Tuesday, June 5, 2012

The best horse at the glue factory

As I write the Mexican peso is at 14.36 to the U.S. dollar, with some forecasting a spike to over 15 to the dollar between now and the Mexican Presidential elections on July 1st.  

Meanwhile, Charles Schwab's investment newsletter's lead-off story is captioned "Is the U.S. the Best House in a Bad Neighborhood?," which for me immediately brought to mind an investment expert's far more memorable description of the panicked flight to U.S. Treasury bonds we've seen repeatedly since the '08 market crash as people buying "the best horse at the glue factory." I love the black humor, and it reminds us that as awful as the economic and political situation is in the U.S., it's much worse almost everywhere else. 

As for Mexico, the famous quote attributed to Porfirio Diaz comes to mind: "poor Mexico, so far from God and so close to the United States." More black humor, but sadly it's true in many ways. First of all, Mexico's economy is inextricably intertwined with the U.S., which for American visitors and expats means that we're very unlikely to see the kind of major upsurge in the strength of the peso vs. the dollar that has wreaked havoc with the lifestyle of expats on fixed incomes in places like Thailand and Argentina. 

With the European Union on the verge of total meltdown, the U.S. economy in the toilet and key Asian economies slowed to a crawl by lack of demand my crystal ball says that more upheaval and panicked fleeing to safe harbor assets is very likely. Times like these make me appreciate the design of Harry Browne's Permanent Portfolio, which continues to respond well to market upheavals. With half of its assets in U.S. Treasury securities paying nothing (T Bills) and next-to-nothing (30 year bonds) respectively, plus 25% in gold bullion that just sits there and the rest in a U.S. stock index fund you'd hardly think this would be an approach that's outperformed the S & P 500 for decades with a only a quarter the volatility, but it is. 

Meanwhile, when the peso hits 15 to the dollar it'll be time to do some serious stockpiling. And for anyone contemplating a visit to Mexico, your timing is perfect - come on down. 

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