First Move

Consumer Sentiment in Latin America

It’s not a good idea to try to call tops or bottoms—so I won’t—but one of the data streams I’ve been monitoring with interest is consumer sentiment in Brazil and Mexico. Given the political and economic turmoil in the former, and the fact that average manufacturing wages have been flat for a decade in the latter, it’s little surprise that consumers in these countries have been gloomy for five years running.

And yet, since the beginning of 2015, there has been a marked divergence in retail sales volumes across these two markets. Brazilian retail sales have declined in line with a contraction in consumer lending. By contrast, Mexican retail sales have been on a tear, fueled, in part, by a rapid expansion in household credit.

Brazilian consumer confidence is recovering, as are retail sales, and consumer credit growth remains restrained. Though the politics are slippery, it appears like a bottoming process is at hand. Mexico’s debt-fueled consumption binge, however, gives one pause. It’s hard to look at the chart below without contemplating a parallel to the morning after a night out in La Condesa, having imbibed too much mezcal and consumed too few tacos.

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From the Bookshelf

Earlier this year, I read Carroll Quigley’s Evolution of Civilizations (1961). One of Quigley’s core arguments is that societies create instruments to meet basic human needs (e.g., security, the accumulation of wealth and savings, etc.), but these instruments evolve into institutions, which over time become less effective at achieving their original purposes.

When discussing the interwar period (1919-39), Quigley makes an insightful point about the evolution of the economic system that seems germane to today’s debates about secular stagnation.

The purpose of any economic system is to produce, distribute, and consume goods … As [the economic system] became institutionalized, profits became an end in themselves to the jeopardy of production, distribution, and consumption.

The rub is that the expansion of profit margins through higher prices and lower costs of production ultimately reduced consumption, and increased wealth inequality. Quigley continues:

Such an inequitable distribution of wealth was a very excellent thing as long as lack of capital was prevalent in the economic system, but such a maldistribution of income ceases to be an advantage as soon as the productive system has developed out of all proportion to the processes of distribution and of consumption.To some extent this situation was made worse by the growing separation … between ownership and control of corporations, since this led to an increased accumulation of undistributed profits held by the corporations in control of the management rather than distributed as dividends to the owners. Such undistributed profits became savings with no possibility of serving as consumer purchasing power … Increasing proportions of the national income were going to those persons in the community who would be likely to save and decreasing proportions were going to those persons in the community who would spend their incomes for consumers’ goods.

As someone who genuinely believes in long-term investment, the passage above left me wondering whether this world awash in capital—one in which U.S. after-tax corporate profits (net dividends) amount to $982 billion (see below) and the pension assets of 22 countries total $36.4 trillion—is one that consigns us all to Keynes’s paradox of thrift.

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