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Saturday, November 12, 2011



First: A reality check on Mexico

Mexico is in an unique position to reap many of thebenefits of the decline of the US economy. In order to notviolate NAFTA and other agreements the U.S.A. cannot usedirect protectionism, so it is content to allow the mediato play this protectionist role. The U.S. media - over thelast year - has portrayed Mexico as being on the brink ofeconomic collapse and civil war. The Mexican people areeither beheaded, kidnapped, poor, corrupt, ornarco-traffickers. The American news media wasparticularly aggressive in the weeks leading up to springbreak. The main reason for this is money. During thattwo-week period, over 120,000 young American citizenspoured into Mexico and left behind hundreds of millions ofdollars.

Let's look at the reality of the extensive drug andcorruption problem, kidnappings, murders and money. TheU.S. Secretary of State Clinton was clear in her honestassessment of the problem. "Our insatiable demand forillegal drugs fuels the drug trade. Our inability toprevent the weapons from being illegally smuggled acrossthe border to arm these criminals causes the deaths ofpolice officers, soldiers and civilians," Clinton said.The other large illegal business that is smuggled into theU.S.A. that no one likes to talk about is Human Trafficfor prostitution. This "business" is globally nowcompeting with drugs in terms of profits.

It is critical to understand, however that the horrificviolence in Mexico is over 95% confined to the threetransshipping cities for these two businesses, Juarez,Tijuana and Nogales. The Mexican government is so seriousabout fighting this, that they have committed over 30,000soldiers to these borders towns. There was a thoughtfularticle written by a professor at the University ofJuarez. He was reminded of the Prohibition years in theU.S.A. and compared Juarez to Chicago when Al Capone wasconducting his reign of terror capped off with The SaintValentine's Day Massacre. During these years, just likeJuarez today, 99% of the citizens went about their dailylives and attended classes, went to the movies,restaurants, and parks.

Is there corruption in Mexico? YES !!! Is there an equalamount of corruption related to this business in theU.S.A.? YES !!!. When you have a pair of illegalbusinesses that generate over $300,000,000,000 in salesyou will find massive corruption. Make no mistake aboutthe Mexican Drug Cartel; these "businessmen" are 100 timesmore sophisticated than the bumbling bootleggers duringProhibition. They form profitable alliances all over theU.S.A. They do cost benefit analysis of their businessmuch better than the US automobile industry. They havefound over the years that the cost of bribing U.S. andMexican Border Guards and the transportation costs ofmoving marijuana from Sinaloa to California have cutsignificantly into profits. That is why over the past 5-7years they have been growing marijuana in State andFederal Parks and BLM land all across America. From abusiness standpoint, this is a tremendous cost savings onseveral levels. Let's look at California as an example asone of the largest consumers. When you have $14.2 billionof Marijuana grown and consumed in one state, there issavings on transportation, less loss of product due toconfiscation and an overall reduction cost of bribery withlaw enforcement and parks service people. Another greatsavings is the benefit to their employees. The penaltiesin Mexico for growing range from 5-15 years. The penaltiesin California, on average are 18 months, and out in 8months. The same economic principles are now being appliedto the methamphetamine factories.

FOX News continues to scare people with its focus onkidnapping. There are kidnappings in Mexico. Theconcentration of kidnappings has been in Mexico City,among the very rich and the three aforementioned borderCities. With the exception of Mexico City, the numberone city for kidnappings among NAFTA countries isPhoenix, Arizona with over 359 in 2008. The PhoenixPolice estimate that twice that number of kidnappingsgoes unreported, because like Mexico 99% of these crimeswere directly related to drug and human traffic.Phoenix, unfortunately, is geographically profitabletransshipping location. Mexicans, just like 99% of U.S.Citizens during prohibition, go about their daily livesall over the country. They get up, go to school or workand live their lives untouched by the border townviolence.

These same protectionist news sources have misled thepublic as to the real danger from the swine flu inMexico and temporary devastated the tourismbusiness. As of May 27 2009 there have been 87 deaths inMexico from the swine flu. During those same five monthsthere have been 36 murdered school children in Chicago.By their logic, if 87 deaths from the swine flu inMexico warrants canceling flights and cruise ships toMexico, then close all roads and highways in the USAbecause of record 43,359 automobile related deaths inthe USA in 2008.

What is just getting underway is what many are callingthe "Largest southern migration to Mexico of people andreal estate assets since the Civil War" A significantpercentage of the Baby Boomers have been doing theresearch and are making the life changing decision tomove out of the U.S.A. The number one retirementdestination in the world is Mexico. There are alreadyover 2,000,000 US and Canadian property owners inMexico. The most conservative number of Americanand Canadian Baby Boomers who are on their way toowning property in Mexico for full or part time livingin the next 15 years is over 6,000,000. Do themath on 6,000,000 people buying a $300,000 house orcondo and you will understand why the U.S. Government istrying to tax this massive shift of money to Mexicothrough H.R. 3056. The U.S. government calls this "TheTax Collection Responsibility Act of 2007". Those whowill have to pay it are calling this the EXIT TAX.

Mexico: A better economic choice than China

Another large exodus from the U.S.A is high payingskilled jobs. The job shift in automobile sector,both car and parts manufacturing, is already known bymost investors. In the last few months as John Deere andCaterpillar have been laying off thousands of workersin the U.S.A., and hiring equal numbers inMexico. The most recent industry that is makingthe shift is the aerospace manufacturers. In the city ofZacatecas there is currently a $210 million aerospacefacility being built. With the 11 U.S. companies movingthere, it is estimated to provide over 200,000 new highpaying jobs in the coming years. One of the main factorsfor the shift in job south to Mexico instead of China isrealistic analysis of total production, labor anddelivery costs. While the labor costs in China are 40%less on average, the overall transportation costs andinherent risks of a long distance supply chain, andquality control issues, gives Mexico a distinctfinancial advantage.

Mexico's real economic future

Mexico has avoided completely the subprime problem thathas devastated the U.S. banking industry. The Mexicanbanks are healthy and profitable. Mexico has a growingand very healthy middle and upper middle class.The very recent introduction of residential financinghas Mexico in an unique position of having over 90%of current homeowners owning their house outright.U.S. banks are competing for the Mexican, Canadian andAmerican cross border loan business. It is and willcontinue to be a very safe and very profitable business.These same banks that were loaning in a reckless mannerhave learned their lesson and are loaning here the oldfashioned way. They require a minimum of a 680 creditscore, 30% down payment, and verifiable income that cansupport the loan. In most areas of Mexico where BabyBoomers are moving to, with the exception of PuertoPenasco (which did not have a national and internationalbase of buyers), there is no real estate bubble.. Thehigher end markets ($2-20 million) in many of thesedestinations are going through a modest correction. TheBaby Boomers market here is between $200,000 and$600,000. With the continuing demand inside the Bay ofBanderas, that price point, in the coming years, willdisappear. This is the reason the Mexican government isspending billions of dollars on more infrastructurenorth along the coast all the way up to Mazatlan.

The other major area where America has become overpricedis in the field of health care. This massive shift ofrevenues is estimated to add 5-7% to Mexico's GDP. Thename for this "business" is Medical Tourism. The twobiggest competitors for Mexico were Thailand and India.Thailand and India's biggest drawback is geography. Alsorecent events, Thailand's inability to keep a governmentin place and the recent terrorist attack in Mumbai, havehelped Mexico capture close to half of this growthindustry. In Mexico today there are over 56 worldclass hospitals being built to keep up with thisbusiness.

Mexico is currently sitting on a cash surplus and analmost balanced budget. Most Americans have neverheard of Carlos Slim until he loaned the New York Times$250 million. After that it became clear to manyinvestors around the world what Mexicans already knew:that Mexico had been able to avoid the worst of the U.S.economic devastation. Mexico's resilience is to beadmired. When the U.S. Federal Reserve granted a $30billion loan to each of Mexico, Singapore, South Korea,and Brazil, Mexico reinvested the money in Treasurybonds in an account in New York City.

According to oil traders, Mexico's Pemex wisely as theprice of oil shot to $147 a barrel put in place aninvestment strategy that hinged on oil trading in therange of $38-$60 a barrel. Since the beginning of 2009Mexico has been collecting revenues on hedged positionsthat give them $90-$110 per barrel today. Mexico'srecent and under reported oil discovery in the PalaeoChannels of Chicontepec has placed it third in the worldfor oil reserves, right behind Canada and Saudi Arabia.

The following is a quote from Rosalind Wilson, Presidentof the Canadian Chamber of Commerce on March 19, 2009."The strength of the Mexican economic system makes thecountry a favorite destination for Canadian investment".


The answer is simple and old fashioned: SUPPLY ANDDEMAND.

The area of Puerto Vallarta/Riviera Nayarit inside theBay of Banderas is an investor's dream. This area hasthe comprehensive infrastructure in place, world classhospitals and dental care, natural investment protectionfrom the Sierra Madre Mountains, endless future watersupply, low to nonexistent crime, international airport,and limited supply inside the Bay, first class privatebilingual schools and higher than average appreciationpotential. Like many areas in Mexico there is largedemand for full and part time retirement living and alot of construction underway to meet this demand. Preconstruction of course is where the best bargains areavailable.

I would offer a word of caution for investors in Mexico.Do not be seduced by the endless natural beauty that iseverywhere, both inland in colonial towns and alongthousands of miles of beach. Apply conservative mediumand long term investment strategies without emotion. Thedemand for full and part time living by American andCanadian Baby Boomers is evident throughout the country.The top two choice locations are ocean front, and oceanview. The third overall choice, which is less expensive,is inland in one of the many beautiful colonial towns orsmall cities.

Mexico, with the world's 13th largest GDP, isno longer a "Third World Country", but rather a fastgrowing, economically secure state, as the most recentfive-year history of its financial markets whencompared to the U.S.A.'s financial markets suggests.

DOW JONES AVERAGES MAY 2004 10,200 - MAY 2009 8,200 20%LOSS IN 5 YEARS

MEXICAN BOLSA MAY 2004 10,000 - MAY 2009 23,000 130%GAIN IN 5 YEARS

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