There is no doubt that we are living in challenging times virtually everywhere in the world.
Inflation that was once projected to be “transitory” due to supply chain disruption has proven to be here to stay unless central banks take drastic measures to reduce the money supply and make money more expensive.
Almost in tandem, 75 central banks have raised the cost of money. In the U.S., from 0.25% to 3.50% so far this year, and as a consequence, both stock and bond markets have suffered declines of more than 20% for stocks and 15% for bonds, dragging down consumer confidence and creating widespread unease among investors.
Overall inflation exceeds 8%, and consumers are apparently accepting the price increases by reducing their consumption very little. Only in certain areas, such as home sales (down 46% in the U.S.), is the impact of higher rates noticeable.
As an example of this increase, the monthly payment on a 1 million dollar mortgage rose from $4,173 in June to $6,586 at the end of September, which means that far fewer people qualify for or can afford such credit. Many people thinking of moving up to a better home will not do so, as they would have to abandon a cheap loan and start with a much more expensive one.
First-time buyers, generally those of lesser means, see their dream go up in smoke, as they cannot afford the higher payment.
Historically, the median home price was 4.6 times median household income, which today stands at 6.21 times because of the sharp increase in real estate prices without a similar increase in revenue.
In its latest statement, the Fed said it expects the discount rate, the only one they set, as the others are determined by market supply and demand, to reach 4.4% by the end of the year and 4.6% by the end of 2023, indicating that this time they will not backtrack too quickly and that they will try to regain the credibility they have lost.
The growth projection, which in June was 1.7% for the current year, was cut to only 0.2% from the fourth quarter of 2021 to the fourth quarter of 2022; by 2023, the recovery will be only 1.2%, and 1.7% by 2024.
The OECD reduced its global growth projection from 2.8% to 2.2% this year and Mexico 1.5%. In addition, it gave an important fact that the war in Ukraine will cost 2.8 Trillion dollars to the global economy, without considering the additional damage of a freezing winter with a lack of natural gas coming from Russia.
The U.S. is better prepared to face a recession than in 2008-2009, as unemployment is at 3.7%, and there are twice as many job openings for every job seeker. Returning inflation to a number starting with 2 will imply the loss of 6 million jobs and an unemployment rate of 7.1%. In addition, banks are very well capitalized from the measures taken in the last recession, but I still believe that the impact will be severe, as I estimate there will be a recession in the first half of next year.
In the two years of the pandemic, the wealth of the American people grew by 39 trillion dollars because of the increase in home values and the increase in the value of stock markets; this amount is 158% of GDP and a figure never seen before, but applying past data, for every dollar decline in home values, consumption is reduced by $0.40, and for every dollar decrease in financial portfolios consumption is reduced by $0.10.
A fascinating statistic is the distribution of wealth in the United States, where the wealthiest 1% holds 34% of the total. The 0.001% increased their wealth by 1100% in the last ten years even though the 100 wealthiest men and women in the country have lost $1 Trillion in wealth in the previous six months.
The economy in the U.S. continues to perform nicely with low unemployment, moderate growth, and strong inflation. Still, the main focus is now on November’s mid-term elections.
The Republicans are expected to win the House of Representatives. Still, the fight for the Senate is very close, as of the 35 seats in contention, 21 are currently Republican, and only 14 are Democratic.
I was very surprised by the poor selection of Republican candidates in some states, such as Pennsylvania and Georgia. Still, President Biden’s low approval rating (39%) and the perception of 84% of voters that Republicans are better for the economy will likely result in a slim majority of 51 or 52 Senators out of 100.
On the one hand, people are concerned about the economy, illegal immigration, and perceived weakness in the international policy arena, which favors Republicans, while education and environmental protection favor Democrats.
President Biden continues to show signs of cognitive deterioration and has now said four times that the U.S. will defend Taiwan militarily if there is an annexation attempt by China, and all four times, White House spokesmen have come out saying that there are no changes to established policy and there will be NO direct intervention by U.S. soldiers.
The rest of the world is also in turbulence. Still, it is very interesting to see that, in Europe, the trend is to the right, as seen in Italy and England, while in Latin America, the movement is totally to the left and populism. However, we noticed that quite a large margin defeated the attempt to modify the constitution in Chile.
The eyes of the world are now on what happens in Brazil on October 2 and to see if Lula returns to the presidential chair, as well as in Colombia, where Petro spoke of dramatic changes towards populism but has not yet initiated what he proposed.
Mexico is going through a tough time with Banxico rate increases to 9%, and a projection that they are going to reach 11%, very erratic growth, as it did not have the post-pandemic rebound of the magnitude of other countries and only 1-2% growth is expected this year and next, less than the increase in population.
Remittances reached a record $5.286 billion last month, although there may be some drug revenues in that figure, all indicators such as manufacturing, consumer confidence, and PMI are trending downward.
The budget sent by the Treasury Secretary to Congress with 3.2% inflation and 3% growth for 2023 seems unattainable, especially when today’s inflation is at 8.2%, and no major investment promises a significant increase in production. If we add to this the very possible recession of the northern neighbor, it seems even more challenging to reach that 3% growth.
I am very concerned about a series of erratic acts by the government, such as the audits of those who adhered to Peña Niego’s amnesty, repatriating capital, and paying 8% to achieve a “clean slate”. The argument being used by the Ministry of Finance is that the presidential decree was never legally formalized.
The expropriation of a property in Santa Fe by the Attorney General’s Office, the imposition of nationalistic conditions on the sale of BANAMEX that reduced the value of the bank, and the aggressive criticism of GRUMA for trying to raise the price of tortillas as a consequence of its increased production cost, as well as the prolongation of the price freeze on the basic food basket, which will cause shortages, are symptoms of a government with little long-term planning.
Decisions such as the Tianguis del Bienestar, which offered “gifts” to 216,000 families, the gasoline subsidy, and the proposal to mediate in a plan to pacify the war in Ukraine, are symptoms of accommodation towards the 2024 elections and are aimed at maintaining the President’s popularity above 60%, despite the situation in which the country finds itself.
Before moving on to the behavior of the markets, I would like to comment on a few things; the first is my concern about what could happen to Europe if they have a freezing winter due to the shortage of natural gas as a result of the shutdown of pipelines promoted by Putin. Secondly, to observe how India has uselessly spent $100 billion of its reserves (15%) unsuccessfully defending the rupee and finally to mention that on November 15 of this year, the eighth billionth inhabitant of our planet is expected to be born.
Financial markets had a terrible September, with stock markets down almost 6%, bonds suffering a loss of nearly 5% as the 10-year bond rate rose from 2.80% to 3.90%, gold, the supposed defense against inflation, dropping to $1,640 and bitcoin below $19,000.
The yield curve flipped even further, with the 6-month bond paying 3.95% and the 30-year 3.83%, a ratio that preceded the onset of a recession in the past.
The dollar strengthened sharply, dropping the euro to $0.95 and the pound sterling to $1.05, the lowest level in history.
I am hopeful that the economic situation will soon improve and the world’s political future will become clearer.
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