Special Reports

Luis Maizel’s Monthly Letter: Upcoming Changes or More of the Same?

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The two countries most discussed in these letters are at a decisive moment due to the change of leadership, already effective in Mexico and only 35 days away from the elections in the United States. Polarization in the United States has reached unprecedented extremes, and it is difficult for those who vote for the loser to accept the winner’s triumph. Political campaigns are not proactive and only focus on attacking the opponent. With only five weeks to go to the polls, we still do not know what plans each candidate has, nor what the economy and politics will look like with either candidate. Harris has hinted that she will make changes to the health care system by eliminating private insurance, keeping immigration policy unchanged with a porous border, and making the wealthy pay much higher taxes by maintaining and increasing populist subsidies.

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For his part, Trump talks about exploiting much more oil resources to lower energy costs, fight inflation, and deport large numbers of undocumented immigrants. He wants to lower taxes by counteracting the drop in income with tariffs on everything imported into the United States. The only thing we can be sure of is that both proposals will increase the deficit and, therefore, the debt, which today already exceeds 100% of GDP.

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The U.S. economy continues on a path of stability and is trending towards a soft landing without a recession. The 0.5% drop in interest rates shows that the Fed shifted its focus to protecting employment and concentrating less on fighting inflation. Unemployment has remained at 4.2%, although new job creation has dropped from a monthly average of 235,000 to 151,000. Inflation is at 2.6%, no longer so far from the 2% the central bank seeks, although the latter reduction is the most difficult to achieve.

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Interestingly, Harris accused the private sector of abusing price increases, especially in food, when the profit margin of supermarkets is 1.46%, surviving only on the volume of their operations. Gross margins in the rest of the industry have improved from 51% to 54% in the last five years thanks to considerable investments in automation, artificial intelligence, etc. The country’s primary industry continues to be residential construction, which remains depressed due to expensive mortgages and a lack of inventory, especially homes for first-time homebuyers. The ability to pay downpayments and monthly payments remains very tight, and despite a 7 million home deficit, only 700,000 homes are built each year.

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The average income per family in the country is $81,000 per year, but talking about the average says little since hyper-millionaires make the figure go up. In contrast, many families barely reach $40,000 yearly. The average credit card balance is $6,065, and the rate is 21.4% compared to 15% just two years ago. 21% of cardholders only pay the minimum required and no longer have credit available. Bad debt has grown by 8% and personal bankruptcies by 28% from 2021 to 2024.

Photo: on The New York Public Library on Unsplash

On the other hand, U.S. companies have had the highest profit and investment levels in the last ten years. The areas where growth has been explosive are artificial intelligence, data processing, and communications, limited only by the need for more electricity. Oil has been at its lowest price since 2021. The JOLTS report indicates that the number of job openings and unemployed was 1.07 when it reached two during the pandemic. In context, personal debt topped $17 trillion, ten times Mexico’s GDP. Some of the headwinds for the U.S. economy are the uncertainty of the election, the fact that manufacturing has not grown despite a series of government subsidies, Boeing’s economic problems and its quality failures, and the re-emergence of unionized workers’ power with strikes at Boeing, some auto plants and the most serious, the work stoppage at all of the country’s East Coast ports. Some additional U.S. data that I found interesting is that the average cost of supporting a child in their first 17 years of life is $360,000 (food, school, clothing, etc.) The wages of people who changed jobs in 2023-24 went up 6.6%, while those who stayed where they were increased 4.7%, and finally, the U.S. tax code with all its regulations covers 17,631 pages.

Chart: on ourworldindata.org

Mexico saw the inauguration of Claudia Sheinbaum, the first woman to assume the presidency of Mexico. Sheinbaum spoke well in her first official speech, although she reiterated her belief in continuing AMLO’s policies and following the 4T principles. Still, she assured security and support for foreign investment. She also spoke about the fact that electricity generation, both conventional and renewable, will be open to investors from other countries, but always with CFE as a 54% partner, in disagreement with the provisions of the CUSMA/USMCA/T-MEC. I did not like the appointment of Andres, AMLO’s son, as Secretary of Organization of MORENA, creating a negative image of nepotism, nor the inclusion of so many technocrats in the cabinet, especially a university professor as director of Pemex, the most indebted oil company in the world with 110 billion dollars of international liabilities, which requires a good financier more than an expert in hydrocarbons. On the other hand, the current director of PEMEX, who had a dismal performance, was rewarded with the general management of INFONAVIT.

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As expected, the judicial reform was approved, which I will explain below. Still, I am very concerned that it tends to eliminate counterweights and places the three branches of government, executive, legislative, and judicial, in the hands of the ruling party, leaving the people without any recourse to appeal against abuses of authority. The main characteristics of the reform approved by the Senate are that half of all judges will be elected by popular vote in 2025 and the other half in 2027; the Supreme Court will be reduced from 11 to 9 ministers, and its terms from 15 to 12 years. They may be young judges under 35, and the necessary experience as lawyers is lowered from 10 to 5 years. Most importantly, it does not establish who will propose the participants in the elections for judges. The judicial reform is going for approval by most states, which is just a formality, although the state senate of Queretaro voted against the law’s approval. I am very concerned about the approval of another law that establishes that minimum wages should rise more than inflation, as this has been tried in many countries with awful results in some cases, creating an inflationary spiral that is difficult to stop.

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The economic reports in Mexico were quite mixed, and as I do every month, I will separate the positive data from the negative.

Positives:

– Auto sales were up 8.3% over July 2023.

– Inflation decreased from 5.57% to 4.99%.

– Consumer confidence is at its highest point in 5.5 years

– Banks granted 67,000 new mortgage loans in the first seven months of the year

– July was a good month for the economy, with a growth of 0.3%.

– Microsoft announced a 1.3 billion dollar investment in Mexico starting in 2025.

Photo: Fokusiert on iStock

On the other hand, negative elements for Mexico included:

– Remittances have declined in 3 of the last five months.

– Fixed asset investment had the worst August since 2017.

– Foreign investors’ appetite to buy Mexican bonds and stocks is at 2-year lows

– Manufacturing report down 3.1% from a year ago, the eighth straight month of decline

– IMEF reduced its GDP growth forecast from 1.7% to 1.5% for 2024 and from 1.5% to 1/3% for 2025.

– Debt rating agencies put Mexico under negative warning due to judicial reform

– PEMEX averaged 1.752 million barrels per day so far this year vs. 1.879 million in 2023 and well below the 2.5 million barrels promised by AMLO at the beginning of his administration

– PEMEX has maturities of $50.2 billion in the next 3 years, which will be very expensive to refinance without an explicit guarantee from the federal government.

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Turning to the rest of the world, the situation in Israel changed dramatically with the death of Nasrallah and the confrontation with Iran. There is no doubt that the conflict escalated in magnitude as the first anniversary of the October 7 massacre approached, and Israel took the initiative to accelerate the process to eliminate the danger to its inhabitants. We may be facing the end of Iran’s influence in the Middle East, especially if the United States strongly supports Israel. Unfortunately, because of the conflict, the rating agencies downgraded Israel’s sovereign debt from A+ to A, the country’s five leading banks, and Israel’s electricity company by one notch. Annualized GDP grew only 0.7% annualized in the 3rd quarter against an expectation of 5.9%. The expectation is that the cost of the war will reach $57 billion by 2024, and U.S. aid will be $14.5 billion. The fiscal deficit widened to 7.8% of GDP versus 4.1% a year earlier, although the shekel has remained in the $3.75-3.80 range against the dollar, even as inflation rose from 3.2% to 3.6%.

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In China, consumer confidence is at a 20-year low, and there is little expectation of change, as Xi Jinping will continue with the same policies indefinitely. The boost given to China’s economy this month by lowering mortgage rates, giving money to banks to buy stocks, and reducing all interest rates created a nice jump in the local stock market, but it is not sustainable. GDP is expected to grow 4.9% this year and 4% in 2025 versus the 10% or more they were used to. China has had deflation for 13 consecutive months, and its declining economy has affected global commodity prices and luxury goods consumption in France, Italy, and other Western countries.

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The “Argentinean miracle” has reduced inflation from 11% to 4% per month and will now focus on job creation, although the amnesty requested by Milei ended on September 30. India is doing well and even announced the construction of a new semiconductor plant with US capital. GDP has increased with a projection of 6.8% to 7% for this year and similar for 2024. The country in trouble is Germany, where even Volkswagen announced the closure of a plant. Despite inflation of only 1.6%, economic activity has contracted with an increase in unemployment.

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Markets had a reasonably good month in September, with a moderate increase in stocks and bond appreciation as the U.S. 10-year treasury bond declined 0.15%, gold reached an all-time high of $2,679, and bitcoin rebounded to $63,000. Foreign currencies gained ground against the dollar after the U.S. rate cut.

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