World Out Of Whack: Time To Buy The Mexican Crash?

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW we’re covering Mexico

Even before the “Anti-Christ” took the US presidency the market was gyrating like an overly intoxicated teen on spring break, trying to figure out what would happen to the country of drug dealers and rapists South of the border should the worst happen for them – the election of the devil instead of the basilisk.

The peso was the favoured market punchbag, and if we look at the short-term trading during the US fiasco election it certainly looks like it took a knee to the groin and got at least one black eye falling by 13.4% – the most since the Tequila crisis of 1994-95 when Mexico was bailed out by the US and nearly went bankrupt, forcing them to devalue the peso.

mn

Now, a month after the election I find my daily news feeds littered with pundits talking about Mexico. Who’s bullish, who’s bearish, and who just wants their face on TV and will say anything to to make it so?

I have in my inbox several emails from readers asking me about both the peso and the Mexican stock market. Are they a buy? A short?

Let me first say that out of the 50 odd countries I’ve visited Mexico isn’t one of them, and I don’t have any particular deep insights.

With that caveat in place let me show you the below chart. This is the iShares MSCI Mexico Capped ETF (EWW). It’s a decent enough proxy for the Mexican stock market.

MSCI Mexico ETF

The reason I chose to show you this chart, one going all the way back to the GFC, is because I want you to see the forest and not get caught up in the gnarly branches and roots of the trees, and as such realise that despite all the brouhaha crossing your news feeds. Trump’s election is IRRELEVANT to this market. The trend was in place well before Trump began lashing out at the Mexicans and Chinese for stealing America’s rice bowls KFC.

Trend Explained

Let’s get back to the chart above.

The GFC brought about massive QE. This folks simply turned the dollar immediately into the best funding currency on this ball of dirt. If you want to know how this functions go read this article on the carry trade. What took place was that every man and his dog borrowed dollars, thus going short, and investing in higher yielding currencies and assets: in currencies such as the Mexican peso and markets such as the Mexican stock market.

Take another look at the chart and you’ll see this rally in the Mexican market began directly after the GFC. You’ll also notice this gig ended in late 2014, not coincidentally when we told folks that a bull market in the dollar was underway and that most would get blindsided by it. I even sat down and wrote a free Dollar Bull Run report to explain the thinking:

“A bull market in the US Dollar is underway and its magnitude and duration are likely to catch everyone by surprise. I believe it isn’t out of the question for the USD Index to advance by at least 50% within the next 5 years. If this forecast proves correct, there will be profound ramifications for the global economy and many financial markets, particularly emerging markets.”

All good, so here we are at the tail end of 2016. What now?

Take another look at iShares MSCI Mexico Capped ETF (EWW). You don’t need to know anything about charts to see that the trend was in motion well BEFORE Trump started blaming Mexicans for Goldman Sachs cocaine consumption, rape, bad manners, and promising to build a Trump wall, thereby taking on Qin Shi Huang, the first emperor of China.

Take another look at the first chart I showed you: the peso getting a black eye. Now take a look at this one below:

eww

We have here the USD/MXN in green and red with EWW in blue. As the dollar goes so goes the Mexican stock market.

There is but one thing you need to keep your eye on and it sure ain’t whether Trump builds a stupid wall or whether he plants a million daisies on the border instead.

Keep your eye on the dollar because that’s all that matters right now. Remember, currencies trend for long periods of time, and the dollar spent a decade going down. It’s only been in a bull market since late 2014, a few short years.

Oh, and in case you’ve failed to read between the lines: I have nothing against Mexicans, and building a wall is easily one of the stupidest ideas I’ve heard in a long time. Trump has promised to do many things in his presidency. The question isn’t whether they should or shouldn’t be done – many are loony and others are fabulous ideas – but whether he actually can or will. I suspect he won’t do many of the things suggested.

None of this matters with the major trends in motion. One of those is the direction of the greenback.

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We’d love your feedback and if you have a market you think worthy of covering please send it to me here.

– Chris

“When Mexico sends its people, they’re not sending their best… They’re bringing drugs. They’re bringing crime. They’re rapists. And some, I assume, are good people.” — Donald Trump,  June 16, 2015