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.Amusing Irony
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.
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.Pollyanna Outlook
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.”
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.Debate on How to Further Postpone Begins
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.
Efforts to prevent the economy from tumbling over a "fiscal cliff" stalled on Sunday as Democrats and Republicans remained at loggerheads over a deal that would prevent taxes for all Americans from rising on New Year's Day.Poison Pill Nonsense
One hour before they had hoped to present a plan, Democratic and Republican Senate leaders said they were still unable to reach a compromise that would stop the automatic tax hikes and spending cuts that could push the U.S. economy back into recession.
"There are still serious differences between the two sides," said Senate Democratic leader Harry Reid.
Progress still appeared possible after the two sides narrowed their differences on tax increases and Republicans indicated they would withdraw a contentious proposal to slow the growth of Social Security retirement benefits.
The two sides were close to agreeing to raise taxes on households earning around $400,000 or $500,000 a year - higher than Obama's preferred threshold of $250,000 - several senators told reporters.
Republicans aim to pair any tax increase with government spending cuts to benefit programs that are projected to grow ever more expensive as the population ages in coming decades.
But their proposal to slow the growth of Social Security benefits by changing the way they are measured against inflation met fierce resistance from Democrats. Obama included the proposal, known as "chained CPI," in an earlier proposal, but many of his fellow Democrats remain opposed.
'POISON PILL'
"We consider it a poison pill - they know we can't accept it. It is a big step back from where we were on Friday," a Senate Democratic aide said.
Greetings from Arizona, Mish,Virtual Classrooms to Reach 1 Billion People
I ran across this website while exploring various online options for my daughter (in high school, but she’s very computer savvy, so I’m looking for options to expand her interests/basis). It is EdX, an online education group started by Harvard and MIT, but other universities are joining.
Hopefully this online education program will finally put a torpedo in the expense of college.
Have a wonderful New Year, and thanks so much for the effort you put forth on your blog, and educating those like me.
James in Arizona
President Barack Obama issued an executive order to end the pay freeze on federal employees, in effect giving some federal workers a raise. One federal worker now to receive a pay increase is Vice President Joe Biden.Congress Approval Rating is 18%
According to disclosure forms, Biden made a cool $225,521 last year. After the pay increase, he'll now make $231,900 per year.
Members of Congress, from the House and Senate, also will receive a little bump, as their annual salary will go from $174,000 to 174,900. Leadership in Congress, including the speaker of the House, will likewise get an increase.
Here's the list of new wages, as attached to President Obama's executive order
"A new executive order has been issued providing for a new pay schedule beginning 'on the first day of the first applicable pay period beginning after March 27, 2013,'" reports FedSmith.com. "The pay raise will generally be about 1/2 of 1%."
Eighteen percent of Americans approve of the job Congress is doing, as leaders continue to work toward a solution to the looming fiscal cliff. That approval rating is unchanged from last month, but remains low from a historical perspective.Any Raise is Too Much
Republicans' approval of Congress fell slightly to 14% from 16% in November, while Democrats' approval increased slightly to 21% from 19%. The resulting seven-point partisan gap in approval of Congress is the largest measured since June 2011, with the exception of the 16-point gap prior to the election in October of this year.
Key points:Germany
- Near survey-record year-on-year fall in retail sales
- Rate of job losses fastest since July
- Business sentiment weakens to series low
Summary:
Italy’s retail sector remained in a steep downturn in December, with sales dropping sharply according to both monthly and yearly measures. Gross margins decreased amid a further rise in average wholesale prices, while firms cut employment and purchasing activity in line with lower sales. The month also saw business sentiment hit a record low.
December data pointed to another sharp month-on-month drop in Italian retail sales. This was signalled by Italian Retail PMI® registering 36.8, up from November’s seven-month low of 35.5 but slightly below its average over the year as a whole of 37.2. The latest decrease in high street spending was the twenty-second in consecutive months, and attributed by panellists to greater tax burdens, weak consumer sentiment and media scaremongering.
When measured on a year-on-year basis, the decline in retail sales was one of the most marked since data collection began in January 2004. In fact, only in December 2008 and May 2012 have faster annual rates of decline been recorded.
Comment:
Phil Smith, economist at Markit and author of the Italian Retail PMI®, said: “2012 surpassed 2008 as the worst year in the survey’s history, with the PMI showing sharp monthly contractions in high street spending throughout and never once climbing above its pre-2012 historic average. The series measuring year-on-year changes in sales hit a record low back in May and came close to that mark in the latest survey period as consumer spending power was weakened further amid added tax pressure. Firms persistent attempts to boost sales through discounts have proved largely fruitless over the past 12 months, such has been the extent of the downturn in demand among Italy’s households.”
Key points:Italy Implosion Continues
- Moderate reduction in sales since the previous month
- Actual sales fall short initial expectations for December
- Job creation was maintained
Comments:
The seasonally adjusted Germany Retail PMI dropped to 47.6 during December, from 50.2 in November, signalling a moderate month-on-month contraction in like-for-like sales. December’s index reading was below the long-run series average (49.8) and pointed to the sharpest pace of contraction for eight months. Reports from retailers in Germany suggested that strong competition, unfavourable weather conditions and unexpectedly low consumer footfall had all contributed to lower sales.
December sales disappoint compared to targets
German retailers signalled that actual sales at their stores fell short of prior expectations in December, continuing the trend of weaker than expected sales for the ninth month running. Moreover, the degree to which sales failed to reach initial targets was the most marked for any December since that recorded in 2009. Meanwhile, expectations for sales in the month ahead were the weakest since December 2009, with some retailers suggesting that earlier than planned promotional discounting will have a negative influence on like-for-like sales in January.
Margins squeezed again
Operating margins in the German retail sector declined again in December, thereby extending the current period of contraction to 25 months. Anecdotal evidence suggested that lower margins reflected strong competition and a sharp rise in average cost burdens during the month.
Key points:France Economic Implosion Underway
- Sales fall at sharper pace on both monthly and annual measures
- Purchasing costs rise at strongest rate in ten months
- Stocks of goods for resale decline at faster pace
Summary:
French retailers reported another month-on-month decline in sales during December – the ninth in succession which is a survey record. Sales were also down on an annual basis, and fell well short of retailers’ plans. Gross margins remained under considerable pressure, partly reflecting a strong and accelerated rise in purchasing costs.
The headline Retail PMI® slipped to 46.8 in December, from 48.8 in November. The latest reading was indicative of a solid rate of contraction. Anecdotal evidence suggested that a difficult economic climate and low customer footfall had contributed to the drop in sales.
Actual sales at French retailers once again disappointed relative to previously set plans in December. The degree of undershoot was the greatest since August. Survey respondents are also pessimistic regarding the one-month outlook for sales.
Factors expected by retailers to boost sales over the coming three months include cold weather, new product launches and promotions. Those factors expected to depress sales include a weak economy, depressed consumer confidence and increased taxes.
Latest data indicated that French retailers’ gross margins remained under strong pressure in December. Margins have declined in every month since February 2008.
Wholesale prices faced by French retailers continued to increase in December. The rate of inflation accelerated to the sharpest since February. Panellists reported that suppliers had generally raised prices in order to pass on higher raw material costs.
Key points:Cheaper Yen Cannot Save Japan
Output and new orders register sharpest contractions for 20 months
Employment, purchasing and stocks all continue to be cut
Output charges lowered further as input prices remain unchanged
Summary:
Latest data from Markit/JMMA indicated that the performance of the Japanese manufacturing sector continued to deteriorate in December. Output, new orders and employment all fell compared to one month ago while margins remained under pressure as output charges declined amid ongoing price competition.
After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) registered a level of 45.0 in December. Down from 46.5, the PMI subsequently posted a 44-month low.
Output continued to decline markedly, with the sharpest contraction again seen in the capital goods producing sector. Total manufacturing production has now fallen for seven months in a row, with the latest reduction the sharpest seen since April 2011.
Falling volumes of incoming new business was the primary factor driving manufacturing output lower in December. As was the case with output, the fall in new order volumes was the steepest since April 2011, although the rate of decline was considerably sharper than seen for production.
New export order volumes also continued to fall in December, with companies reporting that demand from Chinese and European markets remained sluggish. The fall in orders from abroad was the steepest since July, with investment goods producers recording the steepest reduction.
The House of Representatives will reconvene on Sunday evening, just less than 30 hours before the United States reaches the fiscal cliff.Flagpole Rally S&P 500 Futures
House Speaker John Boehner, R-Ohio, notified lawmakers that the House would come to order at 6:30 p.m. ET on Sunday in hopes of averting the end-of-year combination of tax hikes and spending cuts that constitute the fiscal cliff.
The lawmaker on Thursday's call told NBC News that any Senate plan Boehner puts on the House floor (of which there is no guarantee) would only receive as few as 40 Republican votes, making Democratic help necessary.
"If the Senate will not approve these bills and send them to the president to be signed into law in their current form, they must be amended and returned to the House," Boehner told Republicans Thursday, according to a source on the call. "Once this has occurred, the House will then consider whether to accept the bills as amended, or to send them back to the Senate with additional amendments. The House will take this action on whatever the Senate can pass -- but the Senate must act."
Senate Republican Leader Mitch McConnell said late Thursday that Senate Republicans are open to any White House proposal to avert the fiscal cliff.Easy Escape for Senate Republicans
Reid urged the House to pass a Senate bill extending Bush-era tax cuts for those earning $250,000 a year or less. The Nevada Democrat said the House is being operated under “a dictatorship of the speaker.”
A spokesman for House Speaker John Boehner said in response: “Senator Reid should talk less and legislate more.”
Even in the Democratic-controlled Senate, Obama’s preferred bill faces an obstacle: Sixty senators are required to break a filibuster, and Democrats control 53 seats.
The United States doesn’t have a fiscal problem. Or an economic problem. It has a political problem. The workings of the government are so gummed up that we’re in danger of falling into a recession that’s completely avoidable.Economic Folly of Recession Avoidance
I think it’s high time we locked the members of Congress in a room and told them that we’ll let them out when they reach a deal.
As analysts wrack their minds over specific debt problems in China and how they are to be resolved, I think we must remember to look not at specific debt issues but rather at the way the overall system operates.Mike "Mish" Shedlock
I have argued many times in the past six years that the Chinese growth model has reached the point (perhaps well over a decade ago) where growth was almost necessarily driven by an unsustainable increase in debt. This meant, I suggested, that while it might be hard to predict where the next debt problem would crop up, it was very easy to predict that debt problems would continue to crop in one sector of the economy after another.
We need to remember this as we consider financial risks in China. One of the big stories this month of course was the failure of the Zhongding Wealth Investment Centre, the borrower against a Wealth Management Program (WMP) issued at a Shanghai branch of Huaxia Bank.
According to an article in the South China Morning Post, [Huaxia scandal spotlights China's Ponzi crisis] "dozens of depositors lost their multimillion-yuan investments in a "wealth management product" (WMP) sold at a Shanghai branch of Huaxia Bank. The sorry saga was a rude reminder that Ponzi schemes thrive on the mainland, where millions of residents still believe that banks are the safest havens for their lifelong savings."
The reason this particular story is important is not because the transaction is large enough to make much of a difference, but rather in what it tells us about risks in the financial system. The first point is that we have no idea what is really going on in this already large and rapidly growing part of the Chinese financial system, but whatever we can see looks pretty ugly.
In my October 29 newsletter I referred to a recent article that discussed this problem, an opinion piece by Xiao Gang, the Bank of China’s CEO, in China Daily. In this piece he describes the shadow banking system and the role of wealth management products:
It is difficult to measure the precise amount and value of WMPs. Fitch Ratings says that WMPs account for roughly 16 percent of all commercial bank deposits, while KPMG reports that trust companies will soon overtake insurance to become the second-largest sector in the Chinese financial industry. According to a report by CN Benefit, a Chinese wealth-management consultancy, sales of WMPs soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.9 trillion).
There are more than 20,000 WMPs in circulation, a dramatic increase from only a few hundred just five years ago. Given that the number is so big and hard to manage, China's shadow banking sector has become a potential source of systemic financial risk over the next few years.
Particularly worrisome is the quality and transparency of WMPs. Many assets underlying the products are dependent on some empty real estate property or long-term infrastructure, and are sometimes even linked to high-risk projects, which may find it impossible to generate sufficient cash flow to meet repayment obligations.
I went on to say in my newsletter:
There are three big questions with WMPs, as analysts are increasingly recognizing, each of which Xiao discusses, perhaps a little more politically than I do, in his piece. First, we don’t know the size of the market. Second, we have no idea of whether or not the assets backing these products are money good – in fact the bankers themselves who sell WMPs are almost never able to explain what asset is behind the WMP. Third, we have no idea of the transmission mechanism between potential problems in WMPs and the banking system.
The key point we must remember is that whatever Beijing does about WMPs, this will not resolve the underlying debt problem. Growth in China is currently dependent on an unsustainable increase in debt. If one avenue for this growth in debt is cut off, we will simply see the debt rise somewhere else. Economic growth in China requires rapid growth in investment. This growth in investment is increasingly misallocated on projects that will not generate the increases in real productivity needed to cover the cost of capital. Since these investments are funded at least in part by debt, debt must rise in one part of the system or another as long as GDP growth rates exceed 4-5%.
In China, in other words, high growth is no longer compatible with a strengthening balance sheet. If China is growing at a rate that approaches or exceeds this level, it is probably a safe bet that debt is rising faster than debt servicing capacity.
The good news is that the current leadership seems very clear about the need to implement reforms, and also understands that this is going to be politically a difficult process.
As an article in the People’s Daily put it: No easy path in sight for China's economic future
"Reform is exciting, but it is also full of difficulties and challenges. Xi said in Guangdong that China must squarely face difficulties and challenges, strive for the best results and firmly seize the initiative. This deserves consideration by the entire Party and society."
These expected, and exciting, “difficulties and challenges” are, I suspect, the things we should be most concerned about in our attempts to understand the pace of reform. The history of developing countries suggests that most countries fail in the reform and adjustment process precisely because the sectors of the economy that have benefitted from the distortions are powerful enough to block any attempt to eliminate those distortions.
Certainly not everyone in China is confident that Beijing will be able to force through the reforms that are widely accepted as necessary without a serious fight. There were two interesting and related articles in this week’s South China Morning Post that may indicate the degree of worry.
The first article tells you much of what you need to know in the title (“China's rich and skilled leave in record numbers”). It goes on to say:
More than 150,000 Chinese became permanent citizens in major immigrant countries including the United States, Canada, Australia and New Zealand last year, topping the world’s list of overseas migration in absolute numbers, a recent report revealed. The Centre for China and Globalisation (CCD) and Beijing Institute of Technology (BIT) School of Law jointly released their findings in the Chinese International Talents Annual Blue Book's International Migration Report (2012) on Monday, according to media reports.
…Another report by Hurun Research Institute and Bank of China in 2011 found that 14 per cent of China’s high-net-worth individuals had either emigrated or were in the process of doing so. In addition, 46 per cent were considering permanently moving overseas through various immigrant investor programmes with real estate, foreign currency deposits and stocks being the primary areas of investment.
US Citizenship and Immigration Services (USCIS) declared that 41 per cent of total EB-5 Immigration Investor Programme applicants were Chinese while the Australian Department of Immigration and Citizenship reported that 61.5 per cent of applicants for the Business Skilled Migration Programme were Chinese.
We have known for a while that Chinese with the means to do so are increasingly opting to move abroad. There are many reason for this, of course, but China is still growing much faster than the rest of the world, even if some of us don’t fully accept the official numbers, and so for people to look for opportunities abroad suggests at the very least that either some of these people seriously doubt the sustainability of China’s current growth and expect it to come crashing down, or that they are worried about political uncertainty and the possibility of difficulty ahead. Or both.
The second article, China 'top source' of world's tainted money, also by the South China Morning Post, involves data from a completely different source and for completely different purposes, but it may broadly be telling the same story. The article is based on a very interesting study conducted by Global Financial Integrity on illicit capital flows around the world. The article summarizes their study as:
Some 150 developing countries, led by China, have been the source of flows of tainted money totalling US$5.9 trillion over 10 years through 2010, Global Financial Integrity, a research and advocacy group in Washington, DC, said.
Flows of illicit money from tax evasion, crime and corruption in the developing world have roared back to pre-financial crisis levels, topping nearly US$859 billion in 2010, near the all-time high of US$871 billion in 2008, it said. In 2009, following the global financial crisis, the figure dropped to US$776 billion.
China tops the list of developing countries sending illicit money abroad, either to offshore havens or to financial institutions in developed countries, GFI said in a study. In 2010, illicit money out of China totalled US$420 billion, the report said, and exceeded US$2.7 trillion for the decade ending in 2010 - nearly half that period’s total for all developing countries
For comparison’s sake, Malaysia came second, with over $64 billion in 2010 and $285 billion for the decade. Mexico was in 2010, with over $51 billion in illicit flows, and $476 billion for the decade. The study acknowledges that it does not include cash transactions, so actual illicit flows are probably higher, maybe even significantly higher.
The full ranking of 71 countries shows, among other things, that illicit capital flows from China are roughly equal to the sum of illicit capital flows from the next fifty countries. I haven’t been able to adjust the numbers for GDP size (larger economies should on average have larger illicit outflows), but when you consider that the next fifty countries include Mexico, Malaysia, Russia, India, Indonesia, Poland, Brazil, Turkey, Argentina, Hungary and forty others, I think it is pretty safe to say that China’s ranking as number 1 is not just a function of its being the largest developing economy in the world.
As a share of GDP, in other words, Chinese illicit outflows seem easily to exceed the average for all developing countries. Mexico’s GDP, for example, is roughly one-seventh the size of China’s, and yet for all its drug money, its illicit flows were only one-eight those of China. This means that the Chinese business and political elite export illicitly a larger share of the Chinese economy than the combination of the Mexican business and political elite and their drug cartels.
One of the most interesting paragraphs in the study, for me, concerned trade invoicing:
Trade misinvoicing is the preferred method of transferring illicit capital from all regions except the MENA region where it accounts for only 37 percent of total outflows for the decade ending 2010 (Chart 6). In declining order of dominance, the share of trade misinvoicing in total outflows by region is Asia (94.0 percent), Western Hemisphere (84.0 percent), Africa (65.0 percent), and developing Europe (53.0 percent). Large current account surpluses of countries in the MENA region driven by crude oil exports entail larger outflows through the balance of payments. In the case of Europe, the relatively large unrecorded outflows from the Russia’s balance of payments dominate regional outflows.
This creates, for me, a real and very obvious problem with understanding China’s trade figures. According to the study, illicit money out of China totaled US $420 billion in 2010. The study also claims that in Asia nearly all of the illicit money flows (94%) occur through mis-invoiced trade, which suggests, of course, that the trade numbers can be seriously distorted. If capital is being secretly taken out of the country through trade, exports are likely to be under-reported, imports are likely to be over-reported, and the real trade surplus is almost certainly larger than the reported trade surplus.
How much does this illicit capital flow impact China’s real trade account? Here is a January 2011 Xinhua article on China’s 2010 trade account:
China's foreign trade last year jumped 34.7percent year on year to more than 2.97 trillion U.S. dollars while its trade surplus fell 6.4 percent to 183.1 billion U.S. dollars, the General Administration of Customs (GAC) said Monday.
The country's exports grew 31.3 percent year on year last year to 1.58 trillion U.S. dollars while imports surged 38.7 percent to 1.39 trillion U.S. dollars, said the GAC. "China's foreign trade is, in general, heading towards a balanced structure," said the GAC in a statement on its website. The trade surplus accounted for 6.2 percent of all foreign trade last year, down from 8.9 percent in 2009 and 11.6 percent in 2008.
It is clear that these illicit capital flow numbers are pretty significant in relation to the trade numbers. China’s trade surplus in 2010 was reported to be $183 billion, but GFI claims that Chinese illicit capital flows (I assume that most if not all represents outflows, or even net outflows) for the year were $420 billion, most of which may have been recorded as higher exports or lower imports.
Even if these numbers are way off, they still suggest that China’s real trade surplus may have been substantially higher than reported, with much if not most of the money parked offshore for safekeeping. Among other things these numbers also suggest that the sluggish import growth of the past year, which smart people like Andy Xie insist are among the many numbers that are not compatible with the high official growth rates claimed by the government, may be even lower than reported.
Obviously I am not the first person to complain about the opacity of Chinese economic data and the difficulties we often have in reconciling one set of numbers with another, but I think it is important to note that while opacity may not be a terrible problem during the optimistic up-cycle (in fact hazy data give us more leeway to daydream pleasant things), it can suddenly become a huge problem during the pessimistic down-cycle, when they don’t even constrain our nightmares. What is worse, an increase in opacity, which we are clearly seeing in the financial system, is usually a herald of bad tidings. When the economy starts to get bad, often the first impulse for many is to massage or hide the data.
I don’t think this is the end of this story. The market hasn’t yet priced in the amount of rebalancing China has yet to go through, and so it has also not priced in either the full reduction in hard commodity demand or the extent of rebalancing on China’s export competitiveness. I expect a lot more of the same story in 2013 and 2014.
