Posts

May 29, 2019

Global Market Comments
May 29, 2019
Fiat Lux

Featured Trade:

(WEDNESDAY, JULY 10 BUDAPEST, HUNGARY STRATEGY LUNCHEON)
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW),

(KISS THAT UNION JOB GOODBYE),

Onshoring Takes Another Great Leap Forward

Have you tried to hire a sewing machine operator lately?

I haven’t, but I have friends running major apparel companies who have (where do you think I get all those tight-fitting jeans?).

Guess what? There aren’t any to be had.

Since 1990, some 77% of the American textile workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.

Now that manufacturing is, at last, coming home, the race is on to find the workers to man it.

Welcome to onshoring 2.0.

The development has been prompted by several seemingly unrelated events.

There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low-cost producer which have killed thousands.

Today’s young consumers want to look cool but have a clean conscience as well. That doesn’t happen when your threads are sewn together by child slave laborers working for $1 a day.

Several firms are now tapping into the high-end market where the well-off are willingly paying top dollar for a well-made “Made in America” label.

Look no further than 7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all-American manufacturer.

As a result, wages for cut-and-sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for the industry as a whole.

Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers.

They advertise in languages with high proportions of blue-collar workers, such as Spanish, Somali, and Hmong.

New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.

Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying U.S. factories.

But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.

That is a crucial advantage in today’s fast-paced, high-turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.

By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.

The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades.

It has also been blamed for losses of U.S. jobs, with some estimates reaching as high as 25 million.

When offshoring first started 50 years ago, it was a total no-brainer. 

Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.

So American electronics makers began filing overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines.

After the U.S. normalized relations with China in 1978, the action moved there and found that labor was even cheaper.

Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn’t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.

Today, it is $6,000, and $26,000 for trained technicians, with total compensation still rising 20% a year. At this rate, U.S. and Chinese wages will reach parity in about 10 years.

But wages won’t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks.

Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.

Natural disasters such as earthquakes, fires, and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a highly tuned, incredibly complex watch.

There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the U.S. fleet and the Chinese military playing an endless game of chicken off the coast, we are one midair collision away from a major diplomatic incident.

Protectionism constantly threatens to boil over in the U.S., whether it is over the dumping of chicken feet, tires, or the latest, solar cells.

This is what the visit to the Foxconn factory by Apple’s CEO Tim Cook was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?

Work will come back to the U.S. all the faster. The Chinese press was ripe with speculation that Apple-induced reforms might spread to the rest of the country like wildfire.

The late General Motors (GM) CEO Dan Adkerson once told me his company was reconsidering its global production strategy in the wake of the Thai floods.

Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.

The impact of a real onshoring move on the U.S. economy would be huge. Some economists estimate that as many as 10% to 30% of the jobs lost to offshoring could return.

At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.

It would add $20 billion to $60 billion in GDP per year or up to 0.4% in economic growth per year.

It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ½ years?

Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low-wage jobs in the world.

After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.

So How Does This Thing Work?

June 15, 2018

Global Market Comments
June 15, 2018
Fiat Lux

Featured Trade:
(ONSHORING TAKES ANOTHER GREAT LEAP FORWARD),
(TSLA), (UMX), (EWW),

(KISS THAT UNION JOB GOODBYE),
(TESTIMONIAL)

Onshoring Takes another Great Leap Forward

Have you tried to hire a sewing machine operator lately?

I haven?t, but I have friends running major apparel companies who have (guess where I get all those tight fitting jeans?).

Guess what? There aren?t any to be had.

Since, 1990, some 77% of the American textiles workforce has been lost, when China joined the world economy in force, and the offshoring trend took flight.

Now that manufacturing is at last coming home, the race is on to find the workers to man it. Welcome to onshoring 2.0.

The development has been prompted by several seemingly unrelated events. There is an ongoing backlash to several disasters at garment makers in Bangladesh, the current low cost producer, which have killed thousands.

Today?s young consumers want to look cool, but have a clean conscience as well. That doesn?t happen when your threads are sewn together by child slave laborers working for $1 a day.

Several firms are now tapping into the high-end market where the well off are willingly paying top dollar for a well-made ?Made in America? label.

Look no further than?7 For All Mankind, which is offering just such a product at a discount to all recent buyers of the Tesla Model S-1 (TSLA), that other great all American manufacturer (click here for their website).

As a result, wages for cut and sew jobs are now among the fastest growing in the country, up 13.2% in real terms since 2007, versus a paltry 1.4% for industry as a whole.

Apparel industry recruiters are plastering high schools and church communities with flyers in their desperate quest for new workers. They advertise in languages with high proportions of blue-collar workers, like Spanish, Somali, and Hmong.

New immigrants are particularly being targeted. And yes, they are resorting to the technology that originally hollowed out their industry, creating websites to suck in new applicants.

Chinese workers now earn $3 an hour versus $9 plus benefits at the lowest paying US factories. But the extra cost is more than made up for by savings in transportation and logistics, and the rapid time to market.

That is a crucial advantage in today?s fast paced, high turnover fashion world. Some companies are even returning to the hiring practices of the past, offering free training programs and paid internships.

By now, we have all become experts in offshoring, the practice whereby American companies relocate manufacturing jobs overseas to take advantage of low wages, missing unions, the lack of regulation, and the paucity of environmental controls.

The strategy has been by far the largest source of new profits enjoyed by big companies for the past two decades. It has also been blamed for losses of US jobs, with some estimates reaching as high as 25 million.

When offshoring first started 50 years ago, it was a total no brainer.? Wages were sometimes 95% cheaper than those at home. The cost savings were so great that you could amortize your total capital costs in as little as two years.

So American electronics makers began flying overseas to Singapore, Thailand, Hong Kong, Taiwan, South Korea, and the Philippines. After the US normalized relations with China in 1978, the action moved there and found that labor was even cheaper.

Then, a funny thing happened. After 30 years of falling real American wages and soaring Chinese wages, offshoring isn?t such a great deal anymore. The average Chinese laborer earned $100 a year in 1977.

Today, it is $6,000 and $24,000 for trained technicians, with total compensation rising 20% a year. At this rate, US and Chinese wages will reach parity in about 10 years.

But wages won?t have to reach parity for onshoring to accelerate in a meaningful way. Investing in China is still not without risks. Managing a global supply chain is no piece of cake on a good day. Asian countries still lack much of the infrastructure that we take for granted here.

Natural disasters like earthquakes, fires and tidal waves can have a hugely disruptive impact on a manufacturing system that is in effect a finely tuned, incredibly complex watch.

There are also far larger political risks keeping a chunk of our manufacturing base in the Middle Kingdom than most Americans realize. With the US fleet and the Chinese military playing an endless game of chicken off the coast, we are one mid air collision away from a major diplomatic incident.

Protectionism constantly threatens to boil over in the US, whether it is over the dumping of chicken feet, tires, or the latest, solar cells.

This is what the visit to the Foxcon factory by Apple?s CEO, Tim Cook, was all about. Be nice to the workers there, let them work only 8 hours a day instead of 16, let them unionize, and guess what?

Work will come back to the US all the faster. The Chinese press was ripe with speculation that Apple induced reforms might spread to the rest of the country like wildfire.

Former General Motors (GM) CEO, Dan Akerson, told me his company was reconsidering its global production strategy in the wake of the Thai floods.

Which car company was most impacted by the Japanese tsunami? General Motors, which obtained a large portion of its transmissions there.

The impact of a real onshoring move on the US economy would be huge. Some economists estimate that as many as 10%-30% of the jobs lost to offshoring could return. At the high end, this could amount to 8 million jobs. That would cut our unemployment rate down by half, at least.

It would add $20-60 billion in GDP per year, or up to 0.4% in economic growth per year. It would also lead to a much stronger dollar, rising stocks, and lower bond prices. Is this what the stock market is trying to tell us by failing to have any meaningful correction for the past 2 ? years?

Who would be the biggest beneficiaries of an onshoring trend? Si! Ole! Mexico (UMX) (EWW), which took the biggest hit when China started soaking up all the low waged jobs in the world.

After that, the industrial Midwest has to figure pretty large, especially gutted Michigan. With real estate prices there under their 1992 lows, if there is a market at all, you know that doing business there costs a fraction of what it did 20 years ago.

 

 

Man Fixing MachineSo How Does This Thing Work?

Catching up with Economist David Hale

I have been relying on David Hale as my de facto global macro economist for decades and I never miss an opportunity to get his updated views. The challenge is in writing down David?s eye popping, out of consensus ideas fast enough, because he spits them out in such a rapid-fire succession.

Since David is an independent economic advisor to many of the world?s governments, largest banks and investment firms, I thought his views would be of riveting interest to you.

I met him this time at the posh Ozumo restaurant on San Francisco?s waterfront, near the Ferry Building. A favorite of Silicon Valley?s tech titans, I bumped into Marc Andreessen on the way in, nearly impaling myself on his pointed head.

I settled for a delicate vegetable tempura and eel sushi, while David, being from the Midwest, dug into an excellent Wagyu beefsteak. We washed it all down with liberal doses of Kirin beer and Takagi Shuzo designer sake.

David is an unmitigated bull on the economy, predicting that growth will leap from 2.0% in 2013 to 3% in 2014. Fading away of the fiscal drag created by a gridlocked congress will be the main reason.

Last year, we were hobbled by the maximum Federal income tax rising from 35% to 39.5% for income over $400,000. Capital gains rose from 15% to 20% as well. These combined to subtract 1% off US GDP growth in 2013. There are no such tax hikes planned for 2014.

The economy continues to power along, supported by three legs: housing, the energy boom and a reviving auto industry. Detroit is expected to pump out over 17 million vehicles this year, a figure only dreamed about six years ago, when it hit a rock bottom 9 million unit annual rate.

Management has a death grip on controlling costs, which is why they aren?t hiring, and explains the feeble employment statistics. This has enabled profit margins to surge to all time highs. Expect more of the same.

Europe should grow by 1% in 2014 after delivering a near zero rate this year. It will take years for them to return to any kind of normalized growth rate. That said, continental stock markets could well outperform those in the US in the near term.

David spends much of his time traveling, doing a major intercontinental trip almost every month. The coming calendar includes Japan, Australia, and Europe by yearend. To have his frequent flier points!

Two years ago, David was banging his drum about an imminent recovery in Japan (EWJ) and a collapse in the yen (FXY), (YCS). He was ignored by virtually all, except by me. As you may recall, I started laying on major short positions in the yen about then at David?s behest, which proved wildly successful.

The proof is in the constant testimonials that I regularly publish in my letter. I don?t make these up and they come in almost every day.

David believes that Prime Minister Shinzo Abe is doing all the right things, so the recovery is real, sustainable and will play out over several more years. However, he would have been wise to spread out the VAT tax rise that took place in April, from 5% to 8%, over five years instead of bunching it all up in one.

He also should spend less time focusing on domestic nationalistic issues, which have the undesirable effect in that it focuses China on Japan?s regrettable past, not its bright future.

He is also quite an authority on emerging markets (EEM), which account for 40% of global GDP, and sees the recent collapse as presenting a once in a generation buying opportunity.

His favorite is Mexico (EWW), which will benefit hugely from the first new round of political and economic reforms in 20 years. The new oil and gas fracking technology has also arrived just in the nick of time, as its existing conventional fields are approaching exhaustion.

David thinks Greece (GREK) has more to run, although not at the heady pace of the past year. Nigeria (NGE) is another outstanding opportunity, where he recently visited. A privatization wave there could boost GDP growth from 7% to 10%.

To show you how wide David casts his net, he had lunch with none other than Syria?s Bashar al-Assad a decade ago. The country was then enacting a series of ground-breaking liberalizations by privatizing banks, and was viewed as the hot frontier market of the day. How things change!

This is why investors expect outsized returns from these countries. Less, and the risk is not worth it. They?re called ?frontier? for a reason.

David has in the past made some far out predictions that were real zingers. Population growth is grinding to a halt throughout Asia. It is already well below the replacement rate in Japan and South Korea, which will soon be joined by China.

This will eventually lead to labor shortages in Asia, and bring to an end the cheap labor regime, which has driven their economies for the past 100 years. The Chinese work force will shrink from five times ours to only three times.

Their cost advantage then goes out the window. The upshot for us is that perhaps half of the 6 million jobs that America lost to China over the last 20 years will come back. Many items can now be bought cheaper in Chicago than they can in Shanghai.

This explains why ?onshoring? is accelerating with a turbocharger (click here for ?The American Onshoring Trend is Accelerating?).

China will still become far and away the world?s largest economy in our lifetimes. In 1700, Asia accounted for 58% of world GDP. Some 250 years of wars pulled that figure down to 15% by 1950. It is on track to recover to 50% by 2050.

To learn more about David Hale and the extensive list of services he offers; please visit the website of David Hale Global Economics at http://www.davidhaleweb.com.

EWW 7-3-14

GREK 7-3-14

NGE 7-3-14

David Hale

Sushi Restaurant

Bottles

Things are Heating Up in Mexico

I have fond memories traveling around northern Mexico during the 1950?s. My grandfather used to drive us across the border into Baja in his pickup truck, the back loaded with camping equipment, water, fishing poles, rifles, and shotguns. There was no border control.

To eat, we only had to wait for the tide to go out on the Sea of Cortez, uncovering a banquet of fresh mussels, oysters, and abalone. Eventually, my Spanish got pretty good, especially when it came to fixing cars. When we encountered rare collections of palm frond huts we would lounge around on the beach eating all the tacos we wanted for 5 cents each.

There wasn?t a hotel on the entire peninsula; and the desert was frequented with armed banditos. If any stranger approached, we fired a shot over their heads, at a considerable distance, to convince them to seek easier pickings elsewhere. It was still the Wild West down there, and we didn?t go there to socialize.

As much I loved the land of Montezuma and Pancho Villa, I have never invested a penny in the country. Oil has been the bread and butter for the land south of the border for nearly a century, accounting for the largest share of the government?s revenues. But its main Cantarell field is nearly tapped out, suffering from declining production for years.

There was a decade long drug war in which 40,000 died. It seemed, for a while, that the narco terrorists would win. Mexico City became the kidnapping capital of the world. In the emerging market space, there always seemed to be better opportunities elsewhere. On top of that, the country has a long history of expropriating the property of gringos. So for decades I limited my interest in Mexico to beer, tequila, and tacos.

However, in recent months, the jungle telegraph in the hedge fund community has been buzzing about this once unloved country. I thought I?d take a closer look. It turns out that a few things have changed over the last 60 years.

First, oil. Yes, Cantarell is just about done. But much of Mexico?s subterranean geology is similar to that of the US. That means that the fracking boom, whereby untold quantities of cheap natural gas have suddenly become available, is spilling over into Mexico as well. It helps a lot that Mexico is allowing foreign investment in the industry for the first time in 70 years.

And guess what? They don?t face the environmental backlash or the permitting restrictions that American drillers must endure. As a result, Mexican energy production is taking off once again, with exports to Asia a major target. Energy infrastructure investment will become a significant economic driver in the decades to come. This is hugely positive for both the Mexican economy and the peso.

When China first burst on the international scene during the early nineties, using its cheap labor to replace much of the world?s manufacturing capacity, it was Mexico that took the big hit. Much of their low-end production, such as in textiles, decamped for the Middle Kingdom, leaving hundreds of thousands jobless.

The new ?onshoring? trend that is creating a blue-collar jobs renaissance in the US is gaining speed in Mexico too. While Chinese wages have been skyrocketing at a 20% annual rate, they have been relatively stable in Mexico.

You see this first and foremost with goods that pose logistical challenges, such as anything involving significant transportation costs. You probably don?t know this, but that big screen high definition TV dominating your living room, which used to be assembled near Shenzhen, is now put together a couple of miles inside the Mexican border with Texas. From there, they can be easily and cheaply shipped by rail or truck to any point in the US.

Mexico?s $1.18 trillion GDP ranked 14th in the world in 2012. It stood 11th in population with 112 million. Its per capita income of $10,247 comes in at 66th. The energy boom is likely to boost economic growth from the current 4% annual rate. A strong peso should cause its inflation rate to fall from the present 3.6%. I don?t have to tell you that this is a dream come true scenario for investors. Many analysts expect Mexico to join the world?s top ten economies by 2020.

The one problem Mexico has is that it is tarred with the emerging market brush (EEM), the world?s poorest performing asset classes this year. You may have to wait for the Chinese tide to lift all boats for this unloved sector to move back into the spotlight. That said, emerging markets could be the great rotation play sometime in 2014.

There are a number of American Depository Receipts (ADR?s) issued by Mexican multinationals listed on the NYSE, such as those for Grupo Financiero Santander (BSMX), one of the country?s largest banks.

If you are really brave, you can open a peso denominated account with a broker in Mexico City and invest in stocks there directly. The easiest way to put money into the country is through the Mexico iShares ETF (EWW). Or you can trade the leveraged long ETF, the ProShares Ultra MSCI Mexico Investable Market ETF (UMX).

I went down to Cabo San Lucas a few years ago for some Marlin fishing and to see what had changed. A ten-mile string of hotels lined the beach with names like the Trump Tower and the Four Seasons. The price of tacos had risen from 5 cents to $2. Free spending European tourists crowded bars like the Cabo Wabo, where they strung you up by your feet to see if you could drink tequila shots upside down.

Rather than dine at one of the many overpriced and crowded restaurants, I got in the car and drove north. I stopped at a small out of the way cove, and as the tide went out, I ate my fill of shellfish. Grandpa would have been proud.

US Dollar to MexicanUS Dollar to the Mexican

 

EWW 2-4-14

UMX 2-4-14

BSMX 2-4-14

Mexico - Map

MexicanGotta Love Those Mexican Shares

Mexican Flag

Catching up with Economist David Hale

I have been relying on David Hale as my de facto global macro economist for decades, and I never miss an opportunity to get his updated views. The challenge is in writing down David?s eye popping, out of consensus ideas fast enough, because he spits them out in such rapid-fire succession.

Since David is an independent economic advisor to many of the world?s governments, largest banks, and investment firms, I thought his views would be of riveting interest to you.

I met him this time at the posh Ozumo restaurant on San Francisco?s waterfront, near the Ferry Building. A favorite of Silicon Valley?s tech titans, I bumped into Marc Andreessen on the way in, nearly impaling myself on his pointed head. I settled for a delicate vegetable tempura and eel sushi, while David, being from the Midwest, dug into an excellent Wagyu beefsteak. We washed it all down with liberal doses of Kirin beer and Takagi Shuzo designer sake.

David is an unmitigated bull on the economy, predicting that growth will leap from this year?s 2.5% to 3% next year. Fading away of the fiscal drag created by a gridlocked congress will be the main reason. This year, we were hobbled by the maximum Federal income tax rising from 35% to 39.5% for income over $400,000. Capital gains rose from 15% to 20% as well. These combined to subtract 1% off US GDP growth in 2013. There are no such tax hikes planned for 2014.

The economy continues to power along, supported by three legs: housing, the energy boom, and a reviving auto industry. Detroit is expected to pump out over 16 million vehicles this year, a figure only dreamed about five years ago when it hit a rock bottom 9 million unit annual rate.

The real surprise this year was how hot the second quarter came in, with corporate profits soaring by 17% YOY. Q3 should fall back to a more sustainable 5% rate. Managements have a death grip on controlling costs, which is why they aren?t hiring, and explains the feeble employment statistics. This has enabled profit margins to surge to all time highs. Expect more of the same.

Europe should grow by 1% in 2014 after delivering a near zero rate this year. It will take years for them to return to any kind of normalized growth rate. That said, continental stock markets could well outperform those in the US in the near term.

David spends much of his time traveling, doing a major intercontinental trip almost every month. The coming calendar includes Japan, Australia, and Europe by yearend. To have his frequent flier points!

A year ago, David was banging his drum about an imminent recovery in Japan (EWJ) and a collapse in the yen (FXY), (YCS). He was ignored by virtually all, except by me. As you may recall, I started laying on major short positions in the yen last November at David?s behest, which proved wildly successful. The proof is in the constant testimonials that I regularly publish in my letter. I don?t make these up.

David believes that Prime Minister Shinzo Abe is doing all the right things, so the recovery is real, sustainable, and will play out over several more years. However, he would be wise to spread out the coming VAT tax rise planned for April, from 5% to 8%, over five years instead of bunching it all up in one. He also should spend less time focusing on domestic nationalistic issues, which have the undesirable effect in that it focuses China on Japan?s regrettable past, not its bright future.

He is also quite an authority on emerging markets (EEM), which account for 40% of global GDP, and sees the recent collapse as presenting a once in a generation buying opportunity. His favorite is Mexico (EWW), which will benefit hugely from the first new round of political and economic reforms in 20 years. The new oil and gas fracking technology has also arrived just in the nick of time, as its existing conventional fields are approaching exhaustion.

David thinks Greece (GREK) has more to run, although not at the heady pace of the past year. Nigeria (NGE) is another outstanding opportunity, where he recently visited. A privatization wave there could boost GDP growth from 7% to 10%.

To show you how wide David casts his net, he had lunch with none other than Syria?s Bashar al-Assad a decade ago. The country was then enacting a series of ground-breaking liberalizations by privatizing banks, and was viewed as the hot frontier market of the day. How things change! This is why investors expect outsized returns from these countries. Less, and the risk is not worth it. They?re called ?frontier? for a reason.

What could bring the cheering bull parade to a grinding halt? The debt ceiling crisis, which could start generating headlines in a few weeks. If the government really does shut down in mid October, as Treasury Secretary, Jack Lew, told me a few weeks ago (click here for ?Riding With the Treasury Secretary Jack Lew?) no one will care if it reopens the next day, or the next week. Longer than that and it could be a real problem not just for the US, but for the global economy as well. A similar shut down during the 1990?s lasted only a day, but cost the Republicans dearly in the next election.

David has in the past made some far out predictions that were real zingers. Population growth is grinding to a halt throughout Asia. It is already well below the replacement rate in Japan and South Korea, which will soon be joined by China. This will eventually lead to labor shortages in Asia, and bring to an end the cheap labor regime, which has driven their economies for the past 100 years. The Chinese work force will shrink from five times ours to only three times.

Their cost advantage then goes out the window. The upshot for us is that perhaps half of the 6 million jobs that America lost to China over the last 20 years will come back. Many items can now be bought cheaper in Chicago than they can in Shanghai. This explains why ?onshoring? is accelerating with a turbocharger (click here for ?The American Onshoring Trend is Accelerating?).

China will still become far and away the world?s largest economy in our lifetimes. In 1700, Asia accounted for 58% of world GDP. Some 250 years of wars pulled that figure down to 15% by 1950. It is on track to recover to 50% by 2050.

To learn more about David Hale and the extensive list of services he offers, please visit the website of David Hale Global Economics at http://www.davidhaleweb.com.

EWW 9-13-13

GREK 9-13-13

NGE 9-13-13

David Hale

Sushi Restaurant

Bottles

Things Are Heating Up in Mexico

I have fond memories traveling around northern Mexico during the 1950?s. My grandfather used to drive us across the border into Baja in his pickup truck, the back loaded with camping equipment, water, fishing poles, rifles, and shotguns. There was no border control.

To eat, we only had to wait for the tide to go out on the Sea of Cortez, uncovering a banquet of fresh mussels, oysters, and abalone. Eventually, my Spanish got pretty good, especially when it came to fixing cars. When we encountered rare collections of palm frond huts we would lounge around on the beach eating all the tacos we wanted for 5 cents each.

There wasn?t a hotel on the entire peninsula; and the desert was frequented with armed banditos. If any stranger approached, we fired a shot over their heads, at a considerable distance, to convince them to seek easier pickings elsewhere. It was still the Wild West down there, and we didn?t go there to socialize.

As much I loved the land of Montezuma and Pancho Villa, I have never invested a penny in the country. Oil has been the bread and butter for the land south of the border for nearly a century, accounting for the largest share of the government?s revenues. But its main Cantarell field is nearly tapped out, suffering from declining production for years.

There was a decade long drug war in which 40,000 died. It seemed, for a while, that the narcoterrorists would win. Mexico City became the kidnapping capital of the world. In the emerging market space, there always seemed to be better opportunities elsewhere. On top of that, the country has a long history of expropriating the property of gringos. So for decades I limited my interest in Mexico to beer, tequila, and tacos.

However, in recent months, the jungle telegraph in the hedge fund community has been buzzing about this once unloved country. I thought I?d take a closer look. It turns out that a few things have changed over the last 60 years.

First, oil. Yes, Cantarell is just about done. But much of Mexico?s subterranean geology is similar to that of the US. That means that the fracking boom, whereby untold quantities of cheap natural gas have suddenly become available, is spilling over into Mexico as well.

And guess what? They don?t face the environmental backlash or the permitting restrictions that American drillers must endure. As a result, Mexican energy production is taking off once again, with exports to Asia a major target. Energy infrastructure investment will become a significant economic driver in the decades to come. This is hugely positive for both the Mexican economy and the peso.

When China first burst on the international scene during the early nineties, using its cheap labor to replace much of he world?s manufacturing capacity, it was Mexico that took the big hit. Much of their low-end production, such as in textiles, decamped for the Middle Kingdom, leaving hundreds of thousands jobless.

The new ?onshoring? trend that is creating a blue collar jobs renaissance in the US is gaining speed in Mexico too. While Chinese wages have been skyrocketing at a 20% annual rate, they have been relatively stable in Mexico.

You see this first and foremost with goods that pose logistical challenges, such as anything involving significant transportation costs. You probably don?t know this, but that big screen high definition TV dominating your living room, which used to be assembled near Shenzhen, is now put together a couple of miles inside the border with Texas. From there, they can be easily and cheaply shipped by rail or truck to any point in the US.

Mexico?s $1.18 trillion GDP ranked 14th in the world in 2012. It stood 11th in population with 112 million. Its per capita income of $10,247 comes in at 66th. The energy boom is likely to boost economic growth from the current 4% annual rate. A strong peso should cause its inflation rate to fall from the present 3.6%. I don?t have to tell you that this is a dream come true scenario for investors. Many analysts expect Mexico to join the world?s top ten economies by 2020.

The one problem Mexico has is that it is tarred with the emerging market brush (EEM), one of the world?s poorest performing asset classes this year. At least Mexico has flat lined instead of crashed, as others have. You may have to wait for the Chinese tide to lift all boats for this unloved sector to move back into the spotlight. That said, emerging markets could be the great rotation play in the last quarter of 2013.

There are a number of American Depository Receipts (ADR?s) issued by Mexican multinationals listed on the NYSE, such as those for Grupo Financiero Santander (BSMX), one of the country?s largest banks. If you are really brave, you can open a peso denominated account with a broker in Mexico City and invest in stocks there directly. The easiest way to put money into the country is through the Mexico iShares ETF (EWW). Or you can trade the leveraged long ETF, the ProShares Ultra MSCI Mexico Investable Market ETF (UMX).

I went down to Cabo San Lucas a few years ago for some Marlin fishing and to see what had changed. A ten-mile string of hotels lined the beach with names like the Trump Tower and the Four Seasons. The price of tacos had risen from 5 cents to $2. Free spending European tourists crowded bars like the Cabo Wabo, where they strung you up by your feet to see if you could drink tequila shots upside down.

Rather than dine at one of the many overpriced and crowded restaurants, I got in the car and drove north. I stopped at a small out of the way cove, and as the tide went out, I ate my fill of shellfish. Grandpa would have been proud.

MXN Mexican Pesos to the Dollar

 

EWW 4-23-13

UMX 4-23-13

BSMX 4-23-13

Mexico - Map

Mexican Gotta Love Those Mexican Shares

Mexican Flag