"That's especially true because debt created at points of rapid credit growth is often of fairly low-quality, as we saw in the aftermath of the housing bubble. Lehman and Bear Stearns ran leverage ratios near 30, with disastrous results. Fannie and Freddie's leverage multiples were even higher, at about 40. You might recall that Long-Term Capital Management also ran at a leverage multiple of about 40-to-1 before it imploded. It's probably worth noting that according to the Fed's consolidated balance sheet as of June 8, Ben Bernanke has now taken the Federal Reserve's leverage ratio to 53.4. Fortunately or unfortunately, U.S. taxpayers would automatically end up subsidizing any Fed losses, so unlike commercial banks, the Fed could actually go insolvent without major consequences.
..."Meanwhile, the QE2 trade is essentially unwinding, and our impression is that the Fed's balance sheet is extended enough to make QE3 a difficult (though not impossible) sell. Further economic and market weakness might modify that possibility, but it's not clear how much latitude would be possible for a Fed that is now operating at more than 53-to-1 leverage."
..."Notably, and in contrast to the broad stock and bond markets, our measures of prospective return/risk in gold shares has surged, with falling long-term yields, negative real interest rates, weakening economic statistics and a very high gold/XAU ratio all provoking a distinct jump in our expected return/risk measures for gold stocks (see my 1999 article Going for the Goldfor a discussion of some of these factors). Accordingly, we've built Strategic Total Return's exposure to precious metals shares to nearly 18% of assets, which is significant, but far from the most aggressive 30% exposure that the Fund could hold (which would require stronger inflation pressures and a weaker ISM, combining to create severe pressure on the U.S. dollar)."
http://www.hussman.net/wmc/wmc110613.htm
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