Swine Flu and the Mexican Narco State: No Time to Be Long

Things don't look good for Mexico. We knew this when Secretary of State Hillary Clinton made a state visit one of her first and highest priorities.

So with the drug trafficking, the corruption at local and state levels of government, the de facto martial law imposed by assigning police work to the military, the kidnappings, the lawless border areas, the loss of expatriate income from the U.S., the downturn in global trade, the collapse in oil prices, the rise in food prices...

Wait, I forgot to mention Mexican Swine Flu. I think that any long bet on Mexican currency and sovereign debt right now is financial suicide.

Who's taken political control in other failed states when communication, infrastructure and basic services are compromised? Terrorists in Gaza and warlords in Afghanistan, just to name two. No, Mexico City is not Kabul - but there are plenty of far-flung areas where narco gangs already hold more power than the government. If the swine flu epidemic lasts more than a couple weeks, poverty and starvation will push many marginal areas into the arms of the narco gangs.

These narco gangs have cash. They have multiple and creative means of transport when the epidemic has grounded other legal commerce. They will feed the poor in the short run and keep schools open in the long run, if necessary.

Investing conclusion: Go short the peso and short Mexican sovereign debt. Look for possible spike scenarios in food commodities as regional production is disrupted and global trade slows and reroutes.

And the long-shot: Look for the U.S. to legalize marijuana and allow states to tax its sales. Decriminalization won't dent the narco state without including cocaine in the deal. But marijuana would be a start at putting pressure on the drug lords and closing state budget shortfalls.

Disclosure: no positions

Comments

[duster:]

People are dying.

Apr 27 07:30 AM

[John Polomny:]

You did not mention the problem Mexico has not only with lower oil prices but the fact that its major fields are in terminal decline and that Mexico will cease to be a oil exporter in a couple of years. Mexico is a failed state and all the people that pooh poohed the idea of border controls will see their folly when tens of millions of Mexicans try to migrate North.

Apr 27 09:36 AM

[diogeron:]

Mexico is hardly a "failed state." We should be more worried about Pakistan than Mexico. I spend a lot of time in Mexico and unless you are in one of the few towns where the violence is, you are safer by far than you are in most American cities. That doesn't mean I would invest in the peso to be sure, but the hyperbole about the "failed state" status of Mexico is getting tiresome. Calderon is taking on the narco gangs and the gangs are taking on each other. In the short run, it's messy but in the long run, it might be positive for both us and Mexico. We have a perfect symbiotic relationship with Mexico: We buy their drugs. They buy our guns.

Apr 27 11:01 AM

[dtblount:]

A failed state?!?! Are you serious??? Yes, the cartels have caused terrible problems and violence in border towns and in DF, but the vast majority of the country is as safe and stable as ever. Mexico is still a huge trade partner in NAFTA with massive potential from its natural resources (ags and metals too, not just oil) and human capital (one of the youngest populations by avg age in the world).

I would also categorize Mexico as being more risky in the short run...all of these problems (cartel violence, swine flu, reduced remittance inflows, etc) are more short-term. In the long run, I am very bullish of Mexico. Communications, infrastructure, and basic services are not "compromised." I'm not sure what you are focusing these comments on, but electricity, water, transportation services, etc. are still up and running fine.

While the recent swine flu has caused a hiccup in DF, only about 100 people have died in Mexico so far. While this is still terrible, it is hardly the type of outbreak that would lead to the level of political instability you are assuming.

Apr 27 01:58 PM

[Valley Boy:]

Stratfor and some military analysts suggest Mexico to be a failing or declining state. Silver mining companies operating in central Mexico
suggest otherwise. This situation bears watching.

Apr 27 02:28 PM

[John Polomny:]

The Mexican government gets 40% of its revenue from Pemex. The production from its fields is declining rapidly. In fact Cantarell, which at one time was the worlds third largest oil field, declined by 30% 2009 vs. 2008. Within the next few years the country will be a net oil importer. How will the government replace the 40% of revenues they suck out of Pemex every year. I would suggest that if you removed 40% of any country's government revenue the country would become a failed state. It is all about oil exports in Mexico. I could care less about pig flu or narco gangs they are irrelevant.


On Apr 27 11:01 AM diogeron wrote:

> Mexico is hardly a "failed state." We should be more worried about
> Pakistan than Mexico. I spend a lot of time in Mexico and unless
> you are in one of the few towns where the violence is, you are safer
> by far than you are in most American cities. That doesn't mean I
> would invest in the peso to be sure, but the hyperbole about the
> "failed state" status of Mexico is getting tiresome. Calderon is
> taking on the narco gangs and the gangs are taking on each other.
> In the short run, it's messy but in the long run, it might be positive
> for both us and Mexico. We have a perfect symbiotic relationship
> with Mexico: We buy their drugs. They buy our guns.

Apr 27 06:55 PM

[turen:]

everything will be fine! best regards

May 01 05:47 AM