Don Quijones: Why Are the Four Richest Men in Mexico Getting Crushed?

By Don Quijones, of Spain and Mexico. Originally published at Wolf Street

Tough times for Mexico’s very richest. A couple of weeks ago, I reportedthat 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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  1. tegnost

    Sometimes forget to take competition between rich people ala “The Count of Monte Cristo” into account, I had noticed the peso pushing 17 for a dollar. In my view mexico is the goose that laid the golden egg in spite of it’s clear problems or maybe at least partly because of them…

  2. tegnost

    One point to remember here is if you live/have your family in tijuana and work in san diego for $12/hr you’ve been given a hefty raise unless inflation is off the charts in mexico

      1. tegnost

        Although I’m pretty sure $8/hr in san diego is starvation wages, you are correct. In order to take advantage of the spread you need cross border capacity, even if it’s just in the form of cheap medical/dental but also in the cost of caring for less productive members of the family who can live cheaply in mexico. It’s basically a formula that works well near the border and the H1-B issue is about making it easier everywhere

  3. HotFlash

    the 0.00000(…)1%, could see a sizable chunk of their wealth transition into the realm of the illusory.

    It was *always* illusory. Simply returning to illusion now. The trick is always to sell the coach and get out before it turns back into a pumpkin.

  4. TG

    I am not sure I would worry too much about the Mexican billionaires – markets go up and down, they still have plenty left. For someone like Bill Gates daily market fluctuations must cause his net worth to vary by by billions every week, I should think. (Although investing in a company whose business model is consumer spending by lower-class Mexicans who are barely making enough to eat, does sound like a dumb idea).

    But on the other hand: in the long run the rich don’t really care about their net worth in the absolute. It’s how much is it relative to everyone else. If Bill Gates loses half his net worth, and wages for the rest of us go down to a dollar an hour, he still wins. His control, and his status, and his power over workers, will remain intact if not increase.

    For a billionaire it’s not what they can buy, but how much power they have. If the going rate to buy a politician or a journalist etc. stays ‘affordable’, they’re still good.

  5. jonboinAR

    Well said. It’s, in a nutshell, why we can’t trust the rich acting in their own interests to ultimately improve things for everyone else, as well. It’s not so much the rich are “evil”. It’s human nature.

  6. silverspoon

    gee, I don’t think I can live on 6.54 billion after living on 18.77 billion. I think I will jump off a builiding. darn, the highest building in Carmel is only 4 stories, that is not high enough. does any one have any suggestions?

  7. Praedor

    In a word, GOOD! Glad to see it, want to see more (in spades).

    I’ll be satisfied when the 0.000001% are all taking dives out of the upper stories of the world’s tallest buildings.

    Parasitic self-worshipers.

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