<the following is an excerpt from our GMR Blog>

Reminder: this little blog is simply my tool to remind myself and any readers of my thoughts and anything else I deem important - more extensive charts and/or analysis takes place in the GMR Newsletter and GMR Flashes. Usually, this blog is updated periodically throughout the day / week.

US Market Events / Highlights:

My Market Notes:

• a democratic President and Congress may try to socialize the credit crunch losses with higher taxes and spending programs --> puts more pressure on US Dollar. I see $1.63 to Euro in next months

• Jim Rogers is right : Bernanke is a loose cannon on deck - privatizing profits while he is socializing the Wall Street bank losses.
• There may be one more attempt to re-inflate the economies out of despair ... read more below
• In the GMR Letter I wrote about a foreseen rise in US bankruptcies in the business sector ... see article
• and some interesting numbers : out of 1000 people : in China, only 22 out of 1000 people have a car, in Germany it is 487 out of 1000 and in the US, it is 800+ out of 1000 who own a car. If you think China does not need raw resources like copper, steel, coal, zinc, etc. you must be dreaming. Every day in Peking, 1000 new autos enter the road system
• The banking sector has further losses in the pipeline - we may see hundreds of US banks fail as I warned of in the GMR Letter
• My long-held 1st level targets of 11.000 DOW and 6000 DAX have been recently met - now we have a small rally bounce - I expect these targets to again be breached in Q3

Black Swans

"An economic storm is brewing - of unimaginable magnitude - but nobody cares." That is a thought which keeps going over and over in my mind. And that is why I advise holding some gold. Something real I can touch. The more the better. People do not understand this concept - only a very few do.

The outlook:

Peter Spencer, Ernst & Young's chief economist, said: "Both on the high street and in the housing market, it will get a great deal worse before it gets better."

He added that the economy will struggle to avoid recession next year, with predicted GDP growth of only 1 per cent. "Our worry is that without the usual medication from the Bank of England, consumers will move from their current state of denial into a state of despair."

But Mr Spencer said this profligacy was no surprise. "As we have consistently warned, both the consumer and the Government have been living beyond their means for the last few years, overborrowing on credit. Households will be lucky to see real disposable income growth of 1 per cent this year. With repayments becoming more onerous, rising inflation and sharp reversals in the housing and equity markets, consumers are under increasing pressure."

Black swans were said not to exist, until one day they were spotted in Australia in the 17th century.

In talking with a few friends - I have received some incredulous, well-meant but still sinister remarks concerning my Blog entry Meltdown with respect to the 3rd part regarding capitulation on part of central banks. The main idea of that entry, was that central banks will have to lower rates again to "re-inflate" the economy (which is not growing), borders on the insane, I am told. (which is equivalent to a Black Swan, in my eyes) - it can't happen.

• 3rd part : CAPITULATION : this is currently my working thesis -I may be wrong .... but Kondratieff says that after a period of rate hikes, the central bankers will finally capitulate and lower rates once again to try and kick-start the economy out of an obvious depressionary-like situation ... which is exactly what Japan did and has been at an interest rate level of 0.5% for ages which of course caused the carry trade which of course caused massive speculation on cheap Yen borrowing which caused.... you get the picture. Let's watch this theory a bit closer. If so, I believe we may be facing the forerunner of a hyperinflationary scenario and complete collapse of the US Dollar - hard to believe, but so was the collapse of the Roman Empire to every Roman.

Now, I admit that it may not happen. Likewise, I remind you, that this is not MY theory, it is the theory put forth by Nicolai Kondratieff - I am simply the messenger of possibly incredulous news. The K-Cycle splits the real economy into 4 periods : Spring, Summer, Autumn and Winter. He himself claimed a Winter Cycle had begun in the period just after World War I or around 1920 and it lasted until somewhere around 1950, with the highlight being the 1929 Depression. Depending on various research, a complete K-Cycle happens in a period of 40 to 60 years.

From 1950 to 2008 is 58 years. But that would imply that the Winter Season part of the cycle is just ending, NOT beginning. How to account for this shift in time ? The answer may lie in the fact that since about 1995 monetary M2 under Greenspan really started to move higher (see graphic of M2 - upper portion - remember, I made this chart 2 years ago). Note: I just checked the M2 figure - it is EXACTLY as I predicted on the chart below taking the given actual curve extrapolated out to mid 2008. This may have caused a "bastardisation" of the economic K-Cycle. By delaying and moving out the "pain" period experienced in the Tech-Bubble-Bursting of 2000, this avoided, short-term, the cleansing of bad investments but only to re-visit us 9 years later. And with it an even larger mal-investment to be cleansed.

We know throughout history that periods of credit-induced expansions are followed by mal-investment, greed and ultimately a bursting of the bubble leading to a credit crunch. This time would appear to be no exception to historical guidelines.

Additionally, as I have already stated also, we must not mix or confuse economic cycles with stock market cycles. We may see a "cleansing" in one or we may see a bear rally in the other. In any case, it is human nature to try and reverse the economic pain by either a re-inflationary policy of lower rates (monetary policy) or via a fiscal policy of a massive internal spending program led by the ruling class a la FDR to re-inflate the economy through massive central-bank led spending programs.

Just today, Blanchflower of the Bank of England's Monetary Policy Committee, has said:

Blanchflower has regularly pressed for more aggressive rate cuts by the MPC, which lowered its key rate three times between December and April to 5%. The MPC has remained on hold since April as inflation pressures mounted.

"I think we are going into recession and we are probably in one right now," Blanchflower told the Guardian newspaper. "It's not too late to stop it but we have to act right now. Monetary policy has been far too tight for too long."

and

Peter Spencer, Ernst & Young Item Club chief economist : "We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled," Spencer said. "Our worry is that without the usual medication from the Bank of England -- which would have nasty inflationary side effects in this environment -- the consumer will follow suit, moving from their current state of denial into a state of despair."

The most frightening Black Swan I can see in this respect is the (insert any Central Bank here) stating that core inflation is only 4%, or whatever, when in fact real inflation may be nearly 10% or more. Hence, the governments inflation lies and scams being told to consumers may be their eventual downfall - by implementing a re-inflationary rate policy to kick-start the economy with 4% baseline inflation does not nearly sound or look so bad as that same policy with a 12% baseline inflation. Hence, by disingeniuously stating inflation to be at a far lower level than reality, they leave the door open for more inflation by likely stating that we can squeak out a bit more growth by lowering rates without risking too much more inflation. That is a plausible spin on things, as stated above by Mr. Blanchflower.

Again, let's summarize and understand : there are currently 2 hypotheses on the table :

• interest rates will have to dramatically rise (Which almost every person is repeating in matra-type fashion)
• or, interest rates will need to fall in line with the theory of a capitulation-type scenario set forth under a Kondratieff Winter

Recent history of the last 8 years has shown us that if politicians can lie and cheat and get away with it, while the consumers continue to swallow it all, then why not try the re-inflationary route. It's less painful and can be spun continuously as a good story.

If that's in the pipeline, then get all the commodities you can get your hands on.

Come join us - we have an excellent track record of calling the markets - private and institutional investors in 45+ countries.

Best regards from the GMR,