Servias Ministries Blog

One in seven Americans is living at poverty levels which equates 43.6 million people.  This number does not account for the underground cash economy.  Some of these people are not reporting cash payments and are evading the tax system.  By doing this, they do not contribute their share of social security and the tax structure of state and local governments.  They consume the services but avoid paying their share of the costs.  On the other hand, wage destruction of those who are not yet classified at the poverty level would probably offset those who avoid taxes.

Declining interest rates are now moving toward diminishing returns.  When interest rates move lower, the monthly payment difference is not as great as it would be if the rates were above 7-9%.  For instance, a $100,000 loan moving from 7.5% to 6% would save about $100 per month.  From 6.5% to 5% saves $95.  When comparing the savings to the closing costs and upfront cash requirements, the incentive and the ability to lower monthly borrowing costs is reduced.  Couple this with many Americans’ change in credit score and monthly cash flow, you find that lower rates are not functioning as the Federal Reserve had expected.

Energy prices remain high while the American economy suffers.  Why?  The developing countries such as China are taking up the slack in American demand for oil and other sources of energy.  China is now the largest new car market in the world.  Increased commodity prices will translate to higher inflation in food and energy prices.

Home foreclosures are up 25% over last year and home construction is in the tank.  It appears that the weak recovery has just about run its course.  Locally, our economy is in better shape than most but new construction reflects the national trend.  People are pessimistic about the future and are rethinking all purchases.

Savings rates are dismal.  The problem is that there are no truly safe alternatives to cash at this point in time except for gold and silver.  The Fed has reduced rates to benefit the banking system thereby transferring wealth from the savers to the bankers.  The banks enjoyed the profits in the past without the exposure of the offsetting risks of loss.  How sweet it must be!

Gold has hit a new record high.  For those reading the blogs at this website, we have been predicting this event for some time.  NBC Nightly News is now reporting on gold as an investment.  This signals an increase in public awareness which typically causes an increase in overall demand.  The result is higher gold  (and silver) prices.

It wasn’t that long ago you could eat lunch for $5 at the local sandwich shop.  Now the price point is $6.50.  This 30% increase in prices is not reflected in the government numbers but the average citizen feels the pinch.  Utility bills continue to rise and exceed the meager wage increases that employers can pay.  All of this combined causes consumer frustration.  How can the average person save for retirement with all of the stiff economic headwinds.  To some, these are hurricane winds.

Complexity promotes diminishing returns.  The automobile is a great example.  In the 1960’s, I could replace the starter, alternator, and thermostat.  Today, the engine has become too complex for the average person to tackle auto repair.  Special tools are required that most of us don’t own.  Now where do these extras parts go?  Yes, the extra gadgets are great, your buns can be cooled in the summer and heated in the winter by those new seats but at what cost!

Over the last 50 years, we have enjoyed improvements in the comforts of living.  All of this was built on cheap energy.  Those days are coming to an end.  Our infrastructure promotes energy consumption, not conservation.  There are those who point out cheap alternatives but the capital costs and the time frame to make the transition are substantial.  Also, the corporate will to change has not yet manifested.  The Tea Party has surfaced to reflect the “anger” cycle of loss.  Loss of what?  The way of life we have come to expect.  We are no longer in denial of the problem.  Next comes the sadness then followed by acceptance.  At that point will new leadership rise to guide us in the right direction.  Could it be the glorified sons of GOD?

The following describes the downward spiral of the commercial real estate contraction:

1. Less consumer traffic forces marginal retailers to close once they have liquidated their merchandise at distressed prices.

2. Distressed prices redirect consumers away from the stronger retailers moving them toward marginal business levels.

3. Further price erosion occurs in an attempt to regain volume, especially among the large retailers.

4. Malls and strip centers increase their vacancy rate and reduce their rental income placing pressure on cash flow to support existing borrowings.

5. Landlords walk away from properties and loans (in most states)

6. Stronger properties reduce their lease rates to attract or keep occupants.

7. Banks now have more toxic assets.

8. Banks reduce their exposure to commercial real estate.

9.  Existing properties begin to deteriorate.

10. Consumers stay away from deteriorated malls and strip centers.

11. Remainder of occupants move to better, cheaper locations.

12. Contraction of spending increases unemployment thus starting the process over again (#1)

See:  http://articles.latimes.com/2010/sep/11/business/la-fi-melrose-avenue-20100911

How do you stop the spiral downward?  It will be painful.  Retailers will be closely watching the Christmas spending season this year.  Could the 1/11/11 date see a massive correction?

The next five years (2011-2016) have a high probability of a national if not a global crisis.  The globe is headed towards an economic cliff and the challenge is that no one knows “when” we will arrive.  Those in power simply do not know how to fix the economic problems and are now beginning to admit this reality.

The Federal Reserve is committed to inflation.  They will print as much money as possible to keep deflation from occurring since there is no gold standard to hinder them.  This will increase the price of commodities priced in U.S. Dollars.  Other countries will defend themselves by printing more of their own currencies.

“The U.S. is bankrupt, neither spending more nor taxing less will help pay its bills”  The real debt of the U.S. is 22 times the official debt declared by the government.  In order to survive, we must radically simplify our tax system, healthcare system, retirement system, and our financial system.  Tax revenue is currently  14,,9% of our Gross Domestic Product (GDP) and to survive, we must double the tax revenue on a permanent basis.  Is it possible to do this without collapsing the economy?  No!  The alternative is to immediately cut spending.  There are about 80 million baby boomers in the U.S.  When they are fully retired (within 20 years), the government is committed to paying them about $4 Trillion per year in Social Security, Medicare, and Medicaid payments.

There are three ways to deal with this issue: heavy taxation, decreased spending by reducing benefits, and printing more money thus devaluing the currency.  Those is power will do all three.  Other countries will suffer as well since they are interconnected with the U.S. economy.

Complexity allowed our financial system to become corrupt.  It is riddled with fraud and and those assets have been classified as “toxic assets”.  The government knows it, the banks know it, and the public knows it, but nobody wants to really admit it.  Living out this illusion will prove to be one critical aspect of the coming crisis.  The “too big to fail” policy is simply a “get out of jail free” card.  Independent verification of appraisals, income statements, and disclosures did not occur.

We need a new system.  Taking from the young and giving to the old is a ponzi scheme.  When the life span of the elderly was much younger, this was not a problem.  However, increased life spans has brought this scheme to light.  This scheme is now in its latter stages where the money runs out.  When will it crash?  That is the $202 Trillion question.

A complex system hides the fraud and the truth about our fiscal situation.  If we don’t simplify our system and expose the truth about our issues, we will surely experience a disaster and collapse.  Will we take our pain early?  The current generation is pretty immature and will probably try to delay the solution as long as possible.  This will cause the crisis to be more severe.

The baby boomer generation has fueled the use of credit for the last 40 years and that is now changing.  The prime means of increasing wealth was through the use of leverage: borrow as much as possible to buy the biggest house because it will increase in value.  The problem was the “end game”.  What do you do with your big asset?  Sell it and buy a smaller house and bank the profit for a retirement nest egg?  It seemed like a good plan at the time.

The Law of Familiarity 

How many of us want to live in Hawaii?  The problem is that once you have spent a substantial amount of time in a locale, it becomes familiar and much less exotic.  Each sunset is less of a surprise and no longer tweaks the senses.  The same is true when buying a larger house.  Once the newness has worn off, it is simply a larger asset to maintain.  Less is now more.

Looking Inward

Once all of the big boy toys have lost their appeal, baby boomers will look inward and reassess their priorities.  After all, we can’t take our toys with us when we die.  I believe this collapse of credit will bring forth an awakening of mankind.  Our priorities will shift from material to spiritual.  People will become important again and relationships will once again be a priority.  This will usher in new revelation rather than reviving old revelation and our understanding will be expanded after the idols have been disposed of.

The Fallacy of Assumptions

Over the last five decades, financial assumptions of asset appreciation have served many Americans well.  That is about to change.  Housing may not be the investment it once was.  Granted, everyone has to live somewhere but your house may not hold your retirement funds you were counting on.  Being out of debt with a house that is paid for contains an inherent return on investment (ROI).  You are “making money” by simply not paying rent or a mortgage payment thus you need less money to live on and also will have less tax burden to support.  Those that see the fallacy of more and bigger “things” will position themselves well in the coming economic change.

The Expense Annuity

Many boomers will focus on recurring monthly expenses and energy consumption will be at the top of the list.  Your monthly utility bills are like financial “black holes”.  Once that money is gone, it never returns.  Minimizing monthly recurring expenses will move to the forefront of boomers’ minds.  Energy efficient windows, insulation, and other measures will provide entrepreneurs with a notable growth opportunity.

Gold and Silver

The gold price is flirting with a new all time high.  As the uncertainty continues, more investors will put gold on their radar.  As of late, silver has been leading the way in price appreciation.  Related stocks stand to gain from this price strength.  Physical assets are replacing paper assets as the best store of value.

Inflation or Deflation?

How about both!  It depends on your perspective.  Price deflation of “toys” and McMansions is likely to occur as the attitude and focus of the boomers change and the velocity of money is reduced.  However if the Fed persists in printing more money, inflation will force up prices in food and other necessities of life.  Food, shelter, and clothing are needed no matter what the environment.

The credit “traps” of the past have been uncovered.  Tax credits to increase our borrowing are no longer the incentives they once were.  People are tired of being servants to the lenders.  This servitude has caused many to grow weary.  This fundamental “megatrend” change will create a brave new world.

What a journey!

My near-term target for gold has been $1,600 for some time.  Now, the mainstream press is hopping on board with widely read stories:

http://www.bloomberg.com/news/2010-08-30/gold-rallying-to-1-500-for-analysts-as-soros-s-bubble-inflates.html

Ben Bernanke has assured us that the Fed will print more money to deal with any potential deflation.  That provides plenty of steam for gold and silver to continue their rise.  Gold and silver stocks continue to benefit from the market prices and are still lagging in their stock prices.  Producers are building cash balances that will allow them to acquire smaller producers.

I continue to expect the second leg of the double dip “W” recession and suspect it will be deeper than the first, based on real statistics.  Investors looking in the rearview mirror may be in for a big surprise in the bond market has a large correction.  If this occurs, it may be the tipping point of a new era.

What we don’t know may come back and bite us.  Cash is king… still!  The U.S. consumer has once again painfully learned that lesson.  401-K’s are being tapped for emergency cash thus people are once again mortgaging their future to maintain their current paradigm, not unlike the U.S. Government.  We were once the largest creditor nation and have shifted 180% to become the largest debtor nation.  People want to blame Bush or Obama but the problem was well on its way to fruition when both men took office.  Bill Clinton opened the doors wide for the housing crisis and Greenspan was the partner in crime.  Their “anything goes” view of the financial markets opened a door that could not be closed.  Once opened, it was like opening a pharmacy to a drug addict.

Ben Bernanke is now attempting to navigate the country through this financial mess.  The problem is that his expertise (Analysis of The Great Depression) has a flaw that may prove to be his demise.  During the Great Depression, the U.S. Dollar was tied to gold, today it is not.  In the 1930’s during the global depression, investors flocked to the U.S. Dollar since the U.S. was more stable and the Dollar was backed by gold.  Now, no major currency is backed by gold and money is circling the globe looking for the “best” safe haven.  In an earlier blog, I mentioned that the true U.S. deficit in present day value is roughly $202 Trillion.  Once the market figures out that the U.S cannot continue its current path, the Dollar is at risk of collapsing.  If this were to happen, other countries and their currencies are at risk since the American economy is so intertwined with them.  Hard assets are the best insurance to protect wealth.  Gold and silver continue to be the best insurance policies against the sharks in the water who want to extract the wealth from average citizen.

Reduce your debt, it’s your best investment.  However, keep enough cash on hand to weather any financial storm that may arrive.

When politicians use the “labeling” game to classify future obligations of the nation, bad things will happen… maybe not today or tomorrow, but sooner than later.  According to Laurence J. Kotlikoff, professor of economics at Boston University, if you look behind the curtain of the U.S. Balance Sheet and analyze the numbers, we’re toast.  Asset and liability classification and valuation is important to the creditor.  In order to loan money against an asset, the issue is all about repayment.  If there are too many liabilities demanding future cashflow than any prudent creditor would not extend new credit to a borrower.  It makes no sense.

The following interview sums it up:

http://finance.yahoo.com/tech-ticker/%22enron-accounting%22-has-bankrupted-america-u.s.-deficit-really-202-trillion-kotlikoff-says-535354.html?tickers=udn,tlt,tbt,uup,TIP,%5Egspc,GLD&sec=topStories&pos=9&asset=&ccode=

In the world of Economics these opposing forces are observed and analyzed on a moment by moment basis.  Financial analysis programs on super computers are attempting to predict which of these two views will prevail in the markets around the world every minute of every day.  It’s like watching a herd of antelope running in one direction and then suddenly one in the herd detects danger and moves the whole herd toward a new destination.

When faced with an unknown event, our two year old granddaughter looks to mommy or daddy for safety.  If they project confidence, the child is comforted.  If they look uncertain, she begins to fret.  Investors are looking for someone who is truly confident of the future… and they are not finding that person.

Those in power of the money supply are like a child with a new chemistry set.  There are experiments that will prove to be successful but the ingredients for those are already used up.  Now the child still needs to see some results so he begins to mix chemicals without knowing the consequences of his actions.  Adding hydrochloric acid to water is relatively safe, adding water to hydrochloric acid may produce a disaster.

The universe is constantly expanding and the sun contains an abundance of energy beyond this planet’s greatest need.  However, we do not have the knowledge or infrastructure to take advantage of this abundance.  Our petrochemical infrastructure has peaked and will use up more of our resources to maintain our current paradigm.  This will increase uncertainty and curtail expansion of the economy.

The Federal Reserve continues to shrink the middle class by bailing out those who failed to maintain prudent investing and borrowing practices.  Near zero savings rates are designed to extract wealth from savers and give it to the financial institutions so that they can improve their balance sheets.  This policy forces savers to seek a return on investment in riskier instruments in hope of stable income.  This spells disaster for that middle class person who spent their entire life saving for retirement only to watch it confiscated by low rates and/or risky investments.  What a travesty!

What does one do in this environment?  Turn to Our Heavenly Father.  One Word from HIM produces all the confidence you need to pursue a direction.  Fear, uncertainty, and doubt melt away as HIS Word goes forth.  Why?  We know HIS Word originates out of Love for HIS children whereas politicians tend toward self interest at the expense of the populous and our long-term interests.

Where is the best place to invest?  In those areas sanctioned by Our Heavenly Father.  If you are in business, invest in your calling.  If you are in a ministry, invest in your calling.  If you are in neither, invest in a calling that is producing good fruit.  Either way, lay up your treasures in Heaven where there is no corruption.

Professor Black makes a compelling case against asset valuation issues contained in the banks’ balance sheets:

Revelations 18:10  Standing afar off for the fear of her torment, saying, Alas, alas, that great city Babylon, that mighty city! for in one hour is thy judgment come. KJV

Until recently, this Scripture seemed more allegorical than literal.  Not any more!  Let’s assume that Mystery Babylon consists of three aspects: financial, political, and religious.  These three areas have one thing in common: greed.  Whether it be greed for power or money or stature, the evil source is the same.  Money greases the wheels of Mystery Babylon and with over $449.2 Trillion in derivatives around the globe as well as perception-based currencies, Mystery Babylon is set to fall, yes, within an hour.

Having been associated with the Information Technology (IT) profession for 37 years, it is clear to me that Babylon can literally fall in an hour.  The Internet, texting, world phones, automated stock trading algorithms, and instant information have provided the needed infrastructure for Babylon to fall within 60 minutes.

IT used to be an 8 to 5 job.  Now it is 24×7 on-call job.   We have servers that run 525,600 minutes per year (just as the song indicates), we are never offline.  There are now redundant servers that insure 24 hour access, 365 days per year.

I tend to think that “the hour” would come at 9 AM Eastern time.  Europe’s markets are still open and most of the Western world is open for business and trading.  The speed of information is now fast enough where investors could place orders to dump stocks and bonds at a very high rate of speed and would cause Wall Street to suspend trading.  All sellers and no buyers would cause the market to plummet.  Leveraged hedge funds would dump everything to raise cash.  Banks would suspend lending until they could assess the balance sheet damage of borrowers.  Little known provisions to call notes would force borrowers to either pay up or file bankruptcy.

Money is now mostly electronic in nature and the Internet is robust enough to handle a large volumes sell orders be fearful investors.

The politicians would scurry around trying to figure out what law could be passed to fix the problem.  Church leaders would attempt to calm their flocks who relied on the traditions of man rather than the Revelation from Our Heavenly Father.  All of this could happen literally in one hour.