Emerging markets crisis begins to exact its pound of flesh.
By Don Quijones, Spain & Mexico, editor at WOLF STREET
Tough times for Mexico’s very richest. A couple of weeks ago, I reported that Carlos Slim, once the world’s richest man and the undisputed Big Boss of Slimlandia, as Mexico has come to be called, lost $7 billion in the first seven months of 2015. But since then, his losses have exploded to $11.8 billion.
That’s close to one-fifth of Slim’s total fortune at the beginning of 2015, making him this year’s biggest loser, both in absolute and relative terms, on Bloomberg’s Billionaire index.
Most of Slim’s losses came on the back of continued financial hemorrhaging at his gold mining company Minera Frisco, whose stock has tumbled over 55% this year, as well as the recent drubbing in global stock markets.
Mexico’s second and third richest individuals, Germán Larrea Mota-Velasco and Alberto Baillères González, both of whom made their fortunes in mining, have fared little better this year, having also seen the dollar value of their wealth shrink by roughly 20%. But that is nothing compared to the wealth destruction, in relative terms, suffered by Ricardo Salinas Pliego, Mexico’s fourth richest man, whose personal fortune is now worth roughly half of the $8 billion it was worth at the beginning of the year.
Family Business Troubles
Salinas Pliego is the elder son of Hugo Salinas Price, the founder of Mexico’s Elektra retail chain who is probably best known internationally for his recent efforts to bring physical silver currency back into use in Mexico, the world’s largest silver producer.
When Salinas Pliego took over the family firm, in 1987, Elektra had just 59 sales points around the country. Now it has 4,000 in Mexico and another 637 dotted across Guatemala, Honduras, Peru and Panama.
Despite all the growth, things are not going well. While Salinas the elder seeks to bolster Mexico’s economy by trying to convince the government to re-adopt a sound money policy, the family’s fortune, now under the supervision of Salinas the younger, is bleeding funds at an alarming rate — and not just as a result of unfavorable external conditions.
Long before the Mexican peso began losing weight and global stock markets began diving, the Salinas business empire was already in trouble, reports Economía Hoy. The family’s two main business holdings, the television broadcaster TV Azteca and the appliance retailer and banking company Grupo Electra, have so far lost close to $6 billion this year.
For TV Azteca, the main problem is its anemic advertising sales. According to Homero Ruiz, an analyst with Signum Research, sales are flagging due to two main reasons: a weak retail environment and the decision by many companies to spend more on digital advertising and less on traditional channels such as television. This year alone TV Azteca, which Salinas bought in 1993 to compete with Mexico’s quasi-broadcasting monopoly Grupo Televisa SAB, has lost more than half its value.
“There’s a clear lack of confidence among investors in the company,” said Ruiz. “I don’t think we’ve seen the final leg of Azteca’s stock’s collapse: the margins just keep narrowing. It’s a critical situation for a media company.”
Meanwhile the shares of Grupo Elektra, which targets less prosperous consumers who borrow money from the group’s banking arm, Banco Azteca, in order to buy items like TVs and refrigerators at the group’s appliances retailer Elektra, reached eight year-lows last week. A form of vendor-financed subprime consumer purchases comes to mind. (Elektra stores also sell very attractive, competitively priced one-ounce Silver Libertad coins).
Even with increased retail sales, the holding group’s banking arm, which accounts for two-thirds of its operations, continues to drag down the share price, said Francisco Guzmán, an analyst with Interacciones Casa de Bolsa SA.
Wealth Destruction, at the Top of the Pyramid
Taken together, Mexico’s four richest individuals have lost a staggering $21 billion so far this year – the equivalent of 20% of their total net worth and around 2% of Mexico’s GDP.
Partly to blame for this wealth destruction is the Mexican peso. In the last eight months, the peso has shed 15% of its value against the US dollar. This is playing havoc with company margins and profits, especially for those with dollar-denominated debt but peso-denominated operating income [read: Corporate Dollar Debt Explodes in Mexico as Peso Dives].
But it’s not just billionaires from Mexico who are struggling. On Monday, the last day of the latest stock market rout, $124 billion was wiped off the collective fortunes of the world’s 400 richest people. According to data compiled by the Bloomberg Billionaires Index, so far this year the world’s richest man Bill Gates has lost roughly $6.5 billion, while third-placed Warren Buffet’s fortune is down $9.5 billion.
Although global markets have made a recovery in the last few days, the recent rout has served as a stark reminder of just how exposed the world’s largest personal fortunes are to the everyday vagaries of the international equity markets.
Thanks to years of unprecedented central bank intervention in financial markets, the paper value of the financial assets held by the world’s 0.0000(…)1% has been reinflated to the point where it bears not the slightest relation to economic reality or fundamentals.
But reality cannot be forestalled indefinitely. Indeed, the recent spikes in market volatility suggest that it could be in the process of making a very big comeback. If it does, those who have benefited the most from the central banks’ financial engineering, the 0.00000(…)1%, could see a sizable chunk of their wealth transition into the realm of the illusory.
Hence the rising panic of those at the very top of the global wealth pyramid. Just last week, two senior representatives of America’s financial elite, Laurence Summers and Ray Dalio, begged the Fed for yet another hit of Quantitative Easing — whatever it takes to postpone the day of reckoning. By Don Quijones, Raging Bull-Shit.
Mexico and other Latin American economies are running into deep trouble. Read… “Hot Money” Flees Latin America, Triggers Currency Bloodbath, Risk of Mega Debt Crisis
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Being a fan of good telenovelas I have noticed that all the really good ones come from Brazil and have international themes. The really bad ones are from Mexico and are about the drug trade and illegal immigration. Maybe people are cutting the cord there like they are in the US because there is nothing good to watch. I remember when all the good Spanish movies and TV came from Mexico.
All of those billions of dollars made with leverage & now being destroyed by leverage.
It sounds like a financial parody of Oscar Wilde’s famous classic ‘The Picture of Dorian Gray’.In the end the picture reverts back to it’s original beauty & Dorian Gray’s lifeless face shows all of twisted evil in his life!
I got halfway through Galbraith’s The Great Crash 1929 and find the parallels fascinating, especially with BRICS. America today is skmilar to stodgy England back in the 20s. I was surprised at how few Americans, on a perecentage basis, held stock in the late 20s and found it fascinating how leverage wielding plutocrats drove the 20s boom and bust. Also, large parts of the economy were not firing on all cylinders in the late 20s.
I was in an Elektra/Bank Azteca the other day to buy a few more libertads for my stash… they cost 330 pesos each… just under 20 bucks American (28 loonies). Price inflation is truly taking hold here as the peso is being pummeled (in lockstep with the CDN, AUD etc.).
The one thing that differentiates Mexico from the others however is the lack of personal and home credit bubbles. Houses in Mexico are built cash and carry, most Mexicans have been deemed uncreditworthy and few homes are mortgaged.
Only the past few years have seen the appearance of consumer credit cards and Elektras business is no doubt suffering being no longer the sole source of credit for the lower classes.
The peso is now the only official currency and digital transactions are much more common as the war on cash (including previously common USD and silver coins) is being won by the central bank and the internal taxing mechanism.