The title of today’s letter can refer to many countries where the vested interests of politicians take precedence over decisions favorable to their constituents.
I am going to talk about the crisis in the United States over the debt ceiling and the country’s ability to borrow more money.
The dollar is the strongest currency in the world, representing almost 70% of countries’ reserves, either directly or through its participation in the World Bank’s SDRs, but recently there have been diversification initiatives led by China and seconded by Arab countries, Brazil, and others.
Economic power has been what has sustained the strength of the United States as its purchasing power makes it the main market for all exporters.
History indicates that sovereign debts are not paid but renewed, and countries have to take care of their credit and economic soundness so that when their obligations mature, there will be buyers of new bonds with whose money the maturing bonds will be paid.
There was no doubt that the United States would default on its debt, so the whole theater of not authorizing an increase in the authorized debt was just a form of blackmail to force the Democrats to be a little more aware of what they are proposing in their budget, and to pressure them to spend more according to their income and not by the capacity created by the money printing machine.
Sending over $100 billion dollars to Ukraine, pretending not to collect the debt of college graduates, or “investing” over $100 billion in combating climate change (without much success because it is not a global effort) are some examples of a government that continues to spend indiscriminately while projecting a $4 trillion dollar deficit over the next 10 years.
The compromise reached, which has not yet been approved by the Senate, is to freeze spending in 2023 at the same level as the previous year and raise it by 1% in 2024, excluding defense spending, which can grow as needed.
The main cause of the deficit is Social Security and Medicare, two benefits created by Roosevelt in 1942 when people were retiring at 65, and life expectancy was 66.4. Today the age at which people start receiving social benefits is 67, but life expectancy is 77.1 years. The Social Security fund is going to expire in 2034, and the fiscal burden on the government will be much more severe.
The most important thing the Republicans accomplished is to create a new work culture, as they tied the food stamp program for the poor to finding work and not total reliance on the government.
The U.S. economy is starting to lose steam, and I do believe there will be a very moderate recession in the last quarter of this year and the first quarter of 2024.
The loss of 1 to 1.5 million jobs will be very painful for those who are laid off, but for the economy, it will not be serious, especially because the big banks are very solid. For example, Chase Manhattan has 13% of the nation’s total deposits and 21% of credit card lending and manages over $4 trillion in assets.
Economic statistics for May indicate that production remains solid, although the forward index has dropped from 47.2 to 40.4, and consumer confidence is down 6 points, which is a lot, the inflation indicator that the FED uses most, the PCI or personal consumption index, is already at 4.1% having reached 6.4% 6 months ago and the CPI is at 4.4%, still far from the 2% that the FED is aiming for but decelerating.
Home rentals have stabilized even though 30-year fixed mortgages are at 6.5% after dropping to 3% a year ago. The inventory of homes for sale is very low, as builders have moderated their production for fear of the recession and high mortgage rates.
From a historical average of 85% of used home sales, this has dropped to 64%, mainly because owners who have fixed-rate mortgages (an incredible 94% of the total) do not want to change and have a loan that is almost twice as expensive as the one they are leaving.
Direct investment dropped 18% in the first quarter of the year, and the GDP growth projection for 2023 is 1.7%.
Interesting data is that savings dropped from the historic level of 8.9% of income to just 4.6% and 64% of Generation Z (young people under 26) say they live paycheck to paycheck with zero savings.
The number of bankruptcies nationwide in the first 4 months of this year reached 16,200, compared to 12,100 last year.
It was very interesting to see that retailers were able to maintain their profit margins, i.e., they were able to pass on their cost increases to consumers, but their stock market shares took a hit as they anticipated that the future looks more uncertain and that people have less surplus liquidity.
One fact that I found interesting is that the U.S. vehicle fleet has an average age of 14.1 years and 110,000 miles, both of which are the highest in history.
Investment in solar panels for energy generation exceeded investment in oil exploration for the first time in history.
Mexico is going through complicated times due to the President’s continuous attack on institutions such as the National Electoral Institute (INE), the National Institute for Access to Information (INAI), the National Council for Science and Technology (Conacyt), and others.
The gap between classes is widening, and despite the uneasiness of businessmen and intellectuals, AMLO’s popularity does not drop below 60%.
The next elections in the State of Mexico will be a kind of preview for the confrontation at the polls in 2024 and the possibility of a coalition of opposition parties to face Morena. I believe that Delfina Gomez will win even though Alejandra del Moral seems to be a better candidate, thus reinforcing the dominance of the ruling party.
There was an article in the respected magazine “The Economist” very favorable to Claudia Sheinbaum, where they definitely consider her as the most likely successor to AMLO. I am not sure it will be her, but I do see weakness in INE, since the “corcholatas” are already in full campaign mode with more than a year to go before the presidential election.
The whole process of the sale of Banamex to German Larrea was an aberration since the President’s intervention throughout a whole year of negotiation is difficult to understand, and the apparent insistence that someone had to pay $2 billion in taxes for the transaction, which Citibank did not accept because it was selling at a loss and neither did Larrea, since the buyer does not pay taxes in a transaction of this type.
The simultaneous “expropriation” of 3 sections of Larrea’s railroad company again projected a negative image for foreign investment and made many people think that Mexico is beginning to resemble Venezuela, a perception that I do not share, although I am concerned about what is happening.
The economy in Mexico continues to do well, with forecasts of a 2.3% increase in GDP this year, although there are negative data such as the 5.6% increase in the loan portfolio and federal budget figures showing a 5.5% drop in revenues and a 3.7% reduction in expenditures, which is not favorable.
The famous “nearshoring” or return of manufacturing companies from China to countries closer to the United States, which should be a tremendous boost to the Mexican economy, has not grown as expected and, in the first quarter, only amounted to $938 million dollars or 5.1% of foreign direct investment.
I attribute this to the lack of infrastructure both in energy and water, as well as airports, trains, and highways, but above all, education, since thousands of young people trained to manage these industries would be needed.
Hopefully, the government will “get its act together” and invest in this infrastructure, which will pay off not only in job creation but also in tax revenues that will help the country a lot.
Speaking of other countries, Germany is officially in recession, having had 2 consecutive quarters of negative growth, Argentina is paying 97% in the equivalent of CETES with an inflation rate of 107%, and China surpassed Japan as the main exporter of automobiles, surpassing 1 million vehicles.
Speaking of China, the famous “explosion” of the economy after the reopening of COVID strengthens very fast, and there is a great concern for the real estate sector, which only saw a rebound of 3 months, and for the increase of the bank’s non-performing loans.
One of the most serious problems in China is the absolute power that Xi Jinping has acquired without a succession process, and it is not clear who could replace him if he were to die. Experts believe that he already has more control than Mao ever had and that his policy of investment in the third world has led to a lack of attention to the domestic market and a GDP growth that will hardly reach 4% this year. Xi’s attack on the private sector has discouraged risk-taking, and the increasingly complicated relations with the West have closed doors to exports.
In May, stock markets were mixed, with the NASDAQ up 9.3% but the S&P, a more global index, down 0.2%. Eight of the 500 companies in the index accounted for a 5.3% increase in the total, and the other 492 were down 5.5%.
Bonds suffered a small decline as interest bounced to 3.80% on the 10-year bond, but is already down again to 3.6%, reflecting the debt ceiling negotiations.
Gold is down to $1,950, oil is down almost $6.00 to the $68.00/barrel level, and bitcoin is hovering around $27,000.
Analyzing the peso, I still think it is a mistake to keep it so strong since the four pillars of the Mexican economy, oil, remittances, exports, and tourism, benefit from a weaker peso, and it only favors importers and those people who buy dollars to buy apartments in Madrid or houses in Miami.
I feel that the cheapest thing in Mexico today is the dollar, and I do not understand the reason for the strong peso.
Further Reading: