The title of this letter was hard for me to write. Still, when I look up the definition of socialism, I find that it is when the State tries to control everything, and the bureaucracy’s tentacles get into the citizens’ decisions. Why is Washington going to decide if a Japanese company can or cannot acquire U.S. Steel? Why are they attacking Apple for charging for the sale of space in their app store? Why are they giving Intel 12 billion dollars to put a semiconductor factory in Arizona? Why are they going to decide if an app seen by 170 million people (TIK TOK) has to be sold to Americans or eliminated?
The pressure from the far left in the Democratic party has changed the nature of crime fighting, eliminating cops and turning prosecutors into protectors of criminals. It has created enormous pressure on the companies seeking to merge, led by a 35-year-old economist, Lina Kahn, head of the FTC and champion of interventionism. Among her accomplishments, she has already stopped the merger of two airlines, two supermarket chains, and the buyout of a medical company (Illumina). She is leading the attack on Apple for being “too big”.
The new U.S. federal budget includes a $1.6 trillion deficit despite increasing military spending by only 1% but social projects by 7.3%. For the first time, debt service is higher than the cost of defense. For the first time in history, debt will reach 100% of GDP, a measure that was always said to be the limit for a first-world country, although Japan has been above that figure for many years. Another clear example is all the economic sanctions imposed on countries that are punished with additional tariffs to the detriment of the American consumer and the free market concept.
The political campaigns for the November elections are growing daily, although it is not confirmed who will form the contending duos until the conventions of the two parties are held. Who will Trump choose as his Vice Presidential candidate? Will Biden be the Democratic candidate, and will he keep Kamala Harris as Vice President even though her popularity is below 20%? The use of the Justice Department to attack Trump in 4 different states is the misuse of the legal system to interfere in the November election. I don’t know what happened to the country that was the role model for the rule of law, a safe country where the police protected the citizens, where criminals ended up in jail, and where the successful were respected and not vilified. In the November elections, voters will elect 34 senators and 435 representatives whose terms are only two years, while in the Senate, they are six years. There are 23 Democratic seats in contention and only 11 Republican seats, so the Republican party will likely regain control of the Senate.
When in the State of the Union, President Biden attacked the wealthy for being wealthy and said he would make them pay their “fair” share of taxes, he did not know the actual contribution figures by sector, which are: the lower-income population, which represents 50% of the population, paid 2.3% of the taxes collected, the next 25% paid 8.1%, the next 15% paid 10.1%, the next 5% paid 9.3%, the next 4% paid 22.1%, and the top 1% of the wealthiest citizens paid 48.1% of what was collected. Looking at these numbers, it is evident that the wealthiest contribute more than proportionally to the taxes collected.
As the election approaches, Trump is about 6 points ahead of Biden, primarily because of the impact of the failed immigration policy of the current administration. The images of the open border, the unreasonable murder of Laken Riley by an undocumented South American, and the 270,000 fentanyl deaths in the last four years have people very angry. The sector where the influence of the Democratic Party has declined the most is the Latino voter, who in the last three elections had outvoted the Republicans by 39%, and today, that difference is only 18%.
The central bank, FED, continues to keep rates very high (5.25% – 5.5%) and has not been able to get back to the 2% inflation target, but at the same time, the recession that many people had predicted has not occurred. The price of goods has been contained as supply chain problems have been resolved, but unemployment of only 3.7% has not allowed the cost of services to fall as the FED intended. At the start of the year, there was talk of 6 rate cuts of ¼ point each, and now there is talk of 3 at most, and even that is doubtful, as several of the central bank governors oppose so many cuts.
With the increase in the stock markets, the retirement funds of the American people reached 38 trillion dollars, 32% of all the country’s financial assets. The United States maintained its global leadership in oil production, with an average of 13.3 million barrels per day, mainly due to the increase in sand extraction in the country’s south-central region. As mentioned, employment remains very strong, and there are still 1.4 open positions for every unemployed person. However, a lathe operator in Michigan will not fill a farm worker position in central California.
Speaking of the stock market, the S&P index of the nation’s 500 largest companies rose 10% in the first quarter, this time not just due to the rise of the “Magnificent 7” but a much more even increase across the entire market. Of the seven responsible for the 2023 increase, only Nvidia and Facebook rose sharply, Microsoft, Google, and Amazon were flat to up, and Tesla and Apple fell in price. A curious fact reflecting the rate increase is that the 2023 credit card interest payment was $157 billion when 2020 it was $51 billion. This is a reflection of the fact that many people do not have enough to pay what they owe and only pay the minimum required plus ludicrous interest rates.
In Mexico, we are less than two months away from the elections, and the situation is getting more tense every day. The two main candidates’ mutual accusations about irregularities in the campaigns, the misuse of INE’s logo, and the party in power’s abuse of its resources to influence the vote through the use of social service funds are endless. In my opinion, Xochitl is going to win 95% of votes from the middle and upper classes and Claudia 60-65% from the lower class, but the difference of voters in the two groups is so overwhelming that in the end, Morena will retain the presidency with a pretty comfortable differential.
I did a hypothetical exercise of what will happen in the Senate and the danger of Morena winning the qualified majority that will allow it to modify the constitution. These were my numbers, being generous with the potential gains of the ruling party.
- Morena wins 26 states (the most it achieved six years ago) = 52 senators.
- Morena comes in 2nd place in the other 6 states = 6 Senators
- Morena obtains 59% of the popular vote (its highest ever) = 19 senators.
Total 77 senators. 77/132 = 58.33%
With 58.33%, it is far from the 2/3 needed to change the constitution.
Analyzing what is happening in Mexico and leaving the super peso for last, March saw both positive and negative events.
First, the good:
- Reserves reached $216.8 billion, shielding the country from the risk of a significant devaluation
- Walmex announced investments of $2.2 billion to double its size in 5 years.
- 3.7 million visitors entered the country in January
- China announced that it will start direct flights to CDMX
- Mexico’s central bank revised upward GDP growth to 3.2% in 2023 and 2.6% for 2024
- Automotive exports reached an all-time high
- Fixed investment rose 17.9%, although foreign investment grew less than 1%.
- I had the opportunity to visit Querétaro and was surprised by its industrial boom and explosive growth.
On the other hand, there were a number of negative economic reports:
- In January, retail sales were down from 2023, and IMEF reported that manufacturing is entering a technical contraction.
- Inflation numbers rose 0.2% despite the gasoline subsidy reaching its highest level in 6 years.
- Consumer confidence declined to levels similar to those of the pandemic years
- AMLO took the final step in the expropriation of the facilities of the U.S. company Vulcan in Quintana Roo
- According to the Chamber of Food Products, organized crime theft of products impacted food prices by 7%.
- Foreign investors’ holdings of Mexican bonds are currently the lowest in the last 14 years.
- SHCP reported that the public sector’s financial requirement (RISP) will be 5.9% of GDP, 0.5% higher than what was stated in the budget sent just a few months ago.
- OPEC, in its projections for 2024, considered that Russia and Mexico will produce less oil than the previous year.
- The North American press spread the news of AMLO’s demands to the United States to allow the resumption of the policy of receiving back migrants who are not immediately accepted, which, for many, amounts to an attempt at blackmail that deteriorates relations between both countries.
The strength of the peso continues to surprise everyone with SHCP expecting it to end the year at $17.80 and $18.50 by the end of 2025 while the average of private sector analysts says $18.20 for this year and $19 for next year. As I have already repeated several times, I do not understand the logic of the SHCP policy of continuing to keep the peso around $16.50 when it is affecting the four most important development poles of the country: exports, oil, tourism, and remittances. We know that the market does not float freely since the Treasury “buys” dollars at the price it sets, and sustaining a strong peso is too costly a pride.
The “annual happiness index” of countries was published, and it did not surprise anyone that the first four places were occupied by Scandinavian countries, but it did surprise that Israel was #5 despite the fact that the survey was conducted after October 7, that the United States dropped to #23, the first time out of the top 20, and Mexico in the #36 place.
The situation in Israel continues to be very critical, as the war does not seem to have an acceptable end, the growth of anti-Zionist demonstrations and expressions continue at its peak around the world, and even the United States seems to be changing in its unconditional support, as it abstained in the U.N. Security Council in a frankly anti-Israel vote instead of vetoing it as it had always done. It is unacceptable to demand a ceasefire from Israel without conditioning it on the return of the hostages, and it is inconceivable that almost six months after the horrific attack of October 7, Hamas has never been condemned for the vile attack. The economy has rebounded slightly from the 19.4% annualized fourth quarter decline to a 1.3% contraction in January but is expected to reverse for the second half of the year, ending with a 1.7% increase in GDP by 2024. The stock market has recovered about 40% of what it fell in the wake of the attack, and the international market for its bonds is almost back to September 2023 levels.
Elsewhere in the world, there was significant news in March, including interest rate cuts in Switzerland, Mexico, Brazil, and other countries as inflation moderated, the fact that Putin, emboldened by his re-election to a 5th term as president, threatened the world with possible use of his weapons if they continue to support Ukraine and the drop in Russia’s global natural gas supply from 40% to 25% as a result of sanctions over the war in Ukraine. The OECD announced that it placed $15.31 Trillion in new credit in 2023 and that central banks bought 1,037 tons of gold in the year. It is worth noting here that the United States has been able to finance its deficit without problem because of the ease with which it places its bonds, but there could be a monumental crisis if they ever cease to be the global reference currency. Today, the dollar has dropped from 73% to 59% of global reserves, and the rest of the world is concerned about government deficits, debt growth, and possible changes with the elections. The use of sanctions as an element of punishment. On the other hand, 90% of all international transactions are still in dollars, and all commodities are quoted in U.S. currency.
Regarding China, the real estate crisis is still raging, with the two major homebuilders going bankrupt and 20 million buyers who have been paying their mortgages since they signed the sales contract still waiting for a house they may never receive. Home prices have fallen 6.8% due to insufficient mortgage lending and a loss of buyer confidence. The stock market has recovered 20% but is still 58% below its peak.
In closing, I would like to comment on the Argentine experiment with Milei and his unconventional economic ideas. The unions have not supported his proposal to create 70,000 jobs, and Congress rejected his proposals to change laws to promote foreign investment and free markets. Inflation continues at an astronomical 13.2% per month, and his proposal to switch to the dollar as the official currency has not been implemented.
In March, stocks rose 3.1, bonds almost 1%, gold reached an all-time high, closing the month at $2,238.40, and bitcoin continued with enormous volatility, oscillating between $62,000 and $74,000, closing the month at $71,915.
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