Category Archives: Americas

Twas the Night Before Taper: A Wall Street Holiday Poem

After several months of silence, Mustafa Mond, whom we last heard from in April, has resurfaced. Today, Mr. Mond offers us this holiday poem:


By Mustafa Mond

Twas the night before Taper, when all through the Street
Not a whale was stirring, not even a veep.
The earnings were prepped by accountants with care,
In hopes that bonuses would be much more than fair.

The bankers were settled all smug in their spreads,
While Fed interventions entranced all their heads.
And Barack with his selfie, and Michelle with hers too,
Readjusted their cameras to spy just on you.

When out in the markets there arose such a cry,
Barry sprang from West Wing to see what was nigh.
To the news wires he flew like a bat of hell,
Knowing hestill had the masses to quell.

Markets were speeding, out of control,
The VIX off the charts—who spiked the punch bowl?
When, what to his wondering eyes should appear,
But a great big helicopter with pallets in the rear!

With an exhausted driver, tired of dollar-yen,
And a new co-pilot, it must be St. Ben.
Faster than a flash crash his beneficiaries came,
And he whistled, and shouted, and called them by name!

“Now Blankfein! Now Dimon! Wells Fargo and Citi!
On Gorman! On Moynihan! NYSE and BONY!
To the highest of highs! ‘Til market bears have fled!
After all, in the long run, we’ll all be dead!”

The yield-hungry traders scrambled for carry,
Locking in profits before the curves vary.
And up to the market-top prices arose,
While Barack’s disapproval relentlessly grows.

And then, with the microphones set to full blast,
The media watched carefully for any contrast.
Trading floors went silent, as they are apt to do,
As Fed chairman testimony makes sense to so few.

He spoke all in jargon, acronyms and indices,
Durables and deficits and payrolls and factories.
A big pile of assets he still wants to backstop:
A mortgage, a bankruptcy, a credit default swap.

His data—how thorough! Statistics—such authority!
And his protégé, this Yellen, confirmed with a majority!
His post-Fed retirement expectantly awaits,
No doubt duly hedged for much higher interest rates.

Europe and China, oil exporters like Canada,
The Saudis and Russia, and fiefdoms like Panama,
Listened closely for signs of any new shocks,
But at least they have product–unlike tech stocks!

He was measured, cogent, lacking Greenspan’s grandiloquence,
But the reaction, as always, was irrational exuberance,
As he made quite clear that ZIRP would continue,
And Wall Street rejoiced–“to the discount window!”

Thus ended St. Ben’s last public report
As chairman of the lender of last resort:
Tapering delayed, until 2014,
When St. Ben will no doubt be far from the scene.

He sprang to his chopper, having completed his duties,
Leaving risks to be rated by S&P, Fitch and Moody’s.
And on his way out, they asked, “what of safety nets?”
He cried, “Happy Holidays! And good luck with your debts!”


Markets irrational longer than you remain solvent, exhibit #274

2013.12.Irrational markets

Source: Russell Investments

There’s an article out on Seeking Alpha yesterday, called “Manufacturing Growth and Capital are Moving from China to Mexico“, nominally about the Mexico-China relationship to the US, but also more broadly (in my interpretation) about how we react to and measure growth in developing economies.

The key thesis here has to do with the spillover effects of China’s decelerating growth and who will pick up the slack. This may not necessarily be an exact zero-sum game, but it is to a certain extent, at least as long as Americans are still gaming, eating, drinking, driving and whatever else they demand to do, and as long as China and Mexico remain the second and third biggest trading partners of the US.

That Mexico will pick up some of this slack is a foregone conclusion. But just how much it benefits is what remains to be seen, and at least among its boosters, is what drives all this excitement we’ve been seeing about Mexico ever since the current administration was elected. Specific to this article, which was written by an equity analyst out of California called Erik Gholtoghian, the currency deficit between Mexico and China is particularly telling:

“…the Mexican peso has weakened dramatically against the dollar since 1990, almost 80%, and the peso is down 2.44% against the dollar over the past year. In other words, the Chinese yuan has strengthened 34% against the dollar since the revaluation began in 2006, but over the same time, the peso has weakened 20% against the dollar. This means the yuan is 54% stronger against the peso just over the past seven years. The result will be greatly decreasing exports from China to Mexico and increased exports from Mexico to China.”

All fine and good, but there’s something missing here and after discussing this with some folks I know around Mexico City, it strikes me that this is partly about Mexico but also about how to approach investment prospects for many emerging and frontier market countries.

I’ll begin with a basic metaphor to illustrate what I’m thinking of here. When you jump up in the air, how can you remain airborne as long as you do? Gravity should theoretically pull you back to earth, and in fact it eventually does. But there is a brief moment when you can defy the theory of gravity, due to the relationship between your body’s mass, your muscle strength and the actual gravitational force of the earth.

In the case of Mexico, economic reality has been suspended in this theory-defying space for a few years now and it’s a matter of time before indicators on the ground (no pun intended) reflect a closing of this gap. Think of it as the reverse situation of the dotcom bubble or the real estate bubble. This is the basis for value investing (as opposed to speculative investing) and at a bird’s eye level is no different from the approach Warren Buffet uses in evaluating stocks. Company ABC has low costs, stable contracts with a diversified customer base, competitive quality products and whatever, they should be making X profits per year but they’re only making a fraction of that…therefore, buy.

Here’s another comparable situation: Billy Beane, he of Moneyball fame, used the same approach when he was managing the Oakland A’s baseball team in the early 2000s. He saw underpaid players who may not hit home runs and may even have crappy batting averages, but also never seem to strike out and wind up finding their way across home plate one way or another. He exploited this for as long as he could, until the rest of baseball caught on, copied it, and eliminated his advantage. By this metaphor, Mexico’s economy is slowly being recognized by the Billy Beanes of the investing world. The difference is that Billy Beane kept his mouth shut because he knew he was on to something. Meanwhile, these investing gurus can’t stop praising Mexico as the next big thing, partly because everyone else jumping on the bandwagon makes it a self-fulfilling prophecy (which is where the baseball comparison stops) and partly because the nature of today’s evolving media universe sort of demands everyone to stake his claim as an “expert” in something.

Another difference with the Mexico situation is that there are a lot more variables that could prevent the benefits of this growth from reaching ordinary Mexicans (corruption, red tape, narco, etc) and the persistent failure of commentators on Mexico to recognize the unpredictability and range of these other variables can appear very misleading. Sometimes this failure seems to be because the commentator in question is clueless/stupid/ignorant/etc. Sometimes it’s because they have a vested interest in a positive outcome and are therefore disinclined to (publicly) focus on downside risks (here’s one recent example of this).

There is also the perennial issue of timing, which is the great bugbear of economics and investing in general. Going back to the gravity metaphor, we can predict with decent accuracy how long you can stay airborne as a result of the very specific estimate of Earth’s gravitational force being 9.81 meters per second squared. One of the main reasons for this specificity is that Earth’s gravitational force is independent of human behavior. Mexico’s economy does not enjoy the same luxury for all of the previously mentioned reasons and more.

As John Keynes is supposed to have said, “Markets can remain irrational longer than you and I can remain solvent.”

Personally, I don’t believe anything – good or bad – until I see it.

Mexican congressman to colleagues: “Privatize This”

So, as you may or may not have heard, Mexican Congress has just passed some rather historic oil reforms, much to the consternation of a lot of people. Herein, one congressman’s protest at the lack of transparency surrounding this historic occasion (with thanks to @NetasMX):

2013.12.MX oil reforms

Irrational exuberance continues plaguing Bitcoin

2013.12.IgnoranceBank of America has now initiated coverage of bitcoin and puts a fair value price target at US$1,300, which depending on your view, either validates or discredits the digital currency. Personally, I have no skin in this game, I appreciate and am fascinated by the theoretical construct, but am put off by the breathlessly brainless hype surrounding it and one doesn’t have to look far to see bitcoin’s limitations.

With that said now, the BoA report link is here, and as far as I’m concerned, the most important stuff comes in at page 6, in the section entitled, “How to assess Bitcoin’s fair value?”

I admit up front I have yet to come up with a viable answer to this question, but if I may say so, I am expert at recognizing bullshit when I see it. And BoA analysts make what even they concede are very big assumptions here, but if you know the assumptions are “big” (read: unrealistic), then why bother going on about it in the first place?

Anyway, taking this piece by piece, some of the outlandish assumptions that lead to a “fair value” price of $1,300, as far as bitcoin’s value as a medium of exchange:

Given the assumption that Bitcoin will grow to account for the payment of 10% of all on-line shopping, this would suggest that US households would want to have a balance of $1bn worth of Bitcoins.

…given bitcoin’s famous finite supply cap at 21 million units, the math here isn’t quite doing it for me.

What about for the whole world? US GDP is about 20% of World GDP. If we were to assume the same degrees of penetration of e-commerce for the rest of the world and that spending by households outside the US has the same velocity, we get to $5bn worth of Bitcoins for the total desired cash/noncash balance of global on-line shopping.

…sure, but both of those assumptions are not just wrong but shockingly ignorant about how the world outside the United States operates. I don’t need to spell this one out further, do I?

In addition to its role as a mean for payment for on-line commerce, Bitcoin can be used for transfer of money (e.g. immigrant worker in the US sending remittances back home).

…the average immigrant worker in the US sending remittances back home is a) Latin American, and b) traditionally very distrustful of all financial mechanisms or intermediaries that are not cash; further, this average immigrant worker would require a level of facility with the internet that various studies simply do not bear out.

Western Union, MoneyGram, and Euronet are the three top players in the money transfer industry (with about 20% of the total market share). Let’s assume that Bitcoin becomes one of the top three players in this industry.

…actually, let’s not, for all kinds of practical reasons. See previous two rebuttals to begin with.

A thought just occurred to me: maybe this is a practical joke — like the Onion!

As far as bitcoin somehow serving as a store of value, the entire discussion here appears LSD-induced, with the following statement perhaps being the biggest whopper:

If we were to assume that Bitcoin were to eventually acquire the reputation of silver (which is an extremely ambitious assumption), this suggests that Bitcoin market capitalization for its role as a store of value could reach $5bn.


This is the metaphorical equivalent of saying that assuming gravity were one-tenth its current force, I could leap tall buildings in a single bound…and then going on to design a workout routine that does indeed involve me leaping tall buildings in a single bound.

Someone’s living in unreality and I’m pretty sure it’s not me. 

More evidence of a Bitcoin bubble

If this isn’t proof enough of a Bitcoin bubble, I don’t know what is:

2013 December Bitcoin

Actually you know what? I think there is better proof: THIS.

Ode to Janet Yellen: A Fed Prayer

Yellen PrayerSo Janet Yellen is officially the new Chairperson of the US Federal Reserve Board of Governors. Thanks to whatever anonymous reader just sent me this:

Dearly Beloved,

Let us pray.

Our Fed
Who art in Washington
Yellen be thy name
Thy printing come
Thy will be done by Ben as it is with Janet
And as it was before by Greenspan.
Give us this day our daily 3 billion
And increase us our debts
As we bail out our debtors
And lead us not into inflation
But deliver us from down markets
For thine is the printing, the bubble and the euphoria
Forever till taper

— Anonymous

The press as a lagging indicator, continued

Folha de Sao Paulo has made this easy for us. Here are a couple of Economist covers, four years apart:

2013.09.26 Brazil Economist cover

Honestly, when it’s not so tiresome, it’s actually amusing how blind people can be. I honestly have too many previous ramblings on this topic to list them all but if you’re interested, you can find them somewhere among these.

Also, there’s this:

Fed tapering, Emerging Markets, Banxico

Thanks to Brent Donnelly from Nomura for this chart showing USDMXN vs 10-year US Treasuries since “tapering” became a new market watchword:

2013.09.20.USDMXN 10 year UST

So what? Here’s so what: For anyone who ever thought Videgaray, Carstens or whoever else had any sway, when push comes to shove, dollar-peso moves almost in lockstep with Fed expectations. Put another way, whenever Bernanke & Co. decide easy money is over and raise interest rates, expect the peso to go back above 13.0+ and stay there (possibly even 14). And if Carstens or whoever replaces him is smart, they’ll keep their hands off. Draw your own conclusions about what that means for Mexican inflation, TIIE, etc.

Chart of the Day : Triple Threat for Emerging Markets

Apologies to everyone for the radio silence, but I’ve been occupied with an ongoing project in Peru the past few months. In the meantime, Morgan Stanley just published this chart via Barron’s:

2013.08.19.Emerging Markets Triple Threat

Chart of the Day: Remittances from the US to Mexico

From the International Money Transfer Conference, coming to Mexico shortly:


Chart of the Day: The World as 100 People

From Jack Hagley:



Chart of the Day: China Mobile Users Surpass US

From Mary Meeker’s recent presentation on the state of the web (slide 67):

Chinese mobile users surpass Americans

The First Rule Of Fighting Narcos: You Do Not Talk About Fighting Narcos

Regular readers know it isn’t very often that I re-publish in full something from elsewhere, but this is too important and I have no doubt that the majority of you are not in the habit of reading the Dallas Morning News with any regularity.

Alejandro Hope, who blogs here, tweets here, and works here, had the following op-ed in the Dallas Morning News at the end of last week which should not be missed and which would not be fair to simply excerpt here since every sentence matters. The long and short of it, which David Agren first touched on here, is built on the premise of not talking about drug war-related murders as part of a multi-prong public relations strategy.

If that sounds vaguely familiar, allow me to refresh your memory with this:

You think I’m joking? Read on:

Alejandro Hope: In Mexico, obfuscating crime numbers

Two months ago, a gunbattle erupted between rival drug gangs in Reynosa, Mexico, right across the border from McAllen. The shootout lasted several hours, killing as many as 40 people, according to a newspaper on the U.S. side of the border. Even in Mexico, scarred by seven years of relentless violence, this was big news.

But not big enough to make headlines in Mexican media. With some exceptions, coverage of the Reynosa firefight was scanty. Mostly, newspapers buried it in the police section, while TV and radio news shows virtually ignored it. Social networks were abuzz with information, but almost none was picked up by media outlets.
This was not an isolated shutdown. As a result of threats and violence from criminal gangs, many local news organizations in Mexico have long limited their reporting on the drug war. Now the practice has extended to the national media.

According to a recent report from the Observatory of Violence in the Media, an independent watchdog group, coverage of organized crime and violence in the Mexico City press took a dive during the first three months in office of President Enrique Peña Nieto: The use of the words homicide, narcotrafficking and cartel declined by half from the year before. Similar results were found for TV and radio.

The national media pullback is not the product of intimidation by criminal gangs; it is a response to government policy. Since Peña Nieto took office in December, his administration has made every effort to keep violence out of the limelight. This has not been a heavy-handed operation. Some journalists and outlets may have been pressured; most have not. Rather, the government has tried, successfully, to shroud the issue in silence and confusion.

Some of the administration’s new policies have been positive: For instance, alleged drug gang members are no longer paraded in front of the media, which had been an almost daily ritual while Felipe Calderón was president, one long condemned by human rights groups.

However, other practices are more questionable. According to official sources, 52 top or midlevel operatives of the various drug gangs have been arrested or taken down since December. No one outside government knows their names or any details about their so-called neutralization. All information flows are tightly controlled by a greatly empowered Interior Ministry. The fog of war has thickened.

Most troubling, there is a policy of deliberate obfuscation on crime data. A number of government agencies jointly produce a monthly report on the security situation. According to the latest release, homicides declined from December through April by 14 percent from the same period a year earlier, and by 18 percent compared with the final months of the previous government.

Those numbers are highly problematic. First, they do not refer to total homicides, but to so-called organized-crime-related homicides. The practice of singling out drug gang hits from run-of-the-mill murders — begun by, and later suspended for public consumption under, Calderón — is deeply flawed. Including or excluding an incident is an inferential process, not the result of sound police investigation. If a homicide meets a set of arbitrary criteria, it is counted as organized-crime-related, no further questions asked.

Nor do the data meet consistency standards. Total homicides, as reported by state law enforcement agencies, have declined at a much slower pace. If the government’s numbers are correct, then, by implication, other types of murder must be increasing. Has there been a rise in domestic violence or bar fights? Unlikely. A far better explanation is a change in the criteria for defining a homicide as organized-crime-related.

Second, homicides have indeed gone down from the 2011 peak. But the drop happened before Peña Nieto took office Dec. 1. After 18 months of decline, the curve flattened in late 2012. Last month, Mexico recorded an average of 50 homicides a day — the same number as in October and every month since, plus or minus 4 percent. The rapid decline reported by Mexican authorities is a statistical artifice.

Mexico still faces serious security challenges. The situation has improved somewhat since 2011, but the amount of violence remains staggering. With one-third the population of the U.S., Mexico has 50 percent more homicides. A meaningful reduction in crime will take many years and many reforms. But the task is made even more difficult when public debate and oversight are inhibited by the absence of reliable information.

The Peña Nieto administration wants, legitimately, to change the narrative about Mexico, both at home and abroad. But the best way to improve the country’s image is by changing its reality, not shutting down information flows, fudging numbers and pretending that violence can be willed out of existence.

Alejandro Hope is director of security policy at IMCO, a Mexico City-based think tank. His email address is Follow him on Twitter at @ahope71.

Street Markets 101: On Money Laundering, Foreign Exchange and Counterfeit US Dollars

I’ll begin with the spoiler for those of you who should have been somewhere else five minutes ago:

The Mexican peso trades at a 50% discount on the streets of Peru and I believe this is somehow related to Peru being the top source of counterfeit U.S. dollars in the world.

That’s the basic thesis.

What is about to come next is a series of observations, some postulations, an educated guess or two, and a some rough idea of where to go next.

Contained nowhere in here is actual proof, in the Euclidean sense of the concept. But I’ll defend that by saying that what this brain dump is about is so off the radar that the only possible proof to have is to be an actual perpetrator. So, not being a perpetrator, what I can spell out here is my thought process, and I wholeheartedly welcome comment from anyone who can fill in any of the gaps I’ve left, or better yet, prove me wrong.

With that out of the way, let’s get to the data.

This whole idea began with a simple observation: upon landing in Lima’s airport, the first currency changers available—the ones you see before even clearing customs—offer to sell Peruvian soles in exchange for travelers’ American and Canadian dollars, Japanese yen, British pounds, euros, Swiss francs and Mexican pesos, quoted in terms of how many soles you can expect to receive per unit of your foreign currency. Considering that the first currency changers available upon landing at any airport anywhere in the world will never give the best exchange rate, the rates in Lima’s airport do not depart from current market rates as much as they could.

The single exception is the Mexican peso.

The number of Peruvian soles one can expect to receive per Mexican peso in the Lima airport is quoted as “0.1”. What does this mean?

To equate this to something understandable, we can use the old cross-canceling technique of multiplying fractions with different units. Here’s what happens when we do that:

1 Mexican peso            2.5 Peruvian soles           25 Mexican pesos
——————–         X    ———————-            =      ———————-
0.1 Peruvian soles        1 US dollar                       1 US dollar

Yes, you’re reading that correctly: that’s 25 Mexican pesos per dollar. Look up the going market rate for Mexican pesos, and you’ll see them trading, as of this writing, somewhere in the neighborhood of 12.3 to the dollar.

So, anyone landing in Lima wanting to change Mexican pesos for Peruvian soles at the airport will do so at an implied devaluation of the peso on the order of 50%.

Put another way: you’re going to spend twice as many Mexican pesos as you should to acquire Peruvian soles.

Granted, this is in the airport. Clearly the next step was to see if any casa de cambio in central Lima takes Mexican pesos. The answer to that question is yes, as should be expected of any fully convertible currency in world markets. The rate I was quoted at the casa de cambio around the corner from my hotel was 20 Mexican pesos per dollar. This is better than 25, but not by much; the implied devaluation here is still nearly approaching 40%.

Now, one could argue there is fault in my sample size, that the data only came from the Miraflores neighborhood, which skews it this way or that way…in short, there are always more data points to gather. But for these purposes, for what I’m trying to establish, I do not believe more evidence beyond the airport and the wealthiest neighborhood in Lima is going to materially alter the findings.

Meanwhile, changing US dollars on the street in Lima can be done for very little, if any divergence from the market rate. The single data point I have here—drawn from the casa de cambio that was willing to take 20 Mexican pesos per US dollar—was receiving 258 Peruvian soles for $100 on April 23, which, according to oanda, was exactly the market rate that day.

To further demonstrate the relative demand for US dollars in Peru, my hotel bill for a recent three-night stay there was quoted as payable with 1,386 soles or US$462, which implies a USDPEN rate of 3.0. Given the market rate of 2.58 Peruvian soles per dollar, this means the hotel was willing to devalue its own currency by 14%.

I don’t know if the hotel would have been willing to take Mexican pesos, but that’s unnecessary for a preliminary conclusion here. The 50% devaluation penalty for changing Mexican pesos in Peru is more than just statistically significant. It’s basically the Peruvian foreign exchange establishment saying, “You’re either stupid or a drug dealer.”

As it so happens, Peru is the largest producer of counterfeit US dollars in the world. Coincidence?

Suppose it is. An alternative conclusion here could be that the more convertible a country’s currency is on an international scale, the less it will charge you when you try changing more “exotic” currencies for the local money.

On that front, I’ve since checked so-called “street” FX rates for Mexican pesos in New York, London, Toronto and São Paulo. In every one of those markets, the implied USDMXN rate ranges from 13.0 to 14.5, with the 13.0 rate coming unexpectedly from Sao Paulo. That São Paulo’s rate for pesos is actually better than New York, Toronto or London kind of goes against any theory that greater convertibility reduces the peso spread.

Where this goes next:

It’s probably worth checking Mexican peso rates in Bogotá as another frame of reference, not just for another Latin American country, but another transit point of known narco-related money laundering in the hemisphere. I have no idea what to expect here but am looking into it.

Drunkeynesian, who aided me with the São Paulo data, additionally offers this comment:

“I like your thesis, and I would add to it a premium for the difficulty to convert Mexican pesos in another “liquid” currency. In a country where there are many Mexicans (or people traveling to Mexico), rates should be better, since if you’re a FX broker and you get some Mexican pesos you won’t have to wait long until you make some profit. If this is valid, this premium should grow with the local interest rate (to compensate for the opportunity cost).”

To be continued.

The Latin America “Middle Class” Cliche: Why It Doesn’t Work And How To Fix It

If we wanted to go totally meta with this, we could talk about how people’s shrinking attention spans preclude meaningful conversation and understanding about subjects too complex to be crunched into 140 characters or even 1,200 words.

Seriously, how many slice of life stories do we really need to read about Manuel the carpenter/mechanic/cab driver in Toluca/Cali/San Jose who just paid for a new dishwasher in monthly installments with remittances sent from his 1/3/7 relatives in the US ?

Enter, unexpectedly, the World Economic Forum on Latin America, which just wrapped in Peru the week before last. I never expected a WEF gathering to nail it, but nail it they did in a panel entitled, “Unleashing the Power of the Middle Class“, whose commentary I promise you is far more compelling than the session title.

I don’t blame anyone for not having an hour to sit through this (that’s what I’m here for), so what we have here instead are two of the smartest things I’ve heard anyone say about the so-called “middle class” of Latin America since I don’t know when:

At about 16:00, Marcelo Cortes Neri, Brazil’s Minister of Strategic Affairs:

Just one small point with respect to this in terms of definition. I think when we talk about middle class, we talk very much about US or European definitions, where you have two cars, two dogs, two kids and I don’t think this is a good definition in my opinion.

I think we are having two kids which is important, gives you sustainability, but I think if we look at the US and Europe, we will see ourselves as poor–they are the richest in the world–so I am very much in line with the Minister’s idea, we have to look within our communities and countries, and I think if we do that, the world here…because Latin America actually in terms of its income and its very high inequality, but this is a very good picture of the world, so I don’t think we should import definitions from developed countries, otherwise we are not going to see ourselves moving; we are going from someone whose income changed from $1,000 to $2,000, and you look up, you say well nothing changed in this guy’s life, but there’s a revolution going on.

One last point: I think it would be very tough to respond to the aspirations of the Latin American middle class because we have very high aspirations. Latin Americans are very positive toward their future, it’s more…if you are controlling for income, nobody is more optimistic to the future than Latin Americans. So this is tough.

I’ve been saying this in some way or another for years now, but Minister Neri actually put it in far more eloquent language.

The second comment, which comes at 30:00, is Augusto de la Torre (no relation to yours truly) Chief Economist, Latin America and the Caribbean, World Bank. And disregarding the aforementioned inappropriateness of the phrase “middle class”, what he has to say could not be more true:

I’d like to add a dimension which we highlight in our report. We are excited about the growth of the middle class because people have a better life. But we are also excited because we believe deep down that the bigger middle class will make for better societies. So there is this correct perception that the middle class is associated with citizenry. That middle class people are more educated, they have better jobs, they have a better understanding of what the common good is, and they can push for better institutions, they can reduce the levels of corruption, monitor the government so they can produce better education, etc.

So we did some exercises on this and we found it is not so simple. When we look at the world as a whole and you do the statistics, you do find very good positive associations. Countries that have larger middle classes have lower corruption, better institutions, better government spending, quality, freer markets, better property rights. So these associations are what inspire us. But we have also found, and this is the troublesome part, that the Latin American middle class does not seem to be opting into a better social contract. In fact, what we found was evidence that the middle class in Latin America has a tendency to opt out of the social contract.

Let me give you a couple examples to explain what I mean. The moment a Latin American household becomes a middle class household, the first thing they do is take their kids out of public schools and put them in private schools. They no longer are concerned about the quality of public education as a result. You go to the Dominican Republic, the moment you are a middle class family, you buy your own electricity generator, because you don’t want to trust public electricity services. So once you have your generator, you don’t care about the quality of the public good of energy.

Or when you become a middle class in many Latin American cities, you try to buy a house in gated communities, they have walls, they have private security, because you’d rather not rely on the public police. So you could end up in a bad equilibrium.

So rather than what you would expect, which is a middle class which contributes to better institutions, more public goods, more cohesive society, better citizens, you may end up with a middle class that opts out and finds private ways of solving their own problems. And their interests may diverge from the public good.

Now let’s close this by going back  to the meta. It seems to me that so many people are so desperate for certainty that they resort to the flimsiest of evidence and the sloppiest of explanations to lean on for decision making. In short, sounding like you know what you’re talking about has in some ways become more significant than actually knowing what you’re talking about. And the pithier you sound, the more you’ll be quoted,  and the more you’ll be recognized, which just goes around and around until you wind up with some signalling phrase like “Latin America’s growing middle class” which really, when you get right down to it,  has absolutely zero meaning.

The Cost of VIP Status, Super Bowl Edition

Vince Lombardi super-bowl-trophyNorthern winter is finally over, which means it’s time to start thinking about — what else? — next year’s Super Bowl, which will be the first in the New York area and the first in outdoor cold weather (as well as a number of other firsts which I leave to the archive-obsessed).

Some telling data points on the cost of the “experience” have come across my radar recently which I thought it appropriate to share here. The full extent of what I was sent actually covered a range of major US sporting events in the coming year and is likely more than what would be of interest to most people. To give you an idea, the second most extravagant on the list — the VIP package for the Masters Tournament at Augusta National — came in at not even 1/10 the cost of the Super Bowl package. Anyway, on to the dollar signs…

Bearing in mind the cost to air a 30-second television ad during this past January was $4 million and that the starting price of resale tickets to average fans was somewhere above $3,000, the following was sent to me as a solicitation for a “Luxury Suite Donor Program Investment” for the 2014 Super Bowl:

The total cost is $540,000. This includes the following:

• Private Luxury Suite – 30 people
• Taste of NFL Event tickets – 8 people
• Commissioner’s Lunch tickets – 4 people
• Donor Cocktail Party with NFL Owners – 4 people
• Golf Outing with NFL Owners – 4 people

As well as the following bells and whistles:

• Premium in-stadium venue (open 3 hours pregame and reopens for 90 minutes postgame)
• Full premium menu and top shelf open bar (pregame)
• Select menu items, beer, wine, and soft drinks (postgame)
• Player and cheerleader appearances
• Interactive entertainment elements and more
• Super Bowl XLVII Gift Bag
• Exclusive Stadium Collection Game Program Voucher
• Super Bowl XLVII Lanyard with Ticket Sleeve
• Dedicated security entrance to the stadium on Super Bowl Sunday
• Preferred on location stadium parking (parking fees not included)
• Exclusive Postgame Field Access – once in a lifetime chance to experience the Super Bowl the way the players do: from the field

The following firms have apparently already ponied up $1 million each for the above package: Bank Of America, BlackRock, BNYMellon, Bud Light, JP Morgan Chase, Citibank, Competitor Group, Dassault Falcon, Goldman Sachs, S.A.C. Capital Advisors, Honeywell, Hertz, Hess, Jeffries Group, Tiffany & Co, Morgan Stanley, NCR, NYSE Euronext, New York Times, Pepsi, PSE&G, Price Waterhouse, R.R. Donnelly, Starr Companies, Paul Tudor Jones and Verizon.

I suppose I should I feel grateful to have access to a 46% discount to the $1 million these other institutions paid?

I don’t have the data at the ready, but my understanding is that comparable VIP treatment for World Cup or Formula One events don’t quite reach this level.

Oh well. As my grandfather was fond of saying, “Every price has a reason.” Maybe some day I’ll be in business with someone who will benefit by footing the bill for these things.

Or maybe not.

Map Of The Day: Mexico Drug War Update

The Washington Post published this the other day:

Mexico Drug War Cartel Map

Accompanying it is a rather lengthy article (here), not to be missed, detailing the evolving intelligence challenges since Enrique Peña Nieto took office.

Also not to be missed is David Agren reporting in USA Today on the Peña Nieto Administration’s apparent new strategy which can be essentially summed as: “If we stop talking about the murders, that must mean they’re not happening anymore.”

Do not be fooled.


How Much More Can Emerging Markets Debt Grow?

EM versus US High Yield Bonds riskLondon-based Clear Path Analysis has an excellent report detailing investment considerations for Emerging Markets debt and FX investing. So good, actually, that it’s forcing me to second-guess my previously held view that Emerging Markets debt is in a bubble approaching crisis proportions. It’s a long-ish report (32 pages) and it’s all important, so let’s get straight to some of the notable commentary they’ve put together. I think these quotes really speak for themselves.

Gregoire Haenni, Chief Investment Officer, CERN Pension Fund, on why Asia has and will continue leading EMs:

One of the main reasons why investors are beginning to allocate into EM is because of the Asian sovereign credit re-rating trend. Asian sovereign credit fundamentals have generally been on the up for the last six years which is in contrast to other developed countries. The fiscal discipline and underlying economy growth has capped government debt to GDP without exceptions and trade surpluses over the past decade have resulted in a build up of foreign exchange reserves.
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Chart of the Day: Mexicans More Efficient Than Americans In Gun Murders

Business Insider, which I generally consider to be the equivalent of People Magazine for business, actually has an interesting presentation on gun ownership in the US. I haven’t had a chance, nor will I, to verify the many claims this presentation makes, but I thought the following chart was striking. If true, this implies Mexico has more murders per capita than the US with just 20% as many guns:

Gun deaths versus gun ownership

Full presentation begins here.

Chart of the Day: Frontier Markets Correlations, Round 2

S&P Capital IQ slipped this press release out last week, which I’m glad I followed up on since it led me to the following correlation chart:

Frontier Markets Correlation vs Major Indices

Equally important, this comment which came alongside it:

From an asset allocation perspective, one of the biggest positive differentiators of frontier market equities is their relatively low correlation with both developed and emerging market equities as well as commodities (see table 2). The asset class’ ability to “zig” when others “zag” is a function of its aforementioned limited integration into the global economy and its more domestically driven fundamentals, in our view.

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