The main issue is that, at the 2006 peak, housing affordability was half of what it should be.  Houses were costing six times income, versus a historical level of three times income. That has to correct.  One small positive trend is that the Fed is leaning on banks to renegotiate the terms of mortgages.  That shares the pain between homebuyers and the banks and will stabilize the housing market.  The bad news is it will stabilize home prices above the true price.  It will take a decade for supply and demand to get back into balance. 

The economy can recover without housing.  The problem with the economy was that it was built on an artificial housing market.  The government wanted a housing bubble (but not necessarily liar loans) as a way to maintain aggregate demand.  We need to build a stronger foundation for our economy, part of which is infrastructure.  One of the bad consequences of the housing bubble was it diverted money from these more important projects.  We also need to rebuild our manufacturing base, not just in terms of plants and machinery, but in terms of the technology, like computer-aided design, that supports manufacturing.  Once we start investing and build our export base, we will have a more balanced economy.  I would like to see a trade-led economy instead of a consumption-oriented housing-led economy.

China can grow faster than 5 or 6 percent.  Since 1980, China had been growing at 9 percent.  But 3 percent was true growth and 6 percent was just to catch up with the rest of the world.  China is trying to do in 50 years what the US did in 150 years.  If China goes to 6 percent growth, it is like zero growth in US terms.

I expect that China will grow less than 9 percent for one to two years while US demand slows.

The most attractive markets are in the southern hemisphere: Brazil, South Africa, Australia, and New Zealand.  The fairly simple reason is that these markets are less dependent on the US and European economies than any northern hemisphere countries.  Australia has a self-contained economy, with a lot of dependence on agriculture.  Brazil, South Africa and New Zealand are similarly insulated from the rest of world. But they are attractive only on the curve.

Our overall asset allocation is one-third gold and gold-related stocks and the Prudent Bear fund, one-third Graham and Dodd stocks, and one-third cash.  We don’t use TIPS for our cash, but probably should.

The main thing is to expect a rough year in 2009 and into 2010, with a rebound 12 to 18 months from now.  We are almost halfway through the tunnel and through the darkest parts.  It is not going to be fun but I see greater opportunities ahead.  When we see the turn, we will increase the stock position at the expense of the other two.