* Last week was eerily reminiscent of the mood which prevailed last March, when the stock market was making a low and the nation's auto industry was going bankrupt. I view last week's speech by Obama, on the regulation of the banking system to be pure grandstanding. Having lost the Senate seat in Massachusetts, which was held by Democrats for 50 years, Obama took heed of this wake-up call. I do not doubt the need for the regulation, but there are ways to get things done without scaring the markets. The last time a President sounded so ridiculously aggressive, with bad consequences, was when George Bush told the American people that "The whole house of cards would come tumbling down", if TARP legislation was not passed. This was in late September of 2008, following the Lehman bankruptcy and AIG and Merrill Lynch rescue. In my view of the events, I give Bush more credit for bringing on a collapse in the US economy, on the part of the American people, than I do the Lehman bankruptcy, which so many people wrongly blame, in my opinion.

And so it was with Obama last week. To hear him talk, you'd think the whole house of cards was going to come tumbling down once again. He ended his speech with the statement, "If the banks want a fight, then we are prepared to fight them. He was very aggressive, and this was un-necessary. The stock market is within 5% of its one year high, and the mood was down-right miserable towards the end of last week. In fact, it reminded me of the period from the fall of 2008 through March of 2009. It felt as if the "Ghost of Christmas Past", a year ago, came to visit us.

And here is my take-away to you: While the financial markets have recovered over half its losses from 2007 to 2009, the intensity of emotions last week seemed as if we were still suffering from a bout of financial Armageddon. The reality is that the rally since last March is just a correction in a secular bear market. Last week's sharp (stock) market breakdown erased 10 weeks of gains in just 3 days. As I have reported here over the last few months and weeks, the stock market resembles Wyle Coyote, who chases the Road Runner off a cliff and runs for quite some time on thin air. Eventually the Coyote notices that he is running air, and then drops.

The fundamental underpinnings for a stock market rally have been the incredibly aggressive policies by the US government and governments around the world. And the main premise behind governmental strategies has been to push interest rates to zero, and print and spend money by the trillions. This is not a sustainable strategy, nor can it be repeated many times without having un-intended consequences. In fact, some would argue that the consequences for policies enacted over the last 18 months still has many consequences which have yet to be felt. 

And so I return to my thoughts about the future, and reflect on last week's stock market rout. It felt almost as bad as it did last March, yet prices were comfortably higher than last March. I will admit that there was no panic last week, but I found the mood and tempermant to be down-right ugly. What is it going to feel like when the market trades off over the course of the upcoming year? I can barely think of anyone I know who figures the "great" recession is NOT over. Everyone is bullish on stocks and risk assets. For my part, I still think the stock market goes much lower than the lows of last March, and that last years crisis was just phase 1 of the great depression #2.

Government strategies are being implemented to counter a multi-trillion drop in wealth over the last 3 years. In residential real estate alone, there has been an almost 50% drop, amounting to $7 trillion, in American's equity in their homes. Refer to the attachment I sent out on January 4th, for this information if you want to see this data in a graphical format. For some, it has been a complete wipe out of a family's equity in their home, and a loss of years of savings. The point being that there is a huge hole which the government is attempting to fill, and while their efforts are heroic, I do not believe that the government will succeed. Instead, their policies will have un-intended consequences.

Suppressing rates to record lows encourages people to spend their money, and to invest it in risky strategies. In turn, the government is sending a false message to our society, at a time when our society should be saving. I do believe that there are some positive side effects from massive fiscal and monetary stimulus, and that "investors" feel better and spend more when their stock market portfolios are going up. Yet the piper is going to have to be paid eventually. The minute the government starts acting responsible, and fiscally conservative, is the time which the economy and housing markets are going to fall flat on their faces.

Last week there was talk from many Fed governors about the need for the Fed to end their MBS purchase program, which is supposed to be finished in March with a total portfolio of $1.25 trillion. Before this chatter, I was convinced the Fed would continue this program and expand the size above $1.25 trillion. Over the course of the 15 month program, the Fed will have purchased an average of $4 billion of MBS a day. Currently, they are winding down this program and are buying just under $3 billion a day. There is a Fed meeting this week, and it will be interesting to see if they will stick with ending this program at its expected end time in March. If they do choose to go along with their announced end date, I am convinced that interest rates will rise throughout the rest of the year. Over the past year, the Fed has taken over $7 trillion of duration out of the market via all their investing programs. The only offset I can see to this will be the impact of higher rates on real estate prices, and the subsequent feedback loop in support of the deflationary thesis, which in and of itself, suggests rates should drop. In other words, if the deflationary thesis takes hold, then it is likely that all asset markets will drop, and so will interest rates. Accordingly, I am advising a neutral stance towards rates.

* Gold - along with the sell-off on stocks, and rally in the dollar, Gold was dragged lower last week. In fact, it seems as if gold will be dragged along with stocks and FX. A few readers have inquired about entry points to purchase gold. Here is my view:

1> If you own a lot of gold, as I do, (over 30% of total savings at an average cost of $900), then you should probably stay pat, as there is a decent chance that the deflationary scenario, including a lower stock market presses gold prices much lower;

2> If you own little or no gold, which I describe as being less than 15% of total savings, then I would look to add some gold here ($1080 to $1100, and between $1030 and $1050 an ounce.) These are decent support levels which have served as support before, and could very well act as a break on prices now. Whatever gold you buy, you must be prepared to hold on the way down, so invest according to what your tolerance for paper losses allow.

Why do I own gold? And why would I be willing to sit on such a large part of my savings with the intuition that gold could drop by as much as 50% in price? I own gold as the centerpiece of my HARD core defensive strategy. With the proliferation of money printing and irresponsible deficit spendingby nations around the world, it is only a matter of time before the world's countries adopt a Gold standard. It does not fit within the context of today's reserve strategies of the nations who are accumulating surpluses, but these countries are well on their way to re-evaluating their reserve strategies, and some have started accumulating gold. Gold was the medium by which nation's settled debts for millennium, and the experiment by the US to go off the gold standard in 1971 will prove to be just that, an experiment, which will fail in the end analysis. Because this is predicated on a long term trend shifting, this is a strategy which I believe will take up to 10 years to occur.

And here is a prediction for you: $100,000 of gold today, about 90 ounces, will purchase $1mm of real estate (priced in today's market), in 10 years time. Gold will go up in dollar terms and real estate will go down. The key will be to figure out ways to hold gold, since during times of crisis when the price of gold is likely to jump by multiples, governments usually resort to tactics to deprive their citizens of the fruits from this form of investing, since they decide they need the gold more than their citizens do. This is why I like owning gold in offshore funds not subject to any control by the US, and in off-shore bank accts. Ignore the GLD etf if you plan on holding gold for a very long time. Since the etf is traded on a US exchange, it is subject to US laws, and other controls by the government.