Is the hot money still pouring in?

That is the big question. Portfolio investment in unprecedented amounts -- US$13.96 billion -- flooded into Mexico in the first quarter. To put the figure in perspective, portfolio investment in Q1 2012 was 70% more than the combined amount of net debt taken on and foreign direct investment (FDI).


Portfolio investment has been instrumental to the peso’s post-U.S. financial crisis recovery.  Significant and swelling inflows of portfolio investment beginning in Q1 2009 and accelerating through Q1 2012 have supported a strong peso. 


Carry trade opportunities, worldwide liquidity conditions, and Mexico’s market-derived risk rating (the spread on credit default swaps (CDS) converted to an equivalent ratings agency grade) all enhanced the attractiveness of Mexican money market instruments for foreign investors.  In 2010, foreigners poured US$23.13 billion into money market obligations, nearly equal to direct foreign investment in the year.  In 2011, the net inflows came to US$31.65 billion (62.8% more than direct foreign investment). In Q1 2012, the net inflows were US$13.96 billion, more than three times direct foreign investment in the quarter.


Investors haven't been as keen on equities, the other component of portfolio investment. Foreign investment in Mexican equities was just US$0.64 billion in 2010. In 2011, foreigners pulled US$6.25 billion out. In the first three months of 2012, they put US$1.88 billion into Mexican stocks. 

New economic terms...

The Greek crisis is edging closer to tragedy. In the process, it's coined a few new terms. Amongst them are "bank jog" (a slow-motion run on the banks) and "drachmageddon" (the outcome of substituting the drachma for the Euro).


We're in uncharted territory, which makes investors extremely nervous. Markets reflect that. The average fix peso-dollar exchange rate has depreciated 3.1% this month compared to April. 


Where the peso ends the year depends on what happens in Europe. Could it be $14? Yes. It could also be under $13. If you need to buy or sell pesos, timing will be all-important. Watch the markets and the headlines and time your transactions accordingly.

Logistics in Latin America: an expensive proposition

In Latin America, logistics represent about 25% of products' value. In the US, that number is 9.5%. In Singapore, it's a bit over 8%. Ouch...

Europe, again...

The cost of a dollar shot up from $12.96 on the first trading day of May to $13.52 a week later. No matter that the news that Mexico had a US$1.57 billion trade surplus in March (US$1.75 billion in the first quarter) had come out a few days previously.

Resurgent fears over Europe were behind the peso's sudden drop. The results of the French and Greek elections rattled investors. Concern over Spain is rampant.

Although the focus is on government debt as a percentage of GDP, Spain's problem is much more serious. Spanish government debt is "just" 70% of GDP, an almost reasonable percentage compared to Italy's 120% or Greece's 160%. The sum of Spanish banks, households and government debt comes to 363% of GDP, putting Spain third to Japan (512%) and Great Britain (507%).

"The prettiest horse in the glue factory"

The US economy grew at a 2.2% annualized rate in the first quarter, a rate that only looks good in comparison to Europe's economic performance and the double-dip recessions into which Great Britain and Spain have fallen. In the fourth quarter of 2011, US GDP grew 3.0%.

The decline in the growth rate was not across the board. Personal consumption expenditures accelerated, rising 2.9% in Q1 (up from 2.1% in Q4). Government spending continued to contract (-3.9% in Q1) although at a slower rate than in Q4 (-4.2%). Government spending subtracted from GDP for the sixth consecutive quarter; it cut 0.60 percentage points from growth in Q1. A sharp drop-off in the growth rate of investment (from 22.1% in Q4 to 6.0% in Q1) pulled growth down in the first quarter of 2012. Inventories  contributed 1.81 percentage points to growth in Q4; in Q1, they contributed only 0.59 percentage points. Non-residential fixed investment reduced growth by 0.22 percentage points in Q1; in Q4, it added 0.53 percentage points to growth.

An interesting aside... To see how young US voters rank the importance of different issues, see the summary of Harvard University's Institute of Politics' "Survey of Young Americans' Attitudes Towards Politics and Public Service: 21st edition" at the following link: 

http://www.nytimes.com/interactive/2012/04/28/opinion/blow-young-peoples-priorities-chart.html?nl=todaysheadlines&emc=tha212_20120428

The US economy: before and after...

Take a look at a number of key indicators comparing how the US economy looks now compared to before the "Lesser Recession". Some fascinating charts....

http://www.nytimes.com/interactive/2012/03/22/your-money/where-the-comeback-has-and-hasnt-taken-hold.html?nl=your-money&emc=your-moneyemb1_20120423

Cuidad Juarez, as seen from the US...

A review of a documentary on what's happening in Cuidad Juarez, "Murder Capital of the World", from today's New York Times. Here's the link:

http://www.nytimes.com/2012/04/20/movies/murder-capital-of-the-world-a-look-at-ciudad-juarez.html?emc=tnt&tntemail1=y