In the last few months, the office has received many positive analyses on Mexico and the Mexican peso. It is hard for me to believe that so many can ignore so much history and so many blatant signals of trouble. We can only conclude that the writers have been smoking one of Mexico’s most successful exports – the one not hobbled by excess government control. The positive arguments seem to depend on one of two conceptual frameworks. The first is the most academic, focusing almost entirely upon the internal monetary and economic situation, which shows the government exercising impressive control over the currency and monetary policy while following well accepted IMF-approved practices in managing the economy. Unit labor costs are down, money supply growth is low and multipliers are contracting. With all of these positive macro-economic policies in place, how could things not go well for Mexico? When one considers that the currency is about 20% cheaper than it was in early 2008, the argument is that Mexico must be in a good place and the peso must be a good buy against the dollar. That declining labor cost is a big plus that the southern Europeans do not have, as all the Mexican gain has come from the weakening currency. The other argument depends on a more mathematical comparison of the peso with other Latin American economies and with global liquidity and fund flows. The normal historical correlations seem to have broken down as Mexico is underperforming Brazil, Chile, and even Colombia and Peru, and the analysts point out that this should not be the case. Mexico has high yields and foreign mutual funds are accumulating their bonds. Global liquidity should continue to explode and Mexican two year yields seem higher than they should be, offering real value. With emerging markets the hottest asset class, why not buy Mexico? As it is lagging, it must be a better value?
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