There Are No Winners In This Economy. Even the Winners Are Losing.

Back in January 2003, Mexico’s Undersecretary of Commerce, Maria del Rocio Ruiz, admitted to the LA Times, “We cannot export $6 jeans.” Her country was at a crossroads. NAFTA had given our southern neighbor a significant head start. Offering a huge pool of much cheaper labor, the United States market would be effectively Mexico’s opportunity alone. After sorting out its financial affairs during the so-called Tequila Crisis of 1995, with a tremendous amount of help from the US, the rest of the nineties was a booming blur.

But some of NAFTA’s more unique protections began to expire as the 21st century dawned. In addition to that, global trade agreements between the US and other places put Mexico’s labor in direct competition with Asia’s. If Mexico couldn’t make $6 jeans, the Chinese sure could.

As Ms. Ruiz said of the pants, “This market belongs to China now.”

Up and down Mexico’s once bustling factories, humming along building goods for export, they entered the new millennium first filled with uncertainty and then hammered by the inevitable. Maquiladoras, as these workshops are called, one by one each would announce cuts and then the dagger of a full-blown shutdown.

Canon closed one in 2002 employing 1,200 Mexican workers, moving it to Vietnam. The same year apparel-maker Hanes told 650 of its employees in Monterrey that production was shifting to Haiti. Sanyo Electric had an enormous facility in Tijuana employing 3,000 at its peak. Between 2001 and 2002, all production relocated to China.

Hasbro had been operator of one of the big maquiladoras in the late nineties, one of the top 100 biggest employers. But the toymaker began to struggle (as a whole) with shifting consumer preferences. On December 8, 1999, its management announced a massive restructuring. It had expected that by the end of the following year, 2000, 20% of its workforce would have to be let go.

Employing almost 2,400 Mexicans in Tijuana, Hasbro was among the first maquiladoras to take the shine off Mexico’s nearly perfect NAFTA experience. To add insult to the injury, many of those jobs eliminated in Mexico, about 1,450, didn’t stay eliminated; they were moved instead to China in 2001.

How things have come full circle. In light of the US trade dispute with China that ignited almost two decades after all that, Hasbro management announced in 2018 that it would seek to avoid as many and as much potential tariffs on Chinese-made goods; which quite a lot of Hasbro’s would be.

In October 2018, CEO Brian Goldner told CNBC’s Jim Cramer that “Overall, we produce about 70 percent of our product in China, but we’ve been moving production out of China. In fact, in the next two years, we should be down to about 60 percent out of China.” Then in August last year, Goldner went much further.

“We’re seeing an opportunity that will lead us, by the end of 2020, to be at about 50% or under for the U.S. market coming out of China. We believe by 2023, we should be under a third.”

Only a token number of jobs have been brought back to America, however. Hasbro has made it a talking point of constantly referring to Play-Doh being Made in the USA again. The vast majority of work, however, is being taken from China and shifted to other places like Vietnam, India, and, yes, Mexico.

Hasbro is far from alone in re-kindling its Mexican romance. Dozens of multi-nationals like GoPro have already left China for the south side of our border. The latter company now says nearly all of its US-bound cameras are being made in Guadalajara instead of Guangzhou.

It was easy, according to GoPro’s management, because all the equipment was owned by the company. What it needed from China was, basically, a roof, some walls, and plenty of available workers at the (low, low) price it wanted to pay for labor. Trump’s tariffs have equalized that price if only more to Mexico’s level.

The maquiladoras are back in business. Or they should be. The data tells a very different story, though.

According to Mexico’s Instituto Nacional de Estadística y Geografía (INEGI), Mexican industry really struggled in 2019. As did Mexico’s economy. Anecdotally, it should have been a cakewalk. While the country was clearly winning at the US/China trade war, it was losing at the only game that matters.

In October 2019, the latest data (the update for November will be released today after this is published), Industrial Production fell 2.8% year-over-year. The 6-month average for Mexican IP is now down to an alarming -2.3%.

That doesn’t sound alarming, but you have to go all the way back to 2009 to find negative numbers like this.

It’s the same for GDP. Before Q1 2019, there hadn’t been a single negative quarter (year-over-year) for the country. The worst one previously was +1.1% in Q2 2013. Last year, though, all of a sudden a small minus in Q1 was followed by the tiniest positive in Q2 and then another larger negative in Q3. The Mexican economy absolutely struck that landmine at the end of ’18.

And all that was before the absolute plunge (double digits) in the cornerstone area of automobile production INEGI figures show for Q4.

To put it mildly, last year was not a good year in Mexico. One of the main beneficiaries of the US/China dispute, a global economy supposedly on the mend, and instead this one country finished up 2019 in about the worst possible way even though everything seems to be lining up in its favor – including the peso.

The maquiladoras are increasingly running out of business because they are running into a lack of global demand. US demand, too. American imports from Mexico have contracted in three of the last four months, according to the Census Bureau. What good is it to win the trade war when you lose in the big picture?

That’s being a bit melodramatic, of course. In the long run, China’s loss should be Mexico’s gain just as Mexico’s loss once was China’s.

The difference was significant. Using Industrial Production (IP), between the end of 1995 (when it finally emerged from the Tequila Crisis, a real depression for the economy) and the dot-com peak in June 2000, IP leaped ahead by 26.5%, an annual rate of 5.5%. Tremendous numbers for this kind of statistic.

By comparison, during Mexico’s recovery from the US’ 2001 recession, IP gained just 16%. And since that lower total was spread out over a period containing 14 additional months, the annual rate was only 2.7% - half the boom of the late nineties. Clearly the missing maquiladoras were missed.

Mexican industry was consistent at the lower level in the aftermath of the Great “Recession”, too. Between June 2009 and September 2015, IP managed to grow at nearly the same annual pace, about 2.8% annually.

But September 2015 was the top. Between then and the end of 2017 Mexican industry showed no growth. None. From the middle of 2018 (always May) to October 2019, it has been down almost 5%, a huge decline on its own let alone factoring how production is now at levels last seen in 2013.

Mexico’s economic problems run much deeper than just 2019. The reason Hasbro and GoPro aren’t adding tremendously to its economic condition right now is because that economy had grown weak long before the idea of trade wars and US tariffs on Chinese goods. It never really recovered from Euro$ #3.

For much of the rest of the world, it was as if the global economy forgot how to grow. While the US and Europe, the so-called developed world (DM), struggled in the immediate aftermath of 2008 the developing or emerging market (EM) economies had it pretty good. Between 2009 and 2013 or so, it appeared to be business as usual; a recovery in the making in the real sense of the word.

Everything changed starting in 2014.

You might remember that year for oil prices, but it was actually dollar prices that signaled this paradigm shift.

Mexico is just one example among many; actually, one of the milder forms of this no-growth condition. In other places like Brazil, the world’s ninth largest economy, its experience since 2014 has been nothing short of full-on, unending depression. To put it in the same terms as Mexico, using Industrial Production, the pattern is absolutely the same even if the numbers don’t compare.

According to Brazil’s Instituto Brasileiro de Geografia e Estatística (IBGE), between the bottom in 2009 (actually December 2008) and November 2013, Brazilian IP gained 23% or about a 4.3% annual rate. In the latest estimates for November 2019, IP remains down an unthinkable 16% from that point six years ago. It is only a few percent better than the lowest reached in 2016.

Thus, for Brazil like Mexico 2017’s globally synchronized growth wasn’t so global and synchronized. It made for good TV in how both their numbers might’ve been positive rather than the negatives from 2015 and early 2016, but in no way was there much of a recovery to signify actual growth.

Then came the dollar, again, in 2018. Once it reversed, what little comeback either country (or the world) had managed was itself reversed.

That’s what had changed in 2014.

The eurodollar system first came for, and consumed, the DM’s. Right off the bat, starting in 2009, no chance of a recovery. None. PIMCO’s Mohamed A. El-Erian straight away in 2010 labeled it a “new normal.” He didn’t understand “why” (which is also why it took him so long to let go of Bill Gross) but he was spot on about “what.”

It had been merely assumed, for no particular good reason, that the EM’s would decouple. For a time in early 2008, it was thought they’d managed to escape the growing financial crisis. As it spread globally (how did that happen, again?) and infected them, too, the theory of decoupling was simply transposed to its aftermath. Though Europe and the US were screwed (Ben Bernanke didn’t tell you this) for the long run, Brazil, China, and Mexico would be just fine.

Until 2014.

Paraphrasing Lincoln, an economy divided against itself cannot decouple. The dollar rose signaling for the rest of the world the only monetary decision that has mattered along those lines. As the dollar went up, those economies were stopped dead in their tracks – not because the exchange value of the dollar went up, rather what it indicated. The money ran out.

They’ve simply never recovered, joining the EM’s to the DM’s in a place no one wants to be. In this place, there’s no discernable difference between what’s called a boom and what is effectively a near permanent downturn.

Yesterday, Federal Reserve Vice Chairman (one of them) Richard Clarida traveled to New York to speak before the Council on Foreign Relations participating in their C. Peter McColough Series on International Economics. It was all the usual bland pabulum you expect from these people. The economy must be doing very well and we all have them to thank for it.

“The US economy begins the year 2020 in a good place,” Clarida said, before recalling how, “over the course of 2019, the FOMC shifted the stance of U.S. monetary policy to offset some significant global growth headwinds and global disinflationary pressures.”

What headwinds and disinflationary pressures were they, exactly?

While Clarida didn’t and couldn’t say, Mexico and Brazil, Japan and Germany can. China, too, for that matter and those matters independent of trade wars. The Chinese economy transformed into its current uncertain and dangerous state around…2014.

Though not sure of what those overseas pressures may have been, the Fed’s Vice Chairman yesterday optimistically declared “there are some indications that headwinds to global growth may be beginning to abate.” And that’s true, there are signs, but almost exclusively in the form of sentiment which in the past has been easily assuaged by the smoke and mirrors of monetary policies like rate cuts and QE’s. People, even businesspeople, do tend to say they are relieved by “stimulus” even when they can see for themselves there is no relief.

Sentiment is more positive, which has proved for the Fed its more positive sentiments. The data is an entirely different story.

That evidentiary tale is one that looks upon 2014 as a key demarcation point.

Having never once fully accounted for 2014’s “global growth headwinds and global disinflationary pressures” officials then spent all of 2017 telling us they had been “transitory” and therefore academic only to find them somehow waiting for us entering 2018.

And then 2019, an impossible (from the rhetoric of 2018) globally synchronized downturn which developed only to be easily handled and overcome by these same people despite their galling lack of foreknowledge? In doing so, they say, last year finished up on a much more hopeful note than it started.

At the same time, in key places around the world in all the same key sectors, the downside actually accelerates. From Mexico to India, Brazil to China, Europe to, yes, America, none but headwinds and disinflationary pressures. While other countries suffer in industry and find no takers for their exports, the Census Bureau tells us that in October and November US imports fell by 7% (year-over-year) in each.

American demand has accelerated to the downside, too, and not just for overseas products. Domestic IP is also falling at an increasing rate.

Central bankers will have you believe that they run everything, and that by the flip of a switch, even when it is late and lazy, our authorities can easily turn everything around in the nick of time just like that. Even during those times when they have no idea what’s really wrong – which is every time.

Global headwinds and disinflationary pressures. This is the eurodollar’s world and we are all just trying to live in it as best we can. When it turns, there are no winners even among those who should be winning. Central bankers, maquiladoras, and everyone in between.