A recipe for a debt crisis.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
On Monday morning the world’s tenth most traded currency, the Mexican peso, set a historic precedent that few Mexicans will welcome. For the first time ever, one US dollar fetched as many as 20 Mexican pesos in some of the nation’s banks, including its biggest, Bancomer, following eight consecutive days of losses.
Of all the international currencies tracked by Bloomberg, only the Surinamese dollar fell more against the U.S. dollar last week. The peso also holds the dubious distinction of being the worst performing major emerging market currency of 2016, having lost close to 12% of its value.
So far this week things have only got worse, as the peso’s value slumped from $19.64 on Monday morning to $19.83 at the close of Tuesday’s trading, while the cost of covering against a depreciating peso has reached historic levels in the derivatives market.
There are plenty of reasons for Mexico’s peso woes, including the nation’s slowing economy, the government’s tightening fiscal strains, and the recent resignation of the Minister of Finance and Public Credit, Luis Videgary Caso, after being blamed for arranging an impromptu meeting between Mexico’s Premier Enrique Peña Nieto and the Donald Trump.
The pains of much-shrunken, desperately debt-challenged, state-owned oil giant, Pemex, have also taken their toll. All these factors have contributed to the peso’s spectacular fall from grace – it now takes 60% more pesos to buy $1 than it did in January 2014:
But the two most important reasons for its latest leg-down are:
- The currency’s status as a widely traded emerging market currency has led it to be widely used as a hedge to be sold in turbulent times against other emerging market positions.
- The peso’s newfound role as an insurance policy against a Trump victory in November’s U.S. election.
As some investors are getting spooked over the prospect of a Trump presidency, they are hedging against such an outcome by shorting the peso, making it a perfect barometer of Donald Trump’s US election chances, according to the Financial Times:
[A]s the head of emerging markets at one New York-based bank put it: “If you believe Hillary will win, you should be buying the hell out of Mexican assets.”Alonso Cervera at Credit Suisse in Mexico City traces the link between the peso and the US election to early May, when Mr Trump won the Indiana primary and his rival Ted Cruz dropped out of the race. “The peso sold off and all the other emerging market currencies were unchanged,” he said.
According to some, a weak peso shouldn’t necessarily be viewed as a negative. “In many ways, a weak peso is a good thing for the Mexican economy that is very open,” says Jorge Mariscal, chief EM investment officer at UBS Wealth Management. With exports accounting for roughly one-third of Mexico’s GDP, a falling peso would make the country more competitive, he told the FT. Both dollar oil revenues, and remittances from Mexicans abroad — which totaled $25 billion last year — would also go a lot further with a weaker peso.
What Mariscal doesn’t mention are the potential knock-on effects a weakening peso can have on the hundreds of billions of dollar-denominated debt just sitting, gathering weight, on the balance sheets of Mexican corporations and the Mexican government that have borrowed much more cheaply in dollars but now must pay the price: their revenues of crushed pesos makes their dollar debt more difficult to service.
It’s a recipe for a debt crisis.
Nor does Mariscal mention the decimating effects a collapsing peso can have — indeed, has already had — on the incomes and wealth of Mexican people, from the very poorest to the very richest. According to a report by the Mexican financial daily El Financiero, Mexico’s wealthiest billionaires have seen billions of dollars wiped off their paper wealth since support for Trump bottomed out in early-August. The fallout is particularly pronounced among those whose businesses transact overwhelmingly in pesos. Carlos Slim, once the richest man on the planet, is now relegated to eighth place.
But it’s the poorest that will, quite literally, pay the highest price. In Mexico, the poor are in the majority. And they’re well-accustomed to seeing the value of their earnings slowly eroded. During the last four decades, the purchasing power of the minimum wage has shrunk by 78%.
As the peso plunges in value, this trend is only likely to worsen. A crucial staple food, tortilla, consumed by 21 million of the country’s 26 million families, suffered sharp price increases last year, with some states registering price rises of as much as 60%. The last time the price of tortilla rose so fast, in 2006, it led to food riots.
In some regions things have got so bad lately that industry representatives have begun meeting with local and regional government officials to find ways of “avoiding further price rises,” which can only mean one of two things: public subsidies or price controls.
In the meantime, the peso is being pushed along by a toxic cocktail of forces, many of which (U.S. presidential elections, global oil prices, emerging market trends…) are far beyond the control of the Mexican government or central bank. “It’s a bit of a perfect storm, in a bad way,” said Mike Moran, head of economic research for the US and Latin America at Standard Chartered in New York. “The Mexican peso is really at the bottom of the bucket.”
As long as global investors continue to use the peso as a hedge against emerging markets risks and against the political risks of a Trump presidency, that’s where it’s going to stay. By Don Quijones, Raging Bull-Shit.
Fleeced Mexican investors are left railing against big banks and hedge funds. Read… “Where’s the Money Gone?” Rescue of Spain’s Biggest-Ever Corporate Bankruptcy Stumbles in Mexico
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It is surprising that a country with oil, with manufacturing (its autos and auto parts biz is beginning to rattle Canada’s) with good agriculture, should see the lower- middle class struggling with basic food costs.
The only Latino place I’ve experienced sort of in depth is Uruguay, which has no oil (and gasoline is expensive) no manufacturing to speak of, but although I walked the poorer parts of Montevideo many times I saw no desperate poverty. This in itself wouldn’t mean there isn’t any, because proud people will hide poverty but the locals I asked said things weren’t too bad.
A mystery.
It’s a trick many countries seem to pull off, rich resources, lots of trade, and a struggling middle class.
It’s simply down the to rapidly widening wealth gap that we normally see as charts – i.e. the top 1% owning 50% of the world’s wealth.
This wasn’t so a few years ago – in fact in the 1970s the inequality was far lower, it’s best period, the heyday of the middle class.
But back to that 1%/50% ratio, what that means is that we could _all_ have twice the wealth if we grabbed the wealth of the 1%. But it also means another thing – the inequality is getting worse – and that can only have one effect – our wealth has to shrink in order to feed that wealth.
The offshoring, corporate welfare, tax dodging and corruption all powers this vital figure.
Of course when state owned companies has debt in a foreign currency the real craziness sets in – being in debt to a foreign currency is madness – the madness now afflicting most of southern europe via the foreign, privately owned Euro….
“It is surprising that a country with oil, with manufacturing (its autos and auto parts biz is beginning to rattle Canada’s) with good agriculture, should see the lower- middle class struggling with basic food costs.”
Not surprising at all. NAFTA destroyed peasant agriculture in Mexico by letting U.S.-based multinational agribusiness have their way with the country. Which also contributes to immigration pressure, btw.
The informed and honest observer will notice that most, if not virtually all, of the world’s deepest problems are directly or indirectly due to the greed and ambition of the rich. We focus on symptomology almost exclusively to avoid identifying the causes of these problems.
“The informed and honest observer will notice that most, if not virtually all, of the world’s deepest problems are directly or indirectly due to the greed and ambition of the rich.”
Exactly. We are in fact in the middle of a class war, which the elites are winning and we are losing, since the mid 1970s when we had them worried.
When the rich suck all the wealth out of a country the usual thought is ‘Oh look at those scoundrels’, when what we _should_ be looking at is the devastating poverty than their actions inevitably leave behind. We are now back to the age of the Robber Barons. In fact it never stopped, they just moved abroad for a while…
The media are highly complicit in distracting the public view from these effects, but the effects are real and permanent – short of revolution.
American ag corporations are in no way, not the slightest, affecting labor or prices in Mexico. I have first hand knowledge. Take avocados. Notice how the prices have gone crazy in the US lately. The cartels have moved in. It is quite simple and well documented. They kill a poor family or two or three in Guadalajara, people who pick avocados, or take care of the trees. That is a notice to the owners. Workers stay away. The avocado rancho owner soon learns that problems will go away if he (it) goes along with the ‘new’ distributor who brings the fruit to the US. The prices double. These cartels have a very efficient way of moving into processed products as well as fresh produce and the result is what you see at the grocer’s shelf. American ag corporations just go along until they can find other countries. Manufacturing is next. However, the leverage against auto makers like Ford, Honda and so on by the cartels is very limited – the factories are highly robotic and unskilled labor little used. Add to that: the laws discourage keeping anyone on payroll longer than a year. Mexico is a corpse that is still twitching.
walter map
September 21, 2016 at 4:08 pm
Is right, I remember reading about monsanto and the rest going in and in what might be absurd did things like patent the color of rice….
Very criminal if you ask me…. but that is part of what happened there….
Apparently Mexico now imports oil.
http://www.wsj.com/articles/SB10001424052702304908304579562400748296622
I’ve read a bit about how Pemex was run and its spectacular fall isn’t surprising. Oil revenue paid most of the government’s bills for many years. This is a total disaster. Maybe Wolf or one of his non-original content writers could update this situation.
You missed Wolf’s great Pemex article.
Some people are on the payroll and never show up for work. In perpetuity…!
I think Don Quijones wrote that one.
Marty, here you can find our Pemex articles…
http://wolfstreet.com/?s=pemex
All of them by Don Quijones. He has been on top of it for a while.
Good news for Ford as they move their small car manufacturing to Mexico. Did Ford see this coming?
They’re probably priced in dollars.
The main reason Ford moved small cars (it says) to Mexico is that’s where the market for small cars is.
As someone who has only driven 4 cylinder cars for 30 years, the ongoing love affair with V8’s is puzzling.
In my town Nanaimo- every third guy has a truck. I estimate the load factor at less than 5%- if i had to bet I’d say close to 1. I threw a bale of straw in the box of a poker buddy with a new one just so he could pretend to be a pretend rancher.
If oil goes to 100 again I think the Big Three could be in big trouble- again
I drove only 4-cyl cars for thirty years, but in 2001 I switched to a Ford Ranger. I’ve had two six-cylinder Ford Rangers, and one 4-cyl., since then. The ride is stiff, but I enjoy the utility. Huge trucks baffle me. I agree, the load factor is closer to “driver alone and empty bed” 97% of the time. Dire image: idling huge truck in line to get coffee at Starbucks drive-up window. A 6000-lb vehicle to transport 8 ounces of liquid.
“A 6000-lb vehicle to transport 8 ounces of liquid”
More like a 3-ton vehicle to transport a lone 190 lb. driver with masculinity issues obtaining caffeine so that he can work for the next 5 years to pay off said vehicle….which he’ll likely trade in for something larger in 2 years and roll over into a 7 year loan. Then blame the Mexicans for stealing his job.
While the current global economy may be a scam perpetrated upon the middle classes, it certainly doesn’t prevent individuals from independently self-destructing.
Only truck I ever owned was a Ranger- liked it but it was a 2nd vehicle and could quite justify it for my few dump runs etc.
But I did notice the box was not much smaller than the full size with crew cabs.
There’s a young gal in town with a nice blue Ranger ( mine was old) with a bumper sticker ‘Bitch’ and on the other side ‘Silly Trucks are For Girls”
It’s like 1994 all over again … with a(nother) US bailout? Last time the US administration held their breath when 25 billion was mentioned – that’s just pocket change now.
No surprise, Mexico is another post-peak oil zombie like so many others: Syria, Egypt, Argentina, Venezuela. Mexico’s extraction peak was 2005:
http://www.indexmundi.com/energy/?country=mx&product=oil&graph=production
Less product to sell … in dollars. Only thing that can that mean for the peso (for which the dollar is collateral) = unraveling credit and a currency crisis, ‘capital’ flight.
Mexico’s other precious industries are sinks rather than sources. It loses money on every auto it makes: it HAS to otherwise there would be no crisis! It’s once fabulous agriculture has been emptied of its farmers who have been replaced by machines: the American-style strip-mining model. Where do you think the 11 million Mexicans in the US have come from? Now each Mexican is +40% poorer than he was 2 years ago … and there is nothing he can do about it: robbed by remote control.
Much more US prosperity at Mexico’s expense and that country becomes another Venezuela … hopefully not Syria, Mexico is too close for comfort.
A good time to vacation in Mexico.
Until the social order breaks (even further) down. Comparisons to Venezuela might not be too far fetched. And then there’s the hyper-violent drug cartels, armed in part by the U.S. DoJ. All at America’s doorstep.
I’ve been saying for a long time that best way to curtail illegal immigration from Mexico and Central America is to help improve the conditions in those places — both economic and security — such that citizens don’t consider it worth the danger to come here. Give them an incentive to make a life there instead.
Much of the cause of such deplorable conditions are the result of not only NAFTA and the unchecked greed of U.S. megacorps but as well the wholly failed War On Drug (users). Look at Columbia or El Salvador, never mind Mexico, and see what U.S. military aid has wrought for the citizens. Death from Above so long as you take out some poppy fields.
“I’ve been saying for a long time that best way to curtail illegal immigration from Mexico and Central America”
But none of the powers that be (TPTB) want that. Business wants cheap, hard working labor that can’t complain and pols of both parties want a rapidly reproducing demographic dependent upon government.
The way to stop illegal immigration is to make employers truly liable for hiring them and all that would take would be a change to or elimination of ONE paragraph within the US Code dealing with the hiring of aliens and within that code it clearly states that it is the POTUS alone who is the individual responsible for determining if the code is effective and to make changes to it if it isn’t. No need for a stupid wall.
But, like everything else that should be and could be, it won’t be. Same reason as in all cases – TPTB don’t want it. From the groundbreaking 2014 Princeton University study:
Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
http://scholar.princeton.edu/sites/default/files/mgilens/files/gilens_and_page_2014_-testing_theories_of_american_politics.doc.pdf
Excerpts:
A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues.
Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.
In the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites or with organized interests, they generally lose. Moreover, because of the strong status quo bias built into the U.S. political system, even when fairly large majorities of Americans favor policy change, they generally do not get it.
…the preferences of economic elites (as measured by our proxy, the preferences of “affluent” citizens) have far more independent impact upon policy change than the preferences of average citizens do. To be sure, this does not mean that ordinary citizens always lose out; they fairly often get the policies they favor, but only because those policies happen also to be preferred by the economically-elite citizens who wield the actual influence.
Have any of you ever lived in Mexico?
I was a graduate exchange student in Mexico in 1979.
Back then the place was dirt poor (the beer was really cheap and good though) and there was bad corruption. The cops even tried to get me to pay a bribe one day when riding my bike to school……..
IMO one the biggest industries in Mexico was the mordida. Nothing has changed. Corruption makes the ordinary person poor and puts brakes on economic growth. Mexican exports really haven’t changed much either: people and drugs.
The Rule of Law and the US Constitution were the basis for US strength and success until recently. In Mexico there was/is no Rule of Law and the legal system is a joke. Guess where the USA has been headed recently…….
Until Mexico (or any other country for that matter) changes in this area the country will continue to be a basket case.
And by the way, what about Mexican imports back then?
As Gomer Pyle would say: SURPRISE, SURPRISE, SUPRISE: Americans that were too poor to live in the USA on their pensions (SS or retired military).
True! We’re going this winter, it’s been two years already since we last visited. Always wanted to hike copper canyon and explore around Colima volcano.
Just be careful and aware of the security situation around you………..
All those wire transfers back to Mexico are going a lot farther now.
I go to Mexico for the winter, so I watch the exchange rate to USD on a regular basis. This run to 20 is good for me, but pretty bad for the locals. And it’s already a good deal for anyone north of the border. I hope it stops.
It’s only bad for the poor in Mexico. I suppose that all upper middle class and rich people in the Mexico are fine.
These people bought a lot of real estate in Texas and Arizona and Nevada.
Tons of Small biz owners in Mexico bought houses in Vegas, San Antonio and Houston. Even in Inland Empire, San Bernadino homes were bought by Mexicans 2009-2014 period of time… making out like bandits.
If Mexico could run on hydro- and geothermal power AND export it to the rest of the world it would STILL be a basket case. The corruption and lack of honest governance that make bribes and lawlessness a way of life have to change if it is ever going to accomplish anything useful for its citizens. The Mexican government does not serve the Mexican people; it only serves itself. Most, if not virtually all, of the world’s deepest problems are directly or indirectly due to corrupt governments. Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other.
This is why I advocate for “government by AI”, beginning with “taxation by AI”. Once you have entrenched rulemakers (as we’ve had in the USA since the 1970s, and Mexico since…1917…) the rules will never let down the elite .01%. A few people will break “up” into the ruling elite (e.g. the Walton familty and WalMart) but they simply shore up the status quo.
“Most, if not virtually all, of the world’s deepest problems are directly or indirectly due to corrupt governments.”
Governments corrupted by corporatists. In the U.S., Citizens United guarantees it, but treaties like TPP, TTIP, and TISA would legalise it for the world. Corporate pirates clearly run the planet. Governments are merely their proxies – and their scapegoats.
Yes, I used your phrase because there is a not so subtle difference. Governments possess the one thing corporatists do not have: the power of coercion. Once that is up for sale, its game over. That’s why the working definition of an ‘honest politician’ is one who, once bought, stays bought.
Should have cited Regan for the quote at the end too. Sorry.
“Governments possess the one thing corporatists do not have: the power of coercion.”
And yet, ALEC has made an art form out of coercing policiticians by threatening to support opposing candidates and gearing up smear campaigns, and they are only one of dozens, if not hundreds.
There are thousands of examples, big and small, going back over two centuries. Napolean lost at Waterloo because he wouldn’t play ball with the Rothschilds. Nicholas II was overthrown by a Boshevik coup financed by Wall St., who also financed the Third Reich. And so forth.
The evidence is overwhelming that most, if not virtually all, of the world’s deepest problems are directly or indirectly due to the greed and ambition of the rich. You can catch a tiny sampling of them on Wolfstreet.com.
I’ve lived permanently in central MX for the past 9 years. 9 years ago the exchange rate was 10/1. Local prices have gone up some but not doubled. Imported goods have doubled and maybe more.
The improvements over the last 9 years have been impressive. The closest big city is Guadalajara and it is growing like a weed. Many more new cars on the road, new roads, new subway under construction etc.
From what I can see, MX is “blowing and growing”. Social services are greatly improved, they are managing immigration much better and the use of computers is making a lot of the old practices harder to get away with.
There’s an area about 100 miles NE of here that is rapidly becoming a huge car assembly area. Car manufacturers from all over the world have plants there and the rumor is that they are having trouble getting enough workers.
If I were 20 again, I think that I’d rather be in MX than the US.
I think a lot of Mexicans are seeing that too. The US has now slight net out-migration of Mexicans.
I remember in 1985 how the Peso went from 253 in early summer to 650 in late summer that year. Will we be seeing a kind of repeat ?
Mexico is the new china for many countries .open evonomy prices contril open .open investment. Billions of dollars pouring. Can prices going free fall .i predicted 25 pesos till December. They have 8 billions on euros currency paper. Mexico have 4.5 percent increase economy per year. Most open market in Latin America. 4 billion dollars income per month. Logistics. Development. Manufacturing
Assembling need investment on airplanes assembiing and economic growth will be 5 pecent for next 5 years. Guatemala. Salvador. Panama and others will follow.
Well not quite … are you trying to feed us some silly propaganda?
GDP growth in Mexico since Q1 2013 has been between 1% and 2.3% annualized (not “4.5% per year” as you said)
Economists consensus forecast for GDP growth:
2016: 2.5%
2017: 2.4%
2018: 2.9%
Fiscal balance (deficit) of -2.7% of GDP
Inflation 4.0%
Current account (deficit) -2.0%
2 of the 3 Manufacturing indices have turned negative recently (due slow demand in the US)
Here’s a chart from Focus Economics on Mexico’s Merchandise Trade, which tells you a thing or two:
I guest you don’t travel to Mexico and see the new economy. They have developed city industry like USA .develop infrastructure. The new monterrey or guadalajara .city centers of development. They have more investment from Detroit. Japan.china.spain.france Germany.
You read charts not reality .in every bar of usa have mexican beer .and was manufactured in mexico not usa.
OK, now you cite your own impressions, and I’m fine with that, and that’s welcome, and I agree with your impressions. Just don’t cite some fabricated numbers that set off my BS-o-Meter.
BTW, I have news for you about beer: the HOTTEST movement in the beer world is US craft beer. There are now over 4,000 craft breweries in the US. Many of them make awesome brews. I haven’t touched a Mexican beer outside of Mexico in at least a decade.
The big Mexican brands now below to foreign companies. Grupo Modelo, the largest brewing company in Mexico with over 60% of the market, whose export brands include Corona, Modelo, and Pacífico, is owned by Anheuser-Busch InBev (Belgium). Cheers!
Stop Drugs – Arrest, Convict and Execute the dealers and pushers. Worked in Singapore.
Illegal Immigration – Arrest, Convict, Size Assets and Incarcerate the Employer – Enforce current law and there is no need for any wall.
If the politicians are not willing to do this then you know everything in our government is corrupt and the 1% want it all.