Mexico had no trouble attracting capital in the first half of 2010

Capital poured into Mexico in the first six months of 2010. Foreign investment in the first six months of this year reached US$20.4 billion, nearly double its level in the first half of last year.

Direct foreign investment (DFI) totaled US$12.2 billion, just US$1.8 billion short of the DFI in all of 2009. Reflecting Mexico’s success as a manufacturing export power, 62.8% of DFI in the second quarter went into manufacturing. Commerce and financial services also received DFI (17.1%, 12.8%, respectively, of the total). Over US$5 billion of DFI was due to Heineken's acquisition of Femsa. Without that acquisition, the DFI figure wouldn't have been so impressive.

In the first six months of 2010, portfolio investment totaled US$8.2 billion. That was US$0.5 billion more than in all of last year. Foreign investment in fixed income instruments came to US$7.6 billion, more than double 2009’s total. Foreign investment even rose in equities (US$0.6 billion). It might not seem like much but contrast it to the US, where investors withdrew US$33.1 billion from domestic stock market mutual funds in the first seven months of this year. If that pace continues, the withdrawals will be greater than in any year (except, of course 2008 where investors withdrew US$151.4 billion) since the 1980’s. Money is pouring into bonds: between January and July, investors put US$185.3 billion into bonds. That is on track to approach the 2009 record.

International financial markets are open to Mexican borrowers and Mexican firms are taking advantage of that, once again borrowing abroad. In 2009, Mexican companies (excluding banks) repaid US$3.7 billion (net) in foreign debt. In the first six months of this year, they borrowed (net) US$6.6 billion abroad. Commercial banks reduced their net foreign debt by US$1.2 billion in 2008 and 2009; in the first half of this year, they took on (net) US$1.9 billion.

Unemployment in the US: how it's evolved

There's a fascinating map of the evolution of unemployment in the US by county since January 2007. While the unemployment rate is a lagging indicator, watching the map change colors makes it easy to understand why so many Americans are skeptical about how much of a recovery there's been.

http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

On the cultural front...

There's a very interesting play "Arizona" being presented at the Circulo Teatral. I highly recommend the work, which tells the tale of four women crossing the desert into Arizona. It's especially timely, given the passage of SB1070.

The Circulo Teatral is at Veracruz 107, Colonia Condesa. You can catch the play on Friday at 8:30, Saturday, at 7:00, or Sunday, at 6:00. The phone numbers of the theatre are 5553-1383 or 5553-5039. It's across the street from the Hotel Condesa, which has a lovely rooftop garden. There's also parking.

The US consumer: deleveraging but still up to the ears in debt

The Quarterly Report on Household Debt and Credit published this month by the NY Fed puts total outstanding consumer debt at US$11.7 trillion at the end of the second quarter. Although consumer debt fell for the sixth consecutive quarter, it's still only 6.5% below its peak posted in the third quarter of 2008. The delinquency rate stood at 11.4%, up from 11.2% a year earlier. Of the US$1.3 trillion in consumer debt that was delinquent as of June 30, US$986 billion was past due 90 days or more.

On a positive note for Mexico, auto loans rose 25% between the first and second quarters of this year, nearly 32% higher than in the first quarter 2009, their trough. However, loan balances were well below their 2005-2006 levels.

Between the second quarter of 2010 and the second quarter of 2009, Mexico's economically active population expanded by 1.43 million people. The good news is that most of them (1.31 million or 91.7% of the entrants to the labor force) found work. The bad news is the extent to which job growth is concentrated in the informal economy: the number of people working in the informal economy rose by 0.66 million, half the growth in employment. In the second quarter of 2010, 28.8% of people with jobs worked in the informal economy, a 0.7 percentage point increase compared to a year earlier.

Differing inflation paths...

The risk of deflation will dominate discussions in the US Federal Open Market Committee meeting today. When to take action to counter deflation and which actions to take are being openly discussed.

In contrast, in Mexico, inflation most likely has bottomed out: the annual rate in July, published yesterday, was 3.64%. In its quarterly analysis of inflation, published July 28, Banco de Mexico stayed with its projected inflation ranges, which put the average inflation rate in the fourth quarter of this year at 4.75% - 5.25%.

It would seem that the impact of the output gap and weak demand on inflation is much more restrained in Mexico than in the US. Gee, could quasi-monopolies have anything to do with that?

Hedonic adaptation: what does it mean and what does it mean for for business?

Revisions to the US savings rate show that since the crisis Americans have been saving more than we'd thought. In June, the savings rate hit 6.4% of disposable income, a whole new ball game compared to the 1% - 2% pre-crisis savings rate.

The New York Times article referenced in the link below discusses "Great Recession"- induced changes in buying habits. "Hedonic adaptation" is the term psychologists used to describe people's ability to adapt quickly to great changes, bad or good, in order to maintain their level of happiness: in other words, the pleasure derived from purchasing a new item, be it a TV, car, or clothes, is quickly absorbed.

As a result of the recession, households have been deleveraging and families, forced to turn towards sharing experiences rather than purchasing big ticket items. If the conclusions suggested by current research on happiness -- "unlike consumption of material goods, spending on leisure and services typically strengthens social bonds, which in turn helps amplify happiness." -- are correct, we'll see spending shifting towards the purchase of services and experiences and away from goods.

http://www.nytimes.com/2010/08/08/business/08consume.html?_r=1&th&emc=th

Hot potato

Who's going to pick up the bill for the pensions promised to retiring workers? That's the question at the heart of the controversy over the size of the pensions to be paid to retiring private sector workers sparked by the recent Supreme Court ruling, which reduced the maximum pension from 25 minimum salaries to 10.

For the estimated 1.2 million individuals who qualified for a pension of up to 25 minimum salaries prior to the Supreme Court's ruling, cutting the maximum pension to 10 minimum salaries means, roughly, slashing the maximum monthly pension from Ps$42,000 / month to Ps$16,000. The savings for the government (via reduced transfers to the Social Security Institute) will be substantial.

The employees of those companies who have complementary pension plans won't be affected since their employers will have to make up the difference between the pensions they've promised their employees and the pensions paid by the Social Security Institute. The companies, however, will find themselves footing a much larger pension bill than they'd planned for. The monthly income of future retirees will be slashed if their employer doesn't have a complementary pension plan and if they are eligible for a pension of between 10 and 25 minimum salaries if the Supreme Court jurisprudence stands.

In the end, it comes down to who will pay for the pension promises made in the past, the bill for which is coming due. The Supreme Court's ruling effectively passes the cost of paying for promises that contributed to winning elections to companies and individuals.

The root of the problem goes back to 1997 when the private sector pension reform was approved. Then, workers who had contributed to the existing pension program were given the option of choosing between retiring under the 1973 law or the new law, the SAR, which introduced individual retirement accounts. Over time, Congress raised the limit of the maximum pension from 10 minimum salaries to 25. With the maximum pension at 25 times the minimum salary, there's no question that workers who have the choice of which system to retire under will opt for the 1973 law: the pension benefit is greater.

Like most budgetary snowballs, politicians have known that this one is building for a while. No one has wanted to tackle it for obvious reasons. Now that it's out in the open, we'll see whether the same political considerations that created the problem perpetuate it or pass the bill on to parties who believed in the promises the government made to them.