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What monetary, fiscal, or regulatory policies do you believe will be most effective in stimulating the economy?

For a bunch of cultural and economic reasons the economy was in overdrive in the last couple of decades.  Baby boomers created a boom in technology and leverage.  Starting with Woodstock we have done things in a big way.  We have created an economy that others have found hard to sustain. 

The recent actions by the Fed are leading to over-stimulation. There is no quick or easy fix.  The long term fix is to raise the savings rate, which hurts the economy in the short term.  The period of greatest national prosperity in American history was right after World War II, because we had a 20% annualized savings rate for three and a half years following the war.  I hope we won't need another world war to re-start the engine of prosperity.

We need to get the savings rate back into positive territory - greater than 10%.  What would be helpful is Jimmy Carter's "moral equivalent of war."  Carter’s idea was implemented by Paul Volcker, by controlling inflation through interest rates.  That laid the groundwork for the boom of the 1980s.  None of the three Presidential candidates have the strength to wage that battle to increase the savings rate.  It would essentially require increasing interest rates, which would cut consumption but would increase savings.

At the beginning of the year, your portfolio was 1/3 gold, 1/3 cash, and 1/3 Graham and Dodd stocks.  Can you explain the rationale behind that structure, and whether your allocations have changed since then?

Gold is more expensive now than at that time.  It is at the high end of my $800-$900 an ounce range for 2008, so I've traded down my positions. A few stocks have gotten cheaper recently.  I've added Schering Plough to a pharmaceutical position consisting of Pfizer, Johnson & Johnson, and GlaxoSmith Kline, some of which happen to be Warren Buffett choices as well.

Given my forecast for a halving of the Dow, I do not like US equities, except for high-yielding stocks like Pfizer.  I still have a lot of cash, and I am waiting for opportunities in stocks like Schering Plough. 

The pharmaceuticals are still a relatively safe and stable sector.  They are no longer a growth sector, which is why their valuations have come down.  Those I’ve cited are selling at 60% of the market multiple.  I see pharmaceuticals becoming the new utilities.  They now yield more than real utilities.  Investors are being paid dividends in excess of those of the real utilities but with growth prospects.

Is there any additional advice you would offer for advisors with long term horizons?  Is now the time to make adjustments to their asset allocations?

We are in a rather soggy market, and will be for the next 10 years, with downward and not upward pressure.  Advisors will not lose much by holding Treasuries, gold, and developed foreign bonds (European or Canadian).  Because the US markets are so unappealing, you need to be creative in asset classes, like commodities or foreign stocks. 

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