A tiny ray of light shines in the darkness we live in.
The month of May was not a good one for the world, as the three elements affecting global welfare the most, inflation, Covid, and the Ukraine war, are still present.
I titled the letter as a slight improvement, as price increase numbers are starting to come down, and China is reopening the cities it closed with its zero Covid policy. The number of dead to infected dropped from 0.83% to 0.31% in cases detected this year, and the war in Europe is not over but does not seem to be growing anymore either.
Germany’s lack of natural gas caused that country’s growth to be revised from 2.4% to 0.7% by 2022, and the lack of fertilizers, another consequence of the boycott of Russia, is causing grain prices to rise worldwide.
Europe proposed a new energy plan to not depend on Russia, to be implemented over the next five years, with an investment of $317 Billion. Still, the initial impact will not be seen until the middle of next year.
The shortage problems, in general, are improving, and there are already more products in the stores, more cars in the dealerships, and more minor complaints from industrialists and retailers. It is a widespread complaint that profit margins are shrinking, as consumers start to stop buying things if they are too expensive and are not willing to pay what is necessary to cover the total cost increases of producers and stores.
In May, we saw two new disconcerting events that affected the welfare of Americans. First, the infant formula crisis, where a huge plant was shut down due to contamination and no alternatives were sought to replace the lack of product, and second, two incidents of mass murder by sick people, one in Buffalo, NY, where a savage sought out people of color to kill, and another in Texas where 19 children and two teachers were killed by another 18-year-old savage, whose motives for the massacre are unknown.
President Biden’s popularity continues to plummet, and only 36% of the voters consider that he is doing a good job. Thirty-one percent say he knows how to handle the economy, and 68% of those polled say the situation is worse than it was a year ago, which makes me think that what we have assumed of a change of party in power in the November elections will happen, giving the Republicans control of Congress.
Private analysts raised the expectation for U.S. inflation to 4.1% this year but believe it will fall to 3.4% by 2023. Tax collections are up to $843B over comparable 2021 numbers, and many states that usually ran large deficits are now in much better economic shape.
One thing that has definitely changed is what is happening with U.S. home sales. Between the rise in mortgage rates from 3.1% to 5.4% on a 30-year fixed loan and the 18.4% increase in the median price, demand has plummeted, and home closings have now gone down for four consecutive months. Many buyers who qualified for cheap credit no longer pass the banks’ filters, and many who do qualify are now fearful of buying at the market’s peak and losing value on their purchase.
The CBO, the Congressional office that does economic analysis, sees inflation at 4% by 2022, 2.7% in 2023 and 2.3% in 2024, and GDP growth at 2.3%, 1.7%, and 2% in the same three years.
China is going through a very bad patch as the closures of several cities by Covid, including Shanghai, have caused the projected GDP growth to be revised to 4.0% in 2022, the lowest in 25 years. The main economic trigger, the real estate development sector, is at a virtual standstill, as companies in the industry have found the capital markets closed due to the problems of Evergrande and others. New car sales are down 36% compared to April 2021, and consumption in self-service stores fell 6%, the first decline in 15 years. This despite being the only country in the world that is lowering its interest rates to stimulate demand.
It is curious to note that there were already more than 15,000 Russian soldiers dead and 4,600 Ukrainian civilians in the Russian invasion of Ukraine, another manifestation of the failure of Russian intelligence that assumed it had a very well prepared army that would end the war in a few days.
The situation in Mexico continues to be very complicated, with President Lopez Obrador doing things not very understandable to the thinking class, but obviously aimed at the people, as his popularity rose again to 62%, which is very high. Only Calderon had a better acceptance 3.4 years into his term, with 63%.
When we talk about facts that, for me, are unexplainable, they are the closing of the Vulcan mining operation in Quintana Roo, a new negative message to foreign investment; the continuous attack on the UNAM, and all the people who have university degrees labeling them as neoliberals and the cause of all the economic crisis in the country; the modification of the route of the new freight train, moving it from Texas to New Mexico as a protest against the measures taken to limit the crossing of goods transported in trucks through the Texas border, an action that affects Mexico much more than the United States; Finally, the confrontation with the United States over the meeting in Los Angeles of the countries of the Americas where AMLO intends to put conditions on the host, who will end up angry in one way or another, being a mistake to fight with the largest client of the country.
Another problematic point to understand is the initiative to obtain banking information without a court order, a clear violation of banking secrecy and unconstitutional.
Mexico’s economic statistics are not flattering, with reserves falling below the magic $200 billion level. The PMI manufacturing index below 50 indicates a contraction in production. IMEF projects GDP growth of only 1.7% for 2022, with inflation of 6.8%. This forecast is even after putting a price control on the basic food basket that historically leads to shortages, as manufacturers do not want to produce if they cannot pass on their cost increases.
Other worrying things are the new environmental contingency that returns the issue of pollution to the front page; the continued violence against women and journalists; the discovery of new mass graves, the product of the power struggle between cartels, and Claudia Sheinbaum’s attack on the company that made the expert assessment of the Metro line 12 accident because she “did not like” the conclusion they reached.
In June, the U.S. aviation authorities will review whether to change the restrictions they imposed on Mexico’s airspace. Still, I feel that the incident where two Volaris planes almost collided at the Felipe Angeles Airport and how little that airport has helped the country, together with the lack of maintenance of the AICM, will make it difficult to convince the Americans of the benefits of the new airport.
Before analyzing the month’s results, I would like to give you an observation and a memorable quote that I loved.
The first is that the Saudi Arabian oil company ARAMCO surpassed Apple as the most valuable stock market company globally. The quote:
“The more I work, the luckier I get” by Thomas Jefferson.
The results are as of May 27th as I am leaving on a two-week trip, but I do not expect any significant changes, especially since Monday, May 30th is a holiday in the United States.
Bonds had a recovery of about 1.3%, with rates on the 10-year Treasury note returning from 3.06% to 2.75%. Preferred stocks had a nice recovery of almost 3.5%.
The stock markets started off the month very poorly, with the S&P falling in a “bear market,” where the decline from the high point is as much as 20%. There was a recovery of more than 5% in the last three days. The NASDAQ, the technology index, was down 30% but recovered 6% in the previous few days. The month will end virtually unchanged.
The dollar continued to strengthen as interest rates rose but fell as the rate differential with other countries began to narrow.
Bitcoin fell to $26,800 before returning to $31,600, 58% below its all-time high.
Gold continues to fail to rally in the face of inflation and is at $1,850 despite oil being above $114 a barrel.
The peso is strong due to the rate hikes made by the Bank of Mexico and the government’s fiscal discipline, but I do not think it will hold up if the economy does not rebound. I see it at $20.50-$21.00 by the end of the year.
