Recommended Weekend Reads

August 30 - September 1, 2024

Please find below our recommended reads from reports and articles we read in the last week.  We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list.

Geoeconomics & Markets 

• What is Driving China’s Long-Dated Bonds?  Carnegie China

  The People’s Bank of China (PBoC) is determined to rein in what it fears might be a government bond bubble because of its possible disruptive impact on Chinese banks. Yields on long-dated sovereign bonds have been falling since December of last year when, after a few fairly stable months during which China’s ten-year sovereign bond traded between 2.60 and 2.70 percent, bond prices rose sharply, causing yields to drop 10 basis points during the month.  What is driving this frenzy?

• The Downward Spiral: A Macroeconomic Analysis of the Opioid Crisis   Federal Reserve Bank of Cleveland Working Paper

  There have been more than 700,000 opioid overdose deaths since 2000. To analyze the opioid epidemic, a model is constructed where individuals choose whether to use opioids recreationally, knowing the probabilities of addiction and dying. These odds are functions of recreational opioid usage. The model is fit to estimated Markov chains from the US data that summarize the transitions into and out of opioid addiction as well as to a deadly overdose. The epidemic is broken down into two subperiods: 2000-2010 and 2010–2019. The opioid epidemic's drivers, their impact on employment, and the impact of medical interventions are examined. Lax prescribing practices and misinformation about the risk of addiction are important drivers of the first half of the epidemic. Falling prices for black-market opioids combined with an increase in their lethality are found to be important for the second half.

• Work More, Make Much More?  The Relationship between Lifetime Hours Worked and Lifetime Earnings   Federal Reserve Bank of St. Louis

  Earnings inequality in the U.S. and around the globe is a major topic of research among economists. A key objective of this research is to isolate the quantitatively important forces that shape inequality. In this post, we consider a factor that has been largely neglected so far by the literature, namely differences among individuals in hours worked. In particular, we investigate the relationship between lifetime earnings inequality and lifetime hours worked. In line with many empirical studies, lifetime here refers to ages 25 to 55, a person’s prime working years.  In this blog post, we focus on male workers, who were more likely to have uninterrupted employment histories than female workers during the period we are examining. We are able to construct a sample of 3,006 male workers for whom we have observations of earnings, weeks worked and weekly hours worked for each age from 25 to 55 (either via a direct report or via a simple imputation procedure for missing observations). Since we are interested in lifetime earnings, our sample already conditions on having worked in at least one year between 25 and 55.

Mexico’s Judicial Reform Crisis

• Last Crusade of Mexico’s President: A Drastic Redesign of the Judiciary  New York Times

  President Andrés Manuel López Obrador (AMLO) is scheduled to step down from power in October, succeeded by recently elected Claudia Sheinbaum.  But before he leaves, AMLO is driving hard to push through a highly contentious legislative effort that would require all judges to be elected and no longer appointed.  Foreign governments – including Canada and the US – and foreign investors have been openly critical of the effort as it will likely not only highly politicize the judiciary but also open it to significant interference by the drug cartels.   The effort is already having a significant negative impact on the Mexican Peso.

• Mexico Will Pay Dearly for AMLO’s Judicial Revenge   Bloomberg Opinion

  The ruling party’s huge constitutional overhaul sets the country on a volatile path, hurting investment potential and complicating the incoming political transition.  Just how intense is the pressure Mexican President Andrés Manuel López Obrador (AMLO) putting on judges?  Mexican Supreme Court judges have been told they can resign now and keep their pensions or risk competing in an election next year and then lose their benefits.  Mexico is in uproar over the future of its justice system.

China’s Unemployment and the World Economy

• China’s unemployment conundrum and its implication for global trade  Hinrich Foundation

  How bad exactly is unemployment in China? Consider these examples: An increasing number of fresh college graduates are joining the gig economy by taking low-skilled jobs such as delivering food as they struggle to find jobs commensurate with their degrees. The number of people under the age of 25 who applied for manual jobs in the first quarter of 2024 surged 165% compared with the same period in 2019. A memo from an airport in Wenzhou city indicated that the airport had hired architects and engineers as ground managers and bird controllers. Since December 2022, over 10 protests occurred at Carrefour stores across the country due to store closures and unpaid wages. Alibaba, China’s e-commerce giant, cut 20,000 jobs, or 12.8% of the total employment in the 2023 fiscal year, following a 7% cut in the previous year.

German State Elections

• Putin’s Next Coup Politico EU

  This coming Sunday, elections are being held in three eastern German states—Brandenberg, Saxony, and Thuringia—that are likely to usher in Russia-friendly parties, giving the Kremlin a foothold once again in Germany.

• Germany’s far-left disruptor claims credit for limiting aid to Ukraine: Sahra Wagenknecht’s party rises in polls ahead of regional elections in Eastern German States  Financial Times
  Sahra Wagenknecht, Germany’s most prominent far-left politician, has taken credit for the government’s decision to limit military aid to Kyiv, saying her strong opposition to arming Ukraine was influencing Berlin’s policy on the war. Her political party, the Sahra Wagenknecht Alliance (BSW)—yes, she named the party after herself—has surged in the polls in the three eastern German states holding elections this coming Sunday.

• German coalition unlikely to last until September 2025  Official Monetary and Financial Institutions Forum/David Marsh

  The Chairman of OMFIF, David Marsh, who is also a noted scholar of German politics and economics, writes that a sense of foreboding is building in Germany about prospects for government stability. Under pressure from all sides, the fractious three-party coalition under Chancellor Olaf Scholz may not last the legislative period up to the scheduled general election in September 2025. Scholz is trying to keep his creaking administration intact given the high-tension international environment, but the forces leading to break-up could soon become overwhelming.  And the ongoing and long-running public bickering among the coalition members over the 2025 budget is not helping. 

Personal Note: Visiting The Heart and Soul of Mexico and Much of Latin America

A trip to the Basilica of Our Lady of Guadalupe in Mexico City

During my recent client trip to Mexico City, I took an afternoon to visit the Basilica of Our Lady of Guadalupe. For anyone wishing to understand the single most important spiritual and moral core of Mexico, then you have to visit the Basicila. Indeed, you could easily say this extends to the rest of Latin America, as devotion to Our Lady of Guadalupe is widespread throughout the hemisphere.

For those not familiar with the historical background, here is the short version: In 1531, a poor Chichimec peasant named Juan Diego was visited by the Virgin Mother at least four times and once by his uncle, Juan Bernardino. In the apparitions, the Virgin Mother asked that a church be built on the site where Juan Diego stood. Diego then went to the Archbishop of Mexico City to tell him what had happened - a story that was met with skepticism.

Mary appeared later in the day to Diego, asking him to continue insisting that a church be built. Again, Diego went to the Archbishop who this time asked Diego to ask the woman for miraculous proof. Later in the day, Diego again was visited by Mary, who consented to the Archbishop’s request.

But here is where things got particularly interesting: The next day, Diego’s uncle, Juan Bernardino, fell ill, and Diego had to tend to him. He missed his meeting with the Virgin Mother and felt ashamed of it, as he avoided the normal route where he would see her as he went to find a priest to hear his uncle’s confession and offer him Last Rights. But Mary intercepted him. He apologized and she gently chided him for not having recourse to her to help his uncle: “Am I not here, I who am your mother?” - this is an inscription today over the entrance to the Bascilica.

Mary assured him his uncle had now recovered and that Diego should go to the summit of Tepeyac Hill to gather flowers. It was December and normally the Hill was barren of flowers. But Diego obeyed, and he found Castilian roses - which are not native to Mexico - blooming on the Hill. The Virgin Mary then appeared again and arranged the roses in Diego’s cloak and told him to take them to the Archbishop. When Diego saw the Archbishop, he opened the cloak, the roses fell out, and the image we see today of Our Lady of Guadalupe was on the cloak.

Today, Juan Diego is known as Saint Juan Diego, beautified by Pope Saint John Paul II in 1990.

Yours’ truly taking a photo of Our Lady of Guadalupe.

Scientific studies - and there have been numerous studies — cannot explain the image. A study in 1981 using infrared light could not find nay trace of sizing or skething underneath the paint. Scientists could not explain the original parts of the image or how it was so well preserved.

it is a beautiful and massive site alive with multiple groups and individuals visiting to pray to the Virgin Mother for her intercession. On a personal note, the sense of tranquility and peace in the midst of the great crowds is quite overwhelming. For anyone visiting Mexico City, I highly recommend a visit. You will hopefully, probably, leave feeling like I still do a week afterward: Happy, feeling blessed, and hopeful!

Trip Notes: Mexico City

I was just in Mexico City for client meetings. The City - and the largest Mexican institutional investors there — are vibrant and confident as Mexico is seeing a boom in manufacturing and has become the US’s largest trading partner - dislodging China for the role.

I was particularly struck by how politically focused local investors are in the upcoming Mexican elections. While most believe Claudia Sheinbaum is on track to a fairly easy election replacing her mentor, Andrés Manuel López Obrador (AMLO), there is a sense that the campaign by her opponent, Xóchitl Gálvez, is pushing Sheinbaum to be more responsive to international investors concerns over AMLO’s erratic economic policies.

Additionally, I found tremendous concern and confusion over the US presidential election outlook. In my numerous client meetings, there were constant questions of “How could America want to return to a face-off between an aged and tired Biden and Trump with all his legal problems and behavior issues?” There are no good answers to those questions.

There was a lot of focus on the USMCA and its likelihood to be reviewed in 2026 and what would a re-elected Trump possibly do to the deal. My view is this is Trump’s “ Baby” and, to put it simple terms, no one is going to say his baby is ugly and needs to be fixed in any serious way. There will likely be tweaks of some sort but not an outright reversal away from the agreement.

As for a re-elected Biden, clearly, there will be a strong effort to address labor concerns that have emerged since the deal was inked. Notably, the Biden Administration has aggressively gone to bat for organized labor in pushing Mexico on greater labor representation - to the point of being accused of simply doing Big Labor’s bidding.

Finally, we would note both President Biden and former President Trump visited the U.S -Mexican border while we were in Mexico City. Our assessment of the collective view of Mexicans we met with is bewilderment at the U.S. border policy - and more than a hint of anger as the Biden Open Border Policy has created a crisis within Mexico as it has become a highway for migrants coming from the Northern Triangle, Venezuela, and everywhere else in the world. This was born out visibly by the large number of homeless we saw in the City, many of them Haitian and other nationalities.