Friday, 21 January 2011

Some Economic and Financial Observations

     Usually old blowhards have learned, by my age, not to advise people to do or not do anything.   One learns quickly that anyone who follows some other's advice is quite prone to blame the advisor for any contretemps the flow from said advice.   But....
      We are frequently asked about this business of buying property, of bank deposits, or generally doing business in Mexico.   This is my admonition and, should I say.....suggestion....?

(1)     Business is a proposition of great gain, little gain, no gain/loss, loss, and absolute loss.   Do not do business anywhere without confessing belief in the above.    Business is not a work for salary issue.....although, just like business ventures,  even working for wages and salary carries no certain guarantee of permanence.

(2)    In Mexico, you can buy land, houses, even farms, ranches, on-going businesses, or establish a business.   There are many conditions which must be met.   I will save you time by stating flatly that one wishing to do any of the above should use a Notario Publico to finalize any transaction(s).    That Notario should be recommended by a trusted person who is a Gringo who has done business in Mexico or a Mexican friend who is of absolute trust and experience.   (forget the American Embassy)

(3)     Investment?     No one has lost money in Mexico, even during the depression of 1930's, on deposits made in pesos and paid in pesos.   The risk one takes, after recognizing the previous fact, is that at times....and always following aggressive socialist initiatives by some previous administration, the Mexican central bank is forced to devalue the currency due to the treasury being exhausted of foreign reserves...(and even domestic reserves).   Mexico has wisely based the value of the Peso on the holding of foreign reserve currencies.
      These holdings are still worthless American, French, British, and Japanese paper...but it still holds Mexico to a standard set by an outside, major-league economic standard.   It is about 100 steps higher than taking support loans from the IMF or World Bank   (aka: Bolshevik Capitalist Appreciation Society).
      WHERE PEOPLE LOSE MONEY BY BUYING MEXICAN PAPER.....comes in terms of those pesky devaluation "hangovers" after some socialist episode has cured all the problems of poverty by giving poor people lots of free things and free money.    These are losses in dollar terms, which, if one liquidates his peso holdings and demands to be paid in dollars....then he has secured a loss in dollar terms.     The old wise men who play the peso/dollar game never cash out during these espisodes of devaluation...."Well, I'll just wait a while.   They will raise the interest rates up so high that I'll recover my principal in a couple of years.  I don't need the money right now anyway."  is a common observatoin of the "Old Timers" during those moments of stress.  
       The Administration of Lazaro Cardenas 1936 - 1942, for instance and especially the two administrations of Luis Echevarria Alvarez 1970 - 1976 and Jose Lopez Portillo 1977 - 1983 brought Mexico to the point of disintegration.    It took, literally, 15 years for Mexico to dig its way out of that mess.
      The losses suffered by foreign holders of Mexican paper during the period from 1970 through 1996 were readily offset....for those who held on to their ridiculously high interest rates....which, for a brief period reached 149.50% for a 360 day deposit on Mexican Certificates of Treasury Obligation.
      As an aside....and by nearly pure luck....we were advising an elderly widow about her assets in Mexico.   Her husband had invested a considerable sum about two years before his death.    She had received a lot of mailings, never opened, about her account status.   She asked us to open them and read them and tell her what needed to be done.   It turned out that she had never "taken possession" of the deposits....and the banks were demanding that she execute survivor's rights or they would be forced to turn the inactive accounts over to the Mexican Treasury. 
      She sent me to that retirement area, where they had lived and made their investments, to deliver death certificates, LWT, and probate orders, and we saved her deposits by 23 days....No charge...just copies and re-issuing change of title holder of account name, etc.     The sum that had been left behind was , shall we say, considerable, in American that time that was about 100 figures in Mexican currency.    BUT, at 149.50%, and remembering that no peso deposit in Mexico had ever defaulted, I decided to invest this woman's "chaff" into a one-year deposit on Mexican Treasury Obligations denominated in Mexican Pesos. 
      One week later, President Miquel de la Madrid Hurtado, the Bank of Mexico, and with approval by the "Heroic" Congress of the Republic....froze the rate of exchange and declared that there would be no further float or devaluation for one year.   Budgets, investments, everything in Mexico changed overnight.    Faith in the peso...medium term investments...everything looked brighter immediately.    Mexico confirmed its obligation to the international came in....It was a real "Hello muddah, hello faddah, Wait a second, It's stopped raining"....moment.
      The little old lady essentially made a government guaranteed 150% interest rate in dollar terms...and would wind up with, considerable,  payout.    She made other similar recovery in the Mexican stock market from some of those investments made during their period of residency in Mexico during the earliest part of the 1970's.     One of her mining stocks went on a tear and, after splitting six times, increased over 10,000% in value in 18 months   (yes, 10,000%).    It was madness.
       Her "chaff" had become "wheat" .......

These stories are true.   They are also rare.  
       But, for the average Gringo dumbo, like me, one could take a small, but significant part of his money and place it into Mexican Government paper.   Usually, the best approach is the automatically renewable 28 day deposit.  AT this time....Brazil, the internationally acclaimed celebrity of the Leftist Elitist set....."taxing their way into prosperity (Hillary Clinton - 2010)" in near free-fall....being forced now to pay nearly 12% interest on accounts that are in no wise secured except for IMF backing (disaster).   Brazil will soon be in that undesirable position of having to officially (or unofficially) devalue their currency.   They will soon be involved in pension shortfalls and government operating revenue shortfalls, just like almost all third world countries like New York, Illinois, and California. 
     Mexico is paying 4.5%.....the economy is advancing at a real 5% rate...the budgets are essentially balanced...AND THE PESO HAS GAINED OVER 10% against the American dollar during the past year and a half.....(can anyone say Obamonomics?).    The U.S. runs a 1.5 trillion dollar annual budget deficit and loses currency value against the Mexican Peso when Mexico is running a balanced budget....."How does that happen?" asked the Harvard Economics professor. 
     Brazil is raising taxes on the rich,  the well-to-do, and the lower-middle class for "infrastructure and social equity issues"....and they are now broke.   The great Brazilian miracle  will collapse later this year....and the IMF will blame America and Americans for our selfishness and addiction to consumption.
     Mexico's draconian 16% national sales tax, and the ridiculous "progressive income tax" has essentially been held steady, although they have a much lower corporate income tax than Obamerica.    Brazil heads down, Mexico heads up.   That's my forecast....although it is a forecast that is done by a weatherman who looks outside and sees the rain falling and says "I think it is going to be raining".....these dynamics are presently underway and under reported, because the leftist American and International press "adopted" de Lula's socialist agenda ("it's only fair, after all, to take money by force from those who have it and give it to people who want to procreate, drink beer and bad rum, and receive somebody else's money to do it, No?)   The present President of Brazil is a former communist insurgent  "went institutional" and became a "progressive" (a word meaning communist, but spelled differently).    Her Excellency, Dilma Rouseff does not have the political skills that de Lula had, and chaos is already oozing into their political processes again.

      With reference to the violence in Mexico and its effect upon the economic activity and progress, I will submit that my faith is in the increasing maturity of the Mexican populace, and the superiority of the Mexican military's moral and military bearing as opposed to those who have no souls, no patriotism, no communitarian conscience, and no good grasp of martial procedures beyond abject terrorism.
     These observations and comments come after various questions posed by various people.    In light of the realities, and in many, many cases the poor, but authoritative reporting about Mexico, many Americans have reason to be negative or concerned about anything Mexican.   Americans with negative attitudes can only be seen as being reasonable, based upon what information they receive.
     Still there are inquiries because folks hear about Americans and other foreigners investing in Mexican paper or in some form of import/export, or other pursuit.    I should sum it all up and say, "Yes, Virginia, NAFTA really does work, after a fashion.   Mexico is not China....Mexico is not Detroit....Budget discipline really does work.    Mexico is not perfect, but it is far better than you hear from the experts."
Thanks again for your time and attention.   Give a clik anytime, we always appreciate your emailed questions and comments.
El Gringo Viejo