I begin today’s letter with the economy section as this topic seems to dominate the headlines in the newspapers.
In a technical definition, with two consecutive quarters of decline in U.S. GDP, the country is in a recession, but I’m afraid I have to disagree with this assertion.
GDP has many purely numerical components such as government spending, inventories, the balance of trade, etc. This quarter, companies reduced their inventories by 2% as supply problems were partially alleviated. There was no longer a need to stockpile components or raw materials at any cost to avoid interrupting production. If instead of 2%, the number had been zero, GDP would have shown a growth of 0.6%, and we would not be talking about recession.
When the country has an unemployment rate of 3.6%, one of the lowest in history; when there are 11 million jobs for which no workers can be found; when there is an estimated $2.24 trillion in savings produced by the COVID lock-up; when the banking system is very sound with the 33 institutions considered “too big to fail” has done very well in the stress test and where none were required to increase their capital or reduce their credit exposure, we cannot talk about a recession.
A recession, in my opinion, is when unemployment rises sharply, when people are hungry and cannot afford even the basics when companies lay off employees because sales plummet and when businesses lose money day by day.
Today we are suffering from very high inflation, but it is starting to come down with steel prices down 43% from their peak, oil prices down 34% from $130.00/barrel to $92.50 today, copper prices down 37%, lumber prices down 46% and wheat prices down 28% despite the lack of supply due to the war in Ukraine. Semiconductors which unhinged the sale of cars and other products, are already flowing near normal and are down in price by about 15%.
The FED raised short-term interest rates again by 0.75% to fight inflation, affecting all those with variable credits. The impact is already being felt in the housing industry, where there has been a 17% drop in new home sales. Mortgages have gone from 89% fixed rate in 2021 to only 41% in 2022, as people do not qualify for credit in the face of higher monthly payments due to rising rates.
The freight cost went up almost 400% during the pandemic, and today is about double what it was in February 2020 but trending downward.
The average auto loan payment is $686.00/month, 13% higher than one year ago, and 12.7% of people pay more than $1,000/month, which was 7% in 2021 and 4.8% in 2019.
I think the Fed will not stop raising rates to 3.5% (from 2.25% today) to fight inflation and not promote economic growth. In the second half of next year, we should see a rate cut when inflation is already below 4%. By 2023 we will have a moderate recession for 6-9 months when unemployment will reach above 5%, and the imbalance between demand and supply of workers will be solved.
The U.S. home affordability index, which combines home price and mortgage payment, is at its lowest point since 2006, indicating that the increase in income has been less than the increase in home prices.
Continuing with the global economic theme, Canada raised its short rate by 1%, the most substantial increase in its history, Germany had a trade deficit for the first time since 1991, China has a projected growth of 3.3% in 2022 and 4.6% in 2023, (shallow figures for a country that for 15 years grew above 10% per year). This slowdown, together with that of other emerging countries such as India, Brazil, and Mexico, led the International Monetary Fund to lower its global growth projection for 2022 from 3.6% to 3.2% and from 3.6% to 2.9% for next year.
It is interesting to comment on the mortgage crisis in China. Home buyers start paying their mortgage when they sign the purchase contract. Of the homes sold from 2013 to 2020, only 60% have been delivered!!! And with the builders’ problems, this will get worse to the extent that there is already the beginning of protests of non-payment, which has never happened in that country.
Mexico reports relatively good economic figures, although I will comment on other problems later in this letter.
The bond rating agencies changed their assessment of Mexico, with S&P going from negative to neutral with no change in grade, and Moody’s reducing its rating to a level very close to no longer investment grade. It should be noted that Mexico no longer pays Moody’s to evaluate it. Pemex is already at the junk bond level, although I feel that the government cannot afford to default on its obligations if it wants to continue selling sovereign debt.
On the positive side, private consumption has been up for ten months in a row; reserves continue to be maintained at almost 200 billion dollars, ANTAD reported sales of its affiliates of 7.5% year over year, and PEMEX reported a spectacular quarter, with profits of 6.58B dollars due to the increase in the price of oil.
On the negative side, the inflow of foreign money into Mexican markets was the lowest since 2009.
Pemex averaged an export of 922,000 barrels per day but an import of 888,000 barrels of gasoline.
Mexico’s airports and airlines continued with increases but are already at the lowest level in 6 months.
Inflation was revised from 7 to 7.6% despite subsidies of 21% on gasoline and 47% on diesel. The projected price increase for 2023 rose from 4.3% to 4.5%. The expectation for government rates is that they will reach 9.75% and the peso at $20.95 by December and $21.50 by 2023 with GDP growth of 1.3 to 1.7%.
Let’s move from economics to politics.
The United States continues to experience tremendous polarization generated by the Supreme Court’s decision to return the legalization of abortion to the states, in addition to the proposal of a new budget line item for the fight against global warming and other social initiatives.
Senator Manchin, a conservative Democrat, finally joined his party, although he only agreed to a $790B initiative, 25% of the $3.3 trillion requested initially. It remains to be seen whether Senator Sinema of Arizona will vote for the bill to pass since she opposes tax increases, and this bill contemplates almost $400B in increases.
President Biden, afflicted with recurrent Covid, continues to demonstrate his advanced age and cognitive impairment, making conflicting comments that have to be constantly corrected by the White House.
The non-acceptance of the blame for inflation and even his erroneous comments that the economy is very solid and that the U.S. is the fastest growing country in the world, in addition to not firing any of his officials, are examples of his indecisiveness. Some wrong decisions and lack of leadership have caused his popularity to be only 31%, and more than 50% of Democrats do not want him to seek re-election in 2024.
I believe that the Republican Party will take back Congress and the Senate in the November mid-term elections, as Americans vote with their pocketbooks. 77% think the economy is being mismanaged, and the Democrats are not qualified to solve it.
A new crisis whose end we have not seen yet was triggered by the announcement that Nancy Pelosi, the Democratic leader in Congress, would visit Taiwan, which provoked a negative and aggressive reaction from Xi, the Chinese premier. Everyone knows that the Chinese want to recover Taiwan, which they consider theirs, which is a red light in global stability. A phone call with Biden told him that “he who plays with fire can get burned”.
Mexico continues in a political crisis, with AMLO becoming more polarizing by the day, attacking all intellectuals, business people, and those who promote economic activity while gaining popularity among the less privileged classes.
The dismissal of the risk of the United States and Canada imposing sanctions and even abandoning the USMCA for violations in the energy sector clearly shows a lack of perception of what is happening.
The poor and even insulting reception AMLO received on his trip to Washington is an example of the deterioration of the U.S.-Mexico relationship. I would characterize the trip as a futile effort to resolve differences in trade, immigration, water, and other issues so crucial to both countries.
I found it interesting that two days after the return to Mexico, Caro Quintero was miraculously recaptured, which, in my opinion, indicates that they did know where he was and that there was an agreement in the talks between the two presidents.
I was struck by the Financial Intelligence Unit’s (FIU) attack on Peña Nieto, where the supposed pact of not persecuting previous presidents was broken. This may influence who will be AMLO’s successor since no candidate “not aligned” with the President would be acceptable if they were to go against AMLO’s relatives or inner circle that would have made questionable operations.
I believe that there has not been the Fourth Transformation but a destruction of the institutions that kept the country stable and calm since 1925 and that the militarization of the country will make it much more difficult to govern in the future.
The fact that the Mayan train already has a cost of 17 Billion dollars, 70% over budget, and Dos Bocas with $18 Billion spent and $21.5B programmed to finish the work, are examples of the total loss of control and power of the military. It is worth noting that no new refinery has been built in the United States since 1977.
Portfolios had an exceptional month with stock markets having their best month since 2020 with a recovery of about 10%, bonds with gains of over 2% as the treasury bond rate moved from 3.4% or 2.70%, currencies stable, within the strength of the dollar, and even cryptocurrencies recovering 10% of their value.
Gold remains depressed but rebounded from an 18-month low to $1,766.50.
