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Black Swan Watch: Mexico's Super Volcano Could Be the Next Market Catalyst


Mexican authorities have raised the alert level for its massive "Popo" volcano. Investors ought to pay attention.

Editor's note: The date listed for the eruption of Mount St. Helens has been corrected in this article; it occurred on May 18, 1980.

Mexico's Popocatépetl could be the unseen force capable of toppling world markets.

One of the world's largest volcanoes, reaching over three miles high at 17,887 feet, "Popo" is only overshadowed by its dormant (but not extinct) neighbor volcano Pico de Orizaba, which is the third highest peak in North America at 18,491 feet. The majesty of these two geological wonders cradle Mexico City and its neighboring boroughs, namely Puebla, a major agricultural center. A 2012 census determined that the area was home to more than 19 million people, but estimates as high as 22 million have also been cited. The official number makes this area the 10th most heavily populated region in the world; the higher estimate would qualify it as the fifth most populated region, behind Tokyo, Jakarta, Seoul, and Delhi respectively.

Earlier this week, Mexico's National Disaster Prevention Center raised the alert level for Popocatépetl to "Yellow Phase III," which is the fifth greatest of seven levels; the highest alert is, logically, "Red Phase II." Joking aside, rising seismic activity, plumes of smoke and steam, and the reported melting of the glacial peak due to rising ground temperatures suggest Popo is ready to go loco.

Mexican authorities are no strangers to obeying the whims of their sleeping giants even though the last major eruption occurred an estimated 1,100 years ago. Emexico popo volcanovacuations are well rehearsed, and emergency preparation teams stand ready to assist residents away from imminent danger. Relatively little is known regarding what to expect from Popo in the event of an eruption. Those who remember the eruption of Mount St. Helens may also note the eerie timing of these Popo alarms: Saturday, May 18, is the 33rd anniversary of its eruption. However magnificent this event was, it stands to be a proverbial flea on an elephant's back compared to Popo's fury should its status worsen.

Of course, preventing loss of life is the first and foremost concern, but in the aftermath of such an event (which in theory could last concurrently for many years) Mexico's vitally important contribution to all of North America's commodity markets could endure serious, permanent damage. Agricultural trade between the US and Mexico constitutes over $20 billion annually, accounting for 18% of Mexico's GDP and providing employment to around 5% of the labor force. Even a minor prolonged event causing preemptive evacuations could force laborers far from fields that are now sowing. May and June are critical months for farmers in southern Mexico in terms of corn, barley, and rice, among other commodities grown in the areas adjacent to Popo, which is sometimes called Mexico's breadbasket. To its east, the world's second largest shale oil deposit was recently discovered. Meanwhile, the mountainous terrain in the area is just beginning to gain recognition as a potential literal goldmine.

What would all this mean for the Dow (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX)? The only certainty is a rise in the gauge known as the fear indicator, the VIX (INDEXCBOE:VIX). Stocks with agricultural exposure such as Monsanto (NYSE:MON), DuPont (NYSE:DD), and Dow Chemical (NYSE:DOW) are first in line of this firefight with the entire sector (NYSEARCA:DBA) possibly honing the asterisk -- a.k.a. halts -- from selling pressure. Gold (NYSEARCA:GLD) and especially silver (NYSEARCA:SLV) are likely to see strong demand as Mexico -- along with the US Treasuries and the dollar -- is one of the world's largest producers and safe havens during stressful times. It's fairly easy to pick places to short in this doomsday scenario. Systemic risk is still undeniably an undercurrent of world markets and as the adage goes, "If you can't sell what you want, sell what you can."

Last week, I shared "Nowhere to Go But Up" with Buzz & Banter subscribers, noting that nature has a way of tempering our collective mania in times of irrational exuberance. There's no question that a black swan of this magnitude would be horrific. Markets have thus far ignored the significance of a giant smoking mountain shooting fire from its peak. That, my friends, is what we call a "top" -- or it is, at least, a piece of the puzzle.
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