in Santiago, about 250 miles from the epicenter. And yet, despite all the damage to the city and dozens killed, the city’s metro was open within two days. None of Santiago’s skyscrapers collapsed. It seems that Chileans take their building codes seriously, much to their credit – and to their obvious benefit.
Sadly, and in marked contrast to Chile, Mexico has a long history of official corruption. As your Prezi slide “PRI 2.0 = PRI 1.0″ describes so well, the corruption in Mexico continues to corrode the nation and imperil its prospects, at the local, state, and national levels.
In comparing the economic prospects of Mexico and Chile, it is indeed foolish and impossible to ignore politics and culture. Corruption is toxic to any nation. A national cultural intolerance of corruption is an economic asset not to be ignored. Chile has a huge advantage over Mexico – and most Latin American countries – in that regard.
John, nice to hear from you. The big trick here, as always, is timing, and I’m definitely not so delusional as to think I can time the market. Even if we have the fundamentals right, price action for EWW seems to indicate there’s still some room for it to move up a bit. My initial thinking was and remains that EWW at $75 appears to be the big test, though even if it manages to reach a new high somewhere above $75, the fact that none other than hypemaster extraordinaire Jim Cramer is pumping this etf as long as it’s below $79 (seriously, check this out: http://seekingalpha.com/article/1242231-cramer-s-lightning-round-a-lion-s-share-for-lions-gate-3-1-13) is a major sell signal.
In the immortal words of John Maynard Keynes, “Markets can remain irrational longer than you can remain solvent.”
If memory serves, Lord Keynes became a very wealthy man, so he knew whereof he spoke. As for me, I’m willing to trade short-term only with money that belongs to other people – specifically, other people who don’t know where I live and don’t own firearms. I prefer to invest in the mid to long term, but I might do well to consider these other immortal words of Lord Keynes: “In the long run we are all dead.”
I live in San Diego, about 15 miles north of the Mexican border, and I take great satisfaction in seeing an increasingly prosperous Mexico. The expansion of the Mexican middle class from the old days when I first visited – back when Richard Nixon was the vice-president – has been dramatic and impressive. I recall what they used to say about Mexico: that it has a brilliant future, and always will. It may seem that the future is now, but the events in the state of Mexico that you describe fit a rather disconcerting pattern. Mexico still needs to get corruption under control at all levels of its government – starting at the top – if the nation is to grow an economy that is commensurate with its size and real potential. Sadly, I don’t see much movement in that direction.
When I look at the landscape of easily investable Latin American nations, I see Chile as a standout. (Colombia looks increasingly interesting as well.) Considering Chile’s stable and transparent financial sector, well-funded pension system, abundant natural resources, good governance, and low levels of official corruption, it seems that the country has been overlooked by the markets. I suppose that civic virtue isn’t very exciting, and after all, Chile’s economy is relatively small. However, a modest long position in ECH looks like a good bet in the long term. As things look now, my heirs will likely be very happy indeed.
For you brave traders, I say live large! Long ECH and short EWW.