March was one of the most chaotic months we have experienced in the last decade.
The problem of the banks in the United States, the continuous and now violent protests in France against the change in the retirement age, the widespread outcry against changes to the Supreme Court in Israel that made Netanyahu postpone judicial reform, the beginning of the spring attacks in the war between Russia and Ukraine, the defeat of Boric in Chile to his proposed changes to the law and the struggle in Mexico to defend INE from AMLO’s attempt to take over the Institute, make us reflect on the global political, social and economic instability.
Let’s start with the failures of two major banks in the United States, the second and third largest in history to go bankrupt.
Unlike the 2008-9 crisis, where the banking system faltered because of irresponsible lending to home buyers who did not have sufficient income to pay the mortgages, this time, the crisis came from the banks’ asset side and the bond portfolios they acquired by having an excess of deposits far in excess of the loans requested by their clients, loans that had to be subjected to new regulations imposed by the government after the crisis of 14 years ago.
The troubled banks were those that wanted to use those deposits to generate interest income and purchase longer-duration bonds to seek better yields in 2021 and 2022 when rates were very low.
As interest rates increased in the fight against inflation, the value of these banks’ investment portfolios lost up to 15% of their acquisition value. When customers began to withdraw money, either because of market conditions or because of rumors that some medium-sized banks were in trouble, the banks had to recognize that the actual value of their investment portfolios was many billions less than what appeared on their balance sheets and that the (unrealized) losses exceeded their capital, which caused the government to intervene and they went into receivership.
At the same time came the collapse of Credit Suisse, a bank of great prestige that unfortunately made very bad loans, investments that did not work, and violations in the United States that cost them billions in fines, a totally different situation from that of the 2 U.S. banks. Switzerland decided to save not only Credit Suisse but the country’s reputation as a banking haven, with the state subsidizing the country’s largest bank, UBS, to merge the troubled bank.
I believe that what happened in both countries was entirely local and not a symptom of a global deterioration. We do not expect contagion to other banks or other countries, especially Mexico, where banks are adequately capitalized and do not speculate with their investment portfolios.
The United States is in turmoil with the criminal indictment against former President Trump. Also, the upcoming possibility of a default of the country if the increase in the national debt is not approved and the beginning of the electoral campaign for 2024.
The country’s polarization is enormous and regrettable, and both parties’ lack suitable candidates is quite problematic. The fact that an old geezer no longer in his prime like Biden intends to run again in 2024 and that former President Trump, who left many people unhappy, is already campaigning is an example of how poor the selection of a suitable candidate is.
In a more extensive survey of Americans’ values, figures from 1998, 2019, and 2023 were compared, yielding somewhat surprising results. Patriotism was 70%, 61%, and 28%. Religion 62%, 48%, 39%; having children 59%, 43%, 30%; community involvement 47%, 62%, 27%; and money 31%, 41%, 43%. On the other hand, numbers from the IRS, the tax collector, indicated that the wealthiest 1% of the population paid 42.3% of the taxes, and the top 5% of income received 38.1% of the revenues and paid 62.7% of all taxes.
China reopened after the pandemic and forecasted growth for ’23 and ’24 of 5% of GDP, the lowest figure in 20 years.
President Xi asserted his power by rolling back all of Deng’s reforms, mainly less centralized control and separation of the state and the communist party, when he was ratified for another five years. He immediately dismissed the legislators least aligned with him and all moderates.
His intervention in creating a rapprochement between Saudi Arabia and Iran is an attempt to take away the image of the United States as a mediator of global conflicts. I do not doubt that soon he will try to arrange something between Russia and Ukraine.
Mexico continues to have severe problems in its relationship with the United States, with specific situations such as the kidnapping of 4 Americans and the death of two of them in Matamoros, the transgenic corn crisis, the seizure of the Vulcan property in Q.R. by the army and the ramifications of the Garcia Luna trial.
An article by former Attorney General Barr in the Wall Street Journal accusing the Executive of collusion with drug cartels clearly proves the loss of respect between two supposed partners and friends.
In an El Financiero poll at the end of February, 1,100 respondents indicated that 46% disapprove of AMLO’s performance, the highest figure since his administration began, and their opinion on corruption rose to 45%, people who think Mexico is in the wrong track, up from 28% in December, 31% in January and 35% in February.
For me, it was worrisome to see a crack in AMLO’s relationship with the military since the army’s demonstration following the accusations of the Matamoros massacres, where five soldiers were charged, was very poorly received by the armed forces.
Curiously, in one of his morning press conferences, the President declared that Mexico is safer than the United States, a poorly received comment on both sides of the border.
The announcement of the new TESLA plant in Nuevo Leon, which is very favorable for Mexico, was overshadowed by the dispute with the President over where to build the plant. This decision does not belong to the government and is not subject to the “liking” of the Executive.
Today, Mexico exports 450 billion dollars a year to the United States, not much less than China, which exports 550 billion dollars. Tesla, producing at capacity, will send an additional 15 billion dollars from Nuevo Leon to the United States.
The direct attacks on the President of the Supreme Court, Norma Piña, show AMLO’s contempt for the sovereignty and independence of the Judiciary. The election, by lottery! of the new President of INE, Guadalupe Taddai, following the departure of Lorenzo Cordova, Edmundo Jacobo, and other INE veterans, indicates that even if plan B is not accepted, AMLO’s takeover of INE has already taken place to the detriment of democracy in Mexico.
Moving on to the monthly review of the U.S. economy, the budget sent by Biden to Congress for the next ten years went from $61.23 Trillion with a $12.2T deficit to a new one with spending of $79.99T and a $20.26T deficit. This is why Republicans do not want to accept a new debt ceiling without spending cuts in areas that will significantly reduce the deficit.
Credit card balances have grown 39% since the pandemic, and 59% of cardholders cannot pay off credit in full each month, reflecting inflation. Still, the percentage of uncollectible accounts has not increased significantly.
Mortgage applications are at a 20-year low due to rising rates, and home prices continue to fall, especially in the West, while in the East, they have remained stable, even with small increases.
The U.S. economy grew 2.6% in the fourth quarter of 2022, but much of that figure was generated by an increase in inventories, which does not bode well for the future.
The Consumer Price Index, the Fed’s favorite inflation statistic, rose 0.3% in February, the most moderate increase in 12 months and a good sign that interest rate increases are starting to affect price increases.
The OECD forecast that global growth will be 2.6% by 2023 and 2.9% by 2024, with inflation just under 4%, while the World Bank does not see the increase in the global economy from 2023 to 2030 to be more than 2.2%.
One piece of information I found very interesting is that Apple and Microsoft account for 13.3% of the S&P index and that the 50 largest companies of the 500 that make up the index represent 90.7% of its total value.
March reported mixed numbers for Mexico, with business confidence up 2.3% to 48.9, unemployment reported at a nearly 6-year low, auto sales at a 23-year high in February, and retail sales at a 22-month high, while on the other hand, the cost of capital continues to rise. Banxico raised another 0.25% bringing the 1-month CETES to 11.34% and the TIE to 11.47%.
It is hard to believe that Mexican companies can pay loans at rates around 14% and make money, and if they can pass that cost on to the consumer, inflation will be even more severe.
Banxico’s Deputy Governor Mejia said he believes the rate hike is over, which we hope is the case for the sake of domestic industry, but I think it will depend on what the U.S. Fed does.
The OECD increased the expected increase of the Mexican economy from 1.6% to 1.8% in 2023 and held constant the 2.1% forecast for 2024. Banxico said inflation will be 4.8% this year and 3.1% in 2024.
The budget sent to Congress maintained the oil price for the calculation of PEMEX’s income at $68.30 even though the price is currently $62.38.
The “think tank” Vital Signs published a report where it says that within the remittances that grew from $22 billion to $58 billion in the last ten years, there is about 8% of money laundering sent by the cartels. This figure, I believe, is higher and distorts the actual remittances received by the families of workers in the United States.
Analyzing the peso, we saw an increase to $19.10 and a recovery to $18.10, again making the dollar the cheapest thing you can buy in Mexico today.
I expect it to return to $19-$19.50 soon, especially if Banxico really stops raising rates, and given that almost half of the banks in the U.S. say they are going to reduce their lending because of the crisis, this will make a moderate recession in the northern neighbor more feasible.
The economy in Israel is being hit by the political conflict over the Supreme Court. The projected growth of 2.9% by 2023 and 3.4% by 2024 will depend on resolving the political crisis in a mutually acceptable manner. The evident influence of right-wing extremists demonstrating their strength in the coalition government is scaring off foreign investment and reducing local investment in high-tech projects. On the other hand, Bloomberg projects that the shekel will be the best currency in 2023, with an appreciation of over 6%.
Bond and equity markets had a good month in March, with an increase of almost 3%. Technology stocks rose the most.
Currencies appreciated against a dollar that was down almost 4%, primarily due to a drop in interest rates from 4.06% to 3.41% on the 10-year Treasury bond.
Bitcoin rose to $28,000 as it was considered immune to the banking crisis, and gold hit $1,998.70 before dropping to $1,987.30 at the close of the month, the highest point since July 2020.
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