The fight against inflation has become the main issue for all central banks except China. During the pandemic, most countries (except Mexico, one of those that did not) lowered their interest rates to zero or even negative and established a policy of high liquidity to avoid a massive recession.
Today they realize that they overdid it and that they should have suspended such measures many months ago, as we are experiencing the consequences of excess demand and lack of supply since the supply chain was greatly affected by factory closures to avoid COVID contagions.
The government can control excess demand by making money more expensive and withdrawing liquidity, but having enough products to buy is not in the hands of the state. Fortunately, the shortage is reducing, and in a few months, there will be sufficient supply, although the new closures in China may continue to affect the balance of demand and supply.
A negative consequence of government policies was the high growth of sovereign debts and the evidence that if the United States has a conflict with China, the solution will hardly be to impose sanctions because of the enormous dependence of the Americans on Chinese supplies.
The reaction of the United States to the growth in prices has manifested itself in many ways, from the blockade of the highways leading to Washington by truckers protesting the increase in gasoline; to the fall of Biden’s popularity to the lowest point of his administration (42%), and the first gains of the unions in companies such as Starbucks and Amazon that because of their voluntary benefits seemed to be shielded against labor pressure from the unions.
It was very interesting to read the letter from JP Morgan Chairman Jamie Dimon, who stated that the headwinds from the war in Ukraine, global inflation, and COVID would make the next two years very difficult and anticipated a possible recession by the end of 2023.
The International Monetary Fund reduced its global GDP growth forecasts from 4.4% to 3.6% in 2022 and from 3.6% to 3.4% in 2023. China was reduced from 4.4% to 4.1%, a number that would be acceptable for almost any country, but not for a country growing at over 10% per year until just two years ago.
Here I am going to include a small table that puts in context the economies of some countries and even helps to understand the concept that by 2030 China’s GDP will be equal to that of the United States in total. However, per capita, it will be much lower:
Country Total GDP GDP per capita
(trillion dollars)
USA 22.0 $63,543
China 17.7 $12,359
Russia 1.74 $10,120
Ukraine 0.17 $3,726
Mexico 1.15 $8,346
Israel 0.4 $43,610
The U.S. reported a contraction in its GDP last quarter. Still, I think that number should be taken with caution, as it reflects a significant increase in imports as a result of what did not arrive in the previous quarter, a substantial reduction in government spending due to the failure to pass the bills sent to the Senate by Biden, and a lack of inventory accumulation due to strong unmet demand.
On the other hand, consumer spending grew by 2.7%, and private sector investment was positive, so I do not believe that the negative report is a harbinger of a looming recession (defined as two consecutive negative quarters).
The political situation in the U.S. remains very complicated, with a very strong polarization between Republicans and Democrats, which, in my opinion, will lead to the Republicans controlling the Senate and Congress in the November elections. People are very angry with the contraction in their purchasing power as incomes are rising less than inflation, as well as the handling of education in the public system, which has gone very far to the left and concentrated more on very controversial social issues and not on getting kids to learn more math, literature or history.
It is very interesting to see how the Republican party has mutated from being perceived as the representative of big business and the wealthy to now being favored by small businesses and a large part of the Hispanic and African American minorities, who identify more with family values and respect for free enterprise.
Moving on to Mexico, the situation remains very complex, as AMLO is increasingly promoting the influence of the State in the lives of citizens and his enmity with neoliberalism, for which he blames all the ills the country suffers.
The pyrrhic victory of the recall referendum where 89% of those who voted refused AMLO’s removal, but only 17% of voters chose to go to the voting booths, the defeat in Congress of the Electricity Reform, and an irrelevant vote on the Mining Law reform that will prevent lithium from being exploited in Mexico, losing an important source of income for the country, further isolating the President from the productive sector.
The Treasury Department (SHCP) revised its numbers for 2022 to 3.4% growth and 5.7% inflation. Still, I feel both numbers are slightly different, with less than 3% growth and inflation close to 7%, mainly due to the possible U.S. bullishness. The slight drop in remittances which have already been decreasing for two months and due to inflation will mean that migrants will have less money to send to their families.
I found it interesting that Constellation proposed building a massive brewery in Veracruz at the cost of 1.2 billion dollars after the Mexicali fiasco. Still, it is one more example of Mexico’s industrial possibilities for foreign investors.
Moody’s talked about the risk of downgrading Mexico’s investment grade. Still, I think it is a bit of revenge since they did not renew their contract to rate the sovereign and Pemex bonds. Still, there is no doubt that the economy is a bit stagnant, especially in the construction and manufacturing sectors for local consumption.
The new announcements to combat inflation through price controls are disastrous, leading to shortages and higher prices. Gasoline subsidies, where Mexico loses money on every liter of fuel it sells since most of it is imported, increase PEMEX’s deficit and hinder its debt management.
INEGI published a survey on insecurity where 66.2% of the population considers it unsafe to live in the city where they live. The violence on beaches such as Cancun, where there have been several incidents of tourists killed for being in the wrong place at the wrong time when there is a fight between opposing cartels, has put at stake the tourism sector, which is experiencing a good moment.
To end the commentary on Mexico, I would like to talk about the proposed Electoral Law sent by AMLO to the legislature. I believe it is a big mistake to eliminate the INE, an independent body with the people’s support. The suggestion to create a popularly elected body is erroneous, as it ends the ability to maintain clean elections.
The elimination of plurinominals favors Morena in the short term. Still, it is not necessarily harmful in the long term since Mexico is one of the few countries with this type of deputies.
The markets had a horrible month, with the 10-year rate reaching almost 3%, the Dow down 8.8%, and the NASDAQ having its worst month since March 2008, a 14% drop.
High-quality companies like Amazon or Netflix fell by more than 30%, and in general, technology and companies that flourished in the pandemic plummeted.
The dollar was impressively strong, mainly because it is the first country to state that it will fight inflation by raising interest rates and reducing liquidity in the market. Neither gold nor bitcoin was able to become a refuge against the fall of the markets, dropping to $1,850/oz and $38,000, respectively.
I believe that the peso will defend around $20.50 as long as Banxico moves its rates in line with the FED. I think the US yield curve will flatten out with the 3-year and 30-year bonds paying basically the same.
