Servias Ministries Blog

The final stages of economic collapse are based on two things: debt and fiscal mismanagement.  This is true for individuals, corporations, and countries.  Our presumption that we can conquer economic history and defy the laws that have held true in the past is simply arrogance.  Just as in the Book of Judges, the Israelites repeatedly did not learn their lesson, the West is doomed once again to not read and understand history.

The sovereign debt worldwide is of Biblical proportions and there is no way to repay the debt in today’s real monetary value.  Depreciation of fiat currency is the preferred method of response otherwise default on sovereign debt could get ugly much quicker.  The sum of perspectives of all individuals with money on a global basis  will determine when the inflection point occurs.  On a bigger picture, when Our Heavenly Father opens the eyes of the people and they see what is behind the curtain of the Wizard of Oz, they will realize that tangible value is the only store of wealth.  At that point the velocity of fiat money will increase as they try to buy up tangible value with their increasingly worthless dollars or other currencies.  That is why hyperinflation has a much greater probability than deflation.  Deflation occurred during the Great Depression because Roosevelt had a Dollar peg to gold which kept a restriction on the number of dollars in circulation and those dollars had a tangible value relative to the gold backing them.  Those dollars were being hoarded by people in an attempt to retain their wealth.  Other goods and services had less demand than the gold denominated dollars so their prices declined.

There will be a further disintegration in the Rule of Law and extreme taxation that will fuel the economic collapse.  In a sense, the Rule of Law has already been in a slow train wreck with the redefining of Law and the intent of the originators.  Those with ample treasuries are often able to circumvent the law using superior law firms or political influence.  The tampering with the tax code continues to look for ways to extract wealth from the population to fund fiscal mismanagement rather than putting fiscal policies under the magnifying glass.

China controls 97.3% of all rare earth minerals.  These rare earth minerals are required for wind technology, electric car technology, and military applications.  With this control, China offered manufacturing companies a 40% discount for rare earth minerals if they relocated to China.  With continued movement of manufacturing to China, the West continues to lose its manufacturing employment infrastructure, a fundamental support base for monetary value.  A country’s monetary base is really based on it ability to produce tangible output now and in the future.  Movement to a service based economy has created a vulnerability in a volatile world.

Shale natural  gas was supposed to be a multi-century solution to our energy problems but the toxic emissions from all of those extra wells are causing environmental problems.  See: http://www.dallasnews.com/sharedcontent/dws/news/localnews/stories/DN-gasdrilling_03met.ART.State.Edition1.3563c6c.html

Saudi Arabia is reducing its exploration plans with an excuse that it is saving those reserves for future generations, another confirmation of peak oil.  On April 20th, the BP oil spill began and the implications continue to develop.  There continues to be a high probability of a major hurricane in the gulf to stir up those 5 million barrels of oil that have leaked out and push them inland.  If that happens, it will close refineries and power plants close to the gulf who rely on large amounts of water for the processes.  The aging energy infrastructure coupled with the end of cheap oil provides a price floor for oil.

BP may not survive this oil spill for the claim that 75% of the oil is gone may prove to be false.  The media reports have been well managed painting an optimistic picture but the lawsuits will overtake BP’s ability to  survive.

The UK Energy Resource Center is reporting that governments are grossly underestimating the coming resource scarcity.  Classification of the various grades of oil misrepresent the overall energy value of reserves, up to 30% of reserves.  Heavy oil cost much more to refine versus “light” crude.  Only destruction of demand offsetting the decline of supply will keep the price of oil down.  In the meantime, China and India’s energy requirements are rising. Economic growth is currently tied directly with energy consumption.  See: http://www.guardian.co.uk/business/2010/jul/11/peak-oil-energy-disruption

Peak Oil is a frightening story and the government does not want the bad news of peak oil to be distributed especially in the current weak economy according to Robert Hirsch.   Over the last century, oil was cheap therefore economic expansion was achieved without restraint.  $100+ oil will contract the economy and those in power do not want the public to move to even a more defensive posture than currently taking place.  The U.S. is vulnerable to the price swings because we export 60-70% of our consumption whereas Russia is an exporter with substantial reserves.

In the current system: Economics directs politics and politics directs wars.

Bankruptcies are on track to exceed 1.6 million this year.  Not good.

The economic numbers show that we are in a downturn (after they are revised).  The U.S. Dollar is not stable and global investors are keeping a close eye on the “quantitative easing”.  The amount  of money that will be pumped into the system may trigger hyperinflation which would show up early in the price of oil.  If the price of oil rises, you can expect further contraction in the U.S. economy and if it sustains over $100/BBL, a severe contraction is all but assured.

You cannot grow without energy.  You cannot sustain growth without a sustained energy source.  This is true for an individual as well as a nation.  Our current paradigm of economic growth is based on the past surplus of hydrocarbons, specifically oil.  The population of the U.S. is in denial.  We are discovering 1 barrel of new oil for every 4 barrels we consume on a worldwide basis.  The Chinese know this and are negotiating deals around the world to insure energy supply to fuel their massive growth.  The U.S. is spending money on warfare and welfare rather than focusing on energy efficient infrastructure creation.

The current alternative energy sources will not offset the decline in oil supplies.  We need three new “Saudi Arabia’s” to offset the decline, yes, three!  In 2008, 42 of the 50 largest oil producing countries have passed their peak oil production.  The global decline rate (depletion) of reserves is about 9% per year and exploration companies are not finding enough to offset this decline rate.  If and when shortages begin, economic destruction ensues.

The current economic system is based on an infinite monetary growth debt-based paradigm.  This system is based on fiat currency, fractional banking, compound-interest debt based growth.  Those with unlimited access to the currency or financing extract wealth from the producers of goods and services- you and me.  This system requires those in control to keep our faith in financial instruments positive.  Perception is more important than reality in this system.  Credit default swaps is an instrument that allows you to make more money by destruction of the underlying asset than to invest in its growth.  The increase in CDS’s for state and local government bonds means that the big money is betting on the destruction of these entities.  Uh oh.

What do UK Energy Agency (Jan),  UK Task Force (Feb),  Oxford University & University of Kuwait (Mar), U.S. Military (Apr), and Lloyds of London (Jun) all have in common?  They have all warned of coming shortages in supply of oil versus demand or Peak Oil.

Consumers are stretched to the limit and the cost of oil above $84 assures us of increasing the tension on the ability of the consumer to financially cope with the monthly cost of survival.

State governments are moving toward a 30% shortfall of revenues versus expenditures.  There are two ways to make up the difference: cut services and jobs or raise taxes… or both.  The tax burden of the average citizen is already moving up.  The Bush tax cuts are set to expire this year but I suspect they will be renewed to some degree.

There is no way for the U.S. to cover its total obligations except by printing exorbitant amounts of money.  With no restraint of a Gold standard, you can expect this to happen.  The only question is “when”.  More costly energy will only serve to force action sooner rather than later.

As a business traveler a/k/a “road warrior”, I am extremely sensitive to travel costs.  After all, the money is coming out of my pocket, not some corporate treasury in the sky.  Actual airfares and rental car costs are up substantially, much higher than government based inflation numbers.  I am paying 50% for auto rentals than the best priced rentals of 24 months’ ago.  Airfares are up roughly 20%.  In the meantime, savers are making 3/10 of 1% for savings.  What a disconnect!

Economic indicators are decelerating with housing tanking.  The economic stimulus package has run its course and did not produce a sustained recovery and a new stimulus is in the works.  Obama signed an extended unemployment benefits package this week.  You can be sure that incumbents will be funding anything that will convince voters that the current politicians should be retained.

The private sector is losing jobs whereas the government sector has been adding jobs.  Even though the net effect to unemployment reveals minor decreases, the private sector creates value, the government creates nothing but only consumes.  Welfare and warfare currently describes the government’s expenditures.  In the 30’s, government jobs built assets around the country and thus increased overall value to the economy.

The current politicians are delaying the budget numbers until after the election.  With a deficit expected to be over $1.5 Trillion, Washington is talking about a VAT tax.  When I visited England for the first time in the 1980’s. I discovered the VAT(Value Added Tax) tax.  When I went to pay for a souvenir, the cashier added about 15% to the total- the VAT.  What???  We’ve been hosed, Davey!  The VAT tax will be in addition to the income tax we already pay.  Did Main Street receive any of the bailout money?  Nope.  We simply keep funding the economic experiments and Wall Street shenanigans.

The stock market is confusing hedge funds which causes them to move toward a greater cash position, mostly in U.S. Dollars.  The Dollar is the “least bad” currency versus the Euro.  This is true for individuals as well.  The small investor has shifted out risk-based stocks and moved to bond funds which may be risky as well.  The bull market in bonds is 29 years old and the cycle normally does not last beyond 37 years.  When bonds head south, interest rates will rise and governments will fall.  The cost of borrowing will exceed their ability to repay.

The banking crisis is not over nor will be for some time.  Seven more banks failed on Friday bring the count to 270 since 2007.  The FDIC is selling the banks and guaranteeing asset purchases thus increasing its own liabilities substantially.  By digging down into the transactions, it appears that the bank’s’ assets were overvalued by 40% on their balance sheets.  Since I believe that these banks are not isolated cases, I would assume that other banks around the country are under the same plight.  It would be prudent to keep your balances under the FDIC insurance limit at any one financial institution.  They’re not going to broadcast their imminent failure to the average depositor.  With all of the government based guarantees in place, the Fed cannot allow deflation to take over for it would further erode the value of assets now guaranteed by the U.S. Government.

The complexity of the global system will reach a point of collapse.  As individuals, we need to move away from complexity and toward simplicity.  Can we do this in a day?  Most of us would have to say no, but the goal is to move in that direction.

The following excerpt is from one of the most successful investment letter advisors in history, Harry Schultz.  He confirms what I have been preaching for years about technology but views it from an investing point of view:

Daily Bell: You’ve been successful for a very long time – and you may be, indeed, the oldest active investment writer and consultant around. How has the world changed in your opinion?

Harry Schultz: It’s gotten unpleasant morally, as everyone now realizes – but it’s too late for the wakeup call. It’s gotten speedier, but not better because of speed. There is scant benefit to speed, whether by car, plane, email or market facilities. Speed has forced people to act before they can think things through. Often speed means you don’t weigh the risk/reward factors – as there doesn’t seem to be time for it. High tech makes things easier in many ways, but causes more stress, partly because it keeps breaking down. You see this with computer glitches, crashes and viruses. Also, hi-tech goads you into making fast decisions.

When big corporations must keep a full-time team of techies on-hand to fix computers that fizzle daily, then tech is not, repeat not, working. Private citizens can’t afford the cost or the time-loss to keep tech working. For every hour technology saves us, we lose 75-90 minutes. The stress is not measurable.

Typewriters don’t break down, yet we are forced to accept computers that do. Autos no longer break down. The computer nerds only want to sell them (Microsoft, Dell, etc) and promote updates (which cause new problems). They aren’t interested in making them as efficient as cars and TVs have become. They’ve had decades to get it right but have made near zero progress toward reliability.

Speed is not a worthy goal, nor is the size of the mega bites your computer can handle. Dependability should be the goal. The same goes for banking, rating agencies and derivatives. Everyone wants profits, not dependability. It’s a new form of fraud, masquerading as progress. Morality, where art thou? End of soapbox.

http://www.thedailybell.com/1204/Harry-Schultz-on-the-Power-Elite-Free-Markets-the-Internet-and-Why-Gold-Is-Going-Much-Higher.html

3 out of 8 people on earth live in China or India.  Both countries are growing whereas the countries of the “West” are having severe economic difficulty.  With the arrogance of ignorance displayed by leaders, economic stimulus tactics are not working.  But wait,  Stimulus Package 2 is in the works.  At the same time, a massive tax increase will kick in next year- the kiss of economic death.  Politicians can’t seem to figure out that a tax increase hurts job creation.  Ronald Reagan figured that out and cut taxes.  The result was substantial job creation.

The Federal Reserve will continue printing money a/k/a quantitative easing.  The President’s Budget Director resigned in June.  The new budget will be withheld until after the November election.  Look for a budget with huge deficit in the $1.4-2.0 Trillion category.  If made public before the election, incumbents would lose more seats than currently projected.

The Economic Desperation Index is increasing.  On a recent trip to Padre Island, the local economy was at risk of loss from Hurricane Alex.  The mayor decided against a mandatory evacuation even though the brunt of the storm would hit the island.  I am sure his decision was economic based, not safety based.  Beaches were closed, businesses were closed, the one and only bridge to access the island was closed, but no mandatory evacuation was mandated.  Money vs. life… focus on life, lost.

Worldwide conventional oil production declined 2 million barrels declined last year.  Expect the same this year.  Natural gas inventories are down from last year and the storage levels no longer appear to be at a surplus level.  This bodes well for natural gas prices in the coming months.  The export market from OPEC is shrinking due to more internal consumption and countries like China are tying up the export oil through contracts.  At some point, the spot price for oil will be pressured in an upward direction.  Higher energy costs dampen any attempt of recovery in the West.  Those in power will attempt to suppress energy prices in the short run which will ultimately hurt us in the long run.

We’re on borrowed time.  Gold has increased in value nine years in a row.  The financial storm clouds continue to build in the sovereign debt crisis.  History shows us that when countries accumulate substantial debt, hyper-inflation follows.  The problem is that nobody pays attention to financial history.  We were close to hyper-inflation in the 1980’s but Paul Volcker, the former head of the Fed, was able to raise interest rates and arrest the inflationary pressures.  Asset inflation is occurring in the commodities.  It precedes price inflation.  China is using U.S. Dollars to buy commodities around the world and is reducing its supply of Dollars through this conversion to hard assets.

On top of all of this is the “Cardinal Climax” occurring August 1st, 2010:

Arch Crawford, financial technician states: “On August 1, give or take a week, we’ll have the most five-planet alignments in perhaps thousands of years. Known as the “Cardinal Climax,” this is the meanest, nastiest, most challenging and most transformational of any planetary phenomena in all of written history!”  If planetary alignments do indeed affect the emotional energy state, this could signal a catastrophic fall in global markets.  Will this happen?  Only Our Heavenly Father knows!  If this does happen, food will be the most valuable commodity.

Crawford:

How bad is bad?

“Well, when something is worse than the Revolutionary War, World War I, the Great Depression, and World War II, that’s bad – it’s the worst I’ve seen the charts in over 200-years.

As he explains it, there’s Mars conjunction Saturn which will be in opposition to Jupiter conjuncting Uranus all squaring Pluto.

Do I believe this?  I don’t have an answer but I am led to share those views that show past success.  Crawford’s investment newsletter rank #1 between 2007 and 2009.  He has 50 years of investing experience.  It’s better to be prepared and wrong than unprepared.

The Federal Government is now confirming what I reported in earlier blogs- the States are in trouble.  Do you think $50 Billion is going to be it?  Nada!

Dropping real estate prices hence shrinking real estate tax income is something states never plan on.  Their spending is always one way: up.  As state and local governments enjoyed the rise in revenue over the last 20 years, they generally failed to plan for the eventual downturn.  Arizona is selling and leasing back its government buildings.  California is issuing IOU’s.  Illinois just doesn’t pay its bill under the stated terms of the purchases.  Isn’t that a fundamental breach of contract?  New York is looking at funding its pension funds by borrowing from them?  Huh?  Illinois’ credit rating has been reduced which will make it more costly for them to borrow their way out of their revenue shortfall.

The “W” is not for Bush

In previous blogs, the real question was whether we are going to experience a “V”, “U”, or “W” shaped recession.  The stimulus package has just about made it run and now the big question is if we will enter the second leg of the “W” shaped recession.  I believe we will.  Bernanke calls the problem “headwinds” whereas many Americans call it sustained unemployment with no expectation of getting a job soon.

The average American is slowly moving away from reckless consumption and returning to a defensive posture.  Those with jobs know others without and are adjusting their purchases accordingly.  There is plenty of wealth for some but they will postpone purchases until they see true signs of recovery.  By now most everyone has been burned by at least one investment.

Fixing the Housing Market by tearing down houses

Officials are coming up with new ideas to fix the housing market’s excess supply- tear down houses.  Well, I guess that’s one way to eliminate the demand/supply imbalance.  See: http://www.washingtonpost.com/wp-dyn/content/article/2010/06/10/AR2010061006075.html?wprss=rss_business

When you couple this situation with Europe’s “States”, the outlook is not rosy.  The global contraction of the West and the expansion of China and India are hastening the move of the balance of power to the East.  Have you learned Mandarin yet?

Let’s assume that the world does not end on 12/21/12.  The global population will continue to need energy and the cleaner, the better.  Solar and wind power are not reliable enough to take up the slack.  Nuclear and natural gas generators are scalable.  In addition, geothermal will account for a slice of the pie.  It will benefit from carbon credits as the globe taxes the polluters. 

I listened to an interview with Ross Beatty, the CEO of Magma Energy Corp.  Recent performance was reported: http://www.magmaenergycorp.com/s/NewsReleases.asp?ReportID=400105&_Type=News-Releases&_Title=Magma-Energy-Corp-Announces-Third-Quarter-Results  Beatty’s past performance is impressive and if he performs, this stock has notable upside potential in the long term.  I like to buy stocks on the “dip” and this stock can’t get much cheaper.  MGMXF is the symbol for U.S. based purchases.

This junior energy stock is only for those who can risk a loss of their entire investment.  Oil is a depleting resource but geothermal isn’t.  Developing geothermal resources around the world as a credible player should provide a stable “annuity” of cash flow and revenue growth.  Based on the financials and the management interview, I’ve decided to buy some shares of this “green” energy company.

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One of the greater challenges in the financial and economic arena is to sift through the illusion and see the realities of the day.  Those in power want to create perceptions that perpetuate their agenda even though the facts and/or history support the opposite.  This is the basis of fraud.  However, if you have power over the law, you can circumvent the law by using its weaknesses, caveats, and loopholes unfamiliar to the listener.

“10 Million Barrels short by 2015”

The U.S. Military High Command reported this reality.  However, the Media fails to report this expected shortfall of oil supply.  The EIA reported in 2009 that there would be a 43 million barrel a day gap in supply versus demand by 2035.  Why do you think BP drilled in 5,000 ft. water?  There have been several reports by credible sources reporting this problem but governments are operating under the illusion that “all is well”.

With the BP oil spill, the President has effectively reduced the production in the Gulf by 500,000 barrels per day.  This means we will import this amount from other countries and increase our balance-of-payment deficit. 15 to 17 supertankers will be added to transport this new demand.

China is building 20 nuclear power plants (with 54 in the planning stages), the U.S. is building 1.  Green renewal power is not going to fill the gap.  The illusion of unlimited power has the American public asleep and in denial.  What are we going to do with the waste?

The U.S. needs to spend $100 billion per year on rail.  The U.S. trucking industry will not be able to pay the increased fuel costs coming soon.  China’s increased demand for oil will offset any U.S. reduction thus causing a price floor to some degree.  The days of cheap oil are over unless a global depression wipes out demand.

The G20 countries have been meeting to sort out the global debt contagion.  The solution is simple: spend less, save more, reduce entitlements.  This will not happen on a voluntary basis.  After spending like a drunken sailor (my apology to the sailor), moving towards austerity is extremely difficult.  Six week vacations by Europeans and long lunch hours for Spaniards is so ingrained in the culture of entitlement, there may be only one solution- depression with extreme prejudice.

Illusion serves only to provide temporary emotional comfort and delay of pain.  Delay of pain only insures more intense pain.

7 miles east of the rig blowout is a massive plume of oil escaping and creating a layer of oil nearly 400 ft thick and the footprint is now bigger than Maryland and Delaware.  They believe this plume is spilling 120,000 barrels per day.  See: http://news.yahoo.com/s/ap/20100531/ap_on_re_us/oil_spill_mysteries_of_the_deep    This is in addition to the 1,000 barrel per day in the live feed below.  If they cannot stop this leak, it would take 11 years to deplete this reservoir.  This is taking oxygen out of the Gulf of Mexico and if it continues to shorelines, it will ruin the fishing industry and recreation destination for millions of Americans.  Couple this with an active hurricane season, the Navy may be called upon to detonate a bomb to close up the well bore.  The water temperature are up in the Gulf which is fuel for hurricane activity.