Today’s guest post comes from Eddy Elfenbein of Crossing Wall Street fame. Eddy is classic Graham & Dodd investor. He is an independent consultant and advisor based in Washington, DC. His background is in financial newsletter publishing, and prior to that he was a retail stock stock broker. He currently blogs at CrossingWallStreet.com.
For today’s guest post, Eddy discusses Mexico’s Guillermo Ortiz, who he describes as "Best Central Banker in the World Today."
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Imagine a country whose central bank responded to growing inflation by raising interest rates, strengthening the currency and trying to win investor confidence. This may be shocking to some U.S. investors, but proper monetary policy is still being practiced. Just not here in the United States. I’d give the award for Best Central Banker in the World Today to Mexico’s Guillermo Ortiz.
This is a story that truly ought to be better known. Mr. Ortiz has now been at the helm of the Mexican central bank for over ten years and despite many obstacles (consider that 70% of Mexicans don’t even use banks), he’s emerged as the anti-Greenspan. Mr. Ortiz previously served Finance Minister where he helped clean up the mess surrounding the peso devaluation in 1994.
What impresses me about Oritz, who earned has a Ph.D. from Stanford, is that he’s made it unequivocally clear that the Banco de Mexico (or Banxico) intends to fight inflation until its wins. In the last three months, the bank has raised rates three times. Interest rates now stand at 8.25%, an amazing 625 basis points higher than in the U.S. even though inflation rates are roughly similar.
Make no mistake; the Mexican economy has its share of problems. Growth is slowing and inflation is on the rise. Of course, much of this is understandable considering their raucous, hung-over neighbors to the north—nearly 80% of Mexico’s exports go to the U.S. Still, my money’s on Ortiz. He’s even had the chutzpah to criticize our monetary policy as being “very lax.” Don’t expect to hear anything like that from Senators McCain or Obama.
And what about that hopeless currency, the peso? Well, it’s on a roll this year. The peso is already up 7.5% for the year and earlier this month, it reached a six-year high. In my opinion, the rate gap between the U.S. and Mexico will only grow. The futures market seems certain that the Fed will hold steady for the rest of the year, but I think Banxico could very well raise rates again. Their next meeting is on September 19.
The most recent report for Mexican GDP showed that Q2 growth came in
at 2.8%, which isn’t horrible but it was below expectations. The
economy isn’t so fragile as to ward off monetary tightening. Retail
sales are weak and the stock market is still hurting—the Bolsa is at a
seven-month low. Of course, that comes on the heels of an enormous
rally so some consolidation would be expected. Consider that shares of EWW, the Mexican ETF, more than quadrupled in five years.
What’s really hurting the economy is that less money is being sent
home from workers living abroad. And by abroad, you can probably guess
what country I mean. Speaking of which, Ortiz also favors, sit down for
this one, stricter immigration controls in the U.S. so Mexico
can hold on to its workers. Ortiz said, “I think Mexico needs its
people. It would be best to keep its people in Mexico, and it would
give incentives for Mexico to create the jobs that are needed.” Increíble!
I’m guessing Ortiz has some sympathy for Hank Paulson. When the
Mexican financial system imploded, Ortiz was called into to clean up
the mess. Paulson certainly has a tough task, but look at what Ortiz
was facing—inflation reached 52% and investment fell by one-fourth.
Thing got so bad that the former president basically can’t show his
face Mexico and he’s been exiled to Ireland. By contrast, Senor
Greenspan now works at Pimco! Thanks to Ortiz, Mexico righted itself
and paid back its bailout money to the United States. In fact, Uncle
Sam made a half-billion dollar profit.
The thing about finance, public or private, is that it’s really an
issue of establishing confidence. If investors think you’re serious,
then they’ll invest with you. So far, Ortiz seems to winning the battle
of establishing credibility. The yield on Mexico’s long-term benchmark
bond recently fell to its lowest level since June 6.
Mexico is a country with many deep rooted economic problems,
however, the country has taken many steps in the right direction. For
example, the election of the pro-market government of Felipe Calderon
(cue Larry Kudlow) is helping to bring long-overdue economic reforms
like privatizing the oil industry. Unfortunately, Calderon supports
some poorly considered ideas like price controls. Unlike the United
States, the Mexican government seems to be serious about fiscal
discipline. Their legislature…er, not so much. One issue in
particular that Ortiz wants addressed is reducing the government’s fuel
subsidies. Good luck with that one, but at least he’s trying.
(Incidentally, Ortiz wants to reduce the subsidies even though he
thinks that will increase inflation in the near-term.)
The government recently announced that its current account deficit
widen to over $2 billion which came as a shock to economists who were
expecting a shortfall of $750 million. The trade deficit declined but
that was helped by the increase in oil prices. The Mexican economy
faces several significant challenges ahead. Most importantly, inflation
is simply too high. But I think Ortiz realizes the difficulties and his
current policies will help Mexico be well-prepared for the future.
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Good stuff — thanks Eddy
most depressing post I’ll read today.
Hey Barry,
Like the tags at the top (i.e. “Economy | Federal Reserve | Inflation”), does it make sense to have some tag for guest postings? I think it would be an interesting thread to follow through the postings.
Thanks.
Look at Indian Central Bank. They look good.
I would agree that Mexico’s central banker is a good one over the last ten years, but the best in the world is further south in Brazil where two bankers have headed the BCB in the last ten years. Brazil currently has the highest real (true), real interest rates in the world. Their central bank rates are now over 12% having been raised in the last few months. Their inflation is as low as the US, and the appreciation of their currency the Real, a name that now seems appropriate, has appreciated over 100% against the dollar in the past five years. It has withstood an election of a liberal that the investment community thought would be bad, and the Argentinian debt crisis. While Argentina defaulted on its bonds, Brazil and it companies honored all agreements. Today we see the result. Argentina has runaway inflation, as does most of Latin America, and Brazil with its much higher rates, has almost none. Going forward its self-sufficency in all forms of energy and in most commodiites will help with that inflation.
I would wait to pass judgement on the MCB’s ability. I am extremely dubious. Mexico is corrupt, ill-managed and according to the gini coefficient (as real world data would validate) they are about the furthest thing from a democracy as there is. Mexico has lived off of the kindness of the U.S. with NAFTA and our liberal illegal alien policy. Both have been their largest sources of capital……….other than oil. Which, as we know from the resource curse, is not a sign of economic prosperity.
Over the coming decade, Mexico is very likely going down for the count. Big time.