This month, I will start with the analysis of Mexico since the dramatic, still not so surprising, outcome of the elections creates a situation never seen before, where a populist government, without counterweights, can implement policies and change laws according to its government plan and vision of the country. I am more hopeful than many that Claudia, an intelligent and prepared woman, will be an agent of positive change and lead the country in the right direction, as long as she shakes off the demagoguery and ideas of countries of similar ideology, whose results have not been favorable.
Respect for private property, co-investment for aggressive development of infrastructure, and the fight against crime will be critical factors if Mexico wants to take advantage of the enormous opportunity presented by the conflict between China and the U.S., especially if Trump returns to the presidency of the northern neighbor. I am very concerned about September when there will be a new Congress and still a month of the current government because of all the threats of a new constitution, plan C, and other ideas of President Lopez Obrador that we had discarded because there were counterweights that prevented unilateral actions. There is no doubt that a new chapter will be written on Mexico’s history, and I hope this story will have a happy ending.
The United States is also in a difficult moment. A former president, who is also leading the polls to win the elections again, was convicted of 34 “major” crimes. This has never happened before, and although the trial had political influence and misuse of the judicial system by the Democrats, it is a black mark in U.S. history. It creates an awful international image of a country that is traditionally an example of the rule of law.
President Biden is deteriorating every day, to the point of not being able to give an intelligent speech even though he is reading on the teleprompter, and there is no doubt that his cognitive problem is worsening at an accelerated pace. The thought that he could win and that something could happen to him by leaving the most important job in the world to someone like Kamala Harris is enough to keep me awake at night. As I’ve said before, I’m not convinced that Biden will be the nominee, especially if the debate with Trump on June 27 doesn’t turn out as Democrats hope it will. Speaking of Trump, I want to note that I agree with the view that he is a nasty, egomaniacal, over-the-top man, but physically whole and with sound policies that had the country well in his 2016-2020 administration.
The U.S. has shown lukewarmness in its relationship with Iran, which has aided the growth of terrorism in the Middle East and allowed the advancement of nuclear development that would endanger the entire world. Iran went from selling 300,000 barrels of oil per day to 2,000,000 barrels per day, an increase in revenue of approximately $48 billion per year. This amount is enough to create havoc worldwide through its “proxies” such as Hamas, Hezbollah, and the Houthis and threaten world peace.
The growth of anti-Semitism in the most prestigious universities in the United States and the pro-Palestinian demonstrations all over the world are examples of a planning of many years that finally found the fertile ground to come out of the sewers and that shows the ignorance of the majority of the demonstrators, sheeple managed by paid professionals. It has been long since America has seen the partisan polarization we see today, and the concept of fighting together for a better country no longer exists. I am sure the presidential campaigns beginning in earnest will be very antagonistic and dirty on both sides and will not be positive about building a better nation.
I believe that in November, Trump will win, as the two factors dominating the polls are the economy and illegal immigration, and on both people are very angry with Biden, even though the economy is not bad, with low unemployment, reasonable growth, and moderate interest rates. However, people feel that inflation is sky-high (below 3%, which is not bad) and that their purchasing power is falling quickly. The case of border porosity is undeniable, and although the U.S. needs immigration to compensate for the birth rate, 1.76 per couple is the lowest in the country’s history. The desire is for the entry of foreigners to be legal, monitored, and by laws and procedures that prevent the entry of unwanted people. Here, we can add that, with the porous border, the entry of fentanyl, responsible for 100,000 deaths a year and increased 1,700% from 2018 to 2023, has skyrocketed.
Consumer confidence is at its lowest point since 2022, with the index dropping from 76 to 67 last month. Strategic oil reserves are also at a 30-year low, and the office market crisis is very severe, with buildings at 30-40% occupancy and sales prices at less than half of replacement value. Areas where there were substantial labor shortages, such as information technology experts, now have 8.8% unemployment, and the massive investment in plants to replace semiconductor imports so as not to depend on foreign suppliers, where the government gave subsidies of almost 70 billion dollars, will create in total less than 10,000 jobs.
We have been waiting for several months for a cut in interest rates, and we have already gone from a forecast of perhaps six 0.25% cuts in 2024 to only one by the end of the year. The fight against inflation is slow, and the last 1% to reach the 2% target set by the FED is the most difficult, mainly due to low unemployment. It is worth noting that high rates hit the consumer hard in the past, especially for their monthly mortgage payment. Still, the impact has been much less this time, as 94% of mortgage loans are now fixed and not floating, with an average of 3.41%, a product of the plummeting rates during the pandemic that the vast majority took advantage of to refinance their loans. A slightly worrisome announcement was that China sold $6 billion of U.S. Treasury bonds from its reserve last month, bringing it to $13.6 billion this year. The dollar will remain strong as long as there are buyers for its growing debt, but what if the day comes when there is an auction of government paper, and there are no buyers?
Speaking of the economy in Mexico and recognizing that after yesterday’s cataclysm, the past seems less relevant, the first quarter grew only 0.1%, the smallest increase since 2021. This increase was in the services area, as production declined slightly. The Bank of Mexico reported losses of 440 billion pesos due to the peso’s strength, as it acquired many, many reserves at higher prices than the current exchange rate. Mentioning some positive data, the Dos Bocas refinery finally starts operations in June, the Welfare Pension Fund began to be fed, a bottomless piggy bank that will require considerable amounts to fulfill its promises, the production of light vehicles reached a historical maximum of 358,000 units of which 300,000 will be exported and finally, from January to April, federal revenues grew 5.8% although spending increased 18.1%.
An interesting topic that I do not know whether to put as a positive was the announcement that PEMEX would restructure $40 billion of its $160 billion debt. However, the Treasury announced that it would not be an immediate process. Given that it cannot default on the debt of a 100% owned company, I would like to see the federal government absorb that debt by lowering the cost of the debt by almost 4% per year. What was not favorable about the April reports was that the retail sector fell 0.2% in the fourth month in the last five when it moved downward. ANTAD, which brings together retail companies, reported the lowest growth in 3 years, Banamex economists reduced their forecast for economic growth from 2.4% to 2.2% in 2024 and to 1.8% in 2025 with a projected inflation of 3.7%.
Returning to previous months’ commentary, the long-awaited “nearshoring” does not seem to be gaining traction, as foreign direct investment in 2023 grew only 0.7% in new companies. However, it increased 8.9% in financial instruments. The largest project announced, the TESLA factory in Monterrey, was temporarily postponed due to a lack of infrastructure, especially energy. I want to mention my concern about this lack of infrastructure, which has manifested in the severe lack of water, insufficient electricity, communication problems from highways, lack of airports and limited telephony and internet, and the lack of qualified technical personnel. All of this is very expensive, but if the government does not do it, it will not take advantage of the historical moment that is so favorable for Mexico in terms of manufacturing and foreign investment. Security elements must be added to this effort since organized crime is a significant deterrent to investment.
Israel is still in a great crisis due to the situation in Gaza and the need to use reserves for the army, creating a great vacuum in the country’s businesses. The growth forecast for 2024 is 2% and 5% for 2025, slightly different from the IMF, which estimated it to be 1.6% this year and 5.4% next year. The 20% contraction in the fourth quarter of last year, resulting from the onset of the October 7 crisis, has already been overcome, and the rating agencies maintained the investment grade at A+. However, they placed it under negative watch due to the impact of the hostilities. Israel’s bond sales tripled over the previous year’s equivalent, and the GDP deficit reached an annualized 7%, the highest in history. This month, VAT will increase by 1%, and the shekel is at 3.67 to the dollar, exactly the same as on August 2 last year.
Speaking of the rest of the world, Latin America seems to be beating inflation in almost all countries except Mexico and Colombia, and a reduction in interest rates in local currencies has already begun. Projected growth for the region is 2.7%, although high government deficits complicate the situation. Two countries require special mention, the first is Argentina, where Milei finally got the congress to approve his constitutional amendments and has managed to lower inflation to 8.93% in April. It was the fourth consecutive month of decline and finally in single digits, although extreme poverty rose from 44% to 60%. The other country is Colombia, where Petro is going against private property, causing terrible disinvestment and severe capital flight.
In China, home sales fell 47%, and they now have an 8-year inventory, to the extent that the government started buying homes from private developers who are bankrupt and plans to fund mortgages through regional banks. China’s automotive industry comprises 241 manufacturers, with 17% producing less than 1,000 cars per year, 20% under 10,000, and the rest larger quantities. Total production is 40.1 million cars, and domestic consumption is 20.2 million, so they are expected to flood the markets with Chinese vehicles, especially in the United States, which are blocked by extraordinary tariffs for this industry.
Until today, China has defended itself from the U.S. sanctions by devaluating its currency by 13.5%, partially counteracting the increase of its products that pay higher import taxes, a consequence of the sanctions imposed by Trump and maintained by Biden. The Chinese placed the equivalent of $180 billion of debt in the market to face the upswing of their economy and strengthen the real estate sector. It is worth noting that while China’s GDP contracted somewhat, India grew 8%, possibly becoming a third pole of global development. The interdependence between Russia and China is increasing, representing 33% of Russia’s international trade, while the reverse is only 4%. China’s support for the war in Ukraine puts them directly in an antagonistic position with the West.
This month was good for bonds as interest rates went down a bit, stock markets reached all-time highs, although they pulled back slightly at the end of the month, the dollar was a bit hit by lower interest rates, gold went above $2,400, although it closed at $2,345/oz and bitcoin, after many ups and downs closed at $67,740, especially after the cryptocurrency regulators lowered the authorized production to only 450 bitcoins per day. I suggest we take things calmly and intelligently to react appropriately to a dramatically changed environment.
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