The Ultra-Organized and Elaborate Tactics of Mexican Drug Cartels

Amazing article:

Low, anti-vehicle Normandy barriers, recently installed, ran along the border. Rodriguez said that traffickers use flatbed tow trucks to drop dope-filled vehicles over the barriers. They drive over higher vehicle barriers on portable, custom-built metal bridges. [...]

Cartel surveillance teams generally know how long it will take a law-enforcement unit to get from one point to another — they measure response times. They are familiar with the protocols of Border Patrol shift changes. They know that there are fewer agents in the field on weekends. They have mapped everything — all the forest lanes wavering away from the Lochiel gate, for example, as well as the dead-end spur roads. They know whether the Border Patrol has been using trackers in an area and how much lead time a group will need to outpace them.

If a vehicle crossing the border at Lochiel trips a sensor or is otherwise detected and law enforcement responds, scouts direct it onto a spur road, where its driver covers it with brush and a camouflage tarp. (Scouts may also note the potential presence of a new sensor.) Already provisioned for this eventuality, drivers will wait for minutes or hours or days, until the roads are clear.

Traffickers use decoy groups to walk across the border at known sensor locations. Or they may employ banzais, who simultaneously scale border fences and scatter, vacuuming up manpower. Jim Chilton told me that 12 men with assault rifles once marched across the border and straight at a National Guard surveillance post. The men paused while the alarm rippled through the system and then crossed back. As Border Patrol units and tactical teams and sheriff’s deputies and helicopters descended on the post, smugglers crossed en masse for miles on either side.

Mexico Doubles Size of Century Bond Offering

Mexico sells even more of this junk than anticipated!

Mexico launched its first 100-year bond on Tuesday, to win cheap funds from global investors who are snatching up risky emerging market assets that promise relatively-high yields.

The first tranche of the century bond attracted enough demand for an issuance of $1 billion, double the $500 million expected earlier in the day, a source close to the deal said.

The bond, which IFR reported was priced to yield 6.1 percent...

Also,

"The credit quality of Mexico has been improving as opposed to Ireland et al," said Tom Sowanick, chief investment officer of OmniVest in Princeton, New Jersey, which oversees more than $1 billion.

Really? One of my sovereign credit quality measures is number of gunbattles per fortnight, by which measure Mexico is not improving compared to Ireland.

You Can't Fix Stupid - Mexico Issues 100 Year Bonds

In the news today:

Mexico plans to sell $500 million of bonds due in 100 years in overseas markets in the country’s longest-maturity debt issue. The government may sell the bonds to yield about 6.1 percent as soon as today, said a person familiar with the transaction.

It's hard to express how stupid you would have to be to lend money to Mexico at a fixed interest rate for a century.

The peso was trading at about $12.5 MXP to $1 USD, when in the late 1980's, it began a period of hyperinflation due to rapid government printing of paper money, mostly to finance social programs. The hyperinflation created economic chaos within the country and led to continual devaluations of the currency in the global markets. The peso devalued from 12.5 to about 3000 pesos for $1 USD in a few years. In 1993, Mexican government under Carlos Salinas de Gortari lopped off the three zeros, creating the Nuevo Peso (New Peso, MXN) at about MXN 3 $1 USD. The peso has continued to inflate/devalue from that MXN 3 to $1 USD, to about MXN 13 for USD $1 (early 2010). The peso thus appears to have been holding its value over the last 25 years (an apparent change of only 12.5 to 13 for $1 USD); when in reality, the dollar's value has increased by over 100,000 percent. As of early 2010, the Mexican government continues to fight a slowly losing battle against inflation as the peso continues to inch up against the USD. (In 2009 alone, it went from 10 to 1 to 12 to 1.) [wiki]

I might loan money to Mexico for a couple hours, but a century is maybe not a great investment idea?

Mexican Peso Short

I have been looking at shorting the Mexican Peso. I would do it via FXM, the CurrencyShares Mexican Peso Trust. The expense ratio of 0.4% is a tailwind for the trade.

Shorting pesos does have a big carrying cost of almost 7%. That is a disincentive, since God knows how long it will take people to realize what a basket case Mexico is.

I am super bearish on Mexico. Militant groups are now setting off improvised explosive devices in Mexico. The drug-trade violence is like a low grade civil war. This violence combined with Mexico's longstanding corruption discourages tourism and foreign investment.

According to a recent Economist article, oil accounts for 40% of federal revenue in Mexico. Almost a quarter of Mexican oil production is from the crashing Cantarell field. "As recently as 2004 Cantarell, the country’s main offshore field, produced 2.1m BPD of crude. Now its output is just 600,000 BPD." Soon, the country will be a net importer of oil, meaning no more dollars.

I found out something else interesting. The code of federal regulations specifies minimum capital ratios for banks, and risk categories and weights for the assets banks own.

The following assets are considered Zero percent risk weight:
(i) Cash, including domestic and foreign currency owned and held in all offices of a national bank or in transit.
(ii) Deposit reserves and other balances at Federal Reserve Banks.
(iii) Securities issued by, and other direct claims on, the United States Government or its agencies, or the central government of an OECD country.
(iv) That portion of assets directly and unconditionally guaranteed by the United States Government or its agencies, or the central government of an OECD country.

So banks are allowed to treat Mexican debt as if it has no risk?

I'll be following up on the peso later...