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.
* * *
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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Another holiday is upon us and your editor will be vacating the digital premises for some downtime with drinks, dinners and various diversions. The routine returns on Monday, November 30.
Happy Thanksgiving!

“We have to be sure that the recovery is final, that domestic demand is self-sustaining and the peak in unemployment is on the foreseeable horizon,” Dominique Strauss-Kahn, managing director of the IMF, said yesterday in London yesterday in connection with a speech he gave at a British industry conference.
The topic of discussion was the exit strategy, and the ever-topical question of when to begin retreating from the massive liquidity injections that remain the status quo in the global economy, particularly in the U.S. Straus-Kahn emphasized that “a premature exit is the main danger,” and that’s probably true. But the risk associated with keeping the stimulus running too hot for too long isn’t exactly chopped liver either.

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Is it time to consider more radical strategies for repairing the U.S. economy? Perhaps, although as a recent essay from the Levy Economics Institute argues, it’s also clear that the old game of trying to reflate bubbles isn’t going to work this time.

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Today’s release of second estimate of third-quarter GDP reveals that the economy expanded at a slower pace than originally reported. The initial 3.5% annualized real growth in the U.S. for Q3 was, we’re now told, just 2.8%.
Meantime, corporate profits skyrocketed in Q3. As companies shed payrolls, the cost saving flowed to the corporate bottom line. Profits jumped 13.4% during the July-September 2009 period at an annualized rate. That’s the biggest percentage gain since 2004.
Meantime, consumer spending wasn’t quite as strong as originally estimated in the first print of the GDP report. Consumer spending was revised down to a 2.07% increase from 2.36% initially.
In addition, imports exceeded exports by a higher degree than originally calculated. The change helped trim the second round of estimating GDP for Q3. The U.S. appetite for foreign goods and services surged nearly 21% in the third quarter, the most since 1985.
Inventories slipped a bit more than the first Q3 GDP numbers advised, dropping by a bit more than $133 billion. That’s slightly more than the $130.8 billion initially reported. But that may be good news in the sense that the inventory drop implies that production will ramp up that much more in the future to compensate for lower supplies.
But don’t start celebrating just yet. Perhaps we should wait for the third and final estimate of Q3 GDP, which will be dispensed on December 22, just in time for the holidays.

Are the days of the jobless recovery numbered? Yes, according to the latest survey that was released today.
The Capital Spectator has obtained a copy of the full report. Among the highlights:
* NABE-member economists predict a moderately higher pace of economic growth for this year’s fourth quarter compared to the outlook made in October. According to the report, “The fourth quarter of 2009 is now slated for a 3.0 percent pace of real GDP growth and 2010 is predicted to experience a gain of 3.2 percent over its four quarters. For the two years combined, growth is expected to be one-half of a percentage point above the forecast made in October. Economic growth is projected to slightly exceed its trend pace—which NABE panelists estimate at 2.7 percent—over the next five quarters.”
* The household sector is still expected to post sluggish results for the near term. “Past wealth losses, and initially stagnant employment conditions,” the NABE advises, “are predicted to result in lackluster consumer spending gains over the coming year.”
* Meanwhile, the recovery “will not remain jobless for long,” the report forecasts. “With more than 7.3 million jobs lost since December 2007, NABE panelists believe the end of net employment losses is near, with modest declines during the fourth quarter followed by a ‘bottom’ in the first quarter of 2010 and gains thereafter.”

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Sovereign risk doesn’t usually dominate the headlines on any given day, but in the wake of last year’s financial cataclysm there’s a sharper focus on the fallout that flows from governments that mismanage their debt and economy.
The elephant in the room, of course, is the U.S. The discussion of America’s fiscal condition has heated up in recent history for obvious reasons, starting with ballooning debt. As the overseer of the world’s reserve currency, which happens to reside in the world’s largest economy, the U.S. enjoys certain advantages that other nations can only dream of. That includes the ability to harbor mountains of red ink.

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Everyone knows it’s coming, but when? Everyone recognizes that at some point it’s essential, but the associated benefits and risks are debatable.
One thing we can be reasonable sure of, as we discussed on Monday, is that central bankers are prone to misjudge the future. Indeed, there’s plenty of that to go around. In any case, it comes with the territory when wielding supernatural decisions over money with the conventional processing power of wetware.

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