I begin this letter differently from those of the past, as I write it saddened and concerned about the problematic global situation, particularly in the Middle East.
October 7 will be an unforgettable date along with other tragedies of the past, such as September 11, 2001, the Kennedy assassination on November 22, 1963, and for Mexicans, October 2, 1968, with the Tlatelolco massacre.
The brutal and inhuman Hamas attack on Israel changed the world and put an end to a fragile equilibrium that had lasted for several years and allowed a glimpse of a possible peace in the Middle East that today seems impossible.
I will return to the subject of Israel later, but I begin as usual with the situation in the United States.
President Biden’s administration remains stable but undefined, spending money as if it were unlimited and trying to accommodate the interests of all the political and economic players without satisfying any of them.
The process leading up to next November’s elections has already begun. On the one hand, Biden looks older every day and has episodes that show his cognitive deterioration. On the Republican side, no one seems to have the strength to defeat Trump despite him facing four different judicial processes, two of which could lead him to jail, although I doubt very much that this will happen.
I still believe that Biden will withdraw from the race “for health reasons”, as his popularity is below 30%, the lowest in history for a president in office. Likewise, the Democrats themselves prefer another candidate as they fear losing the White House.
The Republican party is not doing well either, as we saw during the turbulent process of electing the Speaker of the House of Representatives of the party that controls Congress. After 22 days of politicking, an almost unknown, Mike Johnson, who is highly conservative but seems to be a good element, was selected. It is worth remembering that whoever fills this position is third in line to be president should anything happen to the president and vice president.
The U.S. economy remains quite strong despite many forecasts of recession. There is no doubt that the amount of money the government pumped into the system during the pandemic continues to keep the economic machine going. Still, the failure to slow down in time has created the inflationary pressures that continue to be experienced and that today lead to an annual deficit of nearly 2 trillion dollars and a debt of 34 trillion dollars that already exceeds the country’s annual GDP.
Debt service (interest payments) amounts to $976 billion annually, compared to $210 billion just eight years ago, and is already the second largest budget item after military spending.
Biden’s significant projects, such as the Infrastructure Plan, the Semiconductor Import Substitution Plan, and the Poverty Reduction Plan, plus the investment to counteract climate change, all of them without resources and based on deficits, have kept the GDP growing quite solidly (4.9% annualized in the third quarter). These investments are a hefty burden for future generations who will have to bear the debt strain.
Both fixed investment and consumption are still substantial but trending downward; home sales at 4.1 million annually, the lowest since the 2008 crisis; the forward-looking indicators index at 104.8, still positive but slowly falling for the 18th consecutive month; and a GDP growth projection of only 1.8% for next year.
The incredible increase in mortgage rates from 2.79% a year ago to 8.13% today has impacted home sales and the financial ability of buyers to make monthly payments.
The median home price has fallen 11% nationally, and today, it is 56% cheaper to rent than to buy. It is worth remembering that when you move to a new home, you have to pay off the loan and take out a new one, and the payment, in many cases, triples for homes of similar price.
The United States, for various reasons including sanctions against China, Russia, etc., has lost its leadership in grain exports, ceding first place to Brazil. This item is rarely mentioned, but it is one of the most important exports for the United States.
It is interesting to note that the United States will sell 776 Billion dollars of government bonds in the current quarter, and if we annualize it, it is more than twice the GDP of Mexico.
Many people are surprised that the treasury bond rate is 4.85%, ignoring the average of 4.52% since 1790. What is clear is that this is a monumental increase from the 0.3% rate reached during the pandemic.
Bankruptcies in 2023 are at the second highest level since the 2009 crisis, and at the close of September, already exceeded last year’s total.
I want to dedicate a few lines to the economic situation of the people in the United States, not the country.
The increase in wealth rose 37% during the pandemic due to the rise of stock markets and housing but has dropped 10% this year to 135 trillion dollars.
This vast increase basically helped the middle and upper classes who owned homes and stocks but left behind the lower-middle class and people experiencing poverty.
The government’s definition of poverty is from $19,690 income for a couple under 65 with no children to $34,926 for a family of a couple with three children. For comparison purposes, a family in Mexico where only the father works and receives the minimum wage, their annual income is 4,125 dollars.
I want to comment on the auto industry strike that is finally over. The total hourly cost reached by the union is $87.60 compared to $55.00 for non-union workers who work primarily in the Japanese and Korean assembly plants in the southern part of the country. For reference, in Mexico, the hourly industry cost is $12.40.
To finish with the United States, in a Barron’s survey on the economic forecast for 2024 conducted among CEOs of more than 1,000 companies, 38% are optimistic, 38% neutral, and 24% pessimistic.
I find disgusting images from major US universities where they seem to accept the atrocities of Hamas and want to blame Israel. This country has done the most to create jobs and improve the standard of living for the citizens of Gaza. There is no doubt that there was latent anti-Semitism all over the world, and current events gave it the excuse to come to the fore.
I want to mention here the explosive growth of Artificial Intelligence (AI), which made the value of the companies involved go up in the markets but promises to be revolutionary in many fields such as medicines, industrial development, marketing, etc. If mismanaged, it can be hazardous, and the government, together with the 12 directors of the leading companies involved, met to establish regulations and rules for an orderly development.
Mexico had an awful October, partly due to government actions such as seizing the judiciary trusts, which provoked nationwide protests and even strikes by court workers. The vast natural disaster of Hurricane Otis destroyed the port of Acapulco, costing many lives and losses that were initially estimated at 15 billion dollars. Still, I believe the figures will be even higher.
The peso had a sharp drop, reaching $18.60 before returning to $18.00, resulting from a new federal budget already approved by Congress that leaves behind the austerity that characterized AMLO and projects a deficit of 5% of GDP.
Foreign investment in facilities remains very solid, although the problem of lack of infrastructure is already beginning to be felt to the extent that Tesla postponed the construction of its plant in Nuevo Leon until this is resolved.
The government is offering tax benefits for “nearshoring,” an analysis says that this line item will make the GDP grow 0.7% annually, which is quite relevant.
On the other hand, foreign investment in Mexican bonds and the stock market is at the lowest level since 2010, somewhat because of the risk of more abrupt movements in the peso-dollar parity and AMLO’s actions. These seem impulsive and not very justifiable, such as the dispute over the railroad operating concessions, the problems with the Vulcan company that have already reached the level of the CUSMA/USMCA/T–MEC, and the famous meeting in Palenque where all the Latin American presidents of the extreme left met, creating a clear perception of confrontation with the United States and even a possible rapprochement with Iran, which has very close relations with Cuba, Venezuela and now Colombia.
The International Monetary Fund revised the projected growth for Mexico from 2.6% to 3.2% this year and from 1.8% to 1.9% for the next year, consistent with the excellent manufacturing and consumption reports for the first ten months of the year. At the same time, it indicated its concern about the projected budget deficit.
I am concerned about the position taken by Mexico in not condemning the Hamas attack on Israel and taking an attitude of neutrality, calling for peace and a truce, implying guilt on both sides. Once again, AMLO’s attitude of not taking positions even in very clear situations is noticeable. By the way, the start of the flight from Israel to Mexico was announced, but I believe that it will not be implemented for a long time due to the unfortunate drop in tourism to Israel.
China continues to show signs of slight recovery after the end of its pandemic, which followed that of the rest of the world. Both exports and imports have fallen by more than 10%, affecting the whole world, which is interacting more and more with the Chinese every month, and affecting the underdeveloped countries that are basically exporters of raw materials.
On the other hand, there is more and more rapprochement between China and Latin American countries that mistakenly believe that moving away from the United States and getting closer to China will be beneficial for them, without realizing what has happened with the famous “Belt and Road” initiative that has not helped African countries.
Three interesting international commentaries are the announcement by President Bukele of Salvador that he is running for office again and has done a spectacular job of cleaning the country of criminality and improving the economic situation; the election in Ecuador of a conservative as a repudiation of a populist who set the country back a lot and; finally the opening of the Vatican where they are discussing their position on topics that were taboo such as celibacy, women as priests and everything related to LGQBT.
Financial markets had a difficult month, with bonds dropping a little over 1.5% as interest rates on the 10-year bond jumped above 5% for the first time since July 2007, although today it is already at 4.81%.
The stock markets entered a correction, a term used when they fall 10% or more from their highest point and have already given back the profits they had made during the year.
Gold reached $2,025.00 and closed the month at $1,994.30, reflecting global uncertainty. Oil, surprisingly, has been declining and is at $81.27.
Bitcoin rose almost 12% to $34,563 as there are rumors that the government will authorize it to be purchased directly on the exchange through any investment account.
Finally, the peso will be very volatile, as the spread between CETES and T-Bills has not widened, and many Latin American countries have already started to lower their interest rates. Mexico will do so when it controls inflation, but not before the second half of 2024, as Banxico has asserted, in addition to the adverse effects of a higher budget deficit.
I hope that we will soon see a more stable and better world.
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