Mish's Global Economic Trend Analysis

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• Gold Has Longest Streak of Annual Gains Since 1920
• China Manufacturing PMI Shows Modest Growth; Don't Expect Bounce to Last
• Gold, Stock Market Up as Fiscal Cliff Can-Kicking Deal at Hand

Gold Has Longest Streak of Annual Gains Since 1920 Posted: 31 Dec 2012 01:01 PM PST Bloomberg reports Gold Extends Longest Streak Since 1920 on Central-Bank Stimulus. Gold rose, capping the longest annual gain since at least 1920, on renewed concern that central banks from Europe to China will take steps to spur economic growth and as U.S. leaders near a budget deal. Gold futures for February delivery gained 1.2 percent to settle at $1,675.80 at 1:41 p.m. on the Comex in New York, while prices for immediate delivery jumped as much as 1.5 percent. Through Dec. 28, the metal had slumped for five straight weeks as the deadline for the so-called fiscal cliff of automatic tax increases and spending cuts due to take effect tomorrow loomed. President Obama said today at a White House event that an agreement was "within sight." Record Average The metal averaged a record $1,670.71 this year in New York even as it slid 6 percent since September, the biggest quarterly drop since 2004. The run of annual gains in the immediate delivery market is the longest since at least 1920. The Standard & Poor's GSCI gauge of 24 commodities gained 0.3 percent This year, bullion gained 7 percent on the Comex, where floor trading will be closed tomorrow for New Year's Day. Platinum futures rallied 9.8 percent this year in New York and palladium gained 7.2 percent as labor unrest in South Africa helped curb supply. Silver increased 8.3 percent. Amusing Irony The amusing irony, as noted in Poison Pill and Gold Debate is that someone posting under the name "Uncle Frank" made the following accusation. "Mish relishes chaos and financial ruin for this country so his gold holdings shoot-up in value. Everyone has an ulterior motive you know." "Uncle Frank" is devoid of clear thinking because fiscal prudence is the one thing that would be bad for gold. Repeating what I said earlier .... Regardless of my personal beliefs regarding gold (that one would be prudent to buy and hold gold), I actually advocate government and Fed policies that are contrary to my recommendations. My reasons are easily explained: Neither the Fed nor the government gives a damn about what is fiscally prudent.   Both the Fed and Congress are highly likely to debase currency, causing gold to rise, even if I think that is bad economic and fiscal policy, which of course I do. Should Congress actually do what I advocate, I think it would not be good for gold. I recommend governmental actions on the basis of policy merit alone, not based on my stock market positioning. I find it very sad that few others do the same. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

China Manufacturing PMI Shows Modest Growth; Don't Expect Bounce to Last Posted: 31 Dec 2012 11:34 AM PST The HSBC China Manufacturing PMI™ shows modest growth this month. The index is at 51.5 with growth above 50. After adjusting for seasonal factors, the HSBC Purchasing Managers' Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.5 in December, up from 50.5 in November, signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011. Input prices at manufacturing plants continued to increase in December, and for the third successive month. The rate of inflation eased slightly from November but remained marked overall. Average tariffs also increased during December, after remaining broadly similar in November. Output charges rose at an accelerated pace that, although modest, was the quickest in 14 months. Anecdotal evidence suggested that tariffs were raised in line with rising market demand and higher input costs. Purchasing activity rose at a marked rate in December, the fastest since March 2011. Exactly 17% of panellists reported increased input buying. Consequently, stocks of purchases also rose. Even though the pace of stock accumulation was only slight, it was the quickest in two years. Rises in input buying and stocks of purchases were generally associated with higher new order volumes. Comment Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "December's final manufacturing PMI picked up for the fourth consecutive month to a 19-month high, thanks to the faster new business flows and the end of destocking. Such a momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise. This, plus Beijing's reiteration of keeping pro-growth policy in place into the coming year, should support a modest growth recovery of around 8.6% y-o-y in 2013, despite the ongoing external headwinds." Pollyanna Outlook I beg to differ with Hongbin Qu. There is no reason to believe property market conditions will stabilize. Nor is there any reason to believe infrastructure construction will run at "full speed" for any significant length of time. Indeed, should either of those happen, China's already massive rebalancing problem will just get worse. Realistic Outlook July 18, 2012: "China Rebalancing Has Begun"; What are the Global Implications? Michael Pettis on China Rebalancing, Chinese Price Deflation, and Spain Exit from Euro; Target 2 Revisited   August 16, 2012: Pettis on Debt, Currency Wars, Commodity Prices and Capital Flight; China FDI Contracts 8.7% YoY, 8th Drop in 9 Months   December 27, 2012: Michael Pettis on China Reforms, Ponzi Schemes in Wealth Management Programs, Rebalancing Implications For a more realistic assessment on what is happening in China and why, please visit some of the above links. This modest bounce in China PMI to a number barely above contraction is nothing to get excited about. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Gold, Stock Market Up as Fiscal Cliff Can-Kicking Deal at Hand Posted: 31 Dec 2012 10:42 AM PST S&P 500 futures are up 24 points (1.7%) and gold is up $22 (1.3%) on news McConnell-Biden Said Close to Deal Except for Sequester The White House and congressional negotiators have agreed to contours of a deal to avert the fiscal cliff including tax cut extensions, with the remaining sticking point being how to handle automatic military and domestic cuts, according to an official familiar with the talks. Income tax cuts would be extended on families earning up to $450,000, the official said, with rates rising to 39.6 percent on incomes above that. Rates on estate taxes would rise to 40 percent, on amounts above $5 million. Extensions of business tax breaks would continue through the end of 2013. There would be a permanent fix to the alternative minimum tax threshold. The Medicare payment rate for doctors would be extended through 2013. The contours of the possible deal would generate $600 billion toward deficit reduction. The debate over how to postpone automatic federal spending cuts remains. Democrats propose postponing it for a year, while Republicans want to allow cuts to begin taking effect with the new year. Debate on How to Further Postpone Begins In simple terms, Congress will achieve zero budget cuts if Democrats get their way. Republicans appear to be quite fine with that as long as military spending is not cut. Thus, out of a trillion dollar budget deficit, Congress will have addressed a mere $60 billion a year in revenue and something close to $0 in budget cuts, allegedly avoiding a fiscal cliff but in reality creating a far bigger one a few years down the road. Last year, before the election, Republicans could have gotten $10 in budget cuts for every $1 of additional revenue. Now they have agreed to tax hikes, getting virtually nothing in return. The only hope for sanity is the House punts this bill a mile high, but don't count on it. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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