Thanks for your kind words. I appreciate it. The Fed is between the rock and the hard place, as I discussed in my october letter, “Instability or Stability”. My conclusion is that we are in a period of inherent instability, since no one, including the Fed, has no idea how this will all play out. If we experience another brush with deflation in 2010, the dollar index may rally to 92.00 or so, which would hurt gold. If Treasury rates climb in a meaningful way, I hope the last person leaving the room turns out the lights.

Jim Welsh

I believe the Fed has trapped itself with its relationary policies that lead to dislocations which then get “solved” with more reflation but now on steroids which then leads to the next dislocation. In my opinion, this does not end well for the liabilities on its balance sheet. Especially when it needs to sell the asset side in a market with lower demand. Consequently they will have to continue to grow its footings as any decline in its growth rate would lead to increases in market rates.

If one takes for example the LEI components – we can see that the economic components (not the monetary elements) are beginning to rollover. It implies that despite the extraordinary monetary and fiscal stimulus the economy is not revving up. As you point out debt/GDP is the real elephant in the room as debt is compounding at a higher rate than GDP. This is as you say clearly not sustainable. And more so when one looks at the added debt of all the unfunded liabilities coming due over the next several years.

But the Catch-22 – if the Fed stops monetization rates pick up magnifying the rollover debt service while impairing any GDP growth opportunity and if they continue the monetization they risk dislocation in currency and bond markets.

Gold is naturally a highly volatile asset and no doubt will see violent corrections – so investing or trading it requires enormous trading discipline – however in an environment of Fed inspired monetary disorder – it is the only “monetary” asset that cannot be inflated. The dollar while nearing its low point from last Spring could see a significant bounce but over the intermediate term is caught in the Fed conundrum relative to gold. Bonds have had a 25 year run and while yields could still see lower lows it too is vulnerable to the political & monetary headwind – deficits will be larger than projected and foreign asset holders (example Japan) may for their own economic reasons need to liquidate – reducing bids at the margin.

Thanks for sharing your views!

Thanks. The same thought crossed my mind.

rallip,

Building more supply is the last thing the housing market needs. With home prices falling and mrotgage rates very low, many young people will be able to afford a home now than when prices were 40% higher, and they can still get PMI so they don’t need 25% down. Plus, FHA only requries 3.5% down. municipalites are going to have a very difficult time in the next few years as their revenue from real estate taxes fall and assistance from their state government is less. the easiest way to improve the securitization process is to requrie the originating bank to retain 5% to 10% of the loan and to be first in line to take a hit if the homeowner defaults. The problem with securitization was that no one had any skin in the game, accept of course the investor who bought the mortgages thinking they were AAA becasue a rating agency said they were.

Jim Welsh

Perhaps one palliative is to give tax and planning incentives to private pension funds to build and buy units designed for rental at controlled (but index-linked) rates. Another might be to tighten things so that failing to pay a mortgage involves some new and lenient ‘chapter’ of personal bankruptcy (to discourage use of the put by those who can afford to pay but don’t see it in their interest to). Other solutions might be shared ownership schemes where a local municipality buys half the capital of a property and charges a modest rent but participates in their share of the upside when the property is sold.

Finally a relaunch of private mortgages might be helped if the SEC would create a set of mandatory standards for their securitization, a little like the Securities Act of 1933.

Your criticism is s0mewhat justified, and I am fairly religious about stops. This is the first time that I can remember pulling a stop ($1,115). As I noted, it is unusual for any market to reach 90%+ bulls and not undergo a correction. In recent years, gold has routinely topped within a short time after a 90% bull reading. In this instance the 90% of bulls has reached 20 days and counting. This is a rare event and suggests that when/if gold ever stops going up, it will represent more than just a short term top.

Joe,

Get off your hobby horse. Whether the chart is linear or log, it is the form of the pattern that is the point of the comparison to the debt versus GDP chart. If debt versus GDP unwinds as other parabolic charts have, we’re in trouble, whether log or linear.

Jim Welsh

“Short 33% now ($106.82), 33% above $107.50, and 33% if it trades up to $108.50 to $110.50.(Avg $107.94)”

adding to a position as it goes in your face is a no-no in trading. Pretty basic stuff. Maybe I missed a memo or something…..

agreed, adding to gold doesn’t make a lot of sense right here.