Time may be running out for the policy of embracing the Great Liquidity without paying an inflationary price. A hint of things to come is buried in today’s producer price report for November.
Wholesale prices jumped 1.8% last month, the Bureau of Labor Statistics reported this morning. That’s near the upper range for monthly changes in recent years. The surge last month is easily dismissed, however, considering that much of the rise is due to energy prices. On the assumption that energy prices won’t keep rising, one could soft pedal the headline PPI number for November.
It’s harder to dismiss last month’s core PPI change, which excludes the volatile food and energy sectors. As our chart below shows, core PPI gained a hefty 0.5% in November, the highest monthly change in more than a year.

Is simply a case of statistical noise? Or is pricing pressure finally starting to rebubble as the financial crisis of 2008 continues to fade into history? Another clue arrives in tomorrow’s consumer price report.

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Say what you will about household debt and the blowback from recession, but Joe Sixpack and his spendthrift ways won’t go quietly into the night, recession or no recession.
This morning’s update on retail sales for November was a reminder that ours is a consumer economy and old habits die hard. U.S. retail and food services sales for November rose 1.3% on a seasonally adjusted basis, the Census Bureau reports. A monthly rise above 1% for this series is impressive and should soothe worries that the danger of an imminent double-dip recession is lurking. Even after excluding volatile auto sales last month, retail sales climbed 1.2%. In addition, the advance was broad based, with only a few sectors posting declines.

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Today’s update on new jobless claims for last week shows a gain in the number of freshly minted unemployed, but that doesn’t mean the general decline is over.
New filings for unemployment benefits jumped last week by 17,000 to 474,000, the Labor Department reports. But as you can see from the chart below, the overall trend has is down, albeit interrupted at times by temporary setbacks. Last week dispensed another one of those setbacks.

But barring some dramatic new and unexpected event with hefty negative consequences, weekly jobless claims are likely to drift lower in the months ahead. The economy is recovering, albeit slowly and in fits and starts, but the recovery rolls on. It remains to be seen just how durable this expansion will be, but for the moment the growth, light and tenuous as it is, has legs.

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Risk is always present, and always changing, and always surprising. Some of today’s risks may end as false alarms. Meanwhile, what seems benign, perhaps even beneficial, can bite back tomorrow. So it goes in the money game. The challenge is a) understanding the unending dynamic; and b) managing portfolios accordingly by factoring in various risk scenarios and deciding if the price of a given risk looks attractive or not.
The first step is considering the default benchmark for everyone–a global mix of all the major asset classes weighted passively. The main question is how to adjust this mix to satisfy your particular risk tolerance, time horizon while factoring in any expectations for specific risk and return among the various components. Decades of financial economics tells us no less and this two-step foundation is the analytical focus of The Beta Investment Report.
A little strategic perspective, in other words, goes a long way. It begins with calculating the benchmark, our proprietary Global Market Index, which we report monthly on these digital pages (here, for example) as well as in our newsletter, albeit in greater detail for subscribers. In the long run, this what the average investor holds, which is one reason why we pay close attention to GMI’s fluctuations and ever-changing profile. The next step is evaluating the major components of GMI in terms of how expected return and risk in the near term differs, if at all, from the implied equilibrium outlook. It’s a messy business and so we proceed cautiously, but it’s an essential step on the road for the thousand-mile journey of second-guessing Mr. Market’s asset allocation.

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The bull market in gold, now in its ninth straight year, is more than one more commodity trading at higher levels—around $1,160 an ounce, as of Friday’s close. Gold being gold, it carries a range of emotional, financial and economic baggage.
That includes the embedded warning that the risk of instability, including future inflation and banking default, is still bubbling around the world as more than a distant threat. The biggest gold bull market in modern history is also stirring arguments anew in favor of returning monetary policy to a gold standard. As alluring as that might be in concept, in practice it would be unworkable in the long run.

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All hail the arrival of zero! It’s been a long time coming—nearly two years. But better late than never.
Technically, nonfarm payrolls slipped last month by 11,000, the Labor Department reports. But in a labor force of nearly 131 million, that’s effectively no change if we consider the potential for statistical noise and the prospects for an upward revision down the line.

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Today’s update on jobless claims strengthens the case for arguing that the Great Recession is over.
New filings for unemployment benefits dipped 5,000 to a seasonally adjusted 457,000 for the week through November 28–the lowest since September 2008, the Department of Labor reports. The obvious caveat is that last week’s number is skewed to the downside because of the Thanksgiving holiday, which undoubtedly delayed and otherwise deterred the newly unemployed from paying a call to the local unemployment office.
But while should be suspicious of last week’s data point, there’s no uncertainty about the broader trend. As our chart below shows, jobless claims have been in decline since peaking in March. That alone doesn’t tell us that the economic contraction is fading, but it drops a rather large clue for thinking so when considered with a range of other economic indicators.

Anticipating the end of the recession based on looking at a general retreat in new jobless claims is a familiar notion on these digital pages. In the spring we argued that a peak in jobless claims would send a potent signal that the end of the recession was near. Calling peaks in real time is, of course, the stuff of guesswork. But now we can look back with confidence and say that new filings did indeed top out in late March of this year. That and a number of other encouraging macro signals, including the rally in the stock market, all but confirms that the recession has ended.

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The gold market’s worried about inflation, but there are few signs of it in the official numbers. Nor is there likely to be much pricing pressure anytime soon if we consider the latest estimates from ADP.
Nonfarm payrolls for November are expected to be lighter by 169,000 over the previous month, according to the ADP National Employment Report, which attempts to provide an advance estimate of the official data from the government, which will be released on Friday. If we take the ADP report at face value, the labor market is still bleeding jobs, albeit at a lower level than October’s 190,000 loss. But no one should mistake a 169,000 reversal as good news at this late date in the economic cycle.

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Reflation was alive and well in the financial and commodity markets last month. Although November’s rally was well short of the best months this year, no one’s complaining. After nine consecutive months of upward momentum, interrupted only briefly among the major asset classes, 2009 is shaping up as one of the best calendar years on record.
As our chart below reminds, the year-to-date tallies are impressive. By any standard, it’s been a stellar year. Barring a wave of selling this month, risk premiums are on track for results that seemed impossible as 2009 opened.

The trend has definitely been our friend in the cause of rewarding risk. Momentum is king, at least for the moment. The big winner so far is emerging market stocks, which have surged by nearly 70% this year through November 30. Junk bonds are also posting unusually large returns. The laggard, of course, is cash, which is just about unchanged on the year.
The connection between return-less cash and outsized gains in risky assets is proceeding according to plan. The Federal Reserve has engineered the party and so far everyone’s enjoying themselves. The powers of easy money are feted the world over as we write. And that’s what worries us. No, we’re not expecting any sudden change of sentiment in the crowd. In fact, we’d be surprised if the upward momentum doesn’t roll on into the new year.
But 2010 is likely to look much different than 2009. The economic recovery, to be blunt, will face a host of challenges that were largely ignored or irrelevant this year. The Phoenix rising from the ashes is destined for the hard work and complications of navigating the new landscape of subpar growth, debt, higher interest rates and inflation and the general hassles that accompany rebuilding what’s been lost over the past two years.
For now, however, the party’s swinging. Enjoy. But don’t become too distracted. Expected returns fluctuate, which reminds that the midnight chime may yet turn our gilded carriage into a pumpkin.

The debt crisis in Dubai is probably overblown in the media in terms of global economic consequences, but the fear that the problems will spill over into other markets is certainly real enough. But if this sounds like deja vu all over again, you’re right.
Been there, done that, you might say. Of course, that doesn’t mean the global economy is immune to debt-fueled crisis. In fact, it’s a safe bet that this strain of financial crisis–red ink–is ongoing, waxing and waning through time. All the more so these days, when government and consumer balance sheets are loaded up with liabilities.
As for the current blowback from Dubai, there’s chatter that Greece and Hungary may sucked into the vortex.
All of which inspired us to take another look at the recently published This Time is Different: Eight Centuries of Financial Folly, which we reviewed in the October issue of The Beta Investment Report and is republished below. On that note, you can see the entire October issue of the newsletter here.
As for debt and delusion, history has much to teach us. The only question is whether we’re listening.
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The following originally appeared in the October 2009 issue of The Beta Investment Report
BOOK NOTES
This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press)
by Carmen M. Reinhart and Kenneth S. Rogoff
Kindleberger labeled it a “hardy perennial.” Minsky developed a theory called the “financial instability hypothesis.” And now comes a monumental new book on the subject of financial crises, dispensing a data-rich review of an affliction that recognizes no political border, time period or (apparently) policy prescriptions aimed at preventing such events.
Admonitions of this sort presumably need no introduction at this juncture. The world is once again in tune with the finer points of a financial crisis and what it means for markets and economies. Although these debacles are a chronic scourge through time, it seems that every generation must relearn a fundamental truism: The potential for calamity on a broad scale is always lurking in the future, which means that thinking otherwise lays the groundwork for the next disaster.

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