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Folks,

There is a sales pitch at the end of this analysis, which I do not endorse...
only I found the views of Mexico interesting,,,. here again as labor rates
shoot up, so does trade with USA.

John


The Daily Reckoning PRESENTS: The Fleet Street Letter's Lynn Carpenter
takes a peek at the U.S.' oft-maligned neighbor to the south... and admires
the
highest paying investment grade T-Bills in the world.

MEXICO
by Lynn Carpenter

Economists divide the world into the good, the probably bad and the
downright
ugly. They call them developed economies, developing economies and emerging
economies; except for the dismal scientists who compile those nifty charts
on the
back pages of The Economist each week.

As far as The Economist's economists are concerned, the world has 15 real
leaders - these go in the tables and charts for "developed economies." In
The
Economist, everyone else goes on the list of also-rans.

Well, gee, what do you want from a magazine published in a country that stil
l
believes in the divine right of kings and pays an old woman in a flowered
hat
several mill a year to cut ribbons at horse shows? Vision? Elan? Daring?
Modern
thinking? Not likely. (Cheers, mates.)

It's no wonder the Brits think Mexico is still emerging. That's what they
think of
Ireland, too. But there's no excuse for us to be so hidebound or blind...
especially those of us who live right next door to one of the most vibrant
economies in the world. Our neighbor to the south isn't Sri Lanka or
Zimbabwe.
Mexico is a large, vital and increasingly strong economy.

The facts speak highly for Mexico. Let's dig in...

There's only one thing that might - just might - justify calling Mexico an
emerging economy. It does have a lot of poor people.

Mexico's average household income is well behind the incomes in Canada,
Australia, France, Germany, the United Kingdom, Belgium, Austria,
Switzerland,
Japan et al. But that is changing rapidly because of far-reaching changes
in its
trade practices and its economic system.

In 1993, the GDP per head of household in Mexico came to $3,690. Over the
next seven years, that number jumped nearly three-fold to $9,966. But this
hides
even greater strength. In the 1995-1996 recession, Mexican household incomes
fell by slightly over 50% - among the rich and poor alike. Thus, what you
see
here is not a tripling in seven years. It is more like a six-fold gain in
four years.
That is far above the inflation rate and represents real progress as the
economy
grows.

What happened to Mexico was a profound change of direction. Most obviously,
there was NAFTA, an opening to world trade. But during the '90s, Mexico also
moved away from its deeply socialistic stance and privatized hundreds of
state-owned monopolies. This brought landslide foreign investment to Mexico.
Last year, foreign direct investment in Mexico reached a record $24 billion
- the
highest in Latin America.

Half of this came from the Citibank purchase of Banamex, but the pace
remains
brisk. Direct investment is continuing, especially now that Argentina, Peru
and
Chile have disappointed investors.

Apart from low household income, there's really no reason why Mexico should
be on The Economist's list of emerging countries while Austria, Denmark,
Belgium, Spain and Italy make the top-dog list of "safe" developed
countries.

Does Mexico lack roads? They could be better. But Mexico has as many miles
of road for its size as Austria does. Its GDP is larger than Switzerland's,
Belgium's, Sweden's or Denmark's. In terms of purchasing power, Mexico
comes in ahead of Canada, Spain, Australia, The Netherlands and Belgium. And
it is urban, too. Mexico City is the second largest city in the world.

As for the economy, 75% of Mexico's GDP is now based in the service sector.
Mining and agriculture play a small role these days. In terms of world
trade,
Mexico's weakness is still the placement of too much emphasis on one trading
partner, the United States. Over 80% of its exports are U.S.-bound. But
that is
changing as well.

In the past two years, Mexico has initiated open market pacts with Europe
and
Asia, offering reduced tariffs and other perks, similar to the deal between
the
United States, Canada and Mexico under NAFTA. As a result of these changes
in the economy and improving trade relations, Mexico has gone from the 14th
largest trading economy in the world in 1995 to the 8th largest today.

Skeptics may remember other times when Mexico looked promising... only to
backslide. Investing in emerging markets tends to be more volatile than
investing
here at home. Throw in a change in credit rating, opinion or currency
strength
and it all falls apart... as it did for Thailand in 1997 and Argentina this
past year.
And as it did for Mexico in 1984 and again in 1994-1995.

Well, Mexico just got a midterm test - and it rates an A.

In fact, it rates several A's. Both Moody's and Standard and Poor's have
boosted
Mexico's credit rating to investment grade this year. This comes at a time
when
both agencies are downgrading more businesses and countries than they are
upgrading because of accounting questions, weak earnings, trade deficits,
the
global recession and currency weakness outside the dollar.

Mexico is one of the few countries in the world where I would look to invest
specifically for the country benefit. I don't say that lightly. For the
last two years,
I have been telling Fleet Streeters that there is no good reason to go
outside the
United States for the heck of it.

Any sane person can look at a list of foreign markets or currencies in
Barron's to
see what really happens. Last year, the United States suffered, and all
markets
except two - Mexico and China - fell. South Africa gained, too, but that was
solely on the strength of and advance enthusiasm for mining stocks. No other
major currency gained against the dollar, either - unless you count the
Mexican
peso, that is.

What has happened in Mexico during these past two years is telling. Mexico
lost
nearly a half-million jobs last year. That's not good, but it's in no way
dire. In the
United States, by comparison, 2.5 million people filed for unemployment last
year as a result of mass layoffs. That's in addition to the jobs lost here
and there
in small companies.

In case you are wondering, Mexico's population is 93 million, compared to
the
United States' 250 million. Thus, Mexico lost fewer jobs per capita than we
did.

Meanwhile, the peso holds up and so does the Mexican Bolsa. Once a wild
card,
the peso has become rather boring in its stateliness. The last big currency
blowout in Mexico, which occurred during the 1994-1995 recession, is not
likely
to recur. Back then, the peso fell from 3.5 per dollar to about 9 per US
dollar.
Since then, little has changed. A bit of bobbing and weaving in a range,
but no
grand moves. Today's exchange rate is 9.07 pesos per dollar. This is an
outstanding performance against the world's strongest currency over a
seven-year stretch.

And the stock market? So far this year, the Mexican stock market is up 16%
locally and 23% in dollar terms. Last year, as the Dow, S&P 500 and Nasdaq
fell, the Mexican Bolsa gained 20%.

Even inflation is finally under control. In fact, you could argue that this
small
recession is very good for Mexico. It helped cool a hot economy before it
got
too hot. Inflation dropped from the mid-teens in the late '90s to 9% last
year and
is down to about 1.5% now.

All this is much to the good. But Mexico has something that not one country
on
The Economist's list of top economies can claim... youth. Mexico's
demography
is ideal, just when ours is turning nightmarish.

From the United States, to Western Europe and Japan, the demographics warn
that young people are a scarce resource compared to old people. And the
problem is much larger than anyone has admitted so far.

In Mexico, the issue doesn't arise. Not soon anyway - even though the birth
rates
are falling. Of its 93 million people, only 7.5 million are over the age of
50. Only
4 million, a mere 4.3%, are already over 65. Mexico is 20 years away from
the
front edge of the aging crunch.

What this means for Mexico, and for us investors, is a young, vigorous
population with most of its productive years still ahead of it. People are
in the
right age range to shore up high economic growth. And they're of an age to
do a
lot of spending as their earnings increase.

Most of us - as we accumulate cash that waits to be invested elsewhere -
have a
good bit of money in T-bills or money market funds. These days, we're not
getting much on that money - somewhere between 2-4% at best. The
alternatives
are to reach out for slightly less safe returns in order to get even 5%-7%
anywhere else.

Unless you go to Mexico.

Lynn Carpenter, for The Daily Reckoning

P.S. The Bank of Mexico issues Certificados de la Tesoreria de la
Federacion,
called CETES (pronounced sett-ees). These are like US T-bills in that they
are
issued by the central bank and are government obligations. Now that Mexico
is
rated investment grade, as it should be, you can switch your T-bill money to
CETES without undue risk... and collect nearly 7% on the 28-day CETES or
7.2% on the 91-day CETES.

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A Good Primer

Greetings,

My sense is "currencies" is going to be a hot topic in the coming year or
two, and for reasons explained in an article at this location.

Please do NOT click on this if it appears as a hyperlink, since it will
likely not work... just cut and paste it into your browser...

http://www.lewrockwell.com/north/north97.html

John

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