I gave a talk on Thursday night at the New York Investing Club meeting.

The basic points:

Gold does well when real rates of return are low. Real rates describe the price of gold much better than inflation alone. This is because real rates reflect the opportunity cost of holding a relatively useless asset. Part of the reason gold seems irrational is that this extrinsic pricing is unintuitive and largely unappreciated.

Gold does well when liquidity, measured for example by LIBOR, is not especially tight.

Sentiment can be predictive with gold.

The &#8220-extrinsic&#8221- way of thinking is natural in the fx world where all trades are two?sided, and the idealized one?sided currency , e.g. Dollar Index, is a weighted average of two?sided rates. Other examples: the Fed Model and Dividend Discount models explicitly tie together the pricing of equities and interest rates. The housing bubble was to some extent already a mispricing of money in the form of interest rates. What was the “right” price for housing given the price of money?

Do people who claim that assets exhibit “irrational” moves have a clear idea of what level of volatility would be “rational”, especially given such cross?influences? I do not endorse the Dividend Discount Model, but no-one can deny that it is a fundamental model, and it predicts higher volatility when rates are low. Given current levels, a 10% one day drop of the market is by no means absurd. The stock market should also have more idiosyncratic volatility when it is driven by &#8220-top-down&#8221- policy, rather than averaging many &#8220-bottom-ups.&#8221-

There is perhaps a &#8220-long-termism&#8221- fallacy. Even if prices change glacially, if you want to maintain a portfolio limited to 30 stocks out of a universe of 6000, it is easy to see how a sensible person might change the &#8220-best ideas&#8221- list with some frequency. The more prices change, the more frequent portfolio changes would be in order from a valuation standpoint. Again, asset prices are not hermetically sealed, one?sided meanings and values. There is always some discount factor or relative valuation at play.

The easiest way to achieve a shock “20 standard deviation” move is to just not mark (or mis?mark) for a while. Deferral of pricing is much more likely than active trading to originate an explosion large enough to affect the underlying economy. Deferral of pricing, not active trading, played a large role in the corporate credit crisis. Social Security and entitlement programs are also “off balance sheet” debt. At least banks failed to predict the future. Governments failed to predict the past. The basic demographic and longevity trend has been apparent since at least the 1960s.

Demographic trends suggest lower real returns than those seen in the 20th century. Do economists have a demographic blind spot?