Special Reports

Luis Maizel’s Monthly Letter: North America is Upside down

Photo: Elsa González on Unsplash

This month, we will start with the analysis of politics in Mexico after the election of Claudia Sheinbaum. The result of the vote was no surprise to me since if we assumed that 65 million Mexicans would vote, of which 20% are upper and upper middle class and where Xóchitl would achieve 80% of the vote, and 80% are lower middle and lower class, the beneficiaries of the social plans and subsidies given to them by MORENA, where Claudia would obtain 75% of the vote. In addition, 10% of the total vote was granted to Movimiento Ciudadano, and the result of 38 million votes for Morena and its coalition is perfectly understandable.

Graph: Integralia

Now, let’s analyze what can happen. AMLO’s influence is undeniable since Sheinbaum’s growth was thanks to his support and management. MORENA, more than a party, is a movement headed by the current president, who is more than 60% popular. The 20 proposed amendments to the Constitution are feasible, as the winners have a qualified majority in Congress and are only missing three opposition senators who will join them in most of the amendments.

Graph: Integralia

The most problematic part is the reform to the Supreme Court, where it is intended that the selection of magistrates will be by popular election from a list suggested by the executive. Most likely, the party in power will also control the judiciary, ending the system of checks and balances and leaving the way clear for the party to achieve all its objectives and perpetuate itself in that position. I am concerned about September when the new Congress will be installed, and still, Claudia Sheinbaum will not enter, leaving almost unlimited power to AMLO, who could try to make significant changes to reinforce the legacy and image of his presidency.

Image: ALXR on Shutterstock

Sheinbaum’s cabinet announcements are pretty good. Today, it remains unknown who will be the Secretary of the Interior, the second most important position in the country. The confirmation of the Secretary of Finance gave confidence to domestic and foreign investors, and the appointment of her former finance director in CDMX as Secretary of Energy was well received. However, her initial statements on energy sovereignty were unclear since Mexico requires foreign investment for oil exploitation and to increase electricity generation, without which the long-awaited nearshoring will not happen.

Photo: Andrey Popov on iStock

I did not like that Sheinbaum conducted one of the famous popular polls, in which a couple of thousand people gave their opinion, in this case, on judicial reform, and they were supposed to represent the entire population’s opinion. In this case, it was said that more than 95% of the participants voted in favor of the reform to the Supreme Court of Justice, the so-called plan C.

Photo: Ferdinand Stohr on Unsplash

The private sector has endorsed Sheinbaum, and it is clear that the desire to work for Mexico is more robust than electoral preferences. However, business confidence dropped to 54.7, the lowest figure in the last 14 months.

As we do every month, we list the positive and negative statistics, starting with the good ones.

  • Automobile production was 365,000 units, a record, with exports of 310,000 units.
  • The retail trade association ANTAD reported that May was the second-best month in the last twelve months.
  • Production of light oil, the most expensive and most demanded worldwide, reached 47% of Pemex’s total production, having risen from 38% in 2019
  • The trade balance shows positive results; May exports, $55.7 billion, are the highest in history.
  • The country’s airports reported a 14% increase in passenger numbers, which reflects tourism and the return of business travel.

Among the unfavorable reports:

  • This April was the worst in manufacturing in the last six years, and there has only been one positive month in the previous six.
  • The GDP growth forecast was reduced by 0.2 for 2024 and 0.3 for 2025, with an expected increase of only 2%.
  • The global analysis group Eurasia, the most respected in the world for its analysis of global geopolitics, devalued Mexico and placed it at the bottom of the best countries in terms of its growth potential and attractiveness for foreign investment.
  • The peso reacted very negatively to Sheinbaum’s win, falling more than 10% to $18.55 to the dollar, although it has recovered somewhat ($18.35 as of the 28th). I feel that the fall was due to the supermajority in Congress and the perception of international markets that a government where a single party controls the powers lends itself to unchallenged unilateral decisions and the possibility of less adherence to the rule of law than in the current environment.

In the United States, the political situation became much more complicated after the debate on the 27th between Biden and Trump. Biden had a terrible performance, showing his age and his poor ability to handle the most important country in the world by dithering in his answers, losing the thread of what he was saying, and at times making irrelevant references to the question he was trying to answer.

Photo: on AL.com

On the other hand, Trump was dedicated to emphasizing the points that polls show what the electorate is most interested in, migration and inflation, and did not answer any of the specific questions he was asked on the most uncomfortable topics for him. He avoided talking about the events of January 6, 2021, with the invasion of the Capitol, or the legal problems in which he finds himself, many of them a product of the judicial abuse of the party in power. I repeat what I have said many times through this channel that I do not believe that Biden will be the Democratic nominee, not only because of his limitations but because of the danger that, if something happens to him, the presidency will pass to Kamala Harris, the vice president with the lowest approval rating in history, far below that of President Biden himself.

Image: on theconversation.com

During the month, Biden finally sent an executive order to try to moderate the invasion of immigrants across the southern border, but the proposal is limited and comes after an influx of 10 million people of various nationalities.

Photo: Vic Hinterlang on Shutterstock

The U.S. economy remains fairly solid, and the recession that many predicted has not occurred. Some government figures show a slight upturn, but nothing alarming or indicative of a dramatic reversal of the strong performance of the past 18 months. The so-called JOLTS number of open job opportunities fell to 8.1 million, the lowest since 2021. Unemployment rose 0.1% to 4%, but 272,000 jobs were created, a higher number than economists expected.

Graph and data: on bea.gov

The May trade balance showed a deficit of $100.6 billion, the highest since May 2022 and up 2.7% from April of this year. These figures reflect goods and services, with the goods deficit being $75 billion. The problem in the residential sector remains very serious, with very expensive mortgages, above 7%, and very high construction costs. The national average cost of single-family homes rose to $740,000, and in some cities, such as San Diego, it surpassed $1,000,000 for the first time in history.

Image: Kostiantyn Li on Unsplash

In the automotive industry, there was also a historic increase in the average age of cars on the road, which now exceeds 14 years. It is interesting that 82.5% of new car sales are internal combustion, 10.5% hybrid, and 7% electric, despite all the subsidies and incentives for people to buy more electric cars.
The fiscal deficit in the U.S. is at 6.7% of GDP, one of the highest levels in history in non-war years, and 3.6% of GDP if interest on debt is not taken into account. The last two administrations (Trump and Biden) have run deficits of $7.6 trillion in their 4 years, bringing the debt to $34.5 trillion and debt service to over $1 trillion annually, exceeding even the total defense budget. Recall that a series of tax cuts introduced by the Trump administration expire in 2025, which is another important element in the outcome of the November 5 election.

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The cost of CDS (the instrument that protects the investor from a bond issuer default) on U.S. government paper has risen almost 40% from what it cost 2 years ago, indicating that investors no longer see treasury paper as the totally safe investment they previously perceived it to be.

Image: Eric1513 on iStock

Today, the income of the wealthiest savers who have money in banks has grown tremendously, and the real rates they receive (spread between interest minus inflation) is around 2.10% when the average from 2006 to 2023 was 0.74%. This further polarizes society between those who have savings and excess liquidity and those who have no money and are affected by the high interest rates of credit cards and inflation of basic necessities.

Image: Wildpixel on iStock

The expectation at the beginning of the year that the FED would lower interest rates 6 times by 0.25% has been reduced. First to only 3 times, and now many economists expect only one cut. Some believe that rates will not come down, as inflation is not breaking the 3.5% barrier, much less approaching the 2% target set by the Central Bank. I see it as very difficult to achieve that goal as long as labor remains scarce and unemployment does not approach 5%.

Photo: HUNG CHIN LIU on iStock

An interesting fact is that the United States is producing more energy than it consumes, an enviable position that few countries share. The U.S. population stands at 341.8 million, but interestingly from 2020 to May 2024, Hispanics grew 4.8% to 65 million, while the non-Hispanic population increased only 0.1%.
Every month, we comment on China because of its growing importance in the global economy. There is no doubt that the famous Chinese miracle is experiencing difficult times, with a decrease in population due to the erroneous policy of one child per couple. This policy has now been eliminated, but as a consequence, there are now far more men than women, which means that fewer babies are being born.

Photo: Kindel Media on Pexels

Interest rates in China are at an all-time low, with the 10-year yuan bond paying 2.20% and the 50-year bond paying 2.53%. China has just announced a $47.5 billion subsidy to the semiconductor industry to try to compete with what is happening in this sector in the U.S. and Korea. It is interesting that the opening of a huge seaport in Peru, owned by the Chinese, within the third-world investment program known as Belt and shows their intention to grow their trade with South America, especially in view of the risk that if Trump wins in November, he will impose more restrictions on trade with the United States.

Image: Nastco on iStock

The situation in Israel is very complicated, not only because the war against Hamas is now in its eighth month but also because of Gantz’s withdrawal from the war cabinet. The decision of the Supreme Court that the ultra-religious do have to enlist in the army, complicates it even more, as it could cause the ultra-right to withdraw from Netanyahu’s government and lose its majority in the Knesset, forcing elections in the middle of the Gaza Conflict. The war in Gaza is the most expensive in Israel’s history. The central bank estimates that the total cost will be 250 billion Shekels ($67.4 billion) until 2025.

Photo: Naeblys on iStock

Israel’s defense spending was 4.5% of GDP before the war, the lowest in its history, but considerable when compared to 3.5% in the US and 1.5% in Germany. In the last 15 years, GDP per capita has already surpassed that of England, France, and Japan, and the number of foreign companies grew from 150 to 400. Debt is at 62% of GDP, a conservative number, and the economy is on a solid base.

Photo: Pannawit Khongjaroenmaitree on iStock

This economic stability is being threatened by the war, political disputes, and the number of reservists who have been called to the front lines, which calls into question whether growth is sustainable. We can only hope that the effects on the economy are not even a fraction of the impact of the 1973 Yom Kippur War, which led the country into what is called the lost decade.

Photo: IDF Archives on i24news.tv

In June, the stock markets had a good month, although the increases were mostly in the big technology companies. Microsoft, Apple, and Nvidia now account for 20% of the total value of the S&P 500, an index of the 500 largest companies, and the increase in Facebook, Google, Nvidia, and Amazon accounted for 61% of the increase in the value of the index.

Graph: on visualcapitalist.com

Bonds also had a reasonable month, with a 1.3% return as market rates on the 10-year bond fell from 4.5% to 4.32%. The dollar held steady against foreign currencies, gold fell $50 per ounce, and bitcoin fell almost to $60,000 after surpassing $74,000 less than two months ago.

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