Saturday, March 7, 2009

The Debts of the Spenders: The Remittance Economy and Peso Selloff

Both the Mexican and Filipino currencies are called the peso, a relic of Spanish colonial rule. But that is not all they have in common. The two nations are also feeling the brunt of the global meltdown particularly hard. It is sad but true that their main exports are not goods but instead their own people.

These economic emigres leave their respective nations' borders in search of better paying jobs in other countries. The Mexican diaspora is limited mainly to the United States while the Philippines is more diverse and stretches throughout all of Asia, Australia, the Middle East, and the United States/Canada.

Remittances are economic transfers (usually money but can also include physical goods) that are sent back home and constitute a major source of foreign income for both nations.

While many Filipinos and Mexicans have managed to achieve a modicum of success in higher paying skilled or professional jobs, the majority work in labor intensive, low wage service sector occupations. By nature, they serve "at will" and are in danger of losing their jobs at any time. Frequent complaints of unpaid or delayed wages, physical/sexual abuse, threats of deportation, and legal harassment from the authorities have done little to deter the emigrants from leaving their countries.

If you have ever visited the Manila or Mexico D.F. slums then you will know why.

This economic paradigm has been flourishing for decades and is unlikely to stop anytime soon. Indeed, both the Filipino and Mexican political leadership ACTIVELY ENCOURAGE exporting their people overseas as a way of deflecting potential troublemakers.

From time to time, there have been economic and political disjunctions that temporarily disrupt the delicate inter-balance. But none so serious as now. Emmigrants are sending less money home and some are even voluntarily returning to their native lands.

Both the Mexican and Filipino peso sold off hard in the fall of 2008 and early months of 2009. The dollar cross trades directly benefited from these sell-offs as panicky natives rushed to convert their holdings into cold, hard cash. Their medium-long term outlooks remain very grim.

(Are you paying attention goldbugs? The people of the 3rd world could care less about your elitist fashion statements. They recognize value when they see it. The dollar has its flaws but the total amount of wealth destroyed far exceeds anything the government printing presses can churn out. Just look at global stock markets to see just how bad the extent of the damage).

I will focus on Mexico since that is a more liquidly traded market.

Mexico's problems are particularly acute since they are magnified by an ongoing drug war, slackening tourism, and the looming bankruptcy of the Detroit automakers that have extensive operations in the border zones. Of these 3 threats, the drug war has the most potential to destabilize the nation. The druglords are extremely wealthy, well armed, and politically influential. They have managed to wage a bloody war of attrition all over the country - including w/in tourist zones - against first the local police, then federal agents, the army, and of course against each other.

These disruptions are reflected in the peso which is currently trading in the 15/1 range against the dollar. The peso has lost 33% of its value since last summer thus making the short peso trade one of the most profitable of the credit crisis.

Bernanke's swap lines to Mexico were enacted last fall to stem the tide of a rising dollar and allow the Mexican central bank room to stop the debasing of their currency. Since October 2008, the Mexican central bankers have been blowing $400 million/PER DAY to defend their currency. And none of it has worked.

When - not if - GM or F are to go bankrupt then the maquiladora factories lining the border will become ghostowns occupied by narco-terrorists. Also don't forget. The Spring Break travel season is coming up. Cancun and the Riviera Maya should be basically empty.


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