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report
1st September 2009
Defence is sometimes the best means of attack
It’s ofcial, the great recession of 2008-09 is over. The IMF toldus that on the 18 August 2009 and Ben Bernanke said three dayslater that the “prospects for a return to growth in the near-termappear good”. Nomura’s economic team wrote on the same day: “The Great Global Recession is drawing to an end. Its uniquenessand the policy responses informed by Japan’s mistakes make arelapse unlikely.” While the debate about the sustainability of the recovery rages,the majority are ignoring the power of the giant wrecking ballheading our way – a sort of nancial version of the legendaryNibiru/Planet X made famous in the writings of Zecharia Sitchin.In a poll of economists by the Wall Street Journal earlier this month,the majority were in favour of Bernanke being re-appointed fora second term – an implicit approval of his policies. Obama dulyappointed Bernanke for a second term and was gushing in hispraise: “Ben approached a nancial system on the verge of collapse withcalm and wisdom, with bold action and out-of-the box thinking…” 
Contact/additions to distribution:
Paul Mylchreestpaul@thunderroadreport.com
This issue:
Defence is sometimes thebest means of attack
Fed’s reation policy about to
be testedChinese government is telling1.3bn people to buy gold andsilverDo India and China haveenough wheat (redux)?Post script - the man in theClapham health food store
 
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© Thunder Road Report - 1 September 2009
I’ll give him “bold”, but “out-of-the-box thinking”, do me a favour. It’s nothing more than an extremeversion of the easy money policies which have been pursued since the late-1980s. Bernanke should havequit while he was ahead. Most mainstream criticism of Bernanke goes as far as arguing that he doesn’thave a well enough dened exit strategy and there could be a bit of an ination problem down the track.Surely the lesson dished out by nancial markets during the last decade is that prolonged periods of cheapmoney lead to inevitable, and severe, crises. The US Fed Funds remains at 0-0.25%, with no prospect of change, and Bernanke gets off almost scot-free in the mainstream media. Even Oliver Stone warned of the dangers in the opening scene on the trading oor in the movie, Wall Street. Hal Halbrook played LouMannheim, a kind of “elder statesman” in the markets: “The country’s going to hell faster than when that son-of-a-b*tch Roosevelt was in charge. Too much cheapmoney sloshing around the world. The worst mistake we ever made was letting Nixon get off the GoldStandard.” The National Association of Ination nailed it: “President Obama reappointed Ben Bernanke as Federal Reserve Chairman on Tuesday and it is unbelievablehow everybody in Washington and the mainstream media is praising Bernanke for helping prevent the nextGreat Depression, as if the economic crisis is already over. It’s unfortunate how forgetful Washington is andhow the media fails to talk about how Bernanke has simply taken Alan Greenspan’s mistakes and madethem bigger. Nobody has the foresight to see the disaster that lies ahead because of Bernanke…WhileGreenspan’s destructive actions gave our economy a high that lasted for a good ve years, today thereare no more asset bubbles in the U.S. left to inate (Treasuries are the current bubble, Paul). All of theination being created will soon drive up the prices of gold, silver, agriculture, oil, and other commodities.Unfortunately, our country does not produce enough of these commodities to benet from the upcomingboom. Most of our wealth will be transferred abroad and the only people in America who will benet arethose with the cash to purchase these commodities and the stocks of the companies that produce them.” When it starts to go wrong, my prediction is that he’ll be out fast and replaced by Larry “Gibson’s Paradoxand the Gold Standard” Summers. The reality is that the liabilities in the nancial and housing sectorsdidn’t just magically disappear, they were just transferred from the private sector to the public sector – withexpenditure, commitments and pledges in excess of US$11trn for the US alone.Mark Zandi of Moody’s Economy.com published a chart back in June which Eric Sprott of Sprott AssetManagement resurrected in his latest newsletter “Beyond the Stimulus”. This shows how the US$787bnstimulus programme in the US should have its maximum impact in the current quarter.
 
3
© Thunder Road Report - 1 September 2009
As Eric Sprott argues “That’s right – this is as good as it gets”. In a similar vein, the “Cash for Clunkers” scheme is now over having run from 27 July 2009 to 24 August 2009. This mini bubble in the car marketled to the sale of an additional 690,114 vehicles and is likely to have taken the SAAR (seasonally adjustedannual rate) for US car sales to 15-16m in August. The problem is that car sales were running below 10.0min during the rst six months and are likely to drop back sharply in September. GS has estimated that theincremental sales together with the inventory replenishment could add 0.8% to US GDP growth duringH209.We’re only a month away from the fourth quarter now when, unless there’s more traction than I can see tothis recovery, the Fed’s reation strategy is going to be severely tested. Sprott again: “It is our view that the world’s combined government stimuli have completely distorted the global economyin the short term and have encouraged a false sense of hope in the stock market.” And then he asks a poignant question: “So what happens next? Will the Keynesian miracle take hold? Will the recovery be strong enough to payback the increased debt load which was needed to jolt the economy back to life?” I don’t think so. In the meantime, the consensus of opinion is that the recovery will be sustained through2010. I think that there is a real risk that many commentators are merely extrapolating current conditionsinto the future. This is far from new, as SocGen’s strategist, Albert Edwards, showed in a recent chart:
 
Too often economists forecast the status quo on growth
 
Source: SocGen
As an aside, I was sent another SocGen strategy piece back in June with a proposed reading list forthe Summer. On it where classics like Reminiscences of a Stock Operator (Edwin Lefevre) and SecurityAnalysis (Benjamin Graham & David Dodd), modern stuff like Fooled by Randomness (Nassim Taleb) andContrarian Investment Strategies (David Dremen) and some interesting left-eld selections on psychologylike Stumbling upon Happiness (Daniel Gilbert) and Robot’s Rebellion (Keith Stanovich).Like blogs linking to blogs, sharing reading habits (intellectual capital?) seems to be popular. Adam C. sentme a link to a reading list proposed by Blue Ridge Capital and I’ve noticed that Mike (Mish) Shedlock hasone on the front page of his blog. I can’t walk into somebody’s house without looking at what books theyhave on their bookshelves. I’m a compulsive book buyer - a “neurosis” according to my wife. This is whatI’ve been reading over the Summer:
B
The Unied Cycle Theory – how cycles dominate the structure of the universe and inuence life on earth(Stephen J. Puetz):
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