Servias Ministries Blog

The BP oil spill continues to decimate the economy of the Gulf States.  Add a potentially active hurricane season and you have a recipe for disaster.  NOAA projects an 85% probability of an above normal hurricane season.  See: http://www.cpc.noaa.gov/products/outlooks/figure1.gif  If we have one major hurricane entering the Gulf of Mexico while the oil spill is still in play, then we will have an epic catastrophe, not that the current outlook is less than “epic”.

The vacation areas in the Gulf are down 40% due to the oil spill even though they are currently unaffected.  The news media has affected the psyche of the vacationers.  The gulf states’ economies will continue to suffer.

People unfamiliar with the oil industry assume that technology is an answer to peak oil.  This environmental disaster is a clear indication of the difficulty of finding oil and developing fields.  The easily extracted oil has already been found.  The hard-to-find oil has high costs and high risks associated with it.  This is why you should not expect to see cheap oil unless the global economy takes a nose dive.  In that case, oil still will not be cheap on a relative basis.

Once economies of major countries become interconnected, they are all subject to the contagion that can wreak havoc in one country and spread to the others.  Greece was enticed by Wall Street to participate in Wall Street’s financially engineered products.  Along with their socialist mentality of entitlement, they are now in for austere measures which will produce more social conflict.  California is trying to get a one time “wealth” tax on the ballot.  If you owned expensive property, you would pay a tax on it.  This would send a new wave of bankruptcies across the state.  Fitch rating service downgraded Spain’s debt which is effectively downgrading the Euro.  You can expect more downgrades this summer. 

In the U.S., state, county, and local governments continue to see a contraction in tax receipts thus causing layoffs and potential bankruptcy.  See: http://news.yahoo.com/s/nm/20100527/us_nm/us_economy_california_munibankruptcy

Once again, the FDIC is back to closing about 5 banks per week.  See: http://finance.yahoo.com/news/3-Fla-banks-1-each-in-Nev-apf-392122267.html?x=0&sec=topStories&pos=2&asset=&ccode=

I have been suggesting the gold will continue its bull market run to significantly higher price levels.  The media is now jumping on this bandwagon:

I also believe $3,000 is too conservative.  $3,000 gold will pull the silver price with it.  Gold and silver stocks would grow at an even faster rate.  Commodity bull markets normally run at a 19 year cycle and we are 9 years into that cycle.  You can expect notable volatility so do not leverage your investments of any type.

Our current economic model is faulty and will lead us into the “Stagflation Trap”

Stage 1:  Negative real interest rates.  When the interest rate is adjusted for inflation, the resulting rate is negative.  For instance, the bank pays you 1% and the inflation rate is 3% then the real interest rate is –2%.  Your principal is losing 2% per year in purchasing power.  This is hurting all of our elderly who are relying on their CD interest to make ends meet.

Stage 2:  Disenchanted with negative real interest rates, people search out a store of value such as commodities.  They attempt to protect themselves from this loss of principal they were experiencing in stage 1.  Commodities are a volatile market and can create fear in the investor who is unsure about the direction of prices.

Stage 3:  Rising inflationary pressures for consumers and businesses.  Three years ago, the local burger joint sold a combo for $5.50.  Today, it is $7.37 and with tax it totals $8.00.  As prices increase, consumer awareness is sensitized and they respond.

Stage 4:  Businesses and consumers are under pressure to reduce spending due to the inflationary squeeze.

Stage 5:  Debt deflation due to banks tightening their lending policies due to loan losses and consumers deleverage their investments due to uncertainty.

Stage 6:  Economy goes into a recession and unemployment rises.

Stage 7:  Politicians and Central Banks intervene with bailouts, stimulus packages, and quantitative easing.

Stage 8:  Inflationary pressures re-emerge but Central Banks are unable to raise interest rates to arrest higher inflation.  Paul Volcker was able to fight inflation in the early 80’s by forcing real interest rates substantially above inflation rates.

Stage 9:  Deflation of non-consuming assets such as housing occurs.  Inflation of consumables such as food, water, energy, and clothing kicks in while personal income becomes stagnant (Stagflation).

Stage 10:  In desperation, citizens give up liberties and freedoms in an attempt to recover their previous lifestyle.  The fundamental of government change and power is transferred to the wealthy or anarchy rises up and chaos ensues. 

The U.S. debt and unfunded liabilities are currently at $108 Trillion.  Where is the financial point of no return?  Soon!

The Euro is in deep “doo doo”.  The U.S. unfunded liabilities and deficits cannot be paid, the math just doesn’t add up.  Peak oil is here but traders look at immediate demand to determine price.  You cannot get the truth from Economic Officials because they want to manage “perception” for the greater good, thus they lie to us.  Denial is rampant.  Voters are pain adverse and keep postponing the pain for greater adversity in the future.  The pathetic interest rate on CD’s is pulling us into this economic minefield.  Financial fraud is everywhere and honest people are punished.  What are we to do?

We must shrink our living expenses by using a zero based mentality.  Look at your monthly expenses and scrutinize each expense and with minimal emotion, determine whether you need that expense.  Is there an alternative?  Credit cards are time bombs if you can’t pay them off monthly.

Investing is a tremendous challenge now.  Protecting your principal must be the number one prerequisite but this is nearly impossible in today’s environment.  Hidden inflation is the insidious thief that is robbing your principal while your receiving less than 1% in interest.  Increase in taxes and healthcare are chipping away at our wealth.

I continue to believe in physical asset investing for the following reasons:

1.  The global population continues to expand and people have to eat, stay warm, and travel.

2.  The current infrastructure paradigm is a high energy consumption-based reality.  We can talk theory and point to large energy deposits.

3.  The Quants (financial engineers) are taking over the market gambling casino called Wall Street.

The following video will bore most readers but if you can last through it, you will gain a perspective of the complexities that are taking over the global banking industry which will ultimately cause its collapse:

I consider this blog category of Biblical Economics as the fringe versus the “Establishment”.  The Establishment wants to be in control and maintain that status of control over its citizenry.  At the center of this control is self-interest.  On the other hand, “fringe” thinking results from Love being at the center of thought.  It is well known around the globe that the U.S. has an arrogant view of entitlement.  In my travels, I have first hand experience of this world view of the U.S.  I tread lightly during these travels.

The establishment would have us believe that hyperinflation is due to a change in money supply.  That is only partially true for the true cause of inflation includes the velocity of money (the number of times it is transferred or spent in a specific period of time).  When the public loses confidence in their currency, they attempt to convert their currency to other assets that retain value, whether it be bread or gold.  They quit hoarding the currency because they lose confidence in its purchasing power and opt for other assets they believe will hold value in the future.  Thus, hyperinflation is caused by a loss of public confidence.

How do you manipulate public confidence?  You use the media and manipulate tangible asset prices by keeping them “low” versus your currency.  Gold is known for its intrinsic monetary value and to a lesser degree, silver.  This is why there have been notable attempts to keep the price of gold and silver at bay.  Once gold and silver breakout into the public’s view and become a sought after investment, hyperinflation is on the horizon.  A breakout in the price of gold has a direct impact on the confidence of the public that their currency is becoming worthless.  When this happens, the velocity of currency dramatically increases since people do not want to hold that currency but immediately convert it to another asset that will retain its purchasing power.  This is why I have been preaching the view of holding some of your wealth in tangible assets as an insurance policy against hyperinflation  Sure we need currency to conduct normal business activities but we are close to the edge of global hyperinflation.  The latest $1 Trillion bailout of the Euro with the help of the U.S. (you and me) only confirms the seriousness of the global crisis of public confidence.

When people fear the future and trust money, they hoard money.  When they fear the devaluation of money, they get rid of it by converting it to a tangible alternative.  If you are highly leveraged, this becomes a problem.  You don’t have the flexibility to move out of the currency since it is required to pay your obligations.  You need liquidity.  This is why I’ve been urging the readers to simplify and get out of debt as quickly as possible.

The media will report on the hyperinflationary crisis only after it is in full swing.  Congressman will do nothing to prevent the crisis since they only deal with crises after the fact.  With that in mind, expect the crisis to occur.  Prepare for it.  Only Our Heavenly Father knows the day it will escalate. 

There is a tremendous amount of paper money swirling around the globe.  The various central governments created the very monster that will attempt to consume them… all for a buck or two.  With interest rates being held at a sustained low, money is looking for a return.  Shorting currencies is one such method of creating a return on investment.  If you put enough money in play, you can start a death spiral against a currency and the wolfpack has its sights set on the Euro.  They are “selling” the Euro in hopes that it will go down then buy back their position at a lower price thus pocketing the difference.  This last weekend was the tipping point of another global crisis.  The sovereign debt bubble will pop.  The only question is “when”.  As it happens, I expect gold and silver to skyrocket since they are the only currencies without an inherent liability attached to them.

Greece, Italy, Ireland, Portugal, and Spain all need to cut spending and they don’t want to pay the piper.  The socialist view of government is failing.  Initiating an austerity program shortly after they were just told “all is well” is causing riots in the streets.  That is the risk on a global basis.

There has substantial manipulation of gold & silver prices over the last several years and everybody knows it.  Regulators turned a blind eye to the issue until know.  Once the voters caught wind of the alleged corruption in the financial markets, the government finds it necessary to bring some of the players to justice.  Otherwise, a revolt might arise among the populous and they want to steer clear of that alternative.  The following clip is an indication of the next phase of the bull market in precious metals:

Our Heavenly Father is the source of light which exposes the truth of all things.  It appears the gold bashing is just about over and once again the ageless currency is being considered as a basis for exchange.  The IMF meeting tomorrow may catapult gold & silver to the forefront of the investing public.  We mentioned $5,000 gold in past blogs and now the mainstream is putting this number of their radar.  Silver may be the best investment since it is underpriced relative to gold.  The historic ratio of gold to silver is 30:1 which would put silver at $165 if gold were in the $5,000 range, nearly 10x of its current price.

What is a hyperinflationary depression?  A depression is a severe contraction in the Gross Domestic Product over multiple quarters.  To date, there is no consensus on the meaning of “severe”.  The Great Depression in the 1930’s is our only true benchmark for this country.  The term “hyperinflationary” is a severe increase in money supply which works its way to prices of goods and services.  There are competent statisticians who watch these trends closely.  John Williams with www.shadowstats.com is one such analyst.  He continues to calculate comparative government statistics using historically sound definitions.  If you have been following this website you may recall that Bill Clinton changed the definition of the unemployment rate.  His definition improved the unemployment picture overnight.  How convenient!  John Williams uses the raw data and calculates an “apples to apples” comparison which puts our unemployment at over 10%.  Unlike the 30’s, our infrastructure masks the severity of unemployment when compared to that era.  Broke people just don’t look broke.  Loose credit has delayed the inevitable.  In the 30’s they did not have credit cards to delay the day of reconciliation.  Banks have been less willing to foreclose on properties and book the losses on their balance sheets.  To do so might put some of them in an insolvent state.

Blogging on the economy is full of bad news that can cause fear to grip the weak at heart.  Our intent is not to spread fear but to alert you of the potential events that could adversely affect you and your loved ones.  If you are alerted to a potential tsunami, you respond by staying away from the seashore until the threat has passed.  We have spent much time and energy in making you aware of the economic threats to your household.  The time of preparation is still at hand.  We are doing our part by developing/enhancing the EDS “detoxification” technology that we believe will revolutionize family wellness.  By removing inhibitors to health and healing, the body is free to heal itself.  A trained individual with a cost-effective device could easily test family members and promote overall healthy living thus decreasing the cost of medical assistance.  Hopefully, our solution will be in place before the brunt of any severe downturn occurs.

Most of all, you should prepare spiritually.  Refresh yourself in Scripture often.  Study Love.  When things get tough, Love will direct your path just as it did for Joseph when he was in the depths of despair.  When he saw his brethren, he responded in Love.

Yesterday, we saw a 1,000 point drop before buyers came in and propped up the market with a 400 point loss for the day.  Gold closed over 1,200 on the same day.  Volatile times are ahead and we must expect days like yesterday’s volatile trading day.  The U.S. direction is running parallel to the Roaring 20’s moving into the 30’s and 40’s.  The Great Depression was followed by a World War.  Expect the war drums to grow louder.

California’s woes are 4X worse than Greece’s economic issues.  If Greece is causing this type of volatility in Europe, consider what would happen if California’s fiscal problems don’t get resolved soon.

Hope for the best, plan for the worst.

In a blog on March 13th, I mentioned several stocks that I personally believe would benefit from the coming inflation.  If one took these stocks and invested approximately $1,000 in each on March 15th and sold yesterday you would have made over 10%+ in 50 days:

MFN was down but I continue to believe in this stock.  UXG and SVM were obviously the highlights of the group.  This is a good example why you want to spread risks over multiple stocks.  There are no guarantees of performance.

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I am always amazed at the cavalier attitude of regulators who are public servants.  when Penn Square Bank was closed in the 1980’s, I knew a lady who had a Certificate of Deposit (CD) in the amount of $240,000 with the bank.  The bank was seized by the FDIC on Friday.  On Monday, she stood in line with other depositors and waited for her money.  That day she was handed a check from the FDIC for $100,000 and told that she would receive some portion of the remainder in the future.  Finally, she received about $30,000 having a loss of $110,000.  That money was hard earned, saved money for it was going to be her retirement.  She learned a valuable lesson- don’t assume that the government is going to fully protect your money.

Senior Bank Officers and Directors knew the bank was failing yet they failed their fiduciary capacity to protect depositors.  If you or I did this, we would be residing in an orange jumpsuit now.  The regulators also knew of the impending failure.  They create confidential “watch lists” to monitor these banks losing money.  Fraud is intentional deception resulting in injury to another person.

For the week ending April 30th:

This week’s losses were notable They were the largest in any single week since the failure of IndyMac Bank on July 11, 2008.  IndyMac had assets of about $32 billion and deposits of $19 billion. Its failure cost the FDIC an estimated $8 billion.

The seven banks that failed this week had combined assets of about $25.8 billion and deposits of $19.6 billion. These failures cost the FDIC an estimated $7.33 billion. Prior to this week, the FDIC’s estimated losses from 57 bank failures in 2010 stood at about $8.6 billion. This week’s failures practically doubled that figure, to $15.93 billion.

According to an AP article, the FDIC’s deposit insurance fund “fell into the red last year, hitting a $20.9 billion deficit as of [Dec. 31, 2009].” With this year’s losses, the fund’s deficit has grown to at least $36.8 billion. In addition, the FDIC has a huge exposure for worse-than-expected losses on some $165 billion of assets taken over by acquiring banks. See: http://finance.yahoo.com/news/Banks-closed-in-Puerto-Rico-apf-1507617949.html?x=0&sec=topStories&pos=main&asset=&ccode

That wipes out the $45 billion the FDIC announced it was going to raise by requiring banks to pre-pay premiums for the period, 2010 through 2012. Obligations of the FDIC will soon become obligations of the U.S. taxpayer, adding further to the federal deficits.

FASB Valuations

Each of the FDIC’s press releases provides vital information about the true market value of the failed banks’ assets versus the values assigned them by bank management. This gives some insight into the extent of over-valuations across the banking sector in the wake of the Financial Accounting Standards Board (“FASB”) having suspended fair value accounting rules last year.  The FASB’s compromise in the area of valuations has given bank management far too much leeway to value assets at levels far beyond what they could fetch in the open market, resulting in banks’ balance sheets becoming increasingly less reliable indicators of their true financial health.

Bank Closure Details:

Westernbank Puerto Rico of Mayaguez, Puerto Rico, had stated assets of $11.94 billion and deposits of $8.62 billion. On paper, it was an extremely healthy bank; yet the FDIC’s loss estimate for its closure is $3.31 billion. Based on that estimate, the real market value of its assets is only $5.31 billion. Bank management had over-valued these assets by 125%.

R-G Premier Bank of Puerto Rico of Hato Rey, Puerto Rico, had stated assets of $5.92 billion and deposits of $4.25 billion. The FDIC’s loss estimate for its closure is $1.23 billion. Based on that estimate, the real market value of its assets is $3.02 billion, and had been over-valued by 96%.

Frontier Bank of Everett, WA, had stated assets of $3.5 billion and deposits of $3.13 billion. Its loss estimate is $1.37 billion. Based on that estimate, its assets are really worth $1.76 billion, and had been over-valued by 99%.

Eurobank of San Juan, Puerto Rico had stated assets of $2.56 billion and deposits of $1.97 billion. Its loss estimate is $744 million. Based on that estimate, its assets are really worth $1.226 billion, and had been over-valued by 109%.

CF Bankcorp of Port Huron, MI, had stated assets of $1.65 billion and deposits of $1.43 billion. Its loss estimate is $615 million. Based on that estimate, its assets are really worth $815 million, and had been over-valued by 102%.

These bank failures are being reported free of any allegations of fraud or even negligence on the part of bank management. Absent any such allegations, it stands to reason that these over-valuations, ranging from 96% to 125%, are considered to be in line with reasonable accounting practices sanctioned by the FASB at the time it suspended fair value requirements.

Do you think that this is an isolated practice among these banks?  Be vigilant!  It looks like they’ll be cutting down a forest to supply enough money to cover all of the losses.  Oh, by the way, there are banks being closed every week.

On April 19th, Oklahoma City honored the victims of the Murrah Bombing which occurred fifteen years ago.  This tragedy rallied the people of America and brought forth a unifying affect across the country.  Pearl Harbor and the World Trade Center disasters had the same effect.  In those cases, the country went to war and brought forth a requirement of personal sacrifice.  According to the Washington Post, 5,425 military personnel have died in the current wars in the Middle East.  37,467 soldiers have been wounded in action as of this week.  After all of this along with $990,000,000,000 expended on the two war fronts, Osama Bin Laden is still out there.  See: http://www.costofwar.com/

Another 7 banks were closed by the FDIC on Friday with an estimated cost of $7.33 Billion, an optimistic number (you better double it).  33 states are on the verge of bankruptcy and the largest U.S. investment bank is being investigated for criminal intent.  Although the media is not acknowledging the ground swell of discontent, there are many voters who are staging demonstrations against the current direction of government.

What do the think tanks think?  There is already talk of a valued-added tax (VAT).  I was first exposed to VAT during my first trip to England in the 1980’s.  I bought a souvenir and the tax added about 25% to the price.  What???  I felt that I was bamboozled.  How can you get Americans to agree to a VAT?  It sounds like we need a “Black Swan” event to take our minds off the dismal economic picture.  A catastrophic event would bring out our compassion for our fellow man and while we are focused on the human suffering and healing/recovery, a VAT could get passed at midnight on a Sunday night while we’re all in Church.  Am I a conspiracy theorist?  No, I just read and study history and understand man’s failed state when he operates in self-interest.  Greed causes men to rationalize their actions for the “greater good” which always includes them at the top of the ‘greater good” recipient list.  We have been consistently warned in the news media of the potential for another terrorist attack on U.S. soil.  However, each of us must trust Our Heavenly Father to protect us from the ways of man.

The only solution to all of the muck and mire is Love.  Hope by itself will not get us there.  Faith without Love isn’t enough either.  Love eliminates the self-interest motivation and moves the focus to helping others.  It converts our enemies to friends, it reconciles separation!  When Love is backed by the power of the Most Holy Spirit, nations change.  This must be our prayer.

Below is an example of the discontent among the citizenry: