Category Archives: Mexico

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

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: Remittances from the US to Mexico

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

IMX13-infographic-en

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 alejandro.hope@imco.org.mx. 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.

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.

 

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.

Assessing Televisa’s Political Risk in Mexico

Televisa Since Dec 1Mexico watchers up to date on the landmark reforms underway in Mexico can skip straight down to the section below where the block quotes begin.

For the rest of you not up to speed, the Mexican government is getting ready to put most of the new non-oil reforms up for a vote quite soon. The Economist has a pretty good recent summary here, and if you have more time I would highly recommend checking out extensive coverage of the annual Americas Society / Council of the Americas event just closed in Mexico City here.

And for those of you new to Diverging Markets, let me sum up my basic attitude toward the Peña Nieto Administration as being what I call “optimistic distrust.” This means that I have no ideological or financial stake in any of this (though I’m still waiting for the right moment to short iShares’ Mexico ETF), but given what I know of Mexican political history and Mexican society I am highly skeptical about a lot of the big reform promises made thus far for reasons repeated throughout here; at the same time, given that I spend more time in Mexico than anywhere else, I would absolutely welcome having my skepticism proven wrong. But the caveat here as always is that Mexican leadership has become increasingly adept at telling foreign investors what they want to hear and the Peña Nieto Administration in particular has proven itself quite remarkable in this capacity. Put another way, don’t believe everything you read about this country.

Now let’s get to Televisa. The chart above shows this stock’s performance since  Peña Nieto took office on December 1 last year, and its movement in the past week is not encouraging. One of the reasons is likely a disclosure Televisa recently made to the U.S. Securities and Exchange Commission in a form that was previously unknown to me, called form 20-F. According to Investopedia, this is a form meant for foreign companies who list American Depositary Receipts in U.S. markets. The entirety of Televisa’s recent 20-F is worth reading, but in particular the “Risk Factors” section under Item 3, which is chock full of warnings.

Here’s a slice of it from the bottom of page 9 to get everyone’s juices flowing:

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A Brief Review Of The Biggest Obstacles Facing Mexico’s Moment

2013.04.08.Pemex statsHuge kudos are in order for the FT’s Adam Thomson for finally coming around to spelling out the all-uphill battle Pemex faces. Kudos so huge, in fact, that I’m willing to forget all about this pandering portrayal of Mexico as “Aztec Tiger” at the beginning of the year. Some numbers from “Rusty wheels of Pemex require much oiling” that should give any go-go-pro-Mexico cheerleader pause:

  • Although Pemex reported sales last year of about 1.6 trillion pesos ($130bn), only exploration and production, one of its four subsidiaries, regularly turns a profit: 95.5bn pesos last year. Its other three subsidiaries racked up a combined net loss of 111.6bn pesos – about the same as the entire government budget of Bolivia.
  • Of the three lossmaking subsidiaries, the worst offender is Pemex Refining, which last year posted net losses of 100.5bn pesos. That helped increase the company’s net debt, which in December stood at $51.4bn, about 29 per cent higher than in 2008, though it has fallen as a percentage of revenues over the past three years.
  • Pemex pays the fourth-highest tax rate in a sample of 15 oil-producing nations, including the UK, Iraq, Venezuela and Norway. Little wonder the company provides more than one-third of the federal government’s revenue.
  • Mexico’s state oil company is woefully inefficient. The refining subsidiary accounts for about 40,000 of the company’s roughly 150,000 employees and the average workforce at a Pemex refinery is three times that of one with comparable output abroad. Refining capacity has not increased in years and Mexico today imports almost half of its gasoline needs.
  • Pension liabilities were a staggering $52.3bn at the end of 2011, only 8 per cent of which are funded, and with total contractual obligations standing at $141bn.
  • Contractual rigidities leave about 11,000 Pemex workers receiving salaries without actually having any work to do.
  • As the headcount swells – it has increased more than 10 per cent since 2001 – Pemex’s production figures have crumbled and today stand at less than 2.6m barrels a day compared with about 3.4m in 2004.

If the Peña Nieto Administration comes up with a way to fix this — and that’s HUGE if — you can be sure it will not happen without some well-positioned person behind some closed door to take a little extra for himself.

Related reading: I never thought I’d find myself in so much agreement with Counterpunch, but those looking for current run-down of all the other, non-Pemex reasons to be skeptical of the Aztec Tiger are strongly advised to read in full Paul Imison’s latest here.

The Carry Trade Is Not Dead – It’s Just Evolved

My Seeking Alpha article last week on the Mexican peso’s post-rate cut rally prompted this response by a reader:

“Capturing the interest rate differencials across currencies used to be an fx trade, but global monetary accomodative policy has taken the juice out of the carry trade for fx traders. The carry trade has increasingly become a fixed income trade where real money has more tolerance for fx volatility in order to capture higher global yields. To that extent, currencies will in fact benefit where there is a belief that local rates are too high.

I don’t expect further rate cuts, Ulysses. I think the 50bp was an attempt at normalization, perhaps partially due to the increase in real money flows into Mexico that were screaming that rates were too high. The irony that you point out about a stronger peso can probably be attributed as much to the ratings upgrade and correlation with a recovering US dollar. Mexico’s reputation for strong policymakers as well as the convergence of business cycles with the USA, makes it a good laggard candidate to get some beta on the USA. That said, it’s a bit overbought and needs to consolidate if it is going to push much lower.”

To the extent that the Mexico exchange-traded fund, which goes by the ticker EWW, correlates with the peso, it looks like this overbuying has already been priced in. Whether looking at this in terms of absolute price or in terms of returns, the March 8 rate cut coincided with a brief bump in the EWW price which has now reversed course, while the peso remains up. This gap will have to close at some point. The question is when:

2013.03.18.MXN EWW YTD price

 

2013.03.18.MXN EWW YTD percent

And here’s what the EWW vs. peso relationship looks like over the past year:

2013.03.18.MXN EWW 1 year

The Carry Trade Is Dead. Long Live The Carry Trade.

2013.03.13.USD MXN BRL Carry TradeMy latest Seeking Alpha article is out, in which I try to make sense of why the Mexican peso is strengthening on the heels of an interest rate cut by the Bank of Mexico on Friday. And the short answer is that the carry trade is dead. Read the rest here, but what I can add to this argument is actually something that I’m surprised nobody has taken me task for in the comments section yet and that is this: the carry trade isn’t entirely dead. Brazil is in all likelihood about to raise rates again and the expectation is that this is going to strengthen the real.

Which raises the next question: Why is the Mexican peso resorting to the theory of interest rate parity while the Brazilian real is is adhering to the anti-theory of interest rate parity in the form of the carry trade?

Stay tuned.

China Latin America Trade: Who’s Dependent On Whom?

Yes, I am obsessed with charts. And if you’re still reading this blog with any regularity, you are too. Especially if they’re about China Latin America trade.

I finally had a chance to dig through a BBVA report from last month entitled, “How dependent is Latin America’s Economy on China?” Following are the essential takeaways.

  • Commodities have always taken a significant share of Latin American exports; the level of commodity exports concentration had been declining until the start of this century, which coincides with the further involvement of China in global markets.
  • The shift of China’s economic model makes it the biggest contributor to world commodity demand and the top importer of Latin America’s natural resources.
  • There is a positive China effect on commodity exports concentration; the dependency on Chinese demand for sample commodities has indeed increased during the last decade.
  • However, Latin American countries’ economic growth is far less dependent on China than the commodity exports figures might imply.

Now with those overview bullets out of the way, the first chart that strikes me is shown a few different ways but all with the same conclusion. This is one of the versions, demonstrating the proportion of each country’s exports that are commodities:

2013.03.12.Latam-China commodity exports percent share total

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Translation of the Bank of Mexico’s Monetary Policy Announcement on Friday

2013.03.11.Banxico Agustin CarstensAs you may or may not have heard, the Bank of Mexico cut its benchmark interest rate on Friday by 50 points to 4 percent. This is kind of a big deal for reasons I’ll get into in a separate comment. But for the time being I just wanted the full text of the statement in English for easy referencing and nobody else seems to be carrying this, so I just did the translation. More to come shortly.

Here’s the original link in Spanish from Banxico’s website.

Here’s the translation (bold emphasis mine):

March 8, 2013

Monetary Policy Announcement

The Bank of Mexico has decided to reduce the interbank interest rate by 50 points to 4.0 percent.

The global economy continues showing signs of weakness. In the United States growth in 2013 is expected to be lower than in 2012 and important downside risks are prevalent. In particular, the recovery of economic activity and employment, supported in large part by monetary policy, is being affected by necessary fiscal consolidation.

In the Eurozone, economic activity continues without showing signs of recovery. Furthermore, regarding economic recovery, uncertainty continues about the effect necessary fiscal adjustments will have, the health of the European financial system and the possibility of major political instability, particularly among the peripheral economies.

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Basic Strategy For Hyping An Investment Trend

2013.03.11.PlanetHypeI’ve seen this happen so many times, I could teach a class on it:

  1. Take a small data sample of something that confirms the view you’re determined to promote;
  2. Regardless of how rigorous the methodology or how representative the sample size, declare that this is indicative of a broader trend–forest for the trees or some such thing;
  3. Willfully ignore any aspects of this declaration that remotely contradict your view;
  4. Deny/insult/discredit/lash out at anyone who tries to take an even-handed view on it;
  5. Begrudgingly concede that nothing is perfect but that a positive attitude is what counts;
  6. Neglect to make clear the very pertinent fact that you have a vested interest–financially, politically, reputationally–in a positive outcome which therefore inhibits your own objectivity;
  7. If your lawyers insist, loosely outline the caveats to your opinion and bury them somewhere where they are least likely to be noticed (“past performance is not indicative of future results” is the boilerplate here);
  8. Debunk the caveats by paraphrasing points 1 and 2 and emphasize the probability your forecast will prevail;
  9. Lather;
  10. Rinse;
  11. Repeat.

Now, let’s consider a brief list of where we’ve seen this template applied in the recent past:

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Chart Of The Day: Emerging Markets Currency Wars Landscape

This is interesting:

2013.03.06.Swan FX Diagram

2013.03.06.Swan FX Table

And here’s an explanation of what we’re looking at:

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A Perfect Example Of Why Diplomats Should Never Be Trusted On The Economy

2013.02.26.Mexico gdp forecast calculationYes, that’s right: NEVER. War, yes. Economy, no.

I know this has been a very Mexico-heavy week, but there’s been a lot of activity here and I’m angling for some other things coming next week, so stay tuned! In the meantime, chalk up another gushing go-go-pro-Mexico story, this one from the Globe and Mail of Toronto, in which Canadian Foreign Affairs Minister John Baird unleashes this whopper:

“Mexico, in our lifetime, is going to be a top-10 world economy, and potentially in our lifetime, a top-five world economy.”

This is more than just irrational exuberance. I’m tempted to call it a lie, but then that would imply that there is an absolute truth, that Baird knows that absolute truth, and is willfully concealing it while vocally professing the opposite to be true. And I can’t prove that. But what I can prove is that this statement is nothing less than Bullshit.

Consider the 15 largest economies as measured by nominal GDP in 2012, according to the IMF (figures in US$ billions):

1. United States: 15,653.366
2. China: 8,250.241
3. Japan: 5,984.390
4. Germany: 3,366.651
5. France: 2,580.423
6. UK: 2,433.779
7. Brazil: 2,425.052
8. Italy: 1,980.448
9. Russia: 1,953.555
10. India: 1,946.765
11. Canada: 1,770.084
12. Australia: 1,542.055
13. Spain: 1,340.266
14. Mexico: 1,162.891
15. South Korea: 1,151.271

Now here’s how the Economist Intelligence Unit is forecasting Mexico’s real GDP growth out to 2030:

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Cartoon of the Day: The PRI Has No Clothes

A reader identifying himself only as “SuperMandante Marcos” has just sent in the following cartoon. All I have to say is: OUCH.

The PRI Emperor has no clothes

Making A Case For Buying Chile and Selling Mexico

2013.02.27.The Case for Buying Chile and Selling MexicoWhat 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.

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TRANSCRIPT: Nomad Capitalist Report Radio Show Interview

terraqueous-globeI was interviewed for the weekly Nomad Capitalist radio show over the weekend, hosted by Andrew Henderson. On the agenda: the Africa-China relationship, putting the hot-or-not test to Frontier Markets and the nuances of investing in Mexico. Here’s the link and here’s the mp3:

http://www.buzzsprout.com/8222/78536-nomad-capitalist-report-feb-23-2013.mp3

And here’s the transcript:

Andrew Henderson:   I want to start with a piece that you touched on recently, commodities, and emerging markets’ domination of reserves of commodities, explain that a little bit and let’s get into what exactly that can tell us.

Ulysses de la Torre:     Thanks for having me. If it’s the graph I think you’re talking about, it’s not a graph, it’s actually a map, which I pulled from Glencore, which, given Glencore’s footprint in this universe, shouldn’t be surprising that they should come up with something like this. And what it basically shows is a map of the world and how all of the key commodities are dominated in one form or another by underdeveloped markets. When I look at it, the first thing I see is that one of the big obstacles here is nothing more than logistics and infrastructure. And this is something that’s frequently lost on foreign investors trying to research this from afar because these are elements of an economy that you cannot fully understand without experiencing it. It’s one thing to be stuck in a traffic jam that takes you two hours to make a trip that normally takes one hour, but it’s entirely another thing for a truckload of raw materials to take three days to drive a couple hundred miles because of anything from bad roads, military checkpoints, bandits, local territorial disputes, on top of your basic traffic problems. This adds significantly to transport costs and who ultimately foots the bill for this added cost is often a point of dispute that can manifest in a lot of ways that North America and Europe haven’t really had to think about in decades, since before most of us were even alive.

AH:                             You talk a lot about Africa and I want to get into some of the specifics that are going on there. There’s a big media play that China is recolonizing Africa and so many of the resources plays, even the financial sector plays, let’s talk about Africa, because that’s one area to hone in on for these resources, it’s very resource rich, it’s fast growing, but it’s more than just China, let’s talk about who the players are in Africa and what’s going on there, give us the introductory sketch to Africa.

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