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.

The Debts of the Spenders: CNBC Proves To Be The Oracle Of Business

Jon Stewart of the Daily Show says, "I could have been a millionaire
. . . if I had started off w/a $100 million and listened to CNBC's advice."

Here is the clip:

http://www.thedailyshow.com/video/
index.jhtml?videoId=220252&title=
cnbc-gives-financial-advice

PS For those who don't already know, shorting CNBC - and especially Cramer - is a great way to make money. In fact, I often use them as contrarian indicators for my own personal trades. However, please make sure that your technical analysis and other fundamental research align w/the trade.

The Debts of the Spenders: The US Guide To Unemployment

The Government guide to unemployment

The Debts of the Lenders: Chinese Compete W/The US To Sell Bonds

Move aside Bernanke and Geithner! There is a new player in town. All treasuries need right now is more competition. First it was the EU last month and then it was Gordon Brown arriving before Congress this week in a barely disguised plea to buy British gilts.

But now America's largest lender is floating its own issues for the purpose of quantitative easing.

March 6 (Bloomberg) -- Chinese companies have applied to sell 100 billion yuan ($14.6 billion) in bonds to help spur economic growth, following the sale of 130 billion yuan of such debt since Sept. 30, the nation’s top planning agency said.

More than 50 Chinese companies have applied to sell the bonds via a financial system designed to help raise funds to cover spending included in the nation’s stimulus package, Zhang Ping, head of the National Development and Reform Commission, said at a briefing in Beijing today. About 45 enterprises sold debt since the fourth quarter, he said.

http://www.bloomberg.com/apps/
news?pid=20601087&sid=a0srzs9UtTNM&refer=home

The Debts Of The Spenders: CDS Exchange Needed Now!

CDS traders argue that in the absence of CDS the bond markets will operate as a functional equivalent. Under this blissful scenario, the debt of companies and countries will trade at levels set by the market and by rating agencies.


Really?


The bond markets - like CDS - are relatively illiquid. With the exception of sovereign debt (e.g. treasuries) and large corporate issues (e.g. GE), the bond markets remain a relatively illiquid realm of slothful, secondary transactions. The muni bond market comes to mind here w/its history of flagrant abuses in underwriting, rating agency payoffs, political posturing by state authorities, and other sleazy tactics that obfuscate transparency. As for the rating agencies believe them at your own peril. After all, the concept of rating agencies seems to be pointless when a Aaa rated issue has its bond CDS trading at Fff status.


I am not against the concept of a CDS per se.


However, it is more than obvious at this point that the CDS market is is serious need of more regulation and transparency.


A CDS exchange would accomplish the goals of creating much needed transparency. The CDS exchange would post a schedule of rates for each rating grades AS SET BY THE MARKET. Trades would be marked to market on a DAILY BASIS. Funds would also settle quickly such as within 2-3 business days. And finally, a central authority would ensure that there is an actual counterparty capable of resolving outstanding issues.


I rarely talk about trading on this blog since this is more of a macro-economic focus here. However, I have to bring in examples from my own personal trading experience in order to adequately explain the disjunction.


The futures and options exchanges operate on a model of transparency. The shenanigans that brought down the OTC derivatives desks of AIG, Lehman, Bear Sterns, Citigroup, and other former Masters of the Universe would NEVER be tolerated in the futures pits. Imagine being able to postpone assignment for an entire quarter! W/barely any government supervision!

It is also a tragedy that NON-OTC traders (such as equities and futures) working in other divisions had to suffer for the mistakes of their fellow employees.

That is what the CDS contract writers are essentially doing. They wrote a whole bunch of naked options and are now being assigned. Unfortunately, the payout amounts far exceed anything available in their coffers through the magic of leverage. Futures and options brokers would have issued thousands of margin calls by now and driven bankrupt companies into true insolvency. Instead in the CDS fantasy universe the taxpayers . . . are forced to pay for the gambling debts of undead financials.


As a futures and options trader I DO NOT expect others to pick up my trading losses. The entire concept is alien to me and to other non-OTC traders. Leverage is certainly available but the central clearinghouse and mark to market ensure that few traders get out of hand. There are also firm regulatory bodies in place such as the SEC and CFTC to ensure a modicum of responsibility. Those that push the boundaries get punished swiftly - if not by the authorities then by the markets.


The reason why CDS exchanges do not exist yet is because they threaten to make the ratings agencies redudant. After all, what is the point of having fictitious ratings when traders aka THE MARKET can determine price?


A CDS exchange also threatens to reveal the true extent of governments' fiscal profligacy by stripping sovereigns of their fictitious ratings. If we had a CDS exchange, California would be trading at junk bond status now and the USA barely behind. A true CDS exchange would thus encourage fiscal responsibility from politicians by curbing reckless spending. While the authorities have been publicly supportive of such a measure, the blueprints for a CDS exchange(s) remain on the drawing board.

The Debts of the Spenders: President Obama Ignores Precedent

President Obama is calling stocks a "potentially good deal" and telling Americans to go out and buy stocks.

http://news.yahoo.com/s/ap/20090303/
ap_on_go_pr_wh/obama_stocks

This is criminal behavior at worst while facetious at best. Let us take a look at where the stock market is before listening to such nonsense:

Consider the following precedent:

http://social.stocktock.com/profiles/blogs/
1937-vs-2008-updated-daily

The Debts of the Spenders: Bank Failure Friday(s)

The Great Depression is just getting started. The graph to the left displays the 1930s bank failures vs the bank failures of 2008-2009.

The government does not have enough money to bail out all the bank shareholders. Not when the FDIC is running out of money and printing additional funds would lead to inflation.

Remember, at this point the government NEEDS to keep interest rates low in order to re-finance its flood of stimulus packages. The time will come when the US can stiff China and Japan on its treasury bill. Not now. American debt remains in demand because of its reserve currency status.

http://www.bearmarketinvestments.com/graphs-fdic-bank-failures