2021 a momentous but confusing year
This year has been significant economically and politically, characterized by its great volatility and the deplorable lack of leadership in the Western world.
The United States is being governed by a good man with a severe cognitive problem, which does not allow him to have a long term vision or the ability to communicate or defend what he is trying to do, supported by a vice-president who shines for her incompetence in the few occasions she appears, and by a cabinet that, by the attempt to make it diverse in race, gender and ethnicity, is not the best prepared to confront the problems created by the pandemic, immigration, the confrontation with China, inflation or the interruption of the supply chain.
Powell’s nomination to repeat as Fed governor was a wise move. It prevented the arrival of the Progressives’ candidate, who sought to solve social and climate change problems based on a very liberal economic policy. It will be very interesting to see if the central bank tries to fight inflation by raising the interest rate or if its quest for job creation through cheap money dominates its position regarding liquidity in the system. Let us remember that the Fed’s resources are to move short-term interest rates (long-term rates are driven by the market) and to buy back bonds already in the market adding new liquidity.
Congress approved Biden’s traditional infrastructure plan, although it has not yet reached the Senate for ratification, the so-called Build Back Better project, a funding proposal for “human infrastructure” development, is on hold, as there are 2 Democratic senators who disagree with such high spending without the resources to pay for it. With a 50/50 split Senate, Biden cannot afford to lose a single vote from his party.
Border problems remain acute, with an estimated 1.4 million undocumented immigrants entering the country this year. The lack of a serious immigration policy does not help to know the solution to this crisis.
It is unfortunate to see the images of people coming from Haiti, Mexico, Central America, and even Africa, who, upon arriving at the border, because of a mistaken perception that they would be welcomed, are turned away after they left behind family, their few possessions and “burned the boats” thinking they would never return to their home countries.
President Biden wants to go back to what Trump established of having political asylum seekers wait in Mexico until their petition is resolved, despite being highly critical of this policy. It is clear that Mexico has to agree, but there has been no confirmation of acceptance of this plan.
The official position regarding inflation was that it was a transitory phenomenon. Although it was never defined how long this situation would last, it was thought to be a matter of months or no more than a year. Now the position has been changing. Apparently, the Fed’s model did not contemplate the global disruption of the supply chain and logistical problems, which brings the imbalance of supply and demand into play and could cause inflation to last longer.
What happened? When the pandemic began in March 2020, producers of raw materials and manufactured goods assumed that the recession would last at least 11 months, the average of all previous recessions, which ranged from 5 to 111 months. Still, this time it was only two months because of the enormous amount of liquidity added worldwide. Consumption did not fall, creating a shortage of products that worsened as purchasing power and willingness to buy continued or even increased.
This has allowed producers to raise their prices without much consumer rejection and maintain margins, generating the same or better profits with lower sales than before COVID-19.
What remedies does President Biden have? His options are limited and include lowering tariffs, increasing immigration to combat the lack of workers, taking a more significant role in port management, and releasing more oil from the strategic reserve the government maintains (the 50 million barrels announced are symbolic as they represent three days of US consumption). The main thing is to convince people that everything possible is being done to avoid a galloping increase in prices and avoid the consumer psychology of buying today before things get more expensive, which only increases demand and worsens the problem.
We hear about the lack of workers even though unemployment is at 4.6% versus 3.5% in February 2020. Labor force participation in the best age group, 25 to 54 years old, is at 81.7% versus 83% pre-pandemic. There are many explanations such as lack of childcare, people who do not want to get vaccinated, etc., but at least in numbers, the problem should not be serious.
Let’s remember that the FED stated a goal of averaging inflation at 2% for many years, and the last decade, it has been at 1.6%, which allows them to keep it close to 5% this year, 3% in 2022, and the next five years around 2.2%, which would enable them to maintain their long term goal.
The economy grew only 0.5% in the 3rd quarter, but the number is not very representative because of everything that could not be sold due to lack of some components. Still, apparently, the situation is being solved, and we will return to a good year after a very bad 2020 due to the pandemic.
Already some products and raw materials such as wood, copper, aluminum, and even used cars started to drop in price, which is expected to be observed in many more instances.
Consumer confidence has been dropping, and only the growth in the wealth of the population ($5.9 trillion to $189 trillion in the last year) due to the increase in the value of their homes and the rise in the stock markets has kept the drop in confidence from being more significant, as Biden’s approval rating is at 38% and Kamala Harris’s at 28%.
Elsewhere in the first world, we saw Japan increase its money supply by $490 billion in its futile fight against a recession that has been going on for more than ten years. Germany lost a great leader, and a center-left politician came to power amid an economy that is not growing and whose automotive industry, the main pole of industrial development, is losing market share day by day to Asian manufacturers.
China gave Xi absolute powers as Mao and Deng had. Not even the massive housing crisis, where the leading developers face a tremendous liquidity crisis and possible bankruptcy, has been able to diminish the president’s power.
The political situation in Mexico continues to deteriorate, with President Lopez Obrador seeking more power every day. The last decree he sent to Congress establishes that the projects proposed by the Executive are to be considered of national security and, therefore, not subject neither to bidding nor the need to obtain construction permits, environmental permits, etc. This is another example of his attempt to become a plenipotentiary. I hope that the Supreme Court will intervene and reject this decree for the good of Mexico.
The decision to replace Arturo Herrera with Victoria Rodriguez Ceja for Governor of the Bank of Mexico was not well received by the markets. The explanation why a person of little experience was chosen for such an important position was to have a woman. In my opinion, the best and most qualified person should be selected, be it a man or a woman. The independent management of the Central Bank requires a capable, experienced governor who is aware of the importance of the decisions he or she makes, which in many cases will not be in line with the wishes of a populist administration.
The announcement that the supply chain of medicines will be handled from now on by the army is another example of what I have said before, that I am concerned about the country’s militarization. This step is almost irreversible for future administrations.
AMLO’s conflict with Ricardo Anaya has already reached the world press. The Wall Street Journal published a lengthy article that again questioned the application of democracy in Mexico and mentioned corruption at the highest levels of government.
Banco del Bienestar, a recently created public institution, reported losses of 18.5% of its portfolio versus 11% the previous year. If this were a private institution, it would have gone bankrupt by now, as there is no one to support such portfolio deterioration.
The loan portfolio of Mexican banks has fallen over the last 11 months, which is a bad omen for the future since it indicates a reduction in investment in fixed assets and a deterioration in personal consumption.
The average household wealth in Mexico is 759,000 pesos, according to INEGI figures, while in the United States, it is 9,850,000 pesos. This is indicative of the difference between the two economies and is entirely consistent with the GDP per capita ratio between the two countries.
To finish with Mexico’s economic data, last month’s inflation was 1.49%, 8.59% annualized, and industrial production had its worst month in the previous four years, mainly due to the suspension of work in many of the car assembly plants that had to stop due to lack of components such as semiconductors.
One piece of information that I found interesting was the report from FIBRA INN. This hotel company reported that occupancy was 33.7% higher in October but still 24.6% lower than the pre-pandemic figures for 2019.
October was a volatile month in the stock markets with a moderate increase during the month and a terrible end, with the most significant drop of the year on November 26th.
Bonds had another “flat” month, although, over the last 30 days, the rate on the 10-year treasury bond ranged from 1.42% to 1.68%, which is a considerable range. High coupon instruments and emerging country debt contracted slightly, as a safety-seeking, yield-sacrificing position prevailed at the end of the month.
The dollar remained firm against first-world currencies, and the peso had an awful month, mainly due to the appointment of the new governor of Banxico.
The peso has already started to recover due to the increase in the cetes rate and remains in the range we had considered, where there is a ceiling at $22.00.
Gold is at $1,752/oz, not reflecting the fear of inflation, and oil had a swift decline at $65.00 a barrel.