The month just ended was characterized by mixed signals, both in the global economies and in the political controversy created by leftward movements in most countries, the departure in Germany of Angela Merkel, and paralysis in the U.S. Congress.
Before getting into details and as a historical reference, the number of people infected by COVID globally reached 245 million; officially, more than 5 million people have died, although the actual number I believe is much higher and 6.5 billion vaccines have been applied.
In the United States, President Biden’s agenda has not progressed, as his Republican-backed $1.1 trillion actual infrastructure project was linked by the so-called progressives, the left-wing bloc in Congress, to the “human infrastructure” package that included free college, free child care for all, increased eye and dental insurance to the Medicare health care program, and many other things.
To get this package passed, the President first had to eliminate one of the bastions of democracy called the “blockbuster,” which requires that 60 of the 100 senators approve a major initiative. If this requirement is eliminated, it gives near-absolute power to the party with the majority if all of its senators vote in favor of the initiative.
Today, 2 of 50 Democratic senators, Manchin of West Virginia and Sinema of Arizona, disagree with Biden because they consider the program too expensive and full of excesses. They cut programs every day to continue negotiating, which is no longer acceptable to the left, who says they will boycott both programs.
In addition to this, a solid fiscal reform was needed to obtain part of the necessary resources, and this reform is also stuck. This reform included an increase in the rate on corporate profits and an attempt to tax the profits of the wealthiest even before realizing them; that is to say, if a stock increases in value and is not yet sold, the tax must be paid on that appreciation even without having realized the profit.
President Biden’s popularity is at 37%, the lowest point in history for a president in the first half of his initial term. The polls show that people are dissatisfied with the handling of foreign policy (Afghanistan, the lawsuit with France over the Australian submarines, China, etc.) and domestic policy (handling of the border crisis, etc.), but above all, with the economy, where inflation is very high, and there are shortages of many products.
While we are on the subject of inflation, I will dedicate a few lines to this growing problem. The Fed believes that the reported price increase of 5.4% is due to the temporary disruption in the supply chain. This will normalize in a few months, ending the year at around 4%, with the expectation of 3% in 2022 stabilization at 2.5% going forward. This view is consistent with their desire to average 2% over 20 years, supported by the fact that prices increased by 1.6% per year in the previous decade.
Part of their thinking makes sense since producers thought at the beginning of the crisis in March 2020 that the recession would last at least a year (the historical average is 51 months with a range of 11 to 117 months). This time, officially, it only lasted two months, helped by the massive injection of resources from global governments (except for Mexico) that decided to avoid a major crisis through subsidies and increased liquidity.
Manufacturers closed old factories, didn’t produce much, ordered new, more productive
equipment, sent people home, and when supply came back very quickly, they didn’t have enough product to sell.
With people at home receiving the same income and many times more than what they were earning by working and without spending much, since they suspended trips, going out, buying new clothes, etc., to the extent that savings in the United States rose by $2 trillion, the unsatisfied demand was huge, and as soon as the lock-up was over, the demand for goods and services began to rise.
In addition to this, there is a shortage of personnel with more job offers than unemployed people (cannot be balanced by different geographic locations, skills, and experience, etc.) to the extent that 4.2 million people resigned from their jobs in October search of better opportunities.
I believe that, with more people vaccinated, children back to school, and life more or less normal, the production chain will normalize. However, I do not see prices rising much below 3% in the next ten years, especially if emerging countries like China and India continue to maintain an austerity policy with GDP growth of less than 5% per year.
The United States had their perennial discussion of the sovereign debt increase whose limit has to be approved by the Senate, and after their internal politicking, they postponed the decision until December. We all know that they will come to an agreement, as they would never default or stop the daily activities of the government.
According to International Monetary Fund forecasts, the world’s GDP will end up with an increase of 5.9% in 2021 and 4.9% in 2022, depending a lot on China’s growth and on the fact that a new wave of a different COVID will not emerge. It should be noted that GDP in the USA only increased 0.5% in the last quarter, mainly due to the lack of inputs.
It is worth noting that in the U.S., debt as a % of GDP went from 50% to 125% in the last 20 years, and despite this, debt service went down 19% due to falling interest rates.
The wealth of the American people reached $141.7 trillion, $5.9T more than the previous year due to rising home values and rising stock markets.
In Europe, there have been many changes, such as the departure of the Austrian premier, a 33-year-old right-winger, accused of corruption, the imminent change in Germany to a moderate left-wing coalition, the leadership taken by Putin on energy supply and prices, and the traditional economic problems of the economies of the South of the continent as well as the political problems of the countries that were in the communist core of the old USSR, which have shaken the favorable course it had been on before the pandemic.
On the other hand, the European Central Bank ratified its cheap and easy money policy for another year. This will maintain the negative rate on the bonds of strong countries.
In Mexico, the uncertainty generated by AMLO’s difficulty to understand electricity reform continues, which will be an interesting test to see if the President gets 2/3 of the votes needed for its approval. It will be representative to see how PRI legislators vote. It is worth noting that it is the first country in the world where the environmentalist party will vote against clean, renewable energy.
The federal government’s entry into gas distribution has created much controversy, and opposition from the industry has made this vital commodity scarce and more expensive.
Interestingly, the Supreme Court continues to show signs of independence, rejecting proposals from other agencies such as preventive jail for alleged tax crimes, the proposed changes to the IFE, and the first pass of the electricity law.
PEMEX’s results for last year were terrible, although a little better than the previous year. It is difficult to understand the numbers since it includes as an expense all taxes paid to the government, which are not linked to its operating results.
Very interesting comment by the Secretary of Finance that PEMEX debt is federal government debt, making these obligations more explicit. Previously the guarantee was only implicit, making the yield spread of PEMEX and UMS bonds more difficult to understand.
The announcement that PEMEX’s offices are going to Ciudad del Carmen does not make much sense, as there is not enough infrastructure to receive so many people. I think we will end up with offices in two places and with the major decisions made in CDMX.
A publication by the World Justice Product, the organization that compiles a list of corruption in different countries and whose numbers should be taken with care and without much validation from third parties, places Mexico in 135th place out of 139 countries, with only Uganda, Cameroon, Cambodia and the Congo worse than Mexico. Norway and Denmark occupy the first two places.
Figures from Mexico show some positive results such as the consumer confidence index and the first month in the last seven months of inflows to the capital markets, but also some negative statistics, such as the 326,000 COVID deaths (government figures), 0.2% drop in GDP in the last month and the highest annualized inflation since April of this year (7.09%),
In Israel, the Knesset Finance Committee approved the 2021-2022 federal budget, which prevented the dissolution of parliament and represented the first time in 3½ years that there has been an approved budget.
This week the projected deficit was cut to 5.6% from 6.8% previously, as the recovering economy generated better tax collections. The deficit estimate for 2022 is 3.9%, and growth for 2021 is 7% after the 2.2% contraction in 2020.
The pandemic budget is $179.8 billion in 2022 after spending $191.2 billion in 2021.
During October, equity markets recorded an all-time high, recovering from the fall at the end of September. Bonds did not have a good month, as the total return between interest earned and the price was slightly negative, and the dollar suffered a slight decline against strong currencies.
The peso fell 2.2% but remains in the $19.50-$21.50 band we had forecast.
Brazil continues to have enormous economic problems, and although there are no elections until 2022, Lula is looking stronger and stronger. People have lost confidence in Bolsonaro, with the Real and the stock market suffering falls of more than 5%.
Gold is still hovering around $1,800 but has not reacted to inflation fears, leading us to believe that it is no longer the traditional hedge against rising prices.