The title of the letter is from a Broadway play many years ago.
Many people today feel that everything is terrible, with wars dragging on indefinitely, inept and corrupt governments in most parts of the world, non-existent leadership, and a global economic situation complicated by inflation, supply problems, and strikes in many countries.
In the United States, we see an economy that remains strong, although it is stirred by rising interest rates. The high cost of money is already affecting the housing market, where fewer people qualify for mortgages. Auto sales have fallen 14% as zero-interest promotions have run out. Credit card debt burdens the middle and lower middle class, who have drawn down everything they borrowed, bringing the balance owed to over a trillion dollars, despite these loans’ very high-interest rates.
The resumption of the university loan debt payment, suspended with the pandemic, is a new headwind. The discussion on the amount of federal debt postponed for 45 days at the last minute continues to be a brake on a healthy economy.
Despite all this, unemployment remains very low, at 3.8%, and although the average monthly number of new jobs fell from 250,000 to 160,000, it is still positive.
U.S. government borrowing has already reached 33 trillion dollars, and at the current rate, it is growing at almost $2 trillion more annually. President Biden’s programs, such as the infrastructure program, the U.S. semiconductor manufacturing program to produce what is now being imported, and the “fight against poverty” program, are huge expenditures that have kept the economy strong but on credit that gradually burden them more and more.
When did the public debt become so unacceptable? Today, interest payments already amount to $600 billion yearly, compared to $380 billion before the pandemic, representing 14% of public spending.
Another aggravating factor was the drop in tax revenues since 2022 was a lousy year in the financial markets, and investors’ capital gains plummeted.
President Biden shows a more extensive cognitive deterioration every day, and it seems very difficult for him to govern for another four years. Today, he is facing three major problems that are putting him under tremendous pressure: the beginning of an attempt to remove him from office due to evidence of corruption, both his own and that of his son Hunter; inflation, which, although it has gone down, is still at 3.9%, double what the FED wants; and the automobile strike that is spreading to more assembly plants every day and which does not promise to end soon.
On the Republican side, there have already been two debates of possible presidential contenders that were not attended by Trump, who has a considerable lead in the polls and does not want to face uncomfortable questions in an open forum. No opponent who can slow him down was seen, so he will most likely be the nominee, despite facing four lawsuits for manipulating data to get credit, promoting the attack on Capitol Hill, trying to influence the outcome of the 2020 election, and tax evasion.
Trump was a president with good accomplishments for the country during his term, but as an individual, he is very conflicted; however, perhaps he could be the best thing to get the country out of its dilemma.
The American people’s total wealth grew from $5.5 trillion to $155.3 Trillion because of the increase in the value of their homes and the recovery in the financial market’s first half of the year.
Today, the average debt is 101% of annual income, and mortgage interest payments are only 2.7% of income, the lowest in history.
As a reference, the average mortgage loan granted by the most prominent public agency, FREDDIE MAC, averages 3.98%, and today’s rates are at 7.31%, a clear example of why people are not buying homes, as they would trade a cheap loan for a much more expensive one.
The impact of the auto workers’ union strike has not been very big yet since it started in only a few plants, but it is growing every week. If it lasts more than six weeks, it will already impact the GDP since it is the second most important industry in the country after construction and affects other sectors such as steel, glass, rubber, etc. It is worth mentioning that the CEOs of the three assembly plants are paid more than 300 times the average income of the workers.
Mexico has already defined who will compete for the presidency on June 2, and the country will have a female president for the first time. Claudia Sheinbaum has the lead, as Morena controls 23 governorships, the political apparatus, and money, in addition to the full support of AMLO, who continues with a popularity above 60%.
Xóchitl Gálvez represents the hope for change, but she currently lacks the organization or resources. Furthermore, when it comes time to go to the polls, PRI members will not necessarily vote for their perennial enemies, the PAN, even if that is what the party’s leaders suggest.
It is still too early to be convinced of the results, and I believe that the campaign will be intense and not very clean, but I believe that the Frente Amplio has a difficult path to win the elections.
Another unknown is what Marcelo Ebrard will do since he formed a civic organization, El Camino de México. Still, he has not defined who he will support or how active he will be, although he did file a complaint against the process that led to the nomination of Claudia Sheinbaum.
The government presented its proposal for the next fiscal year, and austerity is apparently over. The 9% increase over last year and the deficit’s growth to 4.9% over the previous, 3.3%, are clear signs of a change of direction and the beginning of an election year. Obviously, this deficit will impact the next government, which will have to deal with more debt and at a higher cost.
It is worth noting that the item that grew the most is Defense and Navy spending and the formal mention of support to PEMEX in its fight against enormous indebtedness.
Several of the measures taken by the government to counteract the increase in spending impacted the peso, such as the increase in the withholding tax on the payment of Cetes from 0.16% to 1.48% and the constant pressure from the SAT on large taxpayers, which amount to 49% of the total collected by the Treasury. This month, it was the turn of GNP, the insurance company that was found to have a considerable difference in previous years.
The government’s tax collection was 165 billion pesos in the first half of the year, more or less half in percentage terms of what is collected with respect to spending in the United States.
The fight between INE and Lopez Obrador continues, as the president uses the mañaneras to promote his party. I do not believe this will change until the change of administration.
The amount of oil the country continues to donate to Cuba drew attention, especially when PEMEX production was reduced from 1.691 million barrels per day in 2022 to 1.553 million in 2023, a drop of 8.15%.
It was reported that the Mexican banking system is one of the healthiest in the world, with a capitalization of 19.38%, and that August was the worst month in the last 12 months in terms of foreign capital outflows from financial markets. On the positive side, expected GDP growth for 2023 was revised to 3% and 2.4% for next year, 0.3% better than previous projections.
Regarding the situation in China, the economy is considered to be in the worst moment of the last 15 years. They can no longer use the creation of more infrastructure and support for housing as triggers for growth, the former due to saturation and the latter due to excess supply over demand. The banks entered into crisis due to the insolvency of the companies they financed. This bad debt amounts to 1.9 trillion dollars, equivalent to 12% of its GDP.
With a population growth of 1.09 per 100 inhabitants, they are below Japan’s 1.26, and we already know that their crisis has been going on for almost 20 years.
In a survey of American business people, the majority stated that the conditions for doing business with China are the worst in the last 20 years due to the relations between both countries—more than half plan to reduce or eliminate their activities in the world’s second-largest economy.
Some interesting notes: the European Union raised its interest rates again despite the recession in several of its members. The fight against inflation is more important to them than the loss of employment.
Brazil passed the U.S. as the world’s largest corn exporter, and Colombia earned the infamous record of cocaine becoming the top export with an estimated $20 billion annually.
Interestingly, the sale of the ARROW defense system to Germany for $4.4 billion is the largest export operation in Israel’s history.
Stock markets had their worst month of the year with a drop of over 4%; bonds were down just over 2% as interest on the 10-year treasury bond hit 4.69%, and gold plunged to levels of $1,850, reversing its appreciation of the last year. Bitcoin rebounded to $28,000, but the volumes traded are a fraction of the levels of the previous two years.
The peso’s fall against the dollar is due to the rise in short-term interest rates in the United States, the Bank of Mexico’s announcement that CETES rates will no longer rise, and the perception of the end of austerity and an increase in the government deficit, causing foreign investors to unwind the “carry trade” or rate arbitrage. This could accelerate, and the peso could easily exceed $18 in the short term.
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