Servias Ministries Blog

As a parent with two kids, I understand equality.  Each child is unique but our goal and challenge is to treat each child with an equivalent expression of love.  This takes on various aspects including the economic arena.  College education is the classic financial challenge in a family.  We want the best for both children but one will finish college and the other won’t.  Economic inequality ensues.  How do you help the child that did not complete college and maintain some level of equivalency?

Greece is in trouble.  Their socialist spending patterns causing a less motivated population to “coast” through life is now coming back to haunt them.  On the other side, the Germans have sacrificed and are extremely productive.  The Germans are expected to bail out the “slothful” nation of Greece and they are not happy about it.  Why rescue a nation who will simply continue to do the same thing that got them into trouble in the first place?

California, New York, and Michigan are in similar financial straits.  For those living in other states, we have known for some time that California’s economy was somewhat of a fairy tale.  Stories of how the housing costs were 3 to 10 times the cost of housing compared to the heartland caused many of us to wonder how long this disparity could continue. 

In the 1980’s, the Southwest went through a boom and a bust because of energy prices.  Housing prices dropped 45% during this period.  Penn Square Bank went from a sleepy shopping mall bank to a major energy lender and took down a few financial center banks when the energy industry went bust.  The Federal Government decided to make the region pay for its mistakes.  There was no bailout money for banks in the area nor was there any assistance for businesses.  We simply had to survive the economic bust as best we could.  All of the otherwise incompetent bankers and businessmen were sifted out of the management arena and they went back to their previous job classifications.  During the boom, it was like the Wild West for energy companies.

Now the shoe is on the other foot.  People from states who lived within their means will be expected to bailout the states who have been riding high in the economy over the last 20 years.  Oklahoma’s constitution requires a balanced budget and this prevents lawmakers from spending money they don’t have.  Sure it is painful when there is a drop in revenue but we don’t delay the pain in hope of a better day.  Delaying the inevitable only creates a monster.  There’s an old saying: “Take you pain early and there will be less pain!”

Mankind has been so focused on “things” and entertainment, they have failed to understand financial accountability.  The Great Depression guided our parents into a “saving” mentality and they took nothing for granted.  If you don’t have the cash, you don’t buy it.  We were a nation of savers.  Now, we are a nation of debtors.  Who do we owe?  Other countries.  When will we pay off our debt?  No time soon.  This prevailing attitude has dug us into an insurmountable hole and will require of us tremendous pain.  The states will fend for themselves and there will be many battles with the Federal Government and its attempt to make states pay for others’ poor fiscal policy.  Voters will vote their pocketbooks and remove those who attempt to saddle them with unfair tax burdens.  Money spent on excessive entertainment is now a memory.  The big boy toys are now tagged for the next garage sale.  Was mortgaging our future worth the temporary pleasure?  Repent!

It was only a matter of time before the banks would create wagers against states such as California, New York, and Michigan.  The latest derivatives are called municipal credit default swaps.  JP Morgan Chase and Citibank are both offering these bets against the states and other municipalities.  The problem with these derivatives and any other similar instrument, is that they are unregulated and are only as good as the capital of the entity on the other side of the transaction- similar to a bet.  If the bookie accepts a bet with a person, he expects to be paid if he wins.  Otherwise, he sends his “enforcer” to collect.  These banks continue to play with taxpayer money  since they would once again be bailed out if they lose too much capital.  Betting against California’s ability to repay a municipal bond is no different than betting on tomorrow’s basketball game, only the stakes are higher.  Any increase in price of these derivatives will signal to bond traders to demand higher interest rates for these bonds thus creating a death spiral.  California’s woes are greater than Greece but most of the focus has been in Europe until now.

See: http://www.huffingtonpost.com/2010/04/27/banks-bet-against-us-citi_n_553891.html

When greed is left unchecked, financial chaos will ultimately prevail.  Only by changing the law will banks no longer “double dip” by both selling municipal bonds and derivatives that promote the default of the very same bonds.

The cascading waterfall effect of a stock price chart is triggered by an inflection point in the markets.  Everyone expects the US Dollar to decline but it’s anybody’s guess on how and when.  The hope is an orderly decline over multiple years yet the global markets cannot be government controlled just as an elephant cannot really be controlled by a mere man with a stick.  The elephant allows his “master” to have his way until the elephant simply decides to do something different.  Governments attempt to paint an acceptable picture to the markets so as to control their direction and response.  This will only work until the markets smell “blood”.

Banks continue to act as hedge funds and speculate in the market and at the same time provide great resistance through the Washington Lobbying machine to keep restrictions from forcing them to once again be a banking industry that serve the common man.

Gold is a hedge against the mismanagement of the “economic system”, not a hedge against inflation.  When politicians continue to make decisions promoting self-interest, they undermine the productivity of the country and push it towards destruction.  As the confidence in the future growth of true productivity and capacity wanes, gold becomes the store of value to protect against the mismanagement.  Once you are convinced the policies will result in the destruction of infrastructure, personal savings, and reinvestment, you must discipline yourself to sit on the sidelines and wait for the ship to sink while guarding your wealth from being swept into the fracas.

The fundamentals of stock investing do not take into account of an outside force impacting the stock.  For instance, the oil embargo impacted energy sensitive stocks but could not be accounted for in the fundamental analysis of the stock.  The recent volcanic eruption costing the airline industry $2 Billion in revenues could not be foreseen in the decision to acquire transportation stocks.  The volatility of world events are forcing investors to add “insurance” to their portfolio in terms of precious metals and related mining shares.

Below is an inflation adjusted graph of the price of gold.  The point of this graph is that gold has not yet hit the record $850 achieved in 1979.  It would have to surpass $1775 to break the inflation adjusted record.

During the time of the Carter Administration, high interest rates solved the problem that parallels today’s environment.  However, never in the history of this country has the debt burden outlook been so severe as it is now.  It all but insures that Obama will be a one-term president.  He has few options that are palatable among voters.  An orderly depreciation of the US Dollar is the optimum solution but the markets and our creditors are not going to sit on the sidelines while their investment in US Dollars is depreciated away.  At some point, a big player will head to the exit with others fighting their way to the door.  The last one out will be the ultimate loser and it may just be the U.S. citizenry.  If this Black Swan event happens, %5,000 Gold will be on the radar…

Add 32 million people to the healthcare system without the necessary additional infrastructure to handle them and what do you get?  A disaster.  It takes a minimum of eleven years of schooling to become a primary care physician.  Many of the uninsured have pre-existing conditions already and physicians are going to order enough tests to minimize their legal exposure.  Healthcare costs will exceed estimates thus causing further damage to the economy.  Many doctors will retire early and further exacerbate the shortage.

Nearly five years after conventional peak oil and the population still does not get it.  Thank the media and legislators who continue to shove the problem into the future.  $85 oil is a warning sign.  Automobile sales in China in March jumped up 55.8% year-on-year to a record 1,735,100 units.  China pushed past the U.S. to became the world’s largest auto market for the first time last year as vehicle sales rose nearly 50% to 13.6 million units, due in large part to government incentives.  China’s overall vehicle sales could rise to 16 million units this year if demand continues to grow.  Total auto sales in the U.S. fell 21% last year to 10.4 million.  Many of China’s sales are to first time buyers, new users of oil.  Unless something happens unexpectedly, oil will rise to $100 soon.

Sovereign bond rates for Greece jumped to 7%.  The Eurozone is trying to keep the wheels on the wagon but this is symptomatic for municipal debt around the world.  California is worse off than Greece.  Major banks still have those bad debts on the books at cost rather than market value thanks to the Financial Accounting Standards Board (FASB).

The stimulus dollars of 2009 have just about run their course.  Unemployment remains stubbornly high since Main Street has not enjoyed the stimulus as other sectors of the economy, mainly government.

Definition of “Dollar”:  371.25 grains of silver (from Spanish milled dollar) or the value thereof.  This is the definition referenced in the Constitution of The United States.  Federal Reserve Notes are not “Dollars”.  Is this misrepresentation or fraud?  The Law of Biblical weights and measure are being broken.

The budget deficit is $1.9 Trillion and will get worse.  With an aging population moving to retirement, promises of Social Security and Medicare will either bankrupt the country or the recipients, or both.  The current pension shortfall is north of $3 Trillion and who will step up to bail this sector out?  The day of reckoning will arrive and will probably occur over a weekend.

Since 2000, gold has had an average annual appreciation of 17%.  Name another investment during this period with this performance.  The media has not reported on this success because it is an indictment against the Dollar.

These complexities are moving toward a “collapse” scenario and each of us needs to seek Our Heavenly Father for personal direction of preparation for change.  HE knows what, where, when, and how… nobody else has a clue!

What’s wrong with this picture:

“The love of money is the root of all evil.”  Money represents physical resources, our labor, inheritance, and other forms of tangible wealth.  For most of us, our savings represents our past labor converted and stored as a means to pay for future goods and services- retirement.  Money in itself is not evil for it provides a means to store our current labor for the future, a noble cause.  The problem arises when you leave Love for mankind out of the equation.  When you disregard “your neighbor” then you have broken the most fundamental Biblical Law:  Thou shalt love thy neighbour as thyself.  This is where the problem lies.  When you sacrifice your fellow man’s wellbeing to satisfy your own lusts, you have become lawless.  When you are empowered to continue the lawlessness, those who have power and authority over you also open themselves up to judgment.  The current system is giving rise to a destructive force that will ultimately place the citizenry in peril.  A house divided against itself cannot stand.  The 2010 elections will continue to uncover the primary culprits but it is not known if the electorate will finally respond with “enough”.

President Obama has cancelled the “National Day of Prayer Service” this year: http://latimesblogs.latimes.com/washington/2009/05/obama-cancels-national-prayer-day-service.html  This continues to speak of the corporate departure of the nation as a “Christian” nation.  For those who study history know that this direction ultimately yields destruction to nations who depart from their Biblical roots.  The government is to serve the people, not the opposite.  We have people who have lost their jobs, lost their homes, lost their dignity, to a system that once protected the average family from special interests.  I pray that the revelation of Love permeate the hearts of the people before long.

The following 12 minute video clip summarizes what I have been writing (and warning) about for the last few years:

Visit msnbc.com for breaking news, world news, and news about the economy

The problem is so large that only Our Heavenly Father’s intervention will actually “fix” the problem.  Otherwise, “We’re toast”!

The benchmark global borrowing rate is based on the 10 year U.S. Treasury Bond.  On March 1st, the yield was 3.61% whereas on March 26th, the yield was 3.91%, up 30 basis points (.3%). See: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml  That may not seem much to the average person but in global finance, this is a major move that could affect sovereign borrowing costs in the billions.  Washington’s optimistic views on healthcare costs are based on low borrowing rates, optimistic healthcare needs, and healthy economic expansion. “Not gonna happen”.  Expect the 10 year cost of healthcare to run $3 Trillion and will add an unhealthy extra $1 Trillion to the U.S. debt level.  I’m not the only one who knows this, the bond market is beginning to flex its muscle.

California is worse off than Greece.  Being the most populous state in the Union, California may be the first domino to fall.  The State Treasurer is once again warning about the re-instatement of IOU’s.  The housing crisis continues to be a drag on their economy and the commercial real estate crisis will reach full swing this year.  The Federal stimulus dollars are drying up and the jobs bill may not be enough to keep Congressmen in office this November.

Illinois’ bond rating has been lowered by Fitch.  See: http://www.bondbuyer.com/news/-1010228-1.html .  This does not bode well for the other states who are also heading for the cliff.  Schools around the U.S. are being downsized or closed.  Teachers are being cut from the payrolls and schools are looking for ways to cut expenses, even going to a 4 day week.  City, state, and local municipalities cannot run budget deficits like the Federal Government can.  They have no printing presses.

What puts the Federal Government in check?  Interest rates in the Bond market.  Interest rates on Sovereign debt is what the market uses to assess risk.  The higher the risk, the higher the rate.  The U.S. has been able to recklessly respond to its woes by printing money and creating more “Debt”.  A U.S. Dollar is the debt of the country since it is not backed by gold.  If the bond market concludes the U.S. debt is out of control, interest rates will rise when the Treasury attempts to refinance its debt through the bond market.  Who are the largest foreign holders of U.S. debt?  China ($889B) and Japan ($765B).

The U.S. is in a mess and everybody knows it.  The bond traders are watching each other to see who leaves the dance first.  If a major player decides not to participate in a Treasury auction, remaining players will demand higher rates.  Higher rates will negatively impact a U.S. economic recovery.  If the bond market gets chaotic, a global depression could develop.

Where could the U.S. Treasury get funds to support its addiction to debt?  You and me.  Your 401K looks mighty yummy to the Treasury.

Inflation in the emerging markets will force rates up.  The savers in the U.S. will be rewarded with higher interest income after several years of low rates that favored the banks and borrowers.  However, that lost interest income will not be offset anytime soon.

There is no real  protection for investors in any financial instrument if the sovereign debt crisis comes home to roost.  The Federal Reserve has an incentive to devalue the Dollar to deal with the huge debt bubble.  The investment community knows this reality and will demand higher interest rates to offset risks.  A showdown is coming at the OK corral.  The one who flinches will lose.

More and more people are jumping on to the bandwagon: