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Diana

Nov 4, 2011, 2:56 PM

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Thoughts about this?

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Wondering about the current influence of the economic mess in the U.S. and Europe on Mexico. Any thoughts about now and in the future?

Thanks, Diana

YucaLandia

Nov 4, 2011, 3:31 PM

Post #2 of 6 (1160 views)

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Re: [Diana] Thoughts about this?

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Controversial stuff: There are as many opinions as there are expats.
Complex stuff: There are no simple single cause and effect rules or factors that control the health of the Mexican economy.

Primary factor: The health Mexican economy is heavily linked to the health of the US economy, so, in general, when the US economy does well, the Mexican economy is pulled along in it's wake. When the US economy stumbles, the Mexican economy is buffeted in its wake.

In no particular order:
~ US illegal drug sales feed $45 billion a year back into Mexico.
~ Oil revenues make up a significant part of the Mexican economy, so oil prices have a strong influence.
~ A weak US dollar typically means higher oil prices = stronger Mexican economy, but if the US economy weakens too much, oil consumption drops, and oil prices drop, weakening the Mexican economy.
~ Tourist revenues account for about $25 billion per year in past years.
~ When the US economy is booming, US tourists feel free to spend lots of vacation dollars in Mexico.
~ When the US feels pinched, the US government and Media start bashing Mexico to distract Americans from the problems and to keep tourist $$$ in the Stated. When the US Govt and Press make Mexico appear dangerous, it causes tourist revenues to fall.
~ Push-me/Pull-you: US fears and general unease weaken the Mexican tourist revenues, but pump up oil revenues due to higher oil prices.
~ Weaker USD and weaker US economy means less consumer spending, meaning importing less from Mexico.
~ Weaker USD can mean a slightly stronger peso, making consumer goods imported from USA cheaper in Mexico.
~ Weaker US economy, particularly in construction and home building mean far fewer jobs and remittances from Mexican workers back to Mexican communities fall precipitously. Peak remittance rates were estimated at $20 - $25 billion per year.
~ Weak US housing markets, with 2 years of foreclosed properties keeping US home sale prices low causes people to not sell their US real estate, and to not pay premium prices for Mexican properties.
~ High US unemployment causes a lot of unease even with Americans who have plenty of disposable income, causing them to not take Mexico vacations - and those who do visit here are loathe to open their wallets for discretionary purchases like art, handicrafts, etc.
~ Unease over European problems causes Americans to curtail discretionary spending on vacations.
~ Weak European economy and fears over undisciplined Mediterranean country govt's fiscal policies, makes the USD stronger vs. the Euro, making European vacations look attractive = a smaller slice of the tourist pie for Mexico.
~ Mexico central bank policy can be CRUCIAL... I understand that the central bank had been buying gold, and gold prices have gone up roughly 6% since that purchase.
~ Mexican government fiscal policies are crucial. Since the Presidency has been controlled by the fiscally more conservative and supposedly "business friendly" PAN, and the legislature has been split, the government has played a smaller role than it might play if the PRI wins control of both the legislature and Presidency.

This is a brief starting list of factors to consider, and I've probably missed some key items.
What do you think?
steve
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mazbook1

Nov 4, 2011, 3:39 PM

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Re: [YucaLandia] Thoughts about this?

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A very thoughtful list, Yucalandia. However I doubt that much of the $45 billion income from illegal drug sales actually stays in México. Just my opinion. As we've seen in the revelations of U.S. bank practices, a lot of it gets washed by the biggest of the U.S. banks, then invested elsewhere.

YucaLandia

Nov 4, 2011, 5:25 PM

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Re: [YucaLandia] Thoughts about this?

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I hope readers noticed that I just quoted factors and some facts & figures, laying out the pieces of the rompe cabeza, but I didn't assemble them. The real fun comes in sorting it all out to makes some predictions. Here's my schtick:

US unemployment has been kept high at 9% by one-time government layoffs in 2011, in an attempt to keep 30 out of 50 states from going bankrupt. The 2011 government employee layoffs of 750,000 has offset roughly 100,000 new jobs per month created by manufacturing and retail, etc. These government layoffs should be a one-time thing, since the federal, state, & local government agencies avoided 2008-2010 layoffs by using Stimulus money ($2 trillion printed by the Fed secured by thin air), tapped employee pension funds, drained rainy-day reserves & savings, and juggled budgets to shift expenses from 2008-2010 into the future. The chickens finally came home to roost in 2011, - no more kicking the can down the road -and to balance their budgets they finally made most of the cuts needed to balance local, county, and state budgets, which means far far fewer layoffs in 2012, because they finally took the bad medicine in 2011.

This means that the 19 straight quarters of US manufacturing growth should continue to support weak US economic growth, and consumer spending has rebounded nicely. The US financial, construction, and real estate/development sectors still are weak and have not begun recovering. Governments in key states with lousy real estate markets have been taking 2 years to process foreclosures, so, there is at least a 2 year backlog of foreclosures hanging out there, suppressing housing prices, and suppressing home building. Since it will take at least 2 years to work off (process and sell) the backlog of cheap cheap foreclosed properties, the real estate and construction markets will stay lousy until 2014 and possibly until early 2015. The backed-up septic tank that is the combined real estate/development and construction market will continue to hold back financial sector recovery.

Until US housing, real estate, and construction begin solid recoveries in 2014-2015, US unemployment will remain high and the overall recovery will be slow but sluggish. Which makes me predict that the Mexican economy will similarly only grow slowly, because it is heavily interlinked with the US economy. Healthy and growing US real estate, construction, and housing markets seem to represent about $15 billion in remittances back to Mexico, so, until 2015, I don't see the situation changing much.

This whole house of cards of predictions I've built is contingent on no more catastrophic hits to the financial markets: no Greek collapse, no Iran crisis, no Afghan crisis, no Italian crisis, no Spanish crisis, no Irish crises, no Chinese crisis, no Japanese crisis, NO US FEDERAL GOVERNMENT INFIGHTING SHUTDOWN, no collapse of oil prices, etc etc etc.

One wild card in the pack: oil prices.
World oil consumption has been teetering right at about world oil production capacity: 88 million barrels per day.

Before the wicked Japanese earthquake, growing Chinese oil consumption and growing Indian oil consumption, and recovering oil consumption in USA, Europe, and Japan had slightly exceeded the world's oil production capabilities - driving oil prices from $78/bbl up to $103/bbl. The Japanese earthquake temporarily reduced Japanese oil demand, and the Saudis had bumped up their oil production to make up for losses from Libya. Oil prices temporarily fell back to $80/bbl as a result of the reduced consumption/demand.

Now? The Japanese economy is recovering and heating gently, increasing their consumption and Libyan oil production is not back on line, so, oil prices have recovered to $95/bbl, and seem to be headed back to $103 - $105/bbl.

Crude Assumptions:
At $80 a bbl, the MXN peso seems to weaken to about $13.50 MXN per USD.
At $103 a bbl, the MXN peso seems to strengthen to about $11.7 MXN per USD.

So, in my bubble, oil prices seem to be about as good as any other indicator about the health of the Mexican economy, as long as oil prices stay below $110 - $120/bbl. If consumption does not grow or only grows slightly above 88 million bbls/day, then oil prices should stay below trigger points. If the BRIC countries continue to grow, and Europe solves its sovereign debt crises so European manufacturing takes off, and if the USA and Mexican economies grow, and Japan recovers from the Fukashima shock - then world oil consumption will consistently exceed production => $120 - $140/bbl(??) oil.

Hint: Watch the BRIC countries, their growth, and their oil consumption.

There seems to be a magic number somewhere around $125 - $130/bbl where Americans emotionally start to react to the price of oil and gasoline ($4.75 a gal?). Above these emotional trigger points, US consumers start to significantly cut back on personal discretionary oil consumption - easing off pressure on prices...

" Blah, blah, blah, GINGER. "
If consumption goes high and stays high, then the US economy may actually slow and stagnate - giving Mexico some increases in revenues from high oil prices, but net bigger Mexican losses in other revenue streams from the USA as the US economy falters... So, $140/bbl oil may ultimately be bad for the Mexican economy?

Those are my opinions... worth exactly what you paid for them. *grin*
steve
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E-visit at http://yucalandia.com

DavidHF

Nov 4, 2011, 8:05 PM

Post #5 of 6 (1080 views)

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Re: [YucaLandia] Thoughts about this?

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Oil prices are key but remember that oil is priced in $US. Your assertion that oil at $80 = MXP at 13.5 is way off. Oil at today's close was $94 and the Peso is at 13.55/$1US. Therefore your assertion is way off base. The price of oil is primarily a reflection of the value of the $USD. Ergo, the price of oil in Euros is E68. Now think of the $US and Euro at parity or even less. e.g. in 2001 the Euro was worth $0.91 As the dollar has lost value the price of oil has risen. As it gains value the price of oil decreases. The Euro is overvalued, especially now with the problems in Greece, Spain, Italy, Ireland, and Portugal. The markets will catch up as the US economy grows and dollar will regain strength. The Peso today at 13.5 will move toward 15 as that unfolds and the price of oil will fall. The story told to the US was that the price of oil was rising due to demand in China and India was a crock of BS to keep Americans from seeing their currency lose purchasing power.

YucaLandia

Nov 5, 2011, 6:34 AM

Post #6 of 6 (1029 views)

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Re: [DavidHF] Thoughts about this?

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Too Funny !

You're exactly right: I was so busy looking backwards, I couldn't see the latest data point that was right under our noses...

Ignoring my overly simplified correlation between oil price and exchange rates, I think that the temporary mis-valuations(?) of currencies will resolve over time - and that the peso values will return down into the range of 12's - and that the Greek crisis will resolve - and that the US huge public govt. debt, $14 Trillion and growing will cause the currency markets to realize that the recent flight from Euros and Yen into USD is a good short term strategy but a flawed long term strategy.

There has been an artificial short-term flight to the perceived stability of the USD, and those investment $$$ currently hiding in USDs will sell-off when the appearance of crisis passes. Instead, there are a large group of underlying factors that make the US dollar essentially much weaker than it appears during this time of crisis, and the USD should fall when the crises are over by 2013 or so - but maybe the US real estate, construction, and finance sectors will be recovering by then(?), which might falsely buoy USD values. Significant US problems that should be dragging down USD values:
~ The underlying weakness of Bush and Obama printing $3 Trillion USD with nothing to back it;
~ the underlying US weakness of having a public debt that exceeds annual GDP (never good to owe more than you make in annual income);
~ the underlying US weakness of having a whole generation of politicians who prefer destructive partisan infighting over rational compromise;
~ the underlying inability of the US government to control horrendous deficit spending to buy votes;
~ the underlying inability of the US government to resist the influence of over 13 registered full-time lobbyists per senator & representative, lobbyists who dominate the legislators calenders (20 meetings per day with lobbyists is common) and these lobbyists effectively buy-off the process;
~ the US Supreme Court's decision to give big corporations the same rights of speech as humans - basically opening international conglomerates' coffers to buy election outcomes via advertising and campaign spending,
~ the US voters inabiliity to hold their individual Senators and Representatives accountable for fixing the very broken US tax systems & policies (where the largest companies in the world pay no taxes) and the very broken and built-in deficit spending compulsions. e.g. US voters have known for 25 years that Social Security and Medicare will crash under the weight of Baby Boomer retirements, yet the voters have taken ZERO effective actions at forcing their politicians to change.

I think the in-escapable economically damaging consequences of these factors will become apparent over time, as the current crisis-mentality passes, and the markets will realize the relative strengths of the MXN peso and the fact that Mexico basically has ZERO public debt vs. the US $52,000 of US Government debt for every man, woman, and child. If Big Media and Big Government can keep things roiled up with their messages of fear ("you must trust us to save you from the dragons") , then the current imbalances in the currency markets will continue. If rationality wins-out, then the USD values fall, and oil prices rise.

It's all speculation though, because there are so many uncontrolled variables, and as we've seen, hidden corruption can be exposed at any time: financial sector corruption, junk bonds, junk loans, corrupt/incompetent regulators not doing their jobs, etc; and political leaders do start wars & conflicts to meet their own ends, so my predictions are only as good as long as things stay on rational courses, with no big surprises.

Think of last May, when all the facts and figures of the approving the Debt Ceiling were presented to Congress - and yes, there was always enough money to pay ALL the obligations - did any of us imagine that the US Congress would trigger another round of unnecessary panic by intentionally acting like selfish children and petulantly not approving an increase in the Debt Ceiling => an artificial crisis. Did any of us imagine in May that they would be so foolish?

We might also note that the more rational 12:1 MXN Peso:USD rate was also caught in the backwash of that artificial crisis, creating the current imbalance. Hence, I predict that the MXN peso will strengthen as we move out of crisis, as the artificial flight to USD declines, and as the deeper realizations of the weakness of the US economy sinks-in due to the 7 factors listed above - millstones around the neck of the economic future of the USA, where US's irresponsibility also affects Mexico.
steve
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Read-on MacDuff
E-visit at http://yucalandia.com