A recent article titled ‘Mexico’s Woes: Quakes, Flu and Oil Production Collapse’ says Mexico’s oil production has been ‘collapsing relentlessly, and the the author can’t recall a single forecast by PEMEX that was not undercut later by worse than predicted production data.  The article reports that Mexican oil production fell 7.8 percent in Q1 2009 to 2.7 million barrels/day and that “The trajectory here is on pace to take Mexico’s output from 3.4 Mb/day as recently as early 2005, to 2.4 Mb/day perhaps as soon as this Fall”.   A question not addressed in the article is what these oil production declines will mean to Mexican Government revenues, and what alternate revenue sources might be available to the Mexican Government.  Clearly one place the Mexican Government could look for revenues are mining producers operating in Mexico – perhaps particularly those that are foreign owned.  While presumably the Mexican Government would have to walk a careful line so as not to dissuade mining companies operating in Mexico from reducing investment in exploration and mine development, that is not to say that it could not target such companies going forward for incremental income tax revenues.  I am not suggesting that it is by any means a certainty the Mexican Government will do this, but I think it is something investors in mining companies operating in Mexico ought to consider and possibly factor into their thinking going forward as they research, and do their research updates, on those companies.

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An article just released titled ‘12 pct. are behind on mortgage or in foreclosure’ reports that “a record 12% of (U.S.) homeowners with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit”, and that according to the Mortgage Bankers Association “the wave of foreclosures isn’t expected to crest until the end of next year”.  The article also says the foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures, and that almost 6% of fixed-rate mortgages to borrowers with good credit were in the foreclosure process while almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure.

I consider these statistics shocking.  How people could be so foolish as to borrow beyond their means without considering the consequences is to me even worse than the borrowers lending them the money.  Ultimately I believe everyone is responsible for their own actions and suffers the consequences (ggod or bad) of those actions.  It is thought by some (in absence of reliable studies) that over 25% of all U.S. consumer spending in the 2003 – 2006 period came from homeowners borrowing against their private residences.  If there is any truth to this, assuming I am correct in my belief that increased spending by U.S. consumers is the key to getting out of recession, I can’t see how in light of the foregoing foreclosure and mortgage delinquency statistics the U.S. will get out of recession in the foreseeable future.

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An article this morning titled ‘U.S. durable goods orders rise, jobless claims ease’ reports new orders for durable goods rose 1.9% in April, the biggest % gain December 2007, but concurrently March durable goods orders were revised sharply lower to -2.0% from the previously reported 0.8% decline.  In a separate U.S. Labor Department report initial claims for state unemployment insurance dropped by 13,000 to a seasonally adjusted 623,000 in the week ended May 23, falling for a second straight week.  That said, the number of people staying on benefit rolls after drawing an initial week of aid increased 110,000 to a higher-than-forecast 6.8 million in the week ended May 16.  A Baltimore ‘fixed income strategist’ is reported as saying “The data is consistent with the view that the rate of contraction is slowing, but we are still working our way through a recession. We haven’t hit a bottom yet”.  The article also says high unemployment, underscored by the Labor Department report showing that continued claims have set record highs in every week since January 24, indicate that any recovery after the recession will be painfully slow.

I would have thought that at some point durable goods orders would begin to rise as inventory levels should by now have to some large degree have worked their way out of the system.  Whether that will mean a return to work for some of the workers laid off in the past few months remains to be seen.  The number of people drawing unemployment insurance should come as no surprise to anyone.  The U.S. stock markets have responded to this news by losing a small amount of ground so far this morning.  I am continuing to look to the May U.S. job loss numbers as an ‘trend indicator’ of whether an end to the current recession is anywhere in sight.  I will report my thinking on that on this blog when the May job loss numbers are released.

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An article today titled ‘Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look Levy Viewed as Way to Reduce Deficits, Fund Health Reform’ says that “with budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax”.  I suggest you take the time to click on the link and read the full story.

Under a heading ‘Seeking New Revenue’ the article says “The surge of interest in a VAT is testament to the extraordinary depth of the nation’s money troubles”.  I would say so!  Herein lies the conceptual problem I see facing the U.S. and any other government, business or individual borrower who spends beyond its/their means.  If one does that and incurs debt it/they can’t service and repay in the end, absent the ability to print fiat currency – which of the three only a government has – the borrower has only two choices or a combination of two choices (or declare bankruptcy):  reduce spending, save and service debt and pay down debt principal with those savings, or find a way to increase income (revenue in government parlance).  So what is the U.S. to do?  Its politicians are unlikely to cut spending anytime soon, and where can the U.S. government increase revenue – surely not by taxing its citizens who are losing both jobs and personal wealth at unprecedented rates.  The U.S. politicians can debate a ‘value added’ or any other incremental tax they want to, but from my perspective I don’t see how that plays well with either its citizens or U.S. economic recovery.

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