How will the invasion of Ukraine end?
Usually, the monthly letter focuses on economic problems and describes the environment in which the events occur, but this time I will try to analyze the political aspect that I feel has us all worried.
Putin thought that by having a much more powerful army than Ukraine’s, he would come in like Peter in his own house, President Zelensky would flee the country, and Russia would impose a puppet as head of state who would immediately align himself with the Soviets, rejecting possible NATO membership and becoming a satellite of Russia.
This would help Putin repair his slightly deteriorated domestic image and reinforce his international image as a powerful if undemocratic, leader.
Putin never imagined the nationalistic response of the Ukrainians, nor the heroism of the President, and the global reaction to his abuse of force, both in Europe and the rest of the world. There have even been mass demonstrations in Russia itself.
A good negotiator always leaves a door open to have a decent exit and not lose face. Still, Putin was so sure of what was going to happen that he did not leave any alternative open, and now he is cornered, which makes him very dangerous, as he is not used to losing.
My guess is that he will send in more soldiers and perhaps try to strangle Ukraine with an intense state of siege, as long as the adverse reactions of the oligarchs and the Russian people do not put enough pressure on him to withdraw with his tail between his legs. A declaration that “he has already taught them the necessary lesson so that they will never think of rebelling against Russia” would follow. However, the world will see it for what it is, a failure in Putin’s policy of territorial conquest, whose dream of returning to the pre-1991 USSR collapsed in Ukraine.
Now, going into economic matters, the concern about inflation is still very strong and, together with the much-announced change in the central bank policy (FED) from a promoter of employment to a fighter against price increases, could lead the USA to a recession in 2023.
There is no doubt that this inflation, which reached 7% in the fourth quarter, results from a lack of supply of components in the production chain and not of an excessive increase in demand. It is expected that it will begin to stabilize in the coming months, but for now, it is a heavy tax on citizens that has them angry and worried and will probably lead them to seek a change in the mid-term elections in November.
The progressive policy of the leftist faction of the Democratic Party that brought about the change in Biden’s energy policy now seems to have been misguided by the events in Ukraine. As we know, the American people vote with their pocketbooks, and if they are not happy economically, they look for a change of leadership.
Public debt in the U.S. surpassed $30 trillion, almost 1.3 times GDP, levels never before reached. In the last 20 years, the debt went from 50% to 130% of GDP. Every 1% increase in interest rates costs the government $300 billion more in deficits. This is very troubling, especially when there is still talk of the Democrats’ famous human infrastructure project, which could bring another $3-$4 trillion increase to the debt.
The deficit of imports versus exports with China reached $355.3 billion in 2021, evidencing that the additional tariffs and restrictive measures imposed by the previous administration, which have been partially eliminated, have failed to stop the massive flow of goods to the United States.
The PMI manufacturing index is at 51.1, an 18-month low. When this number is below 50, it represents a decline in production, with 60 being the target for a healthy economy with moderate growth.
An interesting statistic just released indicates that the total wealth of the American people is $141.7 trillion, 5.91% higher than the previous year, primarily due to increases in stock markets and home values. The wealthiest 1% of citizens own 27% of this wealth.
The situation in Mexico has its own complications in addition to what is affecting the rest of the countries.
The famous Houstongate case regarding the Grey house rented by the President’s son is in itself unimportant for the size of the problem. Still, it hits AMLO directly in the image he had tried to maintain of being different from his predecessors in terms of corruption.
President Lopez Obrador’s great popularity among the people is based on convincing them that he is “one of them” and that he has to confront “the bad guys” who are rich and corrupt, and now this event puts him on the wrong side.
His reaction against Loret de Mola was over the top and virulent, and trying to use INAI to get information from the journalist is illegal and a demonstration of his ignorance of the legal process. I believe that the people’s acceptance levels will drop below 65% and will barely pass 50% in the next polls.
Another lurid issue is the recall vote, which cannot be approved because it requires 36 million negative ballots, and it is not expected that more than 5 million citizens will vote. The lawsuit with INE and the lack of resources for this referendum make it a mockery and a waste of time and money.
The relationship with the United States has also deteriorated. An example of this is the letters from senators and deputies about the electricity reform, the avocado dispute, and the protest against the aggressions against journalists that have made this a dangerous profession in Mexico.
The decision that the Financial Intelligence Unit (UIF) can block bank accounts for a presumption of tax evasion is another example of abuse of authority that adds to the possibility of being imprisoned for the same presumption, even before a trial that proves the citizen’s guilt.
Speaking more about economic statistics in Mexico, remittances in 2021 were $51.6 billion, 27.1% more than in 2020.
Fixed asset investment growth was down 17.1% from the high point it was in 2019, the trade balance reflected the worst result in 29 years, and PEMEX had a $124,660,000,000 (6.2 billion dollars) loss in the fourth quarter of 2021.
Inflation reached 10% in January, and Banxico raised the rate to 6% and said it would try to move in sync with the FED, which could bring the rate to 8% by 2023.
The OECD lowered its growth forecast for Mexico in 2022 from 3.3% to 2.3%. INEGI revised Q4 growth from -0.1% to 0%, thus avoiding two consecutive quarters of negative growth and the traditional definition of recession.
Interestingly, it has been 16 months since there has been a new placement on the Mexican Stock Exchange, and 60% of the companies are trading below their original placement price.
The election of Aldana instead of Romero Deschamps as leader of the PEMEX Union is a clear indication that nothing changes and that the state-owned company will continue to be troubled in the future.
The economy in Israel remains solid, and the central bank decided to leave the discount rate at 0.1% until it has seen the impact of the new wave of COVID that affected the country.
Inflation remains within the 1-3% annual range set by the bank, which allows them to keep rates low, although there was a slightly more aggressive tone regarding future increases in their statement.
A slightly worrying aspect is the fall of the production index below 50, and the exports of products are decreasing compared to the export of high technology.
The shekel is still very strong, and the advantage is that it does not affect the sale of high technology, as there are no equivalents in lower labor cost countries and people have to pay whatever it takes to get the product or service.
There has been a significant increase in the relationship with the Emirates, and I do not doubt that diplomatic relations will be established with Saudi Arabia in the not too distant future.
There is no doubt that the saying “The enemy of my enemy is my friend” applies when everyone has Iran as an enemy.
Portfolios had a rather tricky month with equity markets reaching a cumulative drop of 20% in the NASDAQ and 14% in the S&P before having a slight rebound in the last few days, but still with relevant losses.
Bonds were also down about 1.5% as the rate on the 10-year Treasury note hit 2% after starting the month at 1.59%, but is already back to 1.7% due to the search for safety due to the war in Ukraine.
Gold is at $1,940/oz, a 2-year high, and the dollar has maintained its strength as part of the safe haven concept in times of crisis.
I hope to have better news next month.