This week I had the pleasure of talking with Nobel Prize economist Dr. Harry Markowitz. We discuss that conversation, and how it ties in with my continued unease with deflation, Paul McCulley's recent essay, the lack of candor from the Federal Reserve, the implications of the dollar bear market, Iraq and more. It will make for a fast-paced e-letter this week, so let's jump right in.

Markowitz received his Nobel prize for a 1952 essay which marked the beginning of Modern Portfolio Theory. Very simplistically, he said you can reduce the overall volatility of your portfolio by diversifying your investments among a group of non-correlating asset classes. When one asset class (such as stocks) was going down, your diversification into bonds and real estate would help hold the value of your portfolio steady.

Today begins a two part series on a framework for investing when the economy starts to recover. It is my belief that investors need to have a consistent philosophy of investing when choosing investments, otherwise your portfolio looks like the local dog pound: a few lonely purebreds mixed in with a lot of mutts. Some of the mutts end up becoming your best friend, but mostly they just mess up the place.