Mexico should put Trump and his protectionista Lighthizer in their place by getting the US congress to stop this idiocy.

I make no bones that I am far more sympathetic to Mexico than Trump's USA at the ongoing North American Free Trade Agreement (NAFTA) "renegotiations." What US Trade Representative Robert Lighthizer is attempting to do is actually beggar-thy-neighbor masquerading as an "update" of NAFTA. Let's not mince words here: No self-respecting nation would agree to such one-sided stipulations--especially to replace ones that aren't so lopsided.

Among other things on the American negotiators' wish list:

• A US proposal to protect its seasonal produce;
• A sunset clause floated by the US that would kill NAFTA after five years unless the three parties renegotiated;
• US insistence on using the pact to cut its $64.3bn trade deficit with Mexico;
• US desire to see higher US [50%!] and North American content [85% from 60%], so-called rules of origin, in car parts
• Also, a 5-year "sunset clause" if an extension is not successfully renegotiated

The last three are especially egregious for what is ostensibly a "free trade" agreement: Isn't the market supposed to determine where things are made by whom to sell to others? Moreover, why should a regional trade agreement have stipulations for minimum content from one country and not the others instead of having just regional rules of origin? Maybe they should rename it the NA4USAFTA if the Mexicans and Canadians are dumb enough to agree to such unfair giveaways. The sunset clause makes no sense to the others since it's only meant to facilitate piling on more stipulations favorable largely or solely to the US.

In short, the US wants the others to swallow "poison pills" that are thoroughly unpalatable for its benefit--the very definition of mercantilism. What, then, should Mexico do? I've written about the options it can use before, but also consider who will make the ultimate decision on behalf of the United States to leave NAFTA. That's right, it's not Trump but Congress according to international trade law specialist Joel Trachtman:

Many members of Congress work under the fundamental misunderstanding that the president has the power, on his own, to terminate NAFTA. They are unaware that under the Commerce Clause of the Constitution, while the president is the negotiator and signer of trade agreements, he is not the “decider.” Power to approve, and to terminate U.S. participation in, trade agreements is assigned to Congress[...]

And yet, the Supreme Court has said, in the 1994 case of Barclays v. California, that “the Constitution expressly grants Congress, not the president, the power to “regulate commerce with foreign nations.” If the president, acting alone, were to terminate U.S. participation in NAFTA, he would be imposing regulation on commerce, without congressional participation.

Having assented to these agreements, only congress can undo them. Indeed, the legislature should probably make it eminently clear to Trump that he should not pretend to be able to exit NAFTA using executive power:

While Congress can make specific delegations of powers to the president in the field of trade, it has steadfastly avoided delegating power to the president to terminate trade agreements. So there is little basis for an argument of implicit delegation by virtue of the inclusion in these agreements of clauses allowing the member countries to withdraw.

If President Trump proposes to give notice to terminate NAFTA without congressional approval, U.S. exporters, and U.S. consumers, and perhaps also U.S. members of Congress, should sue. Before we reach that point, Congress could pass legislation specifically denying the president authority to terminate these trade agreements, in order to avoid uncertainty. It has the power, and the responsibility, to do so. The Founders wisely determined that Congress, not the president, is the “decider” in the field of trade.

The Mexicans are right to lobby US firms with continental operations. However, they should also lobby lawmakers to assert their primacy on matters of undoing trade agreements. It is unlikely that a majority wound want to kill NAFTA, so Mexico should start the ball rolling in this respect, too. The Canadian President Justin Trudeau is doing so already even if his country has less to lose for reasons I'll discuss more in another post.

Aside from refusing to be force-fed Trump's s--t, they should appeal to those whose voice really matters for this issue.

As Eddie Money once sang, "Gimme Some Water."

To me, it's the most distasteful thing imaginable: why would persons of Latin American heritage help build the infrastructural centerpiece of Donald Trump's bigotry? As it turns out, however, there is no shortage of such folks in the construction industry who are eager to commence work on the Great Wall of Trump. As you would imagine, their excuse is that it's just business--that's all. Nevermind the social consequences and all that jazz.

As the bidding process commences on bits and bobs of this project, the evidence is there for all to see:

Ten percent of the companies interested in bidding for the first stage of the construction of Donald Trump’s border wall with Mexico are Hispanic-owned businesses, as construction firms wrestle with the morality of profiting from the controversial infrastructure project.

More than 600 businesses have formally registered interest since 24 February, when the Department of Homeland Security issued a presolicitation notice for contractors to perform the “design and build of several prototype wall structures” for the border.

Excuses from would-be contractors vary. A common refrain is that the wall is incidental to comprehensive immigration reform:

“The story isn’t, ‘Hey there’s a Latino guy building a wall to keep other Latino people out,” said Michael Evangelista-Ysasaga, CEO of the Penna Group in Fort Worth, Texas. “It’s that we need comprehensive immigration reform.”

That said, the Mexican government has now applied moral suasion against Mexican-owned contractors building the accursed wall:

Mexico's government on Tuesday warned Mexican companies that it would not be in their best "interests" to participate in the construction of U.S. President Donald Trump's border wall, though there will be no legal restrictions or sanctions to stop them if they tried.

While some Mexican companies stand to potentially benefit from the controversial infrastructure project, residents south of the border view the wall and Trump's repeated calls to have Mexico pay for it as offensive. That is putting public pressure on firms to abstain from participating.

"We're not going to have laws to restrict (companies), but I believe considering your reputation it would undoubtedly be in your interest to not participate in the construction of the wall," said Mexican Economy Minister Ildefonso Guajardo.

"There won't be a law with sanctions, but Mexicans and Mexican consumers will know how to value those companies that are loyal to our national identity and those that are not," Guajardo added.

His comments echo those of Mexico's foreign minister Luis Videgaray, who said on Friday that Mexican companies that see a business opportunity in the wall should "check their conscience" first.

To me, there are things simply beyond the pale that I wouldn't do for any amount of money. If I were a Mexican construction contractor, this would easily be one of them. It is the moral equivalent of normalizing extreme bigotry.

It's time to get it on?

And so what was perhaps inevitable has finally broken out: Mexican President Pena Nieto's fruitless efforts to get on the good side of his American counterpart have come to an impasse. Appointing a Trump-friendly foreign minister and sending him to Washington ahead of time before a meeting between North American leaders didn't work. In recent days, Trump made an executive order concerning the construction of a US-Mexico wall and tweeted that Pena Nieto shouldn't bother coming to the White House if his country didn't intend to pay for the wall. Perhaps preserving a shred of dignity, Pena Nieto then counter-tweeted that he didn't intend to go.

OK, things are pretty bad between the US and Mexico. However, what sorts of cards does Mexico have to play against Trump implementing, say, a 20-40% tariff to help defray the costs of building a border wall? Keep in mind that Mexico sends nearly 80% of its exports to the US, while the US *only* sends less than 15% of its exports to Mexico. If trade were to cease full stop or were to be hampered in a significant way, the loser is obvious. What, then, are the cards Mexico can play?

[1] Cease security cooperation with the United States. In other words, allow sinister types to bring drugs, crime and so on to their heart's content to America. [You know, there are these things called "air transport," "digging below the fence" and "going over the wall".]

“We will bring to the table all themes,” [Pena Nieto] said in a speech. “Trade, yes, but also migration and the themes of security, including border security, terrorist threats and the traffic of illegal drugs, weapons and cash.”

His hope is that by introducing broader uncertainty about the bilateral relationship — Will Mexico still cooperate in the fight against drug trafficking? Will it stop foreign terrorists from using Mexico as a way station into the United States? — Mexico can raise the stakes enough for Mr. Trump to reconsider his “America first” approach to commerce.

[2] On the economic front, there's always [nearly] all-out economic conflict. This may actually be a sensible strategy since it's highly unlikely that the WTO would approve of the US singling out Mexico for tariffs for such blatant, unilateral trade discrimination. 

If Mexico stands its ground and even allows Nafta to dissolve, it would send its own signal to China: Resistance is not futile. And Mr. Trump’s threat to raise tariffs against Mexico to 35 percent could easily be challenged under the rules of the WThe time orld Trade Organization.

This is, of course, a hugely risky strategy for Mexico. When Mr. Trump entered the presidential race in June 2015, a dollar was worth about 15 pesos. Now it’s worth about 22. A frontal confrontation with the United States might send it to 40, Mexican officials fear, fueling capital flight. And yet that may be Mexico’s strongest card.

This being a political economy site, you also have to consider whether Pena Nieto can weather the further discontent that would come his way in the meantime. With a less than 15% approval rating, can he stick around waiting for things to get better eventually?

Koreans and others are still doing alright in Mexico. Arguably even better in recent months.

Let us first get an update on the state of Mexican exports to the United States--by far its largest export market. Buoyed by automakers setting up shop south of the border to manufacture automobiles and automobile components at significantly lower costs destined for the United States, it's become a key manufacturing hub for this industry. Consequently, Mexico is now the second-largest exporter to the US (China is tops) after overtaking Canada. To an economist, it simply makes common sense. To the isolationist-protectionist, bunker-mentality specialist Trump, it's "stealing American jobs":

Mexico is overtaking Canada as the No. 2 exporter of goods to the U.S. this year, in a sign of how economic ties have deepened between the two countries even as the relationship is being questioned by President-elect Donald Trump.

Shipments from Mexico totaled $245 billion in the first 10 months of the year, according to Commerce Department figures released Tuesday, ahead of Canada’s $230 billion. If the trend continues, it would be the first time ever the U.S. bought more imports from its neighbor to the south. The two countries ended 2015 tied in exports to the U.S.

Now, more on all this Trumpery. All of Trump's over-the-top anti-Mexico rhetoric has sunk its currency, the peso, to very weak levels.  Mexicans' worst fears came to pass with the US presidential elections that sunk the currency even further. All-time lows, in fact. But, guess, what: just before Trump assumes office, Mexico has turned an expected trade deficit into a surplus, with a weak currency contributing quite a lot. In large part, this unexpected turn of events is due to his rabid anti-Mexico rhetoric about building a wall and the United States leaving the North American Free Trade Agreement (NAFTA):

Mexico is overtaking Canada as the No. 2 exporter of goods to the U.S. this year, in a sign of how economic ties have deepened between the two countries even as the relationship is being questioned by President-elect Donald Trump.

Shipments from Mexico totaled $245 billion in the first 10 months of the year, according to Commerce Department figures released Tuesday, ahead of Canada’s $230 billion. If the trend continues, it would be the first time ever the U.S. bought more imports from its neighbor to the south. The two countries ended 2015 tied in exports to the U.S.

Consider the following unexpected scenario: as long as Trump does not do something radical like leave NAFTA (which, unfortunately, appears under the executive's privilege), Mexico may actually be helped by Trump. Unexpected consequences arise all the time. If so, Michael Bloomberg's advice is sound: don't pay attention to Trump's sound and fury but rather his administration's policies:

Ignore Donald Trump’s words and focus on his deeds, Michael Bloomberg has told Mexico, advising the country to use the president-elect’s antitrade rhetoric as a wake-up call to sharpen its economy’s competitiveness.

“My advice for Mexico is to use this as an opportunity to look inward and see what you can improve to make this country more competitive,” the former New York mayor, whom Mr Trump last week asked for advice on a potential cabinet nominee, told the FT during a visit to Mexico. On a call last week the two laughed about barbs they traded during the election campaign.

The world economy is a weird place. Obviously, things are not what quite what they seem on the surface.

Wave this in front of the dimwit Trump and collect lots of government money.

President-elect Donald Trump took to Twitter on Thursday night to say Ford Motor Co. executive chairman William Ford Jr. had called to say the company would not move production of the Lincoln MKC from its Louisville Assembly Plant to Mexico.

Ford, however, said it neither planned to close the Louisville, Ky., plant nor reduce jobs there. The company said it had considered moving Lincoln production to Mexico to increase production of the Ford Escape in Louisville. Trump criticized Ford during the campaign for its decision to move small-car production from Michigan to Mexico. Trump suggested he might impose tariffs on Ford cars assembled in Mexico.

Trump, who campaigned on promises to keep manufacturing jobs from fleeing the country, claimed credit for a deal in which Indiana state officials agreed to give United Technologies Corp $7 million worth of tax breaks to encourage the company to keep around 1,000 jobs at its Carrier unit in Indianapolis instead of hiring in Mexico.

The agreement was less than a complete victory for Trump, as the air conditioner maker will still send an estimated 1,300 jobs there. The deal does nothing to prevent other employers from shipping work out of state and has been criticized by Democrats and Republicans alike who call it corporate welfare.

Sanders, who attacked U.S. trade policy in his race against Hillary Clinton for the Democratic presidential nomination, said Trump's deal with Carrier set a "very dangerous precedent" of having taxpayers subsidize multi-billion dollar corporations to "beg them" to keep jobs in the country.

• STEP 1: Have existing manufacturing or other operations abroad. 
• STEP 2: Ensure widespread media attention about an impending move so that Donald Trump or his minions like Mike Pence hear about about it. 
• STEP 3: Wait for Trump or his team to contact you to arrange for financial compensation so that these jobs are "kept"Stateside.
• STEP 4: Trump tweets about "keeping jobs in America" to impress the stupid while you're laughing all the way to the bank since you probably didn't intend to send jobs abroad anyway.

I know a money-making racket for companies when I see one. It's called "Pretend to Make America Great Again by Keeping Jobs Stateside."

There's an interesting article on MarketWatch on how the FBI issuing a recent statement that it would look further into Hillary Clinton's e-mails--here we go again--has affected various markets. Earlier in the day, it looked like US stock markets would end a three-day losing streak, but the uncertainty reintroduced into the American presidential elections put paid to that as understandable fears of a Trump presidency returned.

More interestingly from an international perspective, the Mexican peso hit the skids once more as "Build a Wall" Trump and his NAFTA-canceling xenophobia were given a lifeline:

Just when you thought it was all over...

"Delay when we need to pay you back...or we'll default on Oct. 28!" Investor relations, Venezuela-style.

When oil prices were at $100 or higher, Venezuela was flying high, using oil revenues to fund "socialist" PR stunts such as selling subsidized heating oil for poor Americans. As the price of oil tanked, however, the Venezuelan government has been less able to mount such extravagant displays of "generosity." After years and years of low oil prices, we instead have a situation in which state-owned oil company PDVSA is now threatening its creditors with default by next week if they do not accept the swap of bonds due in 2017 with new ones instead due in 2020:

Venezuela's government-run oil giant -- the country's largest source of cash -- is warning that it could default on its bonds as early as next week. Petroleos de Venezuela S.A., or PDVSA, failed to get investors to agree on a deal to push back debt payments by three years. The company said it is extending its deadline for a third time so investors can accept a deal by Friday night. This time, it warned that things could get messy. "If the exchange offers are not successful, it could be difficult for the company to make scheduled payments on its existing debt," PDVSA said in a statement Monday night.

PDVSA owes $1.6 billion in principal and interest on October 28 and another payment of $2.9 billion is due on November 2 for a separate bond. It's unclear if PDVSA may actually default or if it's trying to strong arm investors to take the deal. "I don't think they've prepared themselves for a default, I think it's mostly just a threat. The concern is that they're starting to talk about it," says Siobhan Morden, head of Latin America fixed income strategy at Nomura Holdings.

In total, Venezuela is asking investors to "swap" $5.3 billion of bonds due in 2017 with bonds due in 2020, essentially allowing the government to push back payments. But PDVSA hasn't been able to lure enough investors to accept the offering. It's led Standard & Poor's to cut its rating on PDVSA in mid-September to two notches above default.

What does PDVSA matter to Venezuela? Pretty much everything in terms of generating foreign exchange:

PDVSA represents much more than just an oil company. It is Venezuela's lifeline. Oil shipments make up over 95% of the country's export revenue -- that's cash the government badly needs to pay for imports of food and medicine, which are in short supply. Things have been so badly mismanaged that Venezuela's oil production hit a 13-year low over the summer after oil services provider such as Schlumberger (SLB) dramatically reduced operations earlier this year due to unpaid bills.

PDVSA has been used as a government piggy bank, but it's almost run out of funds. Also consider that the PRC, which has given Venezuela an estimated $60B, is no longer willing to give more:

After pouring billions into Venezuela over the last decade, China is cutting off new loans to the Latin American nation. It's a major reversal of relations between the two nations, experts say. It also comes at the worst time for Venezuela, which is spiraling into an economic and humanitarian crisis.

"China is not especially interested in loaning more money to Venezuela," says Margaret Myers, a director at Inter-American Dialogue, a Washington research group that tracks loans between China and Latin America.

But barter trade--China was being repaid in oil--doesn't quite work when PVDSA is so poorly run that its output has fallen to multi-year lows that there's not much left to barter:

Since 2007, China's state banks loaned Venezuela $60 billion, according to the Inter-American Dialogue. That's more that it loaned to any other Latin American country. China is considered Venezuela's most important creditor. Of that, Venezuela still owes China approximately $20 billion, experts say, and there's no sign that it can pay back the amount amid its crisis.

Venezuela pays back the vast majority of its loans to China with oil shipments. Last year, Venezuela's state-run oil company, PDVSA, shipped about 579,000 barrels of oil per day to China, according to the company's financial audit.

Without Chinese aid--and assuming oil prices don't spike back above $100 anytime soon--you can see the endgame in sight for PDVSA.

The United Kingdom's unprecedented feat at the 2016 Rio Olympics--winning more medals [67] in the event following the one they hosted [65 at London 2012]--has not gone unnoticed. Far more populous China is contemptous, having been beaten into second place overall going by gold medals won. Near-neighbor and constant reference point France [in 7th place] regards the UK's performance with a mixture of disdain and envy (as usual). But what are factors went into it beating more populous competitors with presumably more talent to draw on and cash to spend--especially freed of democratic constraints on public expenditures like China and Russia?

1. The establishment of a national lottery to funnel cash to sports programs, whose funding has greatly increased as a result in the new millennium -

Former UK Prime Minister John Major is little remembered outside of the UK since he served between two much more globally-recognized figures: Margaret Thatcher and Tony Blair. However, his government's decision to launch the National Lottery right before Blair's New Labour era came into power may have set up the UK's run of successes at the Olympics.

Reportedly, the UK government spent just £5m per year funding Olympic sport before the 1996 Atlanta games. But UK Sport spent £54m on elite sports in the run-up to the Sydney games in 2000 - where Team GB won 28 medals and ranked 10th. By the time of London 2012 it was spending £264m, and Team GB came third in the medal table, with 65 medals. 

2. Selectivity is funding sports programs -

It is, yes, performance-based funding. In the absence of a prevailing record, they went on forecasts targeting the overall medal haul (which the Chinese have practiced, of course):

Before the beginning of each funding cycle, all sports present to UK Sport a detailed, costed strategy and agree a range of medals which they will aim to achieve at the following Olympic or Paralympic Games. UK Sport scrutinises all the strategies and allocates funding on a "top-down basis". As a spokesperson puts it: "We start with the sports which are targeting the most medals and work downwards i.e. we do not 'salami slice' funding and give some to every sport." The level of funding in each sport is assessed annually and benchmarked against results at milestone target events in each year, to determine whether they are on track for the next Games.

3.Attention to detail -

Those working with the athletes sweat the details that may lend the Brits an advantage come competition time. Three examples are given:

In the build-up to these Olympics, a PhD student at the English Institute of Sport named Luke Gupta examined the sleep quality of more than 400 elite GB athletes, looking at the duration of their average sleep, issues around deprivation and then individual athletes' perception of their sleep quality. His findings resulted in an upgrading of the 'sleep environment' in the Team GB boxing training base in Sheffield - 37 single beds replaced by 33 double and four extra-long singles; sheets, duvets and pillows switched to breathable, quick drying fabrics; materials selected to create a hypo-allergenic barrier to allergens in each bedroom.

In track cycling, GB physio Phil Burt and team doctor Richard Freeman realised saddle sores were keeping some female riders out of training. Their response? To bring together a panel of experts - friction specialist, reconstructive surgeons, a consultant in vulval health - to advise on the waxing and shaving of pubic hair. In the six months before Rio not a single rider complained of saddle sores.

Then there is the lateral thinking of Danny Kerry, performance director to the Great Britain women's hockey team that won gold in such spectacular fashion on Friday. "Everyone puts a lot of time into the physiological effects of hockey, but what we've done in this Olympic cycle is put our players in an extremely fatigued state, and then ask them to think very hard at the same time," Kerry told BBC Sport. "We call that Thinking Thursday - forcing them to consistently make excellent decisions under that fatigue. We've done that every Thursday for a year."

So it's not just about the money. Although it undoubtedly helps, it needs to be spent in a way that maximizes medal chances based on realistic projections and delivering on real-world results if further funding is to be received. Plus, there is much attention paid to things which may give athletes a competitive advantage from suggestions from coaches and players to applying sports research. Actually, the GBP 4M per Olympic medal looks more affordable if divided per capita per year, upon which the tab comes to £1.09.

Let Team GB show us the way in cost-effective sporting expenditures which burnish national pride..

Remembering when Venezuela wasn't a Chavista hellhole: Of Concordes and oil wealth.

The international humiliation of Venezuela illustrates how far it has fallen in the global pecking order in terms of economic significance. A few months ago, I wrote about how international airlines have begun dropping flights from Caracas paid for in local currency since the government is not exchanging (near worthless) bolivars into foreign exchange--namely, US dollars. Contrary to what is happening to the rest of the world, international flights to Venezuela are disappearing fast. Once a gateway to the region, it's now shunned by most of the world's airlines:

Perched on a coastal plain at the very northern tip of South America, Caracas’s Simón Bolívar International Airport was once the aviation gateway to the continent. Charles Lindbergh scouted the airport’s location in 1929, according to Venezuelan aviation lore, and by 1959, Pan Am was routing its New York-Buenos Aires flights with a stop in Caracas. By the late 1970s, Venezuela was so rich in oil wealth that Concorde jets were swooping in to whisk shoppers off to Paris.

These days, the Caracas airport is a depressing, lonely place, and Venezuelan air travel has shriveled. International carriers have about $4 billion stuck in virtually worthless Venezuelan bolivars that government banks won’t let them convert into hard currency, so they are cutting their losses and dropping Caracas flights. LATAM, the largest carrier in Latin America, took off down the runway this week and isn’t coming back.

By most accounts, Venezuela’s economy is the worst-performing in the world, with the International Monetary Fund predicting a 10 percent contraction this year[...]Since 2013, when the bolivar started its steep drop, the number of passengers traveling to and from Venezuela has fallen nearly 30 percent, according the International Air Transport Association, a leading airline trade group. That is an especially large drop, according to spokesman Jason Sinclair, given that commercial air travel is rapidly increasing almost everywhere else.

I was particularly intrigued by the Concorde stopping over in what has since become a pinko wasteland. Did the world's fastest passenger jets really go to Caracas once upon a time? It's true; they did. Adding to the exotica, the famously range-limited, fuel-hungry jets made stopovers in the Azores:

In 1976 BA launched the jet to Bahrain on a convoluted route down the Mediterranean, while Air France began with Rio – but not non-stop. Due to the distance and Concorde's commercially debilitating lack of range, it had to refuel at Dakar in Senegal. A few months later, the people of the Azores found themselves on the route map; the island of Ponta Delgada served as a pit stop between Paris and Caracas – which was in the middle of an oil boom.

Nowadays, of course, the country is reliant on forced labor in the absence of any real incentives to work. From Concordes to slavery--that doesn't seem like progress, but maybe that's just me.

Stock market "trading"--something of a Peruvian novelty.

To be exact, Peru does not appear to have enough freely traded listings to qualify for inclusion in the MSCI Emerging Markets index according to free float and liquidity criteria. That is, interested foreign investors should have the means necessary to purchase such stocks without undue difficulty. How many listings should qualify? Well, it's, er, three. Even by that measure, though, Peru is coming up short. Despite Peru's thin volumes, there would still be consequences for the global universe of equity investments:

The Peruvian stock exchange fears that the move would drive foreign investment away from its $67bn bourse. Moreover, the move would further unbalance the MSCI Frontier index and potentially divert much-needed foreign investment from countries such as Nigeria, Argentina and Pakistan. “It may seem like linguistics, but the index designation is important in terms of retaining and attracting foreign investor assets,” says Mark Mobius, executive chairman of the Templeton Emerging Markets Group, who believes foreign investors are responsible for roughly a third of Peru’s trading volume.

Index inclusion often drives investment since indexed funds are obviously required to place a proportion of their investments in the countries included. Such are China's hopes and, conversely, Peru's fears. And the bush league of the frontier market is really quite tiny:

MSCI launched a consultation on Peru’s potential ejection from its flagship EM index — tracked by an estimated $1.5tn, against just $12bn for the Frontier equivalent — in August last year. MSCI’s concern was that only three stocks in its Peru equity universe meet its liquidity and free float requirements, the minimum number to be eligible for its EM index...

Compounding the problem, MSCI has proposed switching Southern Copper, one of these three stocks, to its US equity universe, where it is listed (it is currently included in the Peruvian section for “historical and index continuity reasons” and generates 43 per cent of its revenues from Peru, with the remainder from Mexico), pushing Peru below the minimum threshold.

While the arguments for and against de-indexing Peru are interesting, the larger fact remains: without wider Peruvian development, you can hardly expect its prospects for stock market indexing to be much better. And so it finds itself in this unpromising position.

Paraphrasing Enya: Rail away, rail away, rail away.

They say that you may lend a country so much that you eventually end up owning it if it cannot pay, and this belief has interesting implications for modern-day Venezuela. It is estimated--no one knows for certain what the true amount is--that China has lent the Chavista-era socialist government $50B [!] in cash-for-oil deals. It supposedly signed up to yet another such deal recently, possibly staving of Venezuela's inevitable default under current leadership.

That said, the Chinese are not totally suckers in every respect. Sure, they may eventually "own" Venezuela with among the world's largest oil reserves--handy for when oil prices rise again in the future. But, for a "red elephant" project--a high-speed rail link in the country's even less-developed interior--the Chinese have already stopped work. Instead of being a "white elephant" project--a government vanity project which gobbles up public funding for not much public benefit, if at all--what we have here is a "red elephant" project: a communistic endeavor which ends up being of use to precisely no one:

As with many unfinished politically motivated projects dotting Venezuela — government critics call them "red elephants" — the decaying infrastructure contrasts with the railway's promising beginnings. A decade ago then-President Hugo Chavez dreamed up the Tinaco-Anaco railway as a way to populate the plains and attract development from long-dominant coastal areas.

Stretching 300 miles (468-kilometers), it was intended to move 5 million passengers and 9.8 million metric tons of cargo a year at speeds up to 135 miles (220 kilometers) per hour. Chavez turned to China, one of his closest ideological allies, for engineering and financing for the project, part of a $7.5 billion deal that has made Venezuela the world's top recipient of Chinese loans. A consortium of state-run companies led by China Railway Group Ltd, the world's largest train maker, was tasked with carrying out construction. 

At this rate, it's likely that nothing will become of it, to no one's real surprise:

But completion is four years overdue, and work, when it happens at all, has slowed to a crawl. At one barracks facility visited by The Associated Press, half a dozen workers huddled under the shade of a giant cement mixer, while two shirtless managers lounged at a control panel smoking cigarettes. Nowhere are the project's declining fortunes more visible than in Zaraza, a sweltering crossroads town of 75,000 where what used to be an arena-sized factory churning out concrete railroad ties was located.

In government news reels from 2013, the complex can be seen towering over manicured lawns and outdoor basketball courts where Chinese and Venezuelan workers socialized. Shortly after the last Chinese managers left in January 2015, a mob of local residents — some of them armed — ransacked the site and hauled away everything of value. First to go were power generators, computers and air conditioners on the back of pick-up trucks. Vandals then tore apart dozens of buildings to scavenge for metal siding, copper wiring and ceramic tiles, some of which are now on sale at roadside stalls. 

While the Chinese are not exactly shy about spreading state largesse to win friends and influence people, what could have led them to believe this project could ever amount to anything but a total waste of time and money?

Ah well, maybe it helped secure their chance to "own" Venezuela in the near future. In which case, it was just a rather costly bribe of sorts.

The mighty dolartoday.com says it's now over a thousand bolivars to the buck.

Those following goings-on in Venezuela's slow-motion descent into financial oblivion should be familiar with the website dolartoday.com. While the "official" rates posted by the Venezuelan government are regarded with deep suspicion as to their veracity--all four (or is that 40?) of them--dolartoday.com has become the more believable source on what the true exchange rate is at which real Venezuelans can change bolivars can change dollars into. The parallel market does not lie, does it?

Aside from the prevailing exchange rate, I also like the illustration of money supply growth (M2), the country's nearly non-existent reserves, and spiraling foreign debt.

As it turns out, the Venezuelan authorities have been trying to put dolartoday.com--a US-based site--out of business for quite a while now. In true hyperventilating loonie left ranting-and -raving style, the site's proprietors are accused of insurrection and generally being Satan's emissaries on Earth:

DolarToday — the Venezuelan website that Caracas has been trying to sue into silence — has survived the latest legal assault. The U.S. District Court of Delaware this week dismissed “with prejudice” an amended suit by the Central Bank of Venezuela, which alleged that DolarToday was undermining the economy and helping fuel Venezuela’s record-breaking inflation...

DolarToday, which is registered in Delaware and run by three Venezuelan exiles, publishes the bolivar-dollar exchange rate that’s being offered in the Colombian border town of Cúcuta, Colombia. But Venezuela claims the site is undermining the currency with fake rates. In its lawsuit, it called DolarToday an “illegal conspiracy to manipulate the value of Venezuela’s currency by widely publicizing false and misleading information about it.” It has also referred to the site as an act of “cyber-terrorism.”

Adam Fox — with Squire Patton Boggs, which represents the Central Bank — said the institution is still “reviewing its options” with respect to an appeal. “While we respect the court, we also vigorously disagree with its assessment of its own power to consider the controversy, which continues to impact the lives of millions of Venezuelans as well as the Central Bank,” he said in a statement. 

The thing is, if dolartoday.com were misrepresenting the true exchange rate at which everyday Venezuelans can avail USD at, wouldn't folks be selling instead of buying dollars to make a profit out of this website's misrepresentation?

I believe it's a fairly straightforward thing to understand what's going on here: Like pretty much all lse that's happening in Venezuela, the government is attempting to blame its economic collapse on foreign devils for almost entirely self-inflicted troubles. dolartoday.com is merely holding up a mirror to what's happening there, and it so happens the Venezuelan government cannot stand the sight of its own economic handiwork.

Shooting the messenger will hardly fix things.

PRC "fishing" boat headed for Davy Jones' Locker.

The PRC's fisher militia strikes again, destroying goodwill as it poaches throughout the world.

I have previously written about how the PRC deploys its so-called "fishing" vessels in pursuit of foreign policy objectives in the Philippines. Aside from exacerbating overfishing by exploiting waters they have dubious claims to, Chinese fishing vessels serve a paramilitary purpose. Being ostensibly "civilian" ships instead of military ones, they should raise fewer suspicions when they accomplish national policy.

Lest you think I'm biased, two recent incidents illustrate the global reach of these nefarious vessels and their dubious purposes. A few months ago, the Chinese inked a deal with Argentina to build a new nuclear plant in the near future. Unfortunately, PRC-Argentina relations recently took a turn for the worse when Argentinian forces sunk a PRC "fishing" ship in its waters:

Argentina's coast guard has sunk a Chinese trawler that was fishing illegally within its territorial waters, the coast guard said on Tuesday, marking a first test for relations between recently elected President Mauricio Macri and Beijing.

In a high-seas chase, a coast guard vessel on Monday pursued the fishing vessel Lu Yan Yuan Yu 010 toward international waters, firing warning shots across the Chinese boat's bow as it attempted to raise the crew by radio.

"On several occasions, the offending ship performed manoeuvres designed to force a collision with the coast guard, putting at risk not only its own crew but coast guard personnel, who were then ordered to shoot parts of the vessel," the coast guard said in a statement.

Guerra economica and ever after.

The late Venezuelan President Hugo Chavez was once described as a "Narcissist-Leninist" by a number of economic commentators. As we've subsequently learned, self-ingratiating policies for the alleged benefit of the global workingman worked a lot better when oil was at $100/barrel instead of less than a third of that. In the latter situation which Chavez's successors find themselves, the scope for the Venezuelans spreading their largesse from oil revenues is greatly diminished since, well, the country is now faced with empty coffers selling the stuff at below cost for months on end.

Enter Venezuela's new finance minister, Luis Salas. It's not a good start that he's not an economist by training but a sociologist, but it only gets more interesting. Recently, he declared that inflation does not exist:

Venezuela's new economy czar Luis Salas is tasked with controlling what is believed to be the world's highest rate of inflation, but comes to the job with an unusual perspective: that inflation does not really exist.

President Nicolas Maduro on Wednesday tapped the 39-year-old sociologist as vice president for the economy amid soaring consumer prices and chronic product shortages, signaling a move toward orthodox socialism in the OPEC nation struggling under low oil prices.

Essays written by Salas describe scarcity and spiraling prices as the result of exploitation by businesses rather than government policy, offering an academic underpinning to the "economic war" explanation that Maduro uses to describe the current malaise of recession, runaway prices and widespread product shortages.

"Inflation does not exist in real life," he wrote in a 2015 pamphlet called "22 Keys to Understanding the Economic War." "When a person goes to a shop and finds that prices have gone up, they are not in the presence of 'inflation.'"

Salas has argued against the idea that excessive printing of money causes inflation - an almost universally accepted tenet of macroeconomics. He insists prices rise primarily because corporations seek excessive profit margins.

He also goes on a tired rather than proffer any explanation of how to deal with inflation (which you wouldn't have to deal with to begin with if it didn't exist):

Salas' numerous online essays are written in flowing academic prose featuring caustic turns-of-phrase such as "speculative-parasite-vulture capital" or "global war of the planetary plutocracy."

Few offer specific policy proposals. One list of ideas for economic policies for 2016 published on Salas' blog includes a recommendation that economic policy should be "coherent" and "should not be passive but rather active and on the offensive." 

Going back to the father of socialism, did Marx also deny the existence of inflation? Actually, no. From Das Kapital:

If the paper money is in excess, if there is more of it than represents the amount of gold coins of like denomination which could actually be current, it will (apart from the danger of falling into general disrepute) represent only that quantity of gold, which, in accordance with the laws of circulation of commodities, is really required and is alone capable of being represented by paper. If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one-quarter of an ounce. The effect is the same as if an alteration had taken place in the function of gold as a standard of prices. The values previously expressed by the price ’1 will now be expressed by the price £2. 

Why is it that today's socialists deny Marx's insights? If anything, this guy is even worse than Chavez--a "Fantasist-Leninist" [!] I'll stick with "inflation is always and everywhere a monetary phenomenon" which sounds rather more likely than "inflation doesn't exist."

Can new Argentine President Mauricio Macri turn things around? His is not the only financially troubled G20 country.

Four days in, I am not seeing major improvements in 2016 for commodity exporters, although I could (and hope to) be wrong for the rest of the year. Whatever the rest of us think hasn't stopped longtime FT commentator Martin Wolf from placing odds on those three countries as potential borrowers from the world's lender of last resort, the IMF, this year. The prospect is certainly not one any of these countries looks forward to, but don't be surprised if one does go the poorhouse in 2016:

The G20 also contains 10 emerging economies. Some are being buffeted by sharp falls in commodity prices (Argentina, Russia and Saudi Arabia are prime examples). Some run significant current account deficits (Saudi Arabia again springs to mind, along with Brazil and South Africa). Both India and South Africa have fairly large fiscal deficits. Others, such as Brazil, have a smaller deficit but a sizeable burden of public debt. The countries that tick all the boxes for instability are Argentina, South Africa and Brazil. Under stress, those countries have recently changed finance ministers. Argentina has a new government that promises a new approach. The IMF stands ready. Will at least one of these countries call upon it? It seems likely.

It's odd that Martin Wolf doesn't mention how much foreign exchange reserves each of these countries holds. But, by that measure, the skimpiest belong to Argentina (surprise!) and South Africa. By this measure, Argentina is most at risk, followed by South Africa.

It must get hot wearing these Olympic outfits when there's no A/C.

It wasn't supposed to be like this. Brazil during the tail end of the Lula years was riding high on elevated commodity prices as China fueled a seemingly endless demand for what Brazil was selling...then the party stopped when the PRC's economy slowed down, ending a commodity supercycle in which Brazil was one of the biggest beneficiaries. With the 2014 World Cup and the forthcoming 2016 Summer Olympics, Brazil has essentially been left holding the bag with costly international sporting events it can barely afford as perma-recession has taken hold.

As bad as things are, perhaps the ultimate humiliation for Brazil is yet to come. Imagine one of the southern hemisphere's major energy exporters not even being able to provide Olympic athletes with air-conditioning. Due to cost overruns--is anyone really surprised when these Games are concerned--budget slashing has to happen somewhere. As it so happens, Brazil is keen on shifting the burden on the Olympic committees:

Shifting the cost for air conditioning and other amenities from the host city to each nation’s Olympic committee – or to the athletes themselves – is a big deal, said Nick Symmonds, a two-time Olympic runner. “The world wants to tune in and watch the world’s greatest athletes compete at the absolute highest level," Symmonds said. "If you don’t provide them with good food, a good place to sleep and comfortable temperature, they won’t be able to recover and bring the A-plus product that the world is demanding. To cut the budget on athletes’ hospitality and comfort, that’s just going to cheapen the games.”

[Rio 2016 spokesperson Mario] Andrada said air conditioning is an “absolute necessity” in some areas, though not bedrooms. The 17-day event, which kicks off on Aug. 5, takes place in Rio’s winter, and the average daytime temperature is in the mid-20s Celsius (mid-70s Farenheit). Some days are much hotter, though, with highs last August creeping into the mid-90s.

Others worry that the cuts will further underscore the chasm between athletes from wealthy countries and those from poorer ones. (Already some top athletes, including the NBA players who join the USA Basketball squad, choose luxury hotels over accommodations in the Olympic Village.) Those who can afford extra for air conditioning or who travel with laptops or iPads (the host committee has scrapped plans to provide TVs in individual bedrooms) will have it; others may not.

It all goes back to the notion of "economic diversification." Brazil has some world-leading manufacturing concerns like Embraer which makes smaller-capacity regional passenger jets, but for the most part, it remains over-reliant on commodity exports. Even in calendar year 2015, it lives by high commodity prices and dies by low commodity prices. Interestingly, its newfound austerity will further disadvantage fellow athletes from developing countries by forcing them to do with al fresco accommodations.

Is Brazil being shamed? They now say they will provide free A/C, but you never know:

Throw away the floor fans. Rio de Janeiro Olympic organizers have changed their minds and said Friday that athletes will have free air conditioning in their bedrooms at the athletes village. The decision to have free air conditioning comes after The Associated Press reported this week that about 10,000 Olympic athletes would have to pay for it because of budget cuts.

“The sports department found a solution that could allow us to have the air conditioning,” said Mario Andrada, the spokesman for the 2016 Games. “So were buying air conditioning for all the athletes’ bedrooms and social rooms.”

This may be true, but even suggesting that no one gets free air-conditioning suggests evident desperation is at work here.

So broke he can't even spend the night: Venezuela's President Maduro.

We all have wastrel friends and relatives of no particular achievements, distinction or talents who get by through begging, borrowing or stealing money. Such is the nature of life, unfortunately. In the international community, there is a country which embodies such turpitude: It's called Venezuela. To put its senseless wastefulness into perspective, consider that it's already received $45B from China, most of which I guarantee you has already been poured down some rathole.

How do I know this? Well, unbeknownst to many, it's also been taking out its special drawing rights (SDRs) from the IMF absent any significant sources of foreign exchange these days when oil prices are comparatively low. From Agence France-Presse:

With its cash reserves in sharp decline, Venezuela withdrew $460 million from the International Monetary Fund last month in its third such operation this year. he IMF website showed Friday that Venezuela exchanged part of its Special Drawing Rights -- an international reserve asset created by the IMF -- account at the Fund for greenbacks. Some countries often buy SDRs to comply with their obligations at the IMF, and in other cases sell them for hard currency to raise their reserve level at home, the Fund said.

Venezuela depends almost exclusively on oil exports and has taken a big hit from a drop in crude prices. Its hard currency reserves have fallen 25 percent over the past year to $15.4 billion. Venezuela's three SDR-selling transactions this year at the IMF have netted it more than $2.3 billion. Until this year, Venezuela had not withdrawn assets from the IMF since 2006.

The largest Venezuelan note is now worth 12 cents.

Next week, the IMF is holding meetings in Lima, Peru in the region that has suffered as much as any other from the global slump in commodities. It's not bound to be a happy occasion for many of those gathered. Despite everything, some commodity exports have managed to accumulate substantial foreign exchange reserves precisely in anticipation of these lean years. Others, meanwhile, have tried to lessen dependence on commodity exports to literally fuel growth.

As you would expect, Venezuela has done none of these things as it amassed very little in reserves--preferring to waste oil revenues on quite frankly idiotic attempts to show "global solidarity." Diversification away from oil? If nothing else, Venezuela has become more dependent on energy in the past few years...just as China-buoyed global demand has ebbed. Meanwhile, as the rest of the world combats deflation, Venezuela is confronting hyper(inflation) as the bolivar heads to oblivion. It has fallen by 88% in 2015:

Venezuela’s bolivar passed the physiological barrier of 800 bolivars per dollar Tuesday in black market trading as Venezuelans rushed to protect savings amid rising inflation. That means that the country’s biggest currency note of 100 bolivars is now worth about 12 U.S. cents.

The currency has declined 14.7 percent in the past month to 816 bolivars per dollar, according to dolartoday.com, a website that tracks trading in street markets where Venezuelans go to skirt limits on foreign-exchange purchases. The government maintains official rates of 6.3, 13.5 and about 200 bolivars per dollar for authorized purchases of items deemed essential.

Venezuela’s inflation, estimated by some to be nearing 200 percent, is the fastest in the world as President Nicolas Maduro’s administration prints more currency to pay budget expenses as the falling price of oil reduces foreign currency income. The amount of bolivars in circulation passed 3 trillion for the first time on Sept. 19, up 97 percent in the past year, according to data compiled by Bloomberg.

The only thing keeping Venezuela from economic oblivion is not the hated IMF, but rather the People's Republic of China. Ricardo Hausmann, the Venezuelan economist at Harvard, blames the worsening of Venezuela's worrisome situation to continued Chinese cash infusions which now amount to an astounding $45 billion. Who needs the IMF when you've got the PRC?

The billions of dollars China loans to Venezuela in exchange for oil are a “disgrace” and used for corrupt purposes that go undisclosed to the general public, said Harvard professor Ricardo Hausmann.

Venezuela, which has tapped China for more than $45 billion over the last decade, is increasingly reliant on the world’s second-biggest economy for cash because of its unwillingness to comply with the requirements of the International Monetary Fund, Hausmann wrote in a Sept. 28 opinion piece for Project Syndicate. Those loans have become more important than ever as the nation’s international reserves tumbled with oil prices to a near 12-year low.

“The Chinese have not required that Venezuela do anything to increase the likelihood that it regains creditworthiness,” wrote Hausmann, a former Venezuelan planning minister. “They merely demand more oil as collateral. Whatever the IMF’s faults,” China Development Bank “is a disgrace.” The loans have “built-in privileges for Chinese companies” in sectors including telecommunications, appliances, cars and oil drilling, Hausmann said. An e-mail to the bank seeking comment, sent after business hours, wasn’t immediately returned.

Think of tt as underdevelopment theory with a twist. Instead of the "imperialistic West" making its dictates known through the IMF, you have "third world champion" China. Remove the labels though and what you see happening is similar: ever-broader swathes of the Venezuelan economy falling into the hands of the Chinese. I hardly think the Chinese are doing this for altruistic reasons--would they extend so much credit to a resource-poor country? In China's calculations, $45 billion is a drop in the bucker compared to gaining leverage over the vast reserves Venezuela supposedly holds--especially in the form of unconventional reserves.

The question remains, though, of whether the Chavista leaders will continue to have warm relations with China into the future. Or, if these Chavista leaders will remain in place as they are quite unpopular for obvious reasons with the Venezuelan electorate. I guess China throwing billions and billions of dollars at them is one way of helping to guarantee that they do until such as time that China can be paid in full--and more.

I don't use the word "giving" instead of "lending" in the title for nothing.

Roussef is probably nostalgic about her Marxist guerrilla fighter days right about now.

The seemingly inevitable just happened: after being hit hard by slumping global commodity prices, Brazil's sovereign debt has been downgraded back to below investment grade or junk status by Standard and Poor's. In 2008 Brazilian IOUs became investment grade; by 2015 it's yesterday once more. Add in the corruption case hounding the Rousseff leadership and all-around economic malaise to complete the rather dire picture. From building BRICs to stumbling blocks, it seems:

The Brazilian government’s sovereign debt rating has been cut to junk status by one of the major credit agencies, ratcheting up pressure on President Dilma Rousseff to find a way out of the country’s economic and political crisis. Standard & Poor’s said in a note on Wednesday night that Brazil’s hard-fought investment-grade status was gone and that its outlook on the country was negative, just as the nation entered recession and was expected to see an even worse 2016.

That means it will be far more expensive for the Brazilian government to tap international credit markets and that much investor money, such as mutual funds that only plough money into investment-grade nations, will automatically be yanked out of the country. S&P said that extreme political challenges for Rousseff “have continued to mount, weighing on the government’s ability” to shore up its finances as promised...

The downgrade, while widely expected, came earlier than many analysts forecast and arrives at a time of extreme volatility for the Brazilian economy, with inflation hovering around 10% and unemployment the highest it has been in decades. Additionally, Rousseff has almost no political backing, with her approval rating in single digits, the worst seen by any leader since the nation’s return to democracy three decades ago. S&P said that “the negative outlook reflects what we believe is a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position”.

It now seems so long ago that Brazil had surmounted this seemingly regular lurch towards crisis. It was scheduled to host the World Cup and the Olympics to boot to show how times have changed. Apparently, many changes were just cosmetic. When the commodity surge receded, the same governance issues have reaffirmed themselves. How can it escape such a dire situation now? According to former Morgan Stanley man Stephen Jen, it's time for Brazil to turn back the clock in another way: take out an IMF bailout:

Stephen Jen has a proposal for Brazil to get out of the current economic mess: ask for a bailout from the International Monetary Fund. Not that Brazil needs the funding, said Jen, a former IMF economist. Latin America’s largest economy holds $371 billion in foreign reserves, almost 10 times the amount of the government’s foreign-currency debt.

But Brazil’s political system is in such disarray that the country can’t push through reforms needed to curb debt, tackle inflation and avoid more downgrades, according to Jen, the co-founder of London-based hedge fund SLJ Macro Partners LLP. Financial aid from the Washington-based IMF would require austerity measures such as tax increases and spending cuts, providing President Dilma Rousseff’s government with the political cover to implement unpopular measures needed to shore up the budget, he said.

“They cannot implement policies,” Jen said. “The whole system needs a cleanse. A quick way to bypass all these is to get the IMF. It’s a little wacky, but I think it makes so much sense.”

Strictly speaking, Brazil has built up substantial reserves over the years commodity prices were high, so there's little desperation for IMF loans. But, those reserves can go fast, and there is no guarantee for implementing political reform that the IMF would likely require for loan conditionalities.