Ciudad de México

The food is good, and cheap. This is one of the only reasons a person would visit Mexico City. There are many different Mexican regional cuisines that are worth knowing, and they are all available here since like any capital city it draws people from the provinces. CDMX is close to both coasts and gets good seafood. There's a notable international food scene: Italian, Japanese, Israeli for example. The famous restaurant Pujol is a ridiculous $175pp for the taco tasting menu and it’s hard to even get in. It's located by the foreign embassies and Fortune 500 offices in Pulanco so it must be expense account dining. Saw Contramar mentioned in Bon Appétit magazine, the food is good and service is excellent. It was full of rich locals, not so many tourists as other places. A meal (or something like a latte) costs about half of what it would in U.S. Note that the massive Mexican diaspora in the southwest has fully recreated its cuisines so you can eat about as well in the Hispanic parts of Los Angeles or Phoenix.

Great climate. People aren't aware of the vastly superior climates of high altitude Latin American cities. The record high in CDMX is 93 degrees. The afternoon is hot but mornings and evenings are cool. There's no air conditioning in older buildings - people leave their windows open. The air is still pretty smoggy. You can just barely make out the 4000 meter (13,000 foot) peaks that are 10-15 miles away. Back when the air was worse, it must have been unbreathable.

Off the radar. Don’t see many tourists. Not like going to Barcelona or Iceland. There may just not be enough here for the city to make it as a major tourist destination. This despite the proximity, closer than people realize. Seattle is closer to Mexico City than New York City. Is Mexico City in some sense the emerging capital of the American West? (Note that Hispanics in Florida, the NYC metro, and Chicago are not Mexican - only the West has Mexican Hispanics.) Mexico City shows a possible future, or at least tendencies and trends, for some parts of the U.S.

As far as I could tell, there is not one good bookstore in the best neighborhoods of the metro area of 20 million. (The biggest in the western hemisphere.) At the few mediocre bookstores, the books are shrinkwrapped so that you can't page through them. The quality of retail merchandise in general was low, like a former Communist country. No wonder rich Mexicans come to the U.S. for all of their big shopping runs.

Noisy. In Muslim lands they have the call to prayer; in Mexico they have the call to tamales. There are trucks that drive around looking for metal to recycle, and they blast a recording of a child listing names of metal appliances. Trash pickup is done in a peculiar way: the trash truck parks on your street, one of the trash men walks around ringing a handbell, and you (or probably your doorman) brings out trash and the trash men sort it.

Very shabby: buildings are dirty and decaying, and everything looks gritty. Building foundations are crumbling. Sidewalks buckle and heave unbelievably - don't try walking if you have poor vision or are elderly. (You don't see any old people out in public though.) The road infrastructure is very dated. It seemed like they might be consuming capital - not keeping up with deferred maintenance. They would probably reset to an even lower standard of living without oil or without remittances. Sailer's theory is that the shabbiness is an anti-gentrification measure, keeping gringos out by making them uncomfortable. However, they are actually eager to have tourism and trade. They are very friendly to visitors. I think this level of development and maintenance is just what they are able to maintain with their human capital. The neighborhood of La Condesa has impressive Art Deco apartment buildings (from the 1930s) in admirable quantity. There are neighborhoods in Nashville and Seattle that have more cranes than the entire CDMX city center.

Cheap labor. Businesses are much more heavily staffed. Hard to believe the number of people working at small cafes and restaurants, or at department stores. Street vending is ubiquitous. Sidewalks and park boulevards are lined with people in tents selling things like snacks and newspapers, or street food. Far more of them than you would think the market could sustain. People walking into traffic jams trying to sell snacks or cigarettes. Organ grinders looking for donations. People playing music outside restaurants looking for donations. Overall there is just a glut of Mexicans - and that's after having sent so many people north via the population safety valve.

They are firm believers in walls and fences! It was controversial when some razor wire was rolled out on the US border, but I have never seen so much razor wire as down there in my life. Houses and apartment buildings in the best neighborhoods will have 10 foot tall fences topped with spikes and the spikes will be crowned with razor wire. Sometimes above the razor wire there are four or five strands of electric fencing too. Schools and government buildings are fortified with fences like this, and sometimes sandbags in front, the way military bases in Afghanistan and Iraq are set up. Everywhere the buildings present a totally armored face to the street.

At the same time that private spaces are so unwelcoming, the parks are very pleasant. In nice neighborhoods, streets are lined with tall trees and the understories in the parks are planted with trees and flowers. The jacaranda is popular, and colors like the color of the jacaranda flower are popular colors for buildings. 

Whatever is causing the abundance of passive security measures also leads to active ones: heavily armed guards. Office Depot and Radio Shack had guards with 12 gauge shotguns. A department store along the lines of Macy’s had armed police at every entrance, the parking entrance, and the loading dock. One was carrying a submachine gun. Watching a cash pickup from a small business, the armored car had three carriers who all went into the store. When returning, one of them walked point with a 12 gauge shotgun.

Oil and Fragility

The U.S. economy chokes whenever there is a spike in oil prices.

Meanwhile, as the New York Times puts it, Russia Cashes In on Anxiety Over Supply of Middle East Oil.

That is what Taleb would call anti-fragility.

By the way, Russian equities - including their gigantic energy companies Lukoil and Gazprom - trade at much lower multiples than U.S. or Chinese stocks. This is ostensibly because of Russian corruption.

Yet people are OK with buying Mexican century bonds or Chinese stocks or the Market Vectors® Africa Index ETF, which is 21% invested in Egypt and 16% in Nigeria.

The question: what distinguishes Russia from these other basketcases in the eyes of investors?

A Cheap Option: Emerging Markets Debt Has Low Implied Volatility

The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) is an ETF that invests in U.S. dollar-denominated government bonds of "emerging markets" countries.

The largest holding is the Ukrainian 7.65s of 2013, which are 7.29% of the fund. Ukranian debt yields 11 percent.

Some of the holdings seem respectable, like Russia and Brazil. Others, like long-term Mexican (due 2031!), Turkish (due 2036!), or Pakistani debt, not so much.

In the heady days of fall 2007, shortly after it was introduced, PCY hit its all time high of 26.28, when it was yielding (current yields) roughly 6.4%. Interestingly, it bottomed in October 2008 - months before U.S. equities bottomed - at 14.24, when it yielded 11%. It now trades at 25 to yield, once again, 6.5%.


The debt owned by PCY is pretty long term - effective duration 7.31 years. This means that an increase in yields on emerging markets debt would smash the value of PCY.

In fact, the likely reactions of PCY to any this year's possible events are fascinating, and generally bearish:

• Dollar denominated foreign yields are priced off of Treasuries. In a Treasuries collapse or hyperinflation scenario, consequently, it will do poorly.
• There is also the possibility of a flight to Treasuries scenario, during a resumed U.S. or global equities selloff, or during a European or other sovereign debt crisis. In that case, PCY will probably not rally alongside Treasuries - since it consists of emerging market debt.
• PCY is dollar denominated. In a dollar selloff, despite being foreign debt, it will do poorly.
  

The only upside for PCY if is emerging market yields drop further. But the spread above Treasuries is not that big. Do you think it will tighten more? Otherwise, do you think Treasuries yields will fall? How would that happen outside of a flight to quality scenario, which would not benefit emerging market rates?

Given that PCY will probably do poorly under three different scenarios that occupy a large expanse of the probability distribution, you would think that this is priced into the options market.

But, the implied volatility of PCY is low - below 10% - matching the low historical volatility it has enjoyed for most of the past year.

So, for those option premiums (the Sept 2010 22.5 puts trade at $0.35), are the option writers being compensated for all of the dark storm-clouds that my three bullet points above constitute?

Not hardly. Therefore, the trade is to snag some of that cheap insurance while Mr. Market is offering it.

Were PCY to yield 10% again, you could expect a 25% haircut, which would give the Sept 2010 22.5 put an intrinsic value of close to $4: 10x current levels. And the extrinsic value, assuming some time until expiration, would probably be quite large as well.

Mexico Racing Against Time at Cantarell Oil Field

MEXICO CITY (Reuters) - Mexico's state energy company Pemex is scrambling to extract what oil it can from its key Cantarell deposit as growing water and natural gas levels in the giant field depress yields of crude.

Cantarell produced more than 2 million barrels per day as recently as 2004, but yield has plunged as the aging field enters its natural decline phase, sending Mexican oil production tumbling to its lowest level since the mid-1990s.

The giant offshore Akal field and several nearby deposits that Pemex groups as Cantarell produced only 713,000 bpd in April, below Pemex's forecast of 756,000 bpd for 2009. Yields from the area have fallen at annualized rates of more than 35 percent in recent months.

Mexico Budget Gap Fuels Debt Sales, Ratings Concern
The deficit in Mexico, while less than half the gap in neighboring U.S. as a percentage of GDP, is more of a concern because 37 percent of the budget is funded by oil, a revenue source that “is very volatile,” Galvan said.