The World is Upside Down!
2022 started, and it seems that the global crisis does not want to calm down and forecasts a complicated year.
Today we will start with a small analysis of what is happening in Ukraine.
Russia, who was the “owner” of Ukraine until 1989, has accumulated more than 100,000 soldiers and weapons on the border and seems to want to invade and take over the neighboring country that has many natural resources. There are five major players in the conflict, Ukraine, Russia, Germany, China, and the United States. Let’s see what happens with each one.
Putin needs to reassert his internal power and show that he is still the leading player in the area. Ukraine is becoming more capitalist every day and closer to the West. Germany decided to close all its nuclear plants and needs natural gas from Russia. The United States has shown weakness since the ill-fated withdrawal from Afghanistan and the passive attitude of President Biden. China is delighted to see the United States humiliated and can gauge the world’s reaction if, in the future, they decide to try to annex Taiwan.
This combination of circumstances creates a powder keg that could explode at any moment, driving oil prices above $100.00 a barrel and possibly triggering a global recession.
In the United States, Biden suffered two consecutive defeats in his socio-economic plans. The human infrastructure program called Build Back Better failed to pass in the Senate because of the “no” votes of Democratic Senators Manchin and Sinema. The attempt to eliminate the filibuster, the measure of democracy devised by the original framers of the U.S. Constitution, provides that changes in law and significant decisions require a 3/5 vote of the Senate (60 votes) rather than a simple majority, was also defeated. The principle of negotiation and not an imposition by the majority party was preserved.
The economic situation in the United States continues to be complicated, as inflation reached levels not seen in 40 years (7%), unemployment is at 3.9%, and companies are unable to find workers. Demand remains strong as purchasing power grew with the $2.6 trillion increase in savings of people who during the pandemic not only continued to receive their paychecks, but the government gave them additional subsidies while they stayed sheltered in their homes, not traveling, not spending on restaurants, entertainment, etc.
Statistics indicate that 2021 was a good year for the U.S., but already the last quarter seems to be starting to slacken. Consumer confidence is at the lowest point since the beginning of the pandemic, home prices have begun to fall, and shortages are affecting both sales and manufacturing of products that require the assembly of many components.
An index called the “misery measure” (an economic indicator that measures the financial well-being of a country’s citizens, a measure of the nation’s financial health) is the sum of inflation and unemployment. It has historically ranged between 3 and 22. It is currently at 11, about half that, but at the worst level in the last ten years.
Many people believe that oil will become almost obsolete as the number of electric cars grows. If we consider that there are one billion cars in the world and 90-95 million are sold per year, and we assume that by 2030 30% of vehicles will be electric, the reduction in global consumption will be 3-4 million barrels per day, while the increase in consumption in the other items that use oil will be 5-6 million barrels, i.e., there will be no actual decrease in fuel needs.
There is no doubt that the Fed’s position has already changed from promoting job creation to fighting inflation, so I believe that in the next 21 months, we will see seven short-term rate hikes to reach 2%. When the market is sure of this, it will be convinced that inflation will moderate in the long term, and we will see rates over five years coming down, possibly reaching the so-called inverted curve, where 2-year fixed income instruments pay a little more than 30-year instruments.
To finish talking about the United States, I would like to comment that President Biden’s popularity is 34%, the lowest for a President at the end of his first year in office. Vice President Harris is at 13%, the lowest in history. I believe that in the November mid-term elections, the Republicans will take back the House of Representatives and quite possibly the Senate.
Mexico remains in a complicated situation with the second quarter of negative growth, which is already considered a recession. Inflation has reached levels of 8%, and purchasing power has been reduced despite the 22% increase in the minimum wage.
If it were not for the growth of exports to the United States and the remittances sent by migrants, the situation would be even more critical, as investment has declined, the outflow of foreign capital from monetary instruments has been increasing for 14 months, office space in Mexico City has a vacancy rate of 23.7%, and the sale of new cars in December registered the lowest level in the last 12 years.
Additional data shows that tax revenues in 2021 were 1.1% higher than in 2020, one of the lowest increases in the world, as it does not reflect the rebound from the dreadful year of the pandemic where revenues dropped considerably.
Bank of America reduced its forecast for Mexico’s GDP growth from 5.8% to 5.2% in 2021 and from 2.5% to 1.5% in 2022, with inflation expected to be close to 6% and an end-of-year parity of 22 pesos to the dollar.
Mexico plans to export less oil in 2022 and import less gasoline. The purchase of the Deer Park refinery in Houston has already been closed, but apparently, that processing plant is not ideal for refining the Mexican blend.
INEGI published a statistic that 65.8% of the population considers Mexico unsafe, which is worrisome, especially if we add the corruption data that places Mexico at a very high level.
Israel is the most advanced country globally regarding vaccination against COVID, and 42% of the population has already received the second booster (fourth injection) against the virus. Although infections in January reached 30,000 per day, reaching 253,000 active cases, only 446 were severe and required hospitalization.
Inflation in 2021 was 2.8%, the highest in 8 years, but still within the 1-3% band acceptable to the central bank.
There was a rumor that former Prime Minister Netanyahu would agree to have committed some of the acts for which he is being investigated in exchange for a lesser sentence that would not include jail time. Still, the negotiation did not come to fruition, as the prosecutor wanted to have a condition that he not return to politics for seven years, which was unacceptable to Netanyahu.
A small comment on China. For the first time, the central bank’s decision was different from that of the rest of the world, since while the tendency is to increase interest rates, the Chinese have already reduced them twice to try to stimulate the economy, which is only growing at around 3%, the lowest figure in the last 30 years, due to the real estate crisis they are going through and the supply chain problems.
Portfolios did not have a good month, as interest rates jumped 0.40%, causing the return on bonds to be -2% since the price of bonds falls as interest rates rise. Stocks fell significantly, with the Nasdaq down 9.8% and the S&P down 5.85% (although the last two days of the month were quite positive). The dollar gained ground against the currencies of both developed and emerging economies.
Emerging market bonds had a less negative month than those of advanced economies, as people are still looking for better yields, which helps the price decline be reduced.
Bitcoin had a very sharp drop, reaching below $33,000 towards the end of the month, although it ended at $38,500.
It is interesting to note that the total value of the 7,821 cryptocurrencies in existence is equal to 60% of Apple’s market value!
In closing, I give you a curious fact about the Coronavirus. The total number of cases worldwide exceeds 360 million, 5.6 million people have died, and 10.1 billion vaccines have been given. Denmark is the only country that has already announced that it is ending all restrictions because the virus is no longer a threat to society.
