I was pulled up short at the end of last week by the final paragraph in a daily research note that I am now reading on daily basis – "Lunch with Dave", the regular musings of former Merrill Lynch strategist David Rosenberg, who has now downsized to a Canadian brokerage, Gluskin Sheff.

"And let's just finish off by saying that if there is a shred of truth in what Karl Rove had to say in yesterday's op-ed piece in the Wall Street Journal ('Obama Can't Outsource Afghanistan'), then gold is likely going to go much, much higher than $1,000 an ounce. That's the currency we prefer."

Rosenberg, I should quickly point out, is in the "gobsmacked camp" – a member of that group of market watchers who just can't believe what they have witnessed over recent months. In short, they believe that we are currently in the most dangerous bear market rally witnessed in modern times. Trouble is, as the S&P 500 has gunned its way higher – up 60 per cent from the March lows – equity prices have refused to crack. Rosenberg et al are still waiting for evidence of the "bear".

Some, including Rosenberg, thought it had finally arrived on Friday, when the US Labour department released figures showing far more Americans losing their jobs during September than the financial markets were expecting. The so-called non-farm payroll figure shrank by 263,000 during the month, compared with a consensus forecast of minus 175,000.

Some 1.1 million jobs have been lost in the US since May, despite the huge monetary and fiscal stimulus thrown at the problem, from housing subsidies to the cash-for-clunkers programme.

Of course, the bullish camp, cheering the rally on, repeatedly point out that unemployment is a lagging indicator. Companies do not start hiring again until the economy is well into the upswing after a recession. The point with recent unemployment figures in the US is that the rate of job-cutting seemed to be declining. Things were getting '"less-worse" by the month – an encouraging trend, or so it seemed.

As Rosenberg puts it: "The rose-coloured glass donning set of economists who have been talking about sequential improvement in the data and how 'less negative' the employment numbers have become can't say that after today (thank the good lord). That's because at minus 263,000 on non-farm payrolls, instead of the minus 175,000 print that was widely expected, we actually saw sequential deterioration for the first time since May."

His point is that there is no substantial evidence that the US economy has properly come out of recession – the one glimpse of a positive GDP figure simply being the result of "stimulus-crazed" support from the US Government.

Rosenberg could see reality dawning after the jobless figures on Friday – and an equity crash, perhaps, to clear the air and place stock markets on a realistic footing. After all, the recovery, once it arrives will be slow and faltering, and equity prices are not pricing that in.

"We finally could be in the long-awaited corrective phase in equities that will hopefully give us a chance to ultimately buy the market at more appropriate valuation measures. We have said 850 on the S&P 500 would be an interesting price point."

Well, much to Rosenberg's disappointment, we guess, the "correction phase" did not actually arrive on Friday. Indices such as the Dow and the S&P declined, but not markedly so – drifting back gracefully after the recent turbo-charged rally.

And this is what leads us back to Rosenberg's initial comment, quoted above, on gold – "the currency we prefer". A market correction, if and when it does arrive, should bring an end to the sustained period of dollar weakness we have seen over recent weeks. After all, the dollar remains the world's reserve currency and naturally rises when investors flee to perceived safe-havens, like US treasuries.

Rosenberg doesn't like the look of the dollar long-term, but he doesn't see it losing its losing its reserve currency – yet. He quotes Dennis Gartman, author of the famous Gartman letter: "As Dennis poignantly pointed out, the country that is the dominant military power in the world is always the country that enjoys the status of being the world's reserve currency – and history bears that out from Spain to the Dutch to the British to America. And there is no doubt that the United States is still the world's dominant military power; hence it retains the reserve currency status and the dollar being in a secular bear market has little to do with that."

But for how long? For Rosenberg, the outlook is rather murky, leaving the strategist to declare: "It never ever has paid in the past century to write off the ingenuity and might of the United States, but we may look back a decade or two down the road and view what is happening today as the first signposts that the sun is setting on the hegemony as has been the case with so many other dominant powers in the past.

"To be sure, the fiscal might of the United States has completely eroded as years of pork-barrel overspending, insufficient resources to deal with a dramatic rise in dependency ratios in the near future, and decisions to cut taxes while fighting a prolonged war on terrorisms, have seriously jeopardised America's financial, economic and military dominance. The fact that the current administration is trying to combat a business cycle with 'cash-for- clunkers' and housing subsidies (at a time when the tax system already hugely favours homeownership as it is) shows that fiscal short-termism reigns and that it is completely bereft of ideas of how to plan for the long-term with regards to enhanced capital formation, skills and productivity, and sustainable job creation."

Now you can see why this man at least likes the look of gold.

Given the above, consider the chart here – Goldman Sach's Financial Stress Index.

Last month the reading fell to the lowest level since Goldman began the data series, back in 1990.

Of course, this is all down to government support of the financial system, leading to a sharp reduction in all the various money market variables and spreads used by the investment bank to monitor market stress.

What an extraordinary turnaround from just one year ago.


- The writer is an Associate Editor with the Financial Times

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