Global Economist Review

Volume 1 Issue 1 February 2, 2009

Is It Here and What Does It Mean?

Page 5

New Stimulus Package Passes House Vote, But Lacks Total SupportCongressman Royce Gives His

SuggestionsPage 16

A trader’s Perspective of the Housing CrisesPage 11

Defl ation:

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CONTENTSGlobal Economist ReviewGlobal Economist Review

Is published FREE bi-weeklyIs published FREE bi-weekly

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Timothy LuCarelliTimothy LuCarelli

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Karen SmithKaren Smith

WebmasterWebmaster

Edgar PatelEdgar Patel

Contributing WritersContributing Writers

Jackie ArrgondizzoJackie Arrgondizzo

Thomas RehbergerThomas Rehberger

Frank McGuireFrank McGuire

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Global Economist Review February 2, 2009 Page 2

Economic HeartBeat

Defl ation: Is It Here and What Does It Mean?By Timothy LuCarelli - Global Economist Review

Page 5

Investment Markets

Technician’s Corner

Test Your Technical AbilitiesBy Frank McGuire - Global Economist Review

Page 10

Trader’s Perspective

Market Driven Answers to our Financial Crisis: When you are in a hole, stop hammering.

By Thomas Rehberger

Page 11

Political Infl uences

New Stimulus Package Passes House Vote,

But Lacks Total SupportBy Jackie Argondizzo - Global Economist Review

Page 16

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From The Editor

Welcome to the premier issue of the Global Economist Review. The main purpose

of this magazine is to bring facts and opinions of real economic related information to

the public without censorship or sensationalism. The Global Economist Review will al-

ways be free and available for printing. We also encourage your feedback. The Global

Economist Review will always adapt to the times and technology to bring the desired

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please let us know and we will do our best to get it on the site.

Every two weeks we will provide articles by some of the most respected writers

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Timothy LuCarelli Timothy LuCarelli Editor-In-Chief and Publisher Global Economist Review [email protected]

Page 3 Global Economist Review February 2, 2009

Global Economist Review February 2, 2009

Economic HeartBeat

A Quote For Deep Thought

“I believe that banking institutions are more dangerous to our liberties than stand-ing armies.... The issuing powers should be taken from the banks and restored to the people to whom it properly belongs.” Thomas Jefferson

Page 4

Defl ation: Is It Here and What Does It Mean?

By Timothy LuCarelli - Global Economist Review

There are really three parts to this ques-tion: 1) What is defl ation? 2) Are we currently or will we in the near future experience defl a-tion? 3) If defl ation does happen what does it mean for the average person? Answering the fi rst part of the question is fairly easy. Webster defi nes it as: “a contraction in the volume of available money or credit that results in a gen-eral decline in prices”. Globally there has been a contraction in the volume of available money in credit, as central banks around the globe have injected over 2.3 trillion (U.S. equivalent dol-lars) into the global fi nancial system during the second half of 2008; a lot of money by anyone’s standards. They did this by direct cash infu-sions and guarantees to banks and fi nancial in-stitutions coupled with open market operations; the lowering of interest rates. Every industrial-ized country’s Central Bank monitors its bank-ing activity so they immediately know when there is a fundamental change in the volume of money and if the banks are extending credit; Central Banks are the glue that keep their coun-try’s banking system together. In June, July and August of 2008, G8 (Group of 8 leading industrialized nations) Central Banks injected capital into their respective banking systems to address a slowdown in the velocity of money. Henry Paulson, Secretary of the Treasury, told the President and Congress that if they did not provide over $700 billion in fresh capital im-mediately, the banking system would fail. By the second week of October, everyone’s worst nightmare had materialized and the credit mar-kets seized up. This was most prevalent in the commercial paper market, where companies go to borrow short-term funds that cover payroll

and other very short- term obligations. The second half of Webster’s defi nition, “a general decline in prices”, is certainly a little easier to see; we all know when prices decline. However, Webster defi nes it as a “general” de-cline which would mean more of a comprehen-sive or overall decline in prices; the price of just about everything falls. In the last 12 months the price of residential real estate has fallen by varying amounts depending on the area. Com-mercial real estate is now showing signs of pric-ing pressures in many markets as well. What is interesting to note about the real estate price de-clines is that it is global in nature. There are de-clining prices for real estate in North America, Europe and Asia. In the recent past, real estate price declines did not spread beyond a particular area; for instance California or the U.S. North-east in the 1990’s. In those markets, at that time, it was strictly due to a corrective phase because of prior rapid price appreciation; global credit was not affected. In the 1990’s Japan also ex-perienced a real estate correction coupled with a collapse of their banking system, but it did not spread outside of Japan. Our current price collapse has followed the same rapid real estate price appreciation and subsequent bleeding into the fi nancial system that Japan experienced in the 1990’s, but this time everyone is affected including Japan. This is a classic case of not enough money in the fi nancial system and slow turnover of available money – slow or no ve-locity on a global scale. Listening to the news and hearing the hoard of economists make their predictions for the year leads us all to believe the economy will

Global Economist Review February 2, 2009Page 5

be better by the end of 2009 or at the very lat-est the middle of 2010. Most economists have come out and stated that we will not have wide-spread defl ation and that the recession will end in the next 12 to 18 months. Let’s just remem-ber it was some of these same economists that 12 months ago were telling everyone that by the end of the year, 2008, we were going to have much higher infl ation and the Federal Reserve was going to have to aggressively raise interest rates. Yes, well they missed that one. Econo-mists usually make predictions by looking at past history and mathematically projecting fu-ture economic trends. Unfortunately, human behavior has yet to be quantifi ed. Therefore, it is not included in economist prediction models. At the beginning of 2008, it was inconceivable that banks would repossess homes and sell them at prices below the note’s value. Also, some economists did not consider what people would do if their property values dropped below the mortgage amount of their home. Some econo-mists also never thought bank executives would become so fearful as to not lend anyone money because they believed they would never be paid back, and that the value of the collateralized

asset would be worth less than the note. Math is absolute and human emotion is dynamically abstract; they are hard to mix into a projec-tion. In addi-tion to the fall in real estate pric-es, commodity prices also have fallen substan-

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8

Non-Farm PayrollsSource: Federal Reserve Bank of St. Louis - FRED

tially over the past 6 months; of course most of those prices were at all time highs. Automo-bile prices have fallen over the past 12 months, especially for large cars and SUV’s. Yes, the increase of the price of oil to almost $150 per barrel had a lot to do with the auto industry discounting car and truck prices, but oil prices have since declined substantially and automo-bile prices continue to fall. Technology prices continue to fall, but that has been happening for years. Probably the most signifi cant drop is that of labor. There are many people that are taking wage cuts to keep their jobs, as well as people that are fi nding new jobs but at a much lower rate of pay. The latest employment num-bers for December show a 7.2% unemployment rate. The reason for these price declines is not as important as the fact that these declines are coupled with a decline in money velocity. These two factors together create a self- perpetuating cycle so commonly referred to as a “defl ation-ary spiral”. In an infl ationary period, everyone is buying to make sure they get the best price because they know that tomorrow it will be more expensive. Defl ation is the complete op-


posite; no one wants to buy today because they know that tomorrow it will be cheaper; thus the reason behind declining prices becomes imma-terial. People do not really care why prices are declining; they are only concerned with getting the best prices. Consumers become accustomed to prices dropping and know if they wait the price will come down even further. By the con-sumer holding off their purchases, companies discount goods further to generate sales, and so the cycle continues until the price becomes low enough for consumers to start buying. Throw into the mix a good dose of job uncertainty and people cut back their spending which further exacerbates the problem. Hence, the downward spiral of pricing. So the answer to the second part of the question “Are we currently or will we in the near future experience defl ation?” has been answered by examining the fi rst part of the question “What is defl ation?”. Yes, it appears by defi nition that we are in a defl ationary spi-ral. The third part of the question, “If defl a-tion does happen what does it mean for the av-erage person?”, will require greater discussion. If we accept the fact that we are in a defl ation-ary spiral and we admit human emotion plays

a signifi cant role, then we can obtain a fairly accurate answer. Government modeling and the reaction-ary nature of human beings can direct changes or prolong an end result. Many industrialized nations have put forth some type of stimulus package that will aid their banks and citizens in the hope of averting a recession, thereby pre-venting defl ation. The government has stepped in with stimulus spending to try and stop an all out re-cession; all this will do is stretch out the length of time until recovery can begin. If they did nothing, in 12 months it would all be over and recovery could begin, but who is willing to pick up the pieces? In the 1930’s the defl ationary pe-riod lasted 4 years; 1930 through 1933. In 1934 the new president, Franklin Roosevelt, imple-mented the New Deal. This put millions of dol-lars into the hands of the average person, low and lower middle class, which in turn spent the money thereby increasing the velocity of money and breaking the defl ationary spiral. The vast majority of the economy, or Gross Domestic Product, comes from the consumer; currently about 67%. During the depression the consum-er made up less of GDP but still a vast majority

Percentage Change in CPI (Y over Y) Source: Federal Reserve Bank of St. Louis - FRED


-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Page 7

of the economy was the consumer and that is why Roosevelt’s New Deal was so successful. President Obama’s administration is promising to implement similar programs as those institut-ed by President Roosevelt in the 1930’s to get cash into the hands of the consumer. If they are successful it will help, but success is also reliant upon how much cash the administration actual-ly gets directly into the hands of consumers that need it and are willing to spend the money. The defl ationary cycle has started and it is very dif-fi cult to stop; pricing, at some point, will seek it’s equilibrium point. Prices, as measured by the Consumer Price Index (CPI), have increased every year since 1955. The price of some items has in-creased more than others. It is the price of these items that will be impacted the most. Human nature is to over-react, that is why fi nancial markets have corrections. Personal consump-tion (consumer spending) makes up 67% of the

economy (the remaining is government spend-ing) and that consumer spending is 100% hu-man emotion. Prices will decline past their equilibrium points and will then increase past their equilibrium points like a bouncing ball; it will take many years for the economy to ob-tain pricing stability after this defl ationary pe-riod. There could and will be books written on this time in our history, some may be titled the Great Depression of the 21st Century. We will not have a clear vision of what to call it until it has passed. How it will end is anyone’s guess at this point. We can conclude that it will be painful, it already has been for some, and we will not know the total population impact until it is over. So, to summarize we have defi ned defl ation, concluded it is here, and that defl a-tion will be painful for the average person. To what extent of pain will depend on that indi-vidual’s employment and economic situation.To go to this articles’s Blog click HERE. GER


http://www.globaleconomistreview.com/wordpress/2009/02/02/deflation-is-it-here-and-what-does-it-mean/


Investment Markets

For Every Action There is an Equal and Opposite Reaction.Sir Issac Newton

Page 9


Technician’s Corner

Test Your Technical Abilitiesby Frank McGuire

At the Global Economist Re-view we will endeavor to pro-vide and promote free think-ing and good constructive arguments that tantalize the mind. Each issue in this sec-tion will look at the technical side of all types of markets; stocks, interest rates, com-modities and real estate. On this page there are 2 charts; one is fairly volatile and the other shows very distinctive chart patterns. We invite you to do your own analy-sis based on the very limited knowledge provided and then answer the questions below each chart on our blog. If you are reading this article online then you can click on the links under each chart. If you are offl ine, then go to our blog page at http://www.globaleconomistreview.com/blogs and click on the “Tech Corner” Blog.

Chart A

The fi rst chart, chart A, has what seems to be some extreme volatility; es-pecially in the second half of the time line. This is not an individual stock chart.First question: Would you be a buyer or seller based on this chart pattern?Second question: Can you pick out any distinguishing patterns?Third question: What market do you think this is?Click HERE to post your answer.

Chart B

The second chart, chart B, has some very distinctive patterns: could be a double top. This is also not a chart of an individual stock.First question: Would you be a buyer or seller based on this chart pattern?Second question: Where is this market going from here?Third question: What market do you think this is?Click HERE to post your answer.

Page 10

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http://www.globaleconomistreview.com/wordpress/2009/02/02/technician%e2%80%99s-corner-test-your-technical-abilities/

http://www.globaleconomistreview.com/blogs.html


Trader’sPerspective

Market Driven Answers to our Financial Crisis: When you

are in a hole, stop hammering.By Thomas Rehberger

You can’t predict the future! However, there is an old saying that if you can’t predict the future, then the next best thing is to create it. I would like to propose a way to save the homeowner that also creates jobs. In order to do it, we will have to become a bit more so-cialistic, but the advantages could be worth the unintended consequences. Our problem is that we have too many homes. People can’t move and the economy is not effi cient. We also face the prospect of continuing downward pressure on home prices from the weakening economy. As the economy slows, land, labor and com-modity prices decline and new homes become cheaper and cheaper to build. Let’s explore what we can do about both this and the future of housing prices. Now that we have nationalized the banks (you could say they are not nationalized, but the government owns a stock in them), let’s be-come fully socialized and save the homeowner. Nationalizing the banks did not solve the cri-sis; it just kept the banking system from im-ploding. If we are going to make any headway on this credit crisis we have to give investors something to invest in and banks some assets to lend against that will hold their value and start to show some appreciation. I chose hous-ing because I own a house in Las Vegas and I

would love to see it stop going down in value (disclosure).The home is the largest asset that most Americans own. Stable or rising home prices are what we need right now. So here is the plan:Central Planning US style! Step 1) Create a national housing and or building department for a 5 year term. This U.S. housing permit department would have the power to set housing limits over state and local building departments for the next 5 years. The same thing could also be done with an exces-sive national tax on building new homes. The tax must be onerous and applied to all home building, apartments and condos everywhere in the US. These ideas are not new and have been done in other areas of the economy to support prices. Sugar subsidies for example. Step 2) Ban all new building for 5 years or tax all new homes being built from 2009 to 2013. No apartments, No condos, No new homes. (A capital gains tax of zero on any home purchased from 2009 to 2013 would be a nice bonus for the “smart housing plan”. Let’s give investors a couple of big incentives to buy houses; higher prices and lower taxes.)Yes, I know there will be problems with this plan on many levels, but hear me out before you go down all those thorny roads. We need a very clear shortage of housing to get people to buy houses and get the home prices to stop go-ing down (defl ating) and start going up. I know there is a big slowdown in building right now through natural market forces, but we need a very direct and clear view of the future of home

Page 11


prices for the next 5 years. Then people can buy houses with confi dence. What would happen if we have housing shortage (let’s call it a “smart housing plan”)?

1. People who are thinking about buying a house right now could buy a house right now. 2. People who own homes will fi ght to stay in them because prices might rise. 3. Speculators will buy houses because they could make a profi t. (there is always risk in any investment) 4. People will borrow and banks will lend the signifi cant amounts of money that we have giv-en them. They will lend with some confi dence that the homes might be worth it.5. The current low in-terest rates will be put to use for the home owner almost immediately.

I want to be clear; we need clarity in the oth-erwise obscured visibility hanging over the economy. If this building department or tax were enacted, congress must not muddy the water with 400 pages of rules and pork. It must clearly say “there will be no more houses”. Is that clear? We have plenty of data to show house prices rise at the rate of infl ation plus approx-imately .2 % over the very long run. Houses became over valued from 2000 to 2006 accord-ing to the long term historical data*. The “smart housing plan” will help houses stay over valued

until things catch up by 2020. If things continue as they did for the last 200 years, home prices would normally double about every 20 years (see infl ation). If we don’t limit housing, we could wait another 15 years or more (barring a deep recession) and prices will be back at the highs of 2006. If you don’t want to wait, then create a housing shortage over the next 5 years and we could be at the highs much sooner. We

could discuss what to do when local home shortages arise, but for now, let’s just hope they do. Yes I’m talk-ing about creating another bubble in home prices, but lenders must stick to strict lending standards to keep it in control. Mortgages must become a valuable invest-ment again. If the lenders have good origination and we have a looming hous-ing shortage the “smart housing plan” would have a chance of doing its job. We need stable home pric-es to cure the last housing bubble. A bit of the hair of the dog, if you please? Step 3) Pass laws mandating that all public buildings must be remod-eled or rebuilt to LEED

(Leadership in Energy and Environmental De-sign) energy effi ciency levels over the next 5 years, with at minimum 30% energy savings in their local climate. Offer huge tax incentives to anybody who can afford to remodel their home or offi ce building up to local LEED standards and increase energy effi ciency. Enact a nation-al green building code for all public buildings, housing and offi ce buildings and enforce it.

Our problem is that we have

too many homes.

People can’t move and the

economy is not effi cient.

Page 12


This simple 3 step process will have im-mediate impact on the housing market if it is done with clarity and purposefulness. The im-pact will be market driven. People will real-ize that homes will not be available in the not too distant future. This “smart housing plan” is very socialistic and not at all what I want for my country, but we need to stop the defl a-tion and keep people from leaving their homes. Let’s not pour any more money into the hands of banks who can’t lend. Let’s not subsidize builders, but give them real direction that will help our future. A “smart housing plan” could make sense with the right directives in place for builders and the right incentives for home own-ers and investors.Tom Rehberger President Private Asset Group LLC www.INVESTpag.com

Home builders and developers will be up in arms after step 2 even though they helped to create the huge home inventory. So this last step is to give the builders something to do over the next 5 years. I realize this will cost us something, but we should all be very willing to pay for energy effi ciency. We will need it in the future, so let’s get it done now when we need the jobs. If we direct our builders and spend money on energy effi ciency, the net effect dur-ing the next energy shortage would be worth the current cost. These construction jobs, along with the much talked about build out in infra-structure should create more jobs and income to buy homes. Remember, we face continued pressure on home prices as materials, land and labor get less and less expensive as the econo-my slows down. This factor alone will create a downward spiral on prices that will be very destructive.

*Long-term perspectives on the current boom in home prices by R. Shiller.Disclaimer: This article is the opinion of Tom Rehberger and is not the opinion of Private Asset Group or C B Securities. It may contain forward looking statements. This release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E the Securities Exchange Act of 1934, as amended and such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. “Forward-looking statements” describe future expectations, plans, results, or strategies and are generally preceded by words such as “may”, “future”, “plan” or “planned”, “will” or “should”, “expected,” “anticipates”, “draft”, “eventually” or “projected”. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors, and other risks.This article shall not be construed or interpreted as a solicitation to sell or offer to sell any fi nancial assets or in-vestment advisory services by Private Asset Group or Tom Rehberger. Please contact Private Asset Group LLC for information about our services.There is risk of loss in investing. Please read the complete disclosure page available at www.INVESTpag.com. Past performance is not indicative of future results. Do not invest without discussing any investment with your investment advisor. The Adviser does not attempt to furnish personalized investment advice or services through this publication. Some of the information given in this publication has been produced by unaffi liated third parties and, while it is deemed reliable, the Adviser does not guarantee its timeliness, sequence, accuracy, adequacy, or completeness and makes no warranties with respect to results to be obtained from its use.

Page 13

http://www.investpag.com


http://www.investpag.com


Political Influences

Consciously or unconsciously, every one of us does render some service or other. If we cultivate the habit of doing this service de-liberately, our desire for service will steadi-ly grow stronger, and will make, not only our own happiness, but that of the world at large.Mahatma Gandhi

Page 15

New Stimulus Package Passes House Vote, But Lacks Total SupportBy Jackie Argondizzo - Global Economist Review

The House Democrats passed the stim-ulus package last Wednesday, January 28th, without a single Republican vote. On Friday, Senator John McCain was quick to point out that the GOP was not even consulted on the drafting of the Bill. President Obama has repeat-edly stated that under his administration there would be no petty squabbling and both sides would be allowed to be heard and considered. This stimulus package is larger than the TARP pack-age passed and implement-ed in October 2008; $810 billion versus $750 billion of TARP. Many of the Re-publican Congressmen claim that they did not vote for the package because it contained too many proj-ects that simply would not provide immediate help for those people desperately in need of immediate assis-tance. Since the vote was so one sided, we the Global Economist Review staff, decided it would be a good idea to speak with some of the Republican Congressmen that sit on the House Financial Services Committee to get fi rst-hand explana-tions. Unfortunately, Thursday afternoon when we attempted to call a few Republican Con-gressmen, they were all on their way to a “Re-publican Retreat” for a long weekend. All of their press people referred us to their respective websites where they had posted press releases regarding the Bill and the vote. One Congress-man’s press secretary was very accommodat-

ing and told us that she would get back to us. After speaking with all the press secretaries we followed up with e-mails containing the fol-lowing:

What are some key points the Congressman would like to see in a stimulus package and/or what would he like to see done at this time to fi nancially help out the American people? What would he propose we do? What are

some of his ideas? We heard from Congress-man Royce, Representative of the 40th District of Cali-fornia argues on his web-site, http://royce.house.gov/, that the funds should come from the “private sec-tor” and not “redistributing taxpayer money through the government”. Con-gressman Royce’s response to our questions provided greater insight to his online press release and presents several ideas that involve

no taxpayer money. Here is the Congressman’s response to our questions:

While the Democrat’s stimulus plan will stimulate the federal government and saddle the American taxpayers with nearly another $1 trillion in debt, I believe there is an alter-native method that will not cost the Ameri-can taxpayers anything. Below are a few steps Congress can take that will help US homeowners, our capital markets and our economy recover from this diffi cult period.

While the Democrat’s stim-ulus plan will stimulate the

federal government and saddle the American tax-

payers with nearly another $1 trillion in debt, I believe

there is an alternative method that will not cost the American taxpayers

anything.Congressman Edward R. Royce


• The bursting of the housing bubble was central to many of the problems we are seeing today in our capital markets and the broader economy. A bottoming in the housing industry is a necessary step in the broader economic recovery effort. The Hope Now Alliance has made signifi cant strides in mitigating unnecessary foreclo-sures. In 2008 alone, they prevented 2.2 million foreclosures. However, more work can be done. Currently the mortgage ser-vicers are choosing not to come to the ta-ble to work on restructuring some of these toxic loans. Because they face the threat of class action lawsuits by a battery of op-portunistic trial lawyers, many of the mort-gage servicers have abstained from major restructuring efforts. If Congress enacted legislation to protect mortgage servicers from the threat of class action lawsuits, I believe signifi cant strides could be made in the foreclosure mitigation efforts. • Beyond a recovery in the housing sec-tor, I believe we can take steps to encour-age additional investments into our capital markets. For instance, roughly $400 billion of private capital is available if Congress acted to raise the limit on private equity investments. Because of this arbitrary cap, private equity fi rms cannot take a control-ling stake in a struggling bank to make it more effi cient and profi table. If Congress acted to lift this cap these fi rms will bring in a large amount of capital and can help replenish the system. • Mark-to-market accounting has unnec-essarily pummeled many of our fi nancial institutions in recent months. While well-intentioned, this rule has forced these fi rms to take signifi cant write-downs exacerbat-ing an already diffi cult period in our capi-tal markets. In short, forcing companies to

mark down assets every quarter to refl ect the market value (or lack there of) has done a great deal of damage to our fi nancial sys-tem. If Congress took steps to temporarily suspend mark-to-market accounting, our fi nancial institutions would be better off and better suited to withstand the current economic downturn.

Our thanks to Congressman Royce for some very creative ideas. While these ideas may not be the “end-all” solution they certainly warrant consideration. To go to this article’s Blog click HERE.

GER

Global Economist Review February 2, 2009Page 17

http://www.globaleconomistreview.com/wordpress/2009/02/02/new-stimulus-package-passes-house-vote-but-lacks-total-support/

http://www.americanblastenergydrink.com

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