The Parallel Mexican Government – A Thorn or a Spark that Will Ignite a Revolution

November 27th, 2006

November 27, 2006 – I’m not sure how much press this incredible situation is receiving in the Western hemisphere, but here in Asia, it’s receiving almost none. The situation I speak of is the swearing in of unofficial President Andres Manuel Lopez Obrador in a parallel government this week in Mexico. For those unfamiliar with the situation, Obrador, who lost the recent Presidential election to Felipe Calderon by less than 1%, has repeatedly stated his belief that the official count was fraudulent and thus has proclaimed himself the legitimate winner of the election. This, despite international observers and courts which declared the results of the election as just and fair. Of course, one must always interpret such declarations with a grain of salt as well as the courts and international observers often work for the same state powers that could possibly engage in the fraudulent practices they declare to be just.

As someone with left-wing views, Obrador’s views are often not favorable or in line with the prior Fox administration that heartily embraced free-trade agreements such as NAFTA that aim at building a one continent economy for the United States, Canada, and Mexico. Indeed, according to Subcomandante Marcos, the unofficial leader of the Zapatistas and the revolution for peasant rights in Mexico, the poverty rate exploded, more than doubling in Mexico, expressly due to NAFTA.

Obrador was sworn in by Mexican Senator Rosario Ibarra and more than 100,000 supporters came out for the unofficial inauguration in Zocalo, Mexico City’s main public plaza. For now, even though Obrador has sworn to hinder the Calderon Presidency as much as possible, Calderon has allowed the parallel government to form for fear of public rioting as the alternative. After over 70 years of non-interrupted rule by the PRI party, Mexico has only seen six years of multi-party democracy, although many Mexicans were furious at the looting of national assets that occurred under the Fox administration, such as the sale of national bank Banamex to U.S. multi-corporate giant Citigroup.

Two things seem to be certain here. One is that leftist sentiment is strong in Mexico. At least strong enough to prevent a very determined President Vicente Fox from giving his last State of the Nation address. For those that have invested in companies that trade on the Mexican Bolsa, as I have, this situation must be watched closely. Subcomandante Marcos, who know prefers the nickname Delegado Zero, himself stated that the unrest that he has seen in Mexico is the greatest he has witnessed in over 12 years.

Political instability and inklings of a revolution will undoubtedly cause volatility and a lack of confidence in the Mexican stock market so it will be interesting to see how this situation plays out. In fact, the last time civil unrest was this heightened, Chase Manhattan Bank issued a now infamous memo to the Mexican government to “eliminate” Delegado Zero and the Zapatistas. Below is an actual excerpt verbatim from that memo.

“The uprising in the southern state of Chiapas is now one-year old and, apparently, no nearer to resolution. The leader, or spokesman, of the movement, sub-comandante Marcos, remains adamant in his demand that the incumbent PRI governor resign and be replaced by the PRD candidate who, Marcos argues, was deprived of victory by government fraud in the recent election. Marcos continues to lobby for widespread social and economic reform in the state. Incidents continue between the local police and military authorities and those sympathetic to the Zapatista movement, as the insurgency is called, and local peasant groups who are sympathetic to Marcos and his cronies.

While Zedillo is committed to a diplomatic and political solution the stand-off in Chiapas, it is difficult to imagine that the current environment will yield a peaceful solution. Moreover, to the degree that the monetary crisis limits the resources available to the government for social and economic reforms, it may prove difficult to win popular support for the Zedillo administration’s plans for Chiapas. More relevant, Marcos and his supporters may decide to embarrass the government with an increase in local violence and force the administration to cede to Zapatista demands and accept an embarrassing political defeat. The alternative is a military offensive to defeat the insurgency which would create an international outcry over the use of violence and the suppression of indigenous rights.

While Chiapas, in our opinion, does not pose a fundamental threat to Mexican political stability, it is perceived to be so by many in the investment community. The government will need to eliminate the Zapatistas to demonstrate their effective control of the national territory and of security policy.”

Government policies significantly effect domestic stock markets, foreign investments and the wealth of many people. Just as Chase Manhattan wanted the Zapatistas “eliminated” to return stability to Mexico’s stock markets and economy, I’m sure that many multi-national companies operating in Mexico would also like to see Obrador disappear. If you have investments in Mexico in any capacity, tracking the outcome of this situation is a must. However, as of now, it is impossible to predict whether Obrador will just be a minor nuisance to the Calderon administration or whether he will be a spark that will ignite a revolution.

Although instability in the political environment is not good for the stock market, such instability may create great buying opportunities in the future. For example, if the cement giant Cemex plummets in share price due to the situation of political instability but due to no negative changes in its operations or management structure, then I would seize the opportunity to buy the stock. Especially if the perceived instability is much greater than reality. Only the future will let us know how reality will unfold in this extremely interesting scenario.

One prime recent example of global perception of perceived instability leading to a prime investment opportunity occurred in Thailand after its recent military coup. The Thai stock market, already the cheapest stock market index in Asia prior to the coup on a P/E basis, plummeted even more due to all the confusion and fear created by the media that reported from afar and did not understand the true situation. Investing in i-shares of the SET (the major Thai stock market index) immediately after the coup was probably one of the best risk-reward set-ups for investing in the SET that had existed in years. Such a situation may also develop in Mexico. But for now, the verdict is still out.

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J.S. Kim is the Founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to return high double-digit and triple-digit returns.

Entry Filed under: Politics and stocks