Thursday, January 21, 2016

Peso Hits New Low of 18.8 Against Dollar

Mexico News Daily | Thursday, January 21, 2016

The Mexican peso dropped to a new record low against the dollar yesterday and did the same again today.

The peso slid to 18.8 to the dollar today after dropping to 18.71 yesterday.

Some banks were selling the U.S. currency for more than 19 pesos today.

The peso has lost nearly 8% in the past three weeks. Last year it dropped by nearly 17% against the dollar.

Finance Secretary Luis Videgaray told El Financiero during an interview today that the peso is “clearly undervalued” and that its decline in value is the result of overreaction by the market.

But when markets calm down, he said, the peso will regain strength.

Ongoing dollar auctions to support the currency will continue, said the Finance Secretary, who is attending the World Economic Forum in Davos, Switzerland, but there will be no further budget cuts.

He said there was “definitely” no risk of a financial crisis.

Source: El Financiero (sp)

Sunday, January 17, 2016

Medical & Dental Care

I am impressed with the Medical & Dental care here in San Miguel. Women here can have face lifts done by the revered Dr. Barrera and his beautiful doctor assistant for $6600. Included is a pick up and delivery to and from the hospital, four day stay in the hospital, personal home visit by the doctor to remove stitches, and all sorts of hand holding before and after. Compare that to the U.S. at three or four times the price and a one day stay in the hospital.

For me, I had a tooth that was bothering me. Turns out I had developed a cavity under the crown. The dentist examined me, took an x-ray, and sat down with me in his office. I will have to have a root canal and a new crown, he said It would cost me 8,500  pesos. That's about $480 to $500. I would imagine the same thing in the states to be as much as $3,000.

Did I hear medical tourism?

Sunday, January 10, 2016

Impossible Trinity

What is the Impossible Trinity?

It’s a theory that says a country cannot have all three of the following at once: an open capital account, a pegged exchange rate, and an independent monetary policy. That’s all there is to it.

You can have one or two of those three conditions, but not all three at once. If you try, you’ll fail. It’s those impending failures that make the Impossible Trinity so useful for predictive analytics.

Jim Rickards, Editor, Currency Wars Alert, says Mexico is experiencing the Impossible Trinity now and predicts a coming devaluation of the Peso.

What can Mexico do to escape the Impossible Trinity?

It has three choices: close the capital account, give up its monetary independence, or devalue the peso. There are no other ways out for Mexico.

It is almost inconceivable that Mexico will close its capital account. Mexico is dependent on U.S. trade and an IMF backstop lending facility. Both the U.S. and the IMF would strongly oppose closing the capital account. Mexico is highly unlikely to move in opposition to its two largest sources of financial support.

As a short-run expedient, Mexico has abandoned its independent monetary policy. The chart below shows how Mexico raised interest rates 0.25% two weeks ago, exactly one day after the Fed raised rates by 0.25%.

If Mexico had not raised its interest rate, capital would have flowed from Mexico to the U.S. in search of higher yields. These capital outflows would have drained Mexican reserves. This rate hike illustrates the constraints imposed by the Impossible Trinity.

Outsourcing its monetary policy to the Fed bought a little time for Mexico, but it’s not a long-term solution. The Fed will likely raise rates next March, and again in June. The Mexican economy is already slowing down because of declining growth in its major trading partners, China and the U.S. Raising interest rates only make the Mexican slowdown worse.

If Mexico will not close its capital account, and cannot raise interest rates to follow the Fed, there’s only one thing left for Mexico to do — devalue the peso. Not only can we see this coming with our IMPACT system, but we have a good sense of the timing.

The Mexican Currency Commission (the official body that sets the Mexican exchange rate to the dollar) will meet later this month to decide on whether to extend the peso support program. The Fed is unlikely to back off its rate hike rhetoric before then, so that’s an opportune time to devalue the peso.

All of this analysis is probabilistic, but none of it is certain. Still, our analytic tools, including the Impossible Trinity and my IMPACT trading system, give us fairly good visibility on a coming peso devaluation. U.S. dollar investors in Mexican stocks will suffer when the peso value of those stocks declines.

The ideal way for investors to play this is to short a major Mexican company with dollar-based securities and weak fundamentals. That way, an investor can be positioned to win on a declining stock and a declining currency.