Gyroscopic Investing

Swiss money manager Felix Zulauf shared his market views at a Barron’s conference, and according to Robin Blumenthal, much of it was grim:

“Most of the banks are not sound,”? Zulauf told the audience of 250. “The crisis has only begun; there will be a long-term process of one mini-crisis after another.”?

Zulauf, a Barron’s Roundtable member who raised the possibility of further Fed easing last January, when most pundits were anticipating tightening, said the next few years “could be the setup for much higher inflation later.”? In response to a question about how the current mess differs from the 1930s, he quipped that “central banks can keep the economy afloat forever. At QE33, the Fed will own the whole system,”? a reference to the possibility that Fed stimulus could go on indefinitely. The resulting inflation would lead to “the destruction of the currency,”? he said.

The prescient macro-focused money manager likened investing in the industrialized world to “moving deck chairs around on the Titanic.”? Among the possible icebergs: a Greek default, a 30% drop in Spanish real-estate values and a German popular revolt against the government’s support of fiscally irresponsible European Union members. Zulauf said investors should be focused on where to store their money, because “you might not be able to get it out when you want it.”?

He suggests a portfolio that is 20% in gold (he accurately predicted in 2009 that gold would hit $1,300 this year); 30% to 40% in mostly emerging-market equities; and the rest in three-year government bonds, denominated in such currencies as the Singapore dollar and the Swiss franc.

Video interview with Zulauf is here:  http://www.ritholtz.com/blog/2010/10/fe ... rike-2500/

I think the Fed has two goals right now - short term and long term.

Short term - Drop interest rates on 30 year mortgages down to around 3%.  This will take another year or so of QE to accomplish, but the goal is basically to allow people in overpriced houses to refinance and take about $400-500 a month off their mortgage payment, so people might take the financial hit and stay in their houses rather than strategically defaulting.  This will also have the effect of maintaining artificially high house prices as interest rates and house prices have an inverse correlation to each other.

Long term - Devaluation of the dollar so as to minimize the long term deficit.  For example, if they can devalue the dollar down to 1/10th of it's current value, having $50 trillion in deficit becomes $5 trillion (in today's dollars) which is much easier to pay down.

It makes sense, economically, for the Fed to focus on long-term devaluation of the dollar.  Who knows, when the dollar is devalued sufficiently, they may switch to an alternate currency - trade in $1000 regular dollars for $1 megabuck.

The long term is probably 20-30 years away, but it will be interesting times to live in.  Those that are not adequately protected with their investments will surely suffer a great deal.  I hope the PP stands the test of time as LT treasuries might not be safe over a 30 year time frame.