Thu | Sep 21, 2017

Walter Molano | Mexico: The invisible man

Published:Friday | January 6, 2017 | 1:00 AM
Presidential candidate Donald Trump walks behind President of Mexico Enrique Pena Nieto after delivering statements in Mexico City, Wednesday, August 31, 2016.

Many political scientists argue that politicians are chameleons that adapt to their environment. It makes sense, given that they are representatives of the electorate.

In other words, they are nothing more than entrepreneurs that are attending to political needs. When elected officials stray from attending the demands of the electorate and focus their efforts on the needs of narrow interest groups, a sense of general frustration will materialise. This creates an opportunity for new entrepreneurs to carve out niches in the political landscape.

This is clearly what happened during the 2016 United States presidential elections. The traditional parties had been captured by corporate interests, pursuing trade deals and retail policies that enormously benefited their operations, but which were at the expense of the electorate.

Senior economic policy-makers, such as Robert Rubin, Larry Summers and Alan Greenspan, argued endlessly about the merits of improving productivity.

While better productivity boosts corporate earnings, there is no guarantee that the benefits will trickle down to the rest of the work force. Indeed, they never did. This led to an increase in the structural unemployment rate, a decline in real wages and a widening of the income gap.

Within this context, it is easy to see how a political entrepreneur, such as Donald Trump, emerged from outside the political establishment. Touting 'America first' his campaign focused on attending the needs of the electoral base, while eschewing corporate and PAC sponsorship.

Although his message carried lowbrow undertones and nationalist themes that alienated intellectuals and the media, it still carried him past the finish line.

However, as Sir Isaac Newton outlined in his Third Law of Physics, every action has an equal opposite reaction. The CIA calls this 'blow back'. One of the classic examples was Osama bin Laden, who was trained to battle the Soviets in Afghanistan but later used his organisation to launch terrorist attacks against the United States.

Unfortunately, Newton's Third Law may be gestating in Mexico.

The strident verbal attacks by President-elect Trump against the character of Mexicans bristled the population. The Mexican government's ham-fisted response was perceived to be passive and ineffective.

Besides the muddled rants of former Mexican President Vicente Fox, the other major political parties were not able to launch a counterattack. Moreover, Trump's visit with President Enrique Pena Nieto turned into a disaster, leaving the Mexican leader on his back foot.

There is a perception by the Mexican population that the traditional parties are more interested in protecting their corporate donors, than their nation's honour. This is creating a political niche for an entrepreneur to gain national prominence.

The problem is that we do not know who that person is. That is why we refer to him, or her, as the invisible man.

Although economic inequality in the US has been deteriorating for more than two decades, no one would have expected Donald Trump to move into the political vanguard. Yet, it was pretty obvious that such a figure would eventually appear.

Some Mexicans believe that Andres Manuel Lopez Obrador - AMLO - and his Morena movement may be the Mexican-equivalent of that figure. He clearly is a political outsider, and has adopted a strong nationalist rhetoric.

Yet, his populist tendencies and leftist ideology will grate against corporate interests. This could hasten a period of political instability. It could also lead to another drop in the MXN. Conditions are particularly ripe for such a scenario.

Redemptions in local investment funds have been high, and portfolio managers have sold most of their USD positions in order to generate liquidity. This means that the next batch of assets to be sold will be local currency assets.

Unfortunately, demand will be less and prices will probably gap down. This could lead to the bloodbath that never materialised in the aftermath of Donald Trump's victory.

Therefore, in conclusion, the electoral events in the US are not going to go unnoticed in Mexico, and Newton's Third Law will surely come into play. It will lead to the emergence of a new political actor, who most likely remains unknown, but could be AMLO.

Such a scenario would lead to a massive sell-off in MXN-denominated assets. Hence, it is only a matter of time until this individual sheds his invisible cloak.

• Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com