China's Manufacturing Index Rebounds

Good day… And a Tom Terrific Tuesday to you, and… HAPPY NEW YEAR! Here’s hoping that 2012 brings us a correction to the 1 in 5 Americans out of work, and that it is a healthy, prosperous, and peaceful year! Hey… Stranger things have happened, right? But, we have some HUGE hurdles to clear this year, folks… So, keep your fingers crossed!

I see from the Pfennig replies that most of you enjoyed my Christmas Pfennig this year… And in reading the Pfennigs supplied so eloquently by Chris and Mike while I was gone, I know coming in today that the currencies have been in a very tight range… Although I do see that the Aussie dollar (AUD) is much stronger today than it was when I left you.

I can tell you that I pretty much think we’ll see another repeat of what we’ve seen for the past few years in the currencies… And that is… Drum roll please… We start each year fresh, and with the freshness comes forecasts of grander things for the US economy, which the markets swallow, hook, line and sinker. That brings about dollar strength and all the claims from people who should know better that the dollar is ready to begin a multi-year rally… And then by the time major league baseball players move north to begin their seasons in April, the reality begins to set in…

And, the Christmas present the US lawmakers gave us this year was yet another $1.2 trillion increase in the debt ceiling… You know, I prefer the grinding of teeth, shaking of fists, and name calling that went along with the debt ceiling raise back in August of last year, to the increase that almost went unnoticed at the end of the year… Yes, I would rather the lawmakers at least fight for the increase!

Last week, I sent Mike a note regarding the agreement that China and Japan have entered into that will allow them to exchange each other’s currencies in trade, thus removing the US dollar from those terms of trade. I’ve written and talked at conferences about these currency agreements for a couple of years now… Japan was the 500 pound elephant in the room that China finally came to agreement with, thus closing the door on Asia… So, now probably about 90% of trade in Asia among each other is done without using dollars in the terms of trade…

Maybe I’m the only one that notices these things because I never see any other writers talking about the currency agreements… But then in 2001, I was the only one pointing to the exploding debt, which at that time was scary at $400 billion added a year… Now, people don’t even get excited about $1.4 trillion being added each year! Eventually these things come back to haunt anyone that does not pay attention to them… And while the commercial that claims a very bad thing was going to happen in 2011 to change the way we do everything, came to an end without it happening in 2011, it doesn’t mean it won’t happen eventually… Debt, as Europe has now learned, is a bad thing… When will we learn that lesson here in the US?

Not until that “something bad happens” that changes the way we do everything… And as long as the lawmakers, administration, Treasury and Fed, continue to kick the can down the road, everyone will think I have gone off the deep end, talking about how debt is going to kick us in the rear one of these days…

OK… Enough of that, Chuck! You don’t really believe that your dear readers want to get the “debt is a bad thing” on the first working day of 2012 do you? Ok… Sorry… But when I get started on that stuff, I can’t stop!

So… As I said above, the Aussie dollar has rebounded nicely since I left, and is up almost a full cent this morning. Another currency that has really taken some huge strides in appreciation since I left is the Chinese Renminbi (CNY)… I find this a bit strange because the “forward market” for renminbi is no longer speculating strong moves in the next year… You know, as I’ve explained before, but will go here again for all the newbies to the Pfennig….

In currencies that trade freely (well supposedly that is) the forward market price is simply the difference between the two countries’ interest rates and the number of days to the maturity of the forward… But with a “non-deliverable forward” like the Chinese renminbi (Indian rupee (INR) & Brazilian real (BRL)) the forward market price also includes “speculation”… So, when I say that the renminbi forward price is no longer seeing speculators drive the price higher… Well… That concerns me…

But, the markets have been so wrong about China from the get-go, that I think this reversal of speculation now, is simply them readjusting their pie-in-the-sky forecasts for the renminbi, and coming back to reality… Theses speculators might be changing their tune soon, after seeing the latest measurement of Chinese manufacturing that was printed this past weekend…

The December manufacturing Index (PMI) rose 49 points in November to 50.3… Remember, any number above 50 represents expansion…

I read a report on the Bloomie this morning that reported Fund Managers putting on trades that bet commodity prices will increase the most since August 2010 this year…. The Fund managers believe that there are signs that we will see sustained economic growth in 2012, and it will drive a rebound in raw materials…

While I believe that economic growth in Asia will be the thing in 2012, I’m not “buying” the sustained growth here in the US. I just don’t see where it comes from… As we saw with the final revision of third quarter GDP, Consumer Spending is flat at best… The boys and girls over at Macroeconomic Advisors are forecasting 2% growth in Consumer Spending in the first half of the year… 2% Consumer Spending growth isn’t going to sustain anything but our reliance on government spending to keep us out of an official recession…

Long time readers know that I believe the US economy to be in a depression, and therefore shake my head at those who say that the US economy left the recession a couple of years ago…

The Big Boss, Frank Trotter, sent me a PDF that highlights the countries that waded into currency markets in 2011… It was interesting, but all have been highlighted here in the Pfennig before, but the PDF had the amounts that each country spent intervening to keep their currencies weak… For instance… Brazil spent $50.1 billion in 2011… Japan spent $165 billion! The rest of the “currency interveners” includes: Mexico, Switzerland, Poland, Turkey, India, South Korea, and Indonesia…

I was given the book Currency Wars by James Rickards as a Christmas Present from a friend, and hoped to have read it during my winter break, but never got around to it… So, I’m sure it will highlight this stuff…

And the actual folding currency of the euro celebrated its 10-year anniversary on Jan 1st… Just a few years ago, the word “euro” was followed by the word “successful”… These days, the word “euro” is followed by the word “crisis”…

Speaking of the euro… I wouldn’t be surprised one iota if the euro (EUR) fell to around 1.18 this year… But then I also wouldn’t be surprised if it rallied to 1.40 either… It was the weight of the world on its shoulders, but the focus could easily shift to the US this year, like it did for a couple of months last summer…

Gold is rallying this morning, pushing its price higher by $25… So, all-in-all, it looks like there’s a better feel for risk assets this morning… But be careful, don’t read too much into the price action today, for the markets are still pretty thin…

Speaking of today, the US will print its own version of their manufacturing index (ISM) for December, and it is expected to have pushed higher… Along with the prices paid component of the index… I talk about this component from time to time, and it is important to follow it… For if the price component is rising, you can expect higher prices down the line…

Then there was this… OK… Many of you know my view of gold (and silver)… It has not changed, and if anything… The drop in the price of gold since last summer, only allows me to buy more at cheaper prices… Which I did! But, in the interest of being fair… Here’s a link to a 7-minute video of two guys talking about gold… I obviously do NOT agree with them, but thought I would show that gold has a two way market…

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To recap… Happy New Year! Risk assets are looking healthier this morning, but the markets are still pretty thin, so be careful today… China printed a stronger manufacturing index this past weekend, and that is the catalyst to the risk assets rally this morning. The physical euro celebrated its 10th birthday on Jan 1. And the forecasts for 2012 are looking and sounding very much like the ones we saw and heard the past few years, in January…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning