Special Reports

Luis Maizel’s Monthly Letter: Are we doing well……. or not?

Photo: Bruce Mars on Unsplash

The question in the title applies to both Mexico and the United States. There are countries where the answer is definitely no, such as Israel, Ukraine, Russia, or Turkey, but when focusing on the United States or Mexico, the answer is unclear, as there are things that are going well and others that are not.

The U.S. is in a position where the “soft landing” seems to have defeated those predicting a recession. The economy remains solid, with unemployment low, production indexes at a 20-month high, and a consumer who keeps spending, either because he still has savings or because he is maximizing his ability to borrow. The political campaign ending on November 5 with the presidential election, 33 Senate seats, and 435 congressional seats is already in full swing. Every day, it seems to be confirmed that there will be a rematch between Biden and Trump if no health or legal issue is preventing either of them from being the nominee.

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I have repeated on several occasions it is unheard of that these two contenders are the best the two parties can put up. The option of having to choose between a Biden who did not age well and who already has problems with memory, mobility, and ability to react quickly and accurately to the multiple global issues that the most powerful man (or woman) in the world faces every day, and a Trump with good ideas and more accurate policies on crucial issues such as the border crisis, the relationship with China, etc., but whose way of expressing himself, and even the way he executes his policies, are extremely unpleasant for many people. The contest for control of the chambers will be aggressive and dirty, but polls predict that the Republicans will gain a slight advantage in both the Senate and the House of Representatives.

On the one hand, I was pleased that the rule of law continues to prevail, as the Supreme Court ruled that Trump is equal to any citizen and subject to the laws that exist for everyone. Still, on the other hand, I am highly concerned about the country’s indebtedness, as federal liabilities already exceed 34 trillion dollars, and servicing that debt alone is already 680 billion dollars annually. It is estimated that by 2030, interest payments will reach 1 trillion dollars per year. As of 2025, debt service will be the largest item in the federal budget, exceeding military spending, which has always been number one.

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The 2023 government deficit ended up at $1.58 trillion, down slightly from the previous year, due to a rise in corporate profits and higher tax payments, but still too high and dangerous. Just to put it in context, the deficit was about 11% higher than Mexico’s entire GDP. One of the clouds in America’s future is the debt owed by commercial property owners (office and shopping malls) to banks, which is nearly $1 trillion. Second-tier regional banks, which hold $330 billion of this debt, will not withstand a massive default. Large banks report that commercial loan delinquencies have tripled to levels only seen in previous recessions. Another cause for concern is that the index of forward-looking indicators has been declining for 23 consecutive months, an index that anticipates economic activity and is worrisome if it continues to decline. The debt of U.S. citizens are at $17.5 trillion, and servicing it costs 9.77% of total income, seriously affecting their ability to consume.

One interesting fact is that of the total aid the U.S. has given Ukraine, approximately $75 billion, 64% has gone back into arms purchases. The U.S. reported that its imports from Mexico reached $475 billion, exceeding China’s $420 billion for the first time. The trade deficit with China was $280.8 billion; with Mexico, it was $152.4 billion, as the U.S. exported much more to Mexico than to China.

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The increase in the price of some stocks in the stock markets has been spectacular, although limited to a few technology companies and not to most public companies. Microsoft and Apple, the two companies with a market value of over 3 trillion dollars, are more valuable than the publicly traded companies in France or England. The sum of the 7 “magnificent” Microsoft, Google, Tesla, Apple, Facebook, Nvidia, and Amazon would form the third-largest market in the world after the United States and China.

Mexico is immersed in the presidential campaign, as the elections are only three months away. The rallies in favor of Xochitl are multiplying all over the republic. Hopefully, many opinions will change, but I still believe that the control of the political machinery, the majority of the state governments, and the millions of checks that are sent every month will take Claudia to the presidency. It is difficult for the traditional PRI militant to vote massively for a PAN candidate since MORENA is more akin to their historical thinking. Still, in 90 days, a lot can happen.

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The 20 constitutional reforms AMLO sent to the Senate are clear evidence of an attempt by the Executive to take even more power than it already has, eliminating most of the control organisms that limit the President’s reach. I do not believe they will pass because Morena does not have a qualified majority (2/3 of the total number of senators). The proposal that I believe will be approved is that of retirement and pension law reforms. Both the PAN and the PRI seem to support it. Still, I feel that it is dangerous to accept it if there is no fiscal reform that allows the government to have more revenue since the cost of this amendment is very high: 2% of the GDP, according to Citibank’s calculations. It is common practice for governments to raise pensions since the burden will fall on future administrations, but the positive image with workers is with the one who proposes the change.

If we count the positive and negative statistics for Mexico in 2023, we see that both columns have several interesting lines. On the good side, S&P ratified Mexico’s investment grade; automobile production reached a level of 325,000 per month, reserves reached a record 213.464 billion dollars, and the current administration maintained a better parity against the dollar at the end than when it entered, considering this analysis since the free float of the peso in 1976. Economic growth of 3.2% over 2022 with moderate inflation surprised analysts, and foreign investment rose 27% over 2022, mostly in Mexican bonds and stocks. The Tax Administration Service collected $34.5 billion from large taxpayers, 51% of the total collected, 123% above the previous year, and a 57% increase over the six years.

Image: on banxico.org.mx

Adverse reports were that foreign direct investment contracted 0.2% for the year, a clear example that nearshoring is still not growing strongly due to the lack of infrastructure. Retail sales in January were the lowest in 5 years. Pemex is producing an average of 1,602,000 barrels per day, the lowest extraction since 2016, and airports and airlines had a slowdown of almost 5% in passenger numbers.

A couple of articles in the foreign press, the New York Times article on the influence of drug trafficking in the current administration and the Wall Street Journal article on extortion or “piso” at levels that affect the operation of companies, did nothing to help Mexico which is trying to promote the advantages of operating in the country. A problem we saw coming for CDMX, the lack of water and the return of Phase 1 of the environmental contingency, will be one of the biggest concerns for the next administration.

Screenshot: on nytimes.com

Israel reported that the drop in economic activity in the fourth quarter of 2023 was 19.4% annualized, the worst slump even considering the great global crisis of 2008-09. Undoubtedly, the call-up of 360,000 reservists affected all components of the economy. Nevertheless, the economy grew 2% for the year thanks to the good numbers before October 7.

In other countries, both Germany and England are in a technical recession, Japan a little better due to the return of moderate inflation! Turkey has inflation above 40% despite a dramatic increase in central bank rates, but with sustained consumption showing no slowdown, and Brazil has a considerable drop in consumption. Spain saw a further rise in inflation and sent a clear message to the world that lower inflation is not a fait accompli, allowing governments to lower interest rates to encourage economic growth quickly.

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China deserves special mention as its economy continues to shrink despite lower interest rates, the government’s investment of $280 billion in its stock market, and the more than 1% reduction in mortgage rates. The real estate developers’ crisis is enormous, and the largest, Evergrande, ceased operations and went bankrupt as it was unable to restructure its debt. In addition to the internal problems, third world countries to which China lent a lot of money in its Belt and Road project, are not paying the debt that exceeds $100 billion dollars.

February was a good month for the stock markets, bonds had a small drop as interest rates went up by 0.1%, gold is very close to its highest point at $2,061 per ounce and bitcoin had a spectacular rise reaching above $62,000. The dollar was stable, and the peso held at $17.05 even though the 2024 budget no longer has the fiscal discipline of the last five years.

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